14 December 2007, 09:41 in

Some ideas on minimum wage

I recently came across a blog post on minimum wage on the Thoughts On Freedom blog, which argues that the concept of the minimum wage actually disadvantages the poor more than it helps them.

Some quotes:

Imagine you are an entrepreneur. As a businessperson, would you start a venture where you were forced to pay workers $100 an hour, a rate which is well beyond what you could earn from them? No — you wouldn’t open a new enterprise if you were guaranteed a loss. Therefore, the only businesses that will thrive under such conditions are those which are sure to recover the cost of labour plus the cost of capital, and also compensate themselves for the enormous risk of opening a business in the first place. This argument, which is persuasive with a $100 per hour wage rate, can be repeated incrementally down the ladder.

And:

The minimum wage would not be such an issue if it weren’t for politicians who have capitalised on the general public’s perception that wage controls protect the poor from exploitation. But if the poor are in trouble, what is required is to upgrade their skills, and to shift their supply to sectors where market demand is growing. This is not an instantaneous process, and it is important that a social welfare system offer temporary relief in the interim. But it is wrong to penalise small businesses by placing on them the burden of making unskilled workers wealthier than the market will support. Why kill the hen (entrepreneur) that lays the golden egg (of jobs)?

There are many interesting comments on the article. Terje thinks that raising the tax free threshold would be of more benefit than increasing the the minimum wage:

A worker on $14 per hour in a full time job earns well above the tax free threshold and their financial position could be readily enhanced by a tax cut. And yet trade unions seem to spend a very much larger amount of time lobbying government for a higher minimum wage than they ever spend lobbying government for a higher tax free threshold. A higher tax free threshold would improve the financial position of low income workers whilst have no negative effect on their employment prospects.

Makes sense.

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