Poor Guarantees

Akshita Manocha Words of Freedom Leave a Comment

Do minimum wage laws help or harm the poor?

This article is the analysis of the results of the Saturday Poll posted on India Institute’s Facebook page on 11 January, 2014 which asked the above question. There has been a consistent debate on whether the idea of having a minimum wage law is helpful or harmful. In our opinion poll on the question, against a whopping 76% of you who said that a minimum wage level is a good idea as it ultimately helps the poor, only 24% of you said that minimum wage laws actually harm the poor and is therefore not a good law.

There cannot be any argument against the need to protect the vulnerable among us. But whether a law to control wages would achieve that purpose has been questioned by several top economists such as Milton Friedman and Henry Hazlitt. They contend that the minimum wage law has been an example of a law with good intentions but bad consequences. It not only affects the economy adversely but also the marginal workers who receive wages under this law. We present today three of their contentions as an alternative point of view for your consideration.

Firstly, the minimum wage law does not lead to a rise in the wage level. The government does not create more wages; all it does is the redistribution of wealth in any economy. So, when the government orders employers to pay higher wages, it leads to a lot of adjustments by the employer to off set the additional costs of the minimum wages. It leads to an increase in the manipulation of books, reduces the hiring of workers leading to more unemployment, reduces the extra benefits it would have provided to more capable workers and, most of all, a rise in the prices of the products or services that the employer trades in.

When every employer in the economy is forced to do this, the cost of goods and services for the employees who benefited from the minimum wage too goes up, in effect reducing what those beneficiaries could buy with their wages. Put another way, since no business or employer absorbs the cost of minimum wage increase through reduced profits, it is the worker who is affected both as an employee and as a consumer by the minimum wage law.

Secondly, the minimum wage law leads to net loss to the society when calculated in terms of efficient use of money. Since the workers are not paid according to their ability, the money that could have been used to pay for developmental activities or to other more competent workers now not used for those purposes as this money goes into paying for the minimum wages, which may or may not equal the value of the worker based on his or her performance.

Thirdly, there is a huge adverse impact of the minimum wage laws on the fresh working force, part time workers and students who take up various jobs for minimal earnings with the basic aim to gain job experience and learn new skills. All the entry level jobs get washed off from the market because the minimum wages make them unaffordable. The mandatory wage level does not match the actual value of the work and the worker (these are low level jobs that include mostly unskilled workers) becomes a burden rather than a resource for the employers.

Therefore the young workforce wanting to gain experience and learn skills mostly suffers.

Two pieces of work done in this area identify the adverse impacts of minimum wages very effectively. ‘The negative impacts of minimum wages’ is a brief analysis of minimum wages and its ill effects authored by David R. Henderson. Another very famous work is ‘The Negative Effects of Minimum Wage Laws’ by Mark Wilson.

As Heny Hazlitt puts it in his book Economics in One Lesson, “You cannot make a man worth a given amount by making it illegal for anyone to offer him less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering. In brief, for a low wage you substitute unemployment. You do harm all around, with no comparable compensation”.

Since intentions alone don’t make great policies, it is critical to assess suitability of ideas by the real impact they create. That will allow for a constant improvement on how best we use our resources and how best we can care for the under privileged.