Let's get this out of the way fast: any minimum wage law is wicked, and should be immediately abolished.
If that alone doesn't convince you, then let's get into details. A minimum wage law says, in effect, that anybody whose labor is not worth the minimum shall not be employed. Nobody would support a minimum wage law if it were written that way. The Department of Labor minimum wage page says "The FLSA requires that most employees in the United States be paid at least a minimum wage and overtime pay at time and one-half the regular rate of pay after 40 hours in a workweek."
Minimum wage laws are supported by four sets of people:
- Employers who do not want to have to compete with other employers who have lower labor costs.
- Employees who do not want to have to compete with other laborers willing to accept lower wages.
- Employees, typically represented by unions, who can claim that they are providing skilled labor, and should be paid more than a worker hired at the minimum wage.
- Busybodies, who support "a living wage".
The classic example of an employer supporting the minimum wage is the Northeast U.S. textile manufacturer. Textile mills were originally built in America in the Northeast, where water power was necessary and abundant. In time, water power became less important, and textiles could be manufactured anywhere. Labor was cheap in the South, and textile mills began to be built there, competing against Northeast mills.
The Northeast mill owners did not want to have to compete with the Southern mills. To raise everyone's costs to that of the Northeast, they supported a minimum wage law. Rather than allow the South to make textiles, and the Northeast workers move on to more profitable activities, the Northeast textile manufacturers lobbied for a minimum wage. In the end, they couldn't compete anyway, and most Northeast textile mills have closed.
Employees want to be paid as much as they can, of course. They will always have an incentive to have their own wages increased for the same amount of effort. The wise employee will realize that they are making a Faustian bargain. Their increased pay comes from another laborer's unemployment.
Unions are a legal monopoly on labor. A union will (at least in theory) take the members dues and spend them in such a manner as to raise the members wages enough higher to pay for the dues and then some. One of the ways they can do this is by supporting minimum wage laws. Typically, union members' wages are higher than minimum, sometimes by a factor of two or three. They do this so that they can argue "Well, the minimum wage is now fifty cents higher. Our members should get a raise of fifty cents."
Busybodies support minimum wages out of a sense of fairness. Some of them adhere to Marx's labor theory of value. This is the idea that labor produces all value, and so all profits should go to laborers. It's obviously balderdash, but it's convinced some people. There's also shouldness: nobody should have to work for such a low wage. This is obviously true, but the economist needs to add her own should: nobody should lose their job because of a minimum wage law. Equally obviously true.
Some busybodies total up the costs of living the way they want poor people to live, and call the wages necessary to pay thoses costs "a living wage". Without further thought, they support a minimum wage law to increase the wages to a "living wage." This is a "should" rather than an "is", just as in the previous paragraph. Just as they "should" get a living wage, neither "should" they endure the consequences of forcing employers to pay a living wage.
Follow the money
A minimum wage coerces an employer to pay more in wages than they are receiving in labor. Clearly, if the employer was receiving that value in labor, free market competition would force them to pay the wage for that labor. The money to pay wages in excess of labor received does not come from nowhere. It is a new cost imposed on a business. In a free market economy, in time, that cost will be reflected in the price of the good. Go read about prices, costs, and value if you think otherwise.
If nothing else changes, then, prices will rise to cover the increase to the minimum wage. The effect would be for everyone in the economy, including those formerly employed at the minimum wage, those currently employed at the minimum wage, and unemployed people, to pay for the increase. While the now-minimum-wage employees are better-off, the already-minimum-wage employees and unemployed people are worse off. They are paying more for things, but not getting any more themselves, even though they're equally or worse as well-off as the now-minimum-wage employees. This effect is ignored or dismissed by proponents of minimum wages.
You never have the case of nothing else changing, when you change the price of something. Because goods and services produced by minimum-wage employees are now more expensive, fewer of them will be purchased. Fewer minimum-wage employees will be needed. This effect is ignored or dismissed by proponents of minimum wages.
Labor is now more expensive. Whenever the cost of an input to production changes, the manager of that production will re-evaluate the production methods. It may be that a tool whose cost was formerly prohibitive is now cost-effective. The McDonalds near me now has a french-fry basket loader. They dump a big bag of fries into the hopper, and it loads a specific amount into a fry basket. No doubt the machine is cheaper to employ than the employee's time. This effect is ignored or dismissed by proponents of minimum wages.
An employer may reevaluate his processes, and find that he can do without the employee entirely. Perhaps a tool could be employed? Perhaps the production process may be made more efficient? Perhaps he can get other workers to work harder? This effect is ignored or dismissed by proponents of minimum wages.
No matter how you cut it, somebody worse-off than the employee ends up paying for the increased (above market) wages. That's a result of economics, which is value-neutral. We could use our values to decide that that's acceptable, fair, and moral. I don't think it is. Minimum wage laws should be abolished solely because of that negative effect.
Why didn't I notice this?
Right about now, somebody will say "there is no evidence that the minimum wage law creates unemployment." They are fortunately quite correct. The current minimum wage law doesn't lift wages much above the market level. That means that they also don't create much unemployment. You can point to the many people who have minimum wage jobs, if you want. That won't help, because some of those people will have minimum wage jobs anyway simply because the market price matches the minimum.
Another reason you won't notice the unemployment caused by the minimum wage is a very simple fact of human nature: it's hard to see things that don't exist. We are biased by millenia of evolution to notice things that exist, and disregard things that don't exist. It's very easy to see minimum wage jobs. They're advertized in the newspaper. People who are unemployed don't walk around with a sign saying "Unemployed because the minimum wage went up." Everybody who is alive today have ancestors who paid close attention to deadly things that exist, and less attention to things they only imagine.
Also, when a minimum wage law destroys a job, it does so stealthily. The loss of the job associated with an increase in the minimum wage might happen many months after the wage increase.
Some people want the minimum wage to be much higher than it is now. They would like to double the minimum wage. The Haitian lace industry was destroyed (and the livelihoods of thousands ruined) by application of a 1930's US minimum wage law which doubled the wages of workers there. We could try that experiment, but I wouldn't advise it. Any minimum wage law which significantly increased the minimum wage would also significantly increase unemployment. Thank your lucky stars that the existing minimum wage laws have so little effect.
Update, 09Dec2003: David writes:
There is another issue with minimum wages not mentioned in your entry, that of people assuming that banning something will make it go away.
In Australia, we have minimum wage laws and worker protection laws similar to those in western europe. What happens when you say that people can't legally work for less than a certain amount is that large numbers of people start working illegally for less than the minimum wage.
Before finishing my degree, I've worked as a delivery driver, dishwasher, cleaner, kitchenhand, counterhand, coffeemaker, night-filler, farm labourer and research assistant. For all but two of those jobs I worked cash in hand, for around one third to one half of the minimum wage. Thousands of others do the same.
Aside from being paid below the minimum wage, the real problem for workers in this sort of situation is that they are effectively excluded from protection under most worker protection, harassment and injury compensation laws. I've seen people injured while working who had to pay nearly a weeks wages for an ambulance to hospital.
Workers at the lower end of the economy are often the most vulnerable to exploitation, and these laws usually make things worse for them.
He is, of course, quite correct. Making jobs illegal doesn't eliminate the jobs, but it does take them completely out of the purview of the legal system.