The economic effects of minimum wage laws on the poor
Claim: “It is exploitation to pay workers less than a certain amount of hourly wage. Raising their wages by law is fair and helps these workers.”
Analysis
Organizational profit without worker AVSOrganizational output and costs with worker A
A firm calculates how much extra profit it makes with each individual worker. If a potential worker can add to the firm’s overall profit, then he or she will be considered for hiring. No firm is looking for workers on which it continuously makes a loss.
A minimum wage that is higher than a person’s hourly productivity takes away the reason to hire them. A minimum wage hits the people with the lowest productivity first, and those are usually the people who need a job the most, and who desire on-the-job learning the most (to raise their productivity).
The reason why wages go up is because employers compete with each other for workers. If employer X offers a wage that isn't close to someone’s productivity then employer Y still stands to profit by offering a higher wage.
Organization X: profit with worker A at wage NOrganization Y: profit with worker A at wage N+1
The difference between productivity and the real market wage is the signal that tells people with capital to create jobs. If the difference is very big, this means that many more jobs can be created profitably, and that many more people can be helped by the creation of those jobs.
N---N+1---N+2-------Q----R----S-------Q = Market priced wageR = Minimum wageS = Productivity
A minimum wage that is higher than the market priced wage diminishes the reason for firms (existing or new) to invest in that industry or place and create jobs. Capital is always scarce, and goes to the place where it is the most profitable.
Conclusion
If wages are freely floating then the most jobs can be created, the people who need them the most can underprice others and secure a job, and by being able to work with low productivity someone can raise their productivity through experience and learning on the job and thereby be more sought after and have his wages bid up.
Minimum wage laws can help some workers temporarily, but only at the cost of others, particularly those who need a job more.
