On its face, the concept of a mandated minimum wage seems like a great idea. Nobody likes to be poor, and most folks prefer that their neighbor isn't poor either. Unfortunately, the minimum wage does nothing for the poor and ends up taking jobs away from the very people it was intended to help.
It may seem counter-intuitive that the minimum wage is harmful, but if one distills the idea into a problem of simple economics, it becomes much clearer.
Economics, simply stated, is the allocation of scarce resources that have alternative uses. In this case, the scarce resource is labor. In a free market economy, resources are allocated by price, that is the higher the price for a given item or service the more supply will follow it, until the price falls into a state of, more or less, equilibrium. When the price of labor is fixed, as it is with minimum wage laws, it becomes impossible for increased supply to lower the price. What this leads to is a surplus. What is a surplus in labor? Unemployment.
Minimum Wage and Political Rhetoric
For politicians, minimum wage can be an almost irresistible rhetorical tool. A common phrase used by politicians when referring to the minimum wage is "a living wage for a family of four." In truth, it is mostly younger workers, usually unmarried and still in school, who rely on minimum wage jobs for their income. Once these young people gain experience and skills in their minimum wage jobs they move on to higher paying employment, leaving their minimum wage jobs behind for other young, unskilled workers to fill.
Now, do politicians know this? Sure they do, but it is much easier for someone in the hunt for political office to promise to help the poor by mandating higher wages than it is to say that they will employ more people by eliminating the minimum wage.
The Price of Labor in Hong Kong
When Hong Kong was still a British colony and had no minimum wage laws, it's unemployment numbers were astounding, i.e., 2% in 1991. (Wall Street Journal, pg C16, January 16, 1991) In 1997 China introduced many mandated employment benefits, though not strictly minimum wage, these laws had the same effect by raising the price of labor. By 2003 Hong Kong's unemployment rate had escalated to 8.3 percent, a more than 400% increase. (Country Commerce: Hong Kong, pg 45, The Economic Intelligence Unit, December 2002).
In a pure free market, employers couldn't savagely cut pay in order to save money, competition with other employers for the best workers would prevent that. On the other hand, no artificial floor on wages would allow employers to hire more unskilled labor, thereby allowing these workers to gain the experience and skills they will need as they rise up to positions of greater responsibility, skill, and pay.
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