A bill proposing to raise minimum wage from $5.15 to $7.25 recently passed the House and is currently up for debate in the Senate. Minimum wage is a law often taken for granted as a sound economic and social tool, so I thought it would be interesting to put forward some classical arguments against it. These arguments are much the same as those against tariffs and price-fixing, and in general can be found in the short book Economics in One Lesson by Henry Hazlitt. For the sake of classification, Hazlitt's views are fairly Libertarian. He is also frequently grouped as a member of the Austrian School of economics.
Anyway, here are the arguments. One perspective that is rarely stated clearly is that a minimum wage of $7.25 makes it illegal for someone to work for less, even if he wants to. For example, if Adam's labor has a market value of $7, a minimum wage set at $7.25 may have the effect of putting him out of his job. So long as there are people available, say, Bob and Cindy, whose labor is valued at or above $7.25 there will be no incentive for anyone to hire Adam. Prior to this wage law Adam could have competed with Bob and Cindy by working for less, but now it is illegal for him to do so! Unless there is a large shortage of labor it is difficult to force employers to pay workers more than the workers' market value. And even in a shortage, the value of labor would tend to adjust itself.
But even in a situation where companies have no choice but to pay higher wages, there are compelling downsides to a minimum wage. A company that is already operating on a sufficiently thin profit margin, if forced to pay higher wages to its workers, will go out of business. That raising the cost of business can, in fact, hurt business is rather obvious but often overlooked. Or consider - if minimum wages are raised, driving the cost of labor up, alternative methods of production may seem attractive to employers. A factory owner who would not have previously considered mechanizing his workforce with high-tech robotics, for example, may be enticed to do so now, if the new cost of human labor is comparatively more expensive.
Both of these examples are demonstrated well in this case study. Though the writer of that blog is unequivocally Libertarian, his personal experiences stated in the article are factual, so I think his credibility is still good. A nice one-liner from the article is "If the government set a price floor for gasolene, say at $3.00 a gallon, would anyone out there argue that people wouldn't use less gas?" This seems similar to something Hazlitt points out: wages are no different than any other price of any other commodity and it is unfortunate that we think they can be handled on a separate basis.
Of course, some might say, most companies, if they must, will be able to raise their wages to the legal minimum. But even this dubious assertion overlooks a few things. As a result of higher wages the companies will not be able to grow as quickly or produce as much as before; and indeed, if they want to maintain their pace of growth they will have to raise prices. So the prosperity that is passed to the workers is borne by the consumers at large and by anyone who would have benefited by these companies' continued expansion (e.g. the unemployed). The losses of the consumers and the still-unemployed are much harder to notice than the gains of the workers, but they are no less real.
This argument has brought forth some key reasons why minimum wage is ineffective as both a tool of charity and a stimulant of growth. Changing the owners of money is not what helps an economy; increasing material wealth is the only true improvement. A worker's value, and hence his real wages, rises when he is able to produce more - not when the government declares him to be worth more. To truly help raise wages a government should enact policies that encourage growth and increased efficiency, not the opposite.