Supply and Demand
Most people understand that prices are determined by supply and demand. This is depicted in any economics 101 textbook.
The law of supply and demand and the graph above do not originate from the facts of reality but rather from the imaginary construction of the mind. The graph above depicts curves based on the assumption that human preferences remain stationary. In reality, human preferences are constantly changing. It should be clear that man has no knowledge of what the shape of the curves look like. The demand and supply curve can take on many different functions and are constantly changing. All we can say is that the demand curve is downward sloping and the supply curve is upward sloping.
The implications are straight forward. As the price of something rises, people buy less of it.
This can be illustrated by a simple thought experiment. The price of an orange is 1$ right now. The government passes a law and states, “the minimum price for an orange shall not be less than 20$”. Would less people buy oranges or more? As things get more expensive people buy less of it. The answer is obvious.
Labor Services
It is unfortunate that ‘price for labor services’, ‘salary’, etc. have been given a different name other than price. This would eliminate confusion on the subject. The law of supply and demand also govern the price of labor. Let us say I am an airline pilot. A meeting has been called for all airline pilots around the country to gather for a conference in Washington D.C. Every airline pilot in the country shows up except for me. The building the conference was being held in collapses and all the airline pilots die. I am the last one left in the country. Would my salary (think price of labor) go up or down? The answer is obvious. All airline companies in the country would bid up my salary in order to entice me to come work for them. It would be short lived of course. People would see the outrageous salary posting to fly planes and individuals would flood the market to become airline pilots. Eventually the supply would increase and the price of labor would drop.
Now the government passes a law and states “the minimum price for labor shall not be less than 20$ per hour”. In other words, the minimum wage law is raised from its current level of 7.25$ to 20$ per hour. Would less people buy labor services or more? The answer is obviously less. As things (read goods and services) get more expensive people buy less of them. It should be clear. The minimum wage law is actually an unemployment law. It says anyone worth less than 20$ per hour shall now be unemployed.
The fallacy becomes obvious when stated differently:
If the minimum wage law is such a good idea why stop at 20$ per hour? Why not 50$ or 100$ per hour?
Disastrous Effects of This Law
The minimum wage law effects everyone. However, it hits the lowest wage earners the most. Young children living in the inner cities effectively get priced out the market. Instead of getting a job and learning about hard work, work ethic, etc. they become involved in street gangs, drugs, and criminal activity.
You may think since you earn a lot more than the minimum wage that this law doesn’t effect you. You would be wrong. There was a time when you pulled into a gas station and an attendant filled up your tank and washed your windows. There was a time when you called up a company and got a human on the phone. Now you get stuck in the phone tree for about 20 minutes before getting what you want. There is no doubt that automation, technology and competition has cut the need for some of these jobs. We have no way of knowing how much of these jobs were destroyed by minimum wage, but I would not be far fetched to say it is partially to blame for all the small inconveniences in certain aspects of life. The fact that some companies employ their call centers in India or other emerging markets indicates there is some truth in this.
Methodology in the Social Sciences
Social science is very different than natural science. The above analysis did not go back in history and use data to prove the above statements. It is all deductive logic. As things get more expensive people buy less of it. This is in contrast to the natural sciences were empirical data is used. For instance, deductive logic can not figure out the melting point of steel. Controlled experiments are conducted and empirical data shows it is 2500°F.
Majority of economist use data from the past to valid their theories. A “right-wing” economist will show data from specific countries showing that as the minimum wage was raised unemployment rose. A “left-wing” economist will show data from specific countries showing that as the minimum wage was raised unemployment declined.
There are obvious flaws in this thinking.
First, how is unemployment defined? The US government publishes U1 through U6. Private companies publish their own unemployment numbers. They all have different meanings and methodologies. None of them match up. Looking at the trend we can get an idea about what is happening, but to get an absolute number? I can make myself unemployed right now. If I refused to take a job for less than a million dollars a year I would quickly become unemployed. Should I count in the unemployment number? I run into people who would rather be unemployed than take a job at McDonald’s or Walmart because they feel they are above that line of work. Should they count?
Second, showing a chart with the unemployment declining and the minimum wage going up is another flaw. If the minimum wage law in the US was 0.25$ in 2011 and was raised every year by 10% you would have a chart showing increasing minimum wage and decreasing unemployment. However, we know that no one would take a job in the US for 0.25$. Not even 0.50$. Real wages have risen to the point that such absurdly low wages would find no willing employee.
People open themselves to attacks when using empirical data to justify or create theories in economics. In order to beat me in the intellectual field you must be willing to combat me using deductive logic. You must be willing to say, “As things get more expensive people do not buy less of it.” This flies right in the face of reason and logic.
Unemployment in a Free Society
Elimination of the minimum wage law and other regulatory burden would not eliminate the unemployment. Anyone promising a Utopia free of human pain and suffering is living in a fantasy land. This was the promise of socialist in the 20th century. They promised heaven on earth but winded up giving hell on earth. Ludwig Von Mises summarizes unemployment in a free society perfectly in the following passage:
Where production is perfectly balanced there is no unemployment. Unemployment is a consequence of economic change, and where production is unhindered by the interferences of authorities and trade unions, it is always only a phenomenon of transition, which the alteration of wage rates tends to remove. By means of appropriate institutions, by the extension, for example, of labour exchanges, which would evolve out of the economic mechanism in the unimpeded market i.e. where the individual is free to choose and to change his profession and the place where he works – the duration of separate cases of unemployment could be so much shortened that it would no longer be considered a serious evil. But the demand that every citizen should have a right to work in his accustomed profession at a wage not inferior to the wage rates of other labour more in demand is utterly unsound. The organization of production cannot dispense with a means of forcing a change of profession. In the form demanded by the socialist, the Right to Work is absolutely impracticable, and this is not only the case in a society based on private ownership in the means of production. For even the socialist community could not grant the worker the right to be active only in his wonted profession; it, also, would need the power to move labour to the places where it was most needed.