Debunking the Minimum Wage [Updated to Respond to Critique]

This is the first in a series of articles making short arguing for or against certain policy proposals.

One of the first things you learn in an Introduction to Microeconomics course is that demand slopes down. What this means as that as prices increase demand decreases and when prices decrease demand increases. Likewise, supply slopes up and behaves inversely, price and quantity have a positive association. For the minimum wage to be effective it has to be set above market equilibrium, where supply and demand meet, otherwise is would be below where wages are. As the supply and demand graph above shows, when you set a price floor (a minimum price) above market equilibrium you have more quantity supply than quantity demanded which is the definition of a surplus, in this case, we would call it unemployment.

As a first principle, free people should be able to bargain and engage in voluntary exchange with each other without having the government come down and mandate a certain relationship. Let us take the example of a gas station owner who wants to hire help for the summer but is not willing to pay more than two dollars an hour. Under current policy, the gas station worker would not be able to hire anyone because he is not willing to pay the federally mandated $7.25 an hour. This explains why a recent study found that “…this period’s full set of minimum wage increases reduced employment among individuals ages 16 to 30 with less than a high school education by 5.6 percentage points.”

As the study above pointed out, the minimum wage hurts the most vulnerable in society. This is for two reasons. For starters, those who can not produce enough will be fired. As mentioned above, our gas station employee does not produce enough value for the gas station owner to pay more than two dollars, otherwise, he would hire him because it would still be profitable. Similarly, a patty flipper at McDonald’s can only flip so many hamburgers. While until recently this problem could have been partially avoided by the need to have humans flip hamburgers, robots have been recently developed to do this job. Not even McDonald’s employees are safe from automation anymore and raising the minimum wage will only accelerate their fate. On a similar note, the phenomenon of labor to labor substitution means that an employer can swap out a high school drop out for a recent college graduate which could translate to more value created. While the recent college grad might not have worked for $7.25 and the employer would not want to pay more than $7.25 for an employee the raised minimum wage could make, both the opportunity, at least in the short term, attractive to the college graduate and the employer is forced to pay the higher wage so he would want the best value for his purchase.

I have no doubt that the intentions of the advocates for higher minimum wages are good (well, maybe except for big-labor bosses) but that does not negate the results of this policy. Reality is reality and facts do not care about feeling. We can not let our emotions trump reality because that only hurts who we want to help.



5 thoughts on “Debunking the Minimum Wage [Updated to Respond to Critique]

  1. You need only to use a Hessian Matrix to prove that as the wage rate artificially moves up that there will be reduction in employment no matter the company size or profit. The consumer will always pay for the increase and looking at demand of domestic goods will go down with a rise in international substitutes.


    1. The consumer doesn’t necessarily have to pay the increase. The guys on top could pay the price through salary cuts, or income tax. This is not to cause a sort of communist equality, but to make sure that the money (value) is actually being spent and put back into the economy and making an actual use out of it, only if there was no plan to make use of it.


  2. I agree with your argument in the case of smaller businesses, like your gas station example. However, the United States is full of large corporations (take Walmart for example) that can pay their employees more wages but exploit the low minimum wage salary to maximize profits. A minimum wage increase like Sanders’ $15 pitch I agree is too much and would bring much more harm than good, but there should be reform for larger businesses on whether or not they should raise the minimum wage. Keep in mind the low wages paid to workers of these large corporations causes their employees to have to seek government assistance (i.e food stamps) to put food on the table.


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