How minimum wages cause poverty

published Mar 09, 2011, last modified Jun 26, 2013

And destroy the economy.

> For minimum wage in particular, I think it goes against the interest of a lot of companies, since as you said, they like cheap labor.

I know it sounds counterintuitive, but minimum wage is one of the tools to keep business happy. Let's see why:

First, supply / demand. The supply of cheap labor is constant, but the demand fluctuates with minimum wage policy. Business that may otherwise hire someone below the minimum wage just cannot. That right there leaves a lot of young, unqualified people out. So now you have a situation in which you have an oversupply of labor relative to the repressed demand. Yeah, I know, those are really bad jobs that are being priced out of the market but, you know, for a really poor person, $1 beats $0 any day, especially when the alternative is to get drafted by a gang.

Now, let's move to the other facet. You got this huge pool of cheap unqualified labor that cannot compete in price because the law essentially prohibits it. Guess who gets priced out of the market? Bingo, young blacks, because racism isn't exactly a problem overcome yet. If you are a potential employer who is just a little bit of an underground racist, you are naturally going to prefer the "résumé" of the white boy to the "résumé" of the black one. And you're not even going to notice your bias -- it's going to come up in a "Well, I think this guy is better qualified / stronger / seems more of an upstanding kid".

And here's how it benefits business rather than workers: those who employ mostly unqualified labor can tell their employees "You don't like how we treat you like shit? Then FUCK YOU, there are a hundred monkeys out there lusting for your job." If these hundred monkeys were employed to begin with, even if on lousier jobs, the employee who is being treated like shit would have a helluva bigger bargaining chip against the abusive employer, don't you think? Also, don't forget that the biggest affected by minimum wages are precisely those businesses that could really use someone's help for a bit but can't afford to pay full minimum wage because they aren't big businesses with established revenue streams yet (in other words, small and home businesses, that often need to "fly grey under the radar of the law" to reach a steady state of profitability). That is the untold story of the minimum wage.

See how minimum wage regulations actually (though counterintuitively) damage legitimate businesses but benefit exploitative assholes? It would seem, you know, like minimum wages would increase the living standards of poor people, but in actuality it condemns many poor people to a life of wage slavery, and a lot of poor people to a life of crime / panhandling / grey markets. We want to fly, but gravity is adamant; we want to do noble things, but economic law is ruthless. Bastiat said it best: "What is seen, and what is not seen".

Now, politicians come in two kinds: the kind that know this truth, and the kind that ignore it. But almost every politician across the board supports minimum wage legislation. Why is that? Simple: because the majority of the general populace ignores it, and since the people ignore it, by appearing to "do something for poverty", they earn votes -- if they oppose minimum wage, they lose their stab at office. Simple, unprincipled rational self-interest makes both ignorant and perverse politicians be demagogues and do the "popular thing" -- which in the end is the wrong thing for their constituency. So much for democracy, eh?

> I guess inflation might allow wages to decrease over time while appearing to be the same, but as for the decrease in the value of the actual money received, I think most people with low wages spend it fast enough that it isn't very significant.

Well, they spend it in a significant part because they know that, if they save it, inflation will rob their savings out the back door. So, of course, there is no incentive for savings...