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The Hidden Costs of a Minimum Wage

March 6, 2014

By Art Carden

From Mises.org, July 23, 2009.

People in the market can compete on many different margins. They can compete by offering higher productivity, or they can compete by offering better products. Perhaps most importantly, people can compete by offering lower prices. In the case of laborers, this often means offering their services at a lower wage.

Anyone who has taken an introductory economics course is familiar with the idea that a minimum wage leads to a reduction in the demand for labor and an increase in the supply of labor in the relevant market — usually, the market for low-skill workers. The minimum wage removes the ability of some workers to compete by accepting lower wages and shuts them out of the labor force. As a result, it reduces job opportunities for these workers. A minimum wage breaks the hinges on the door of opportunity.

However, there are additional, hidden costs of these interventions, which are more difficult to detect but perhaps more insidious. For example, one effect of a minimum wage is to reduce the availability of on-the-job training, since more resources are required simply to hire and retain a workforce. And further interventions in the labor market (for example, safety regulations and payroll taxes) make it still more costly to employ labor. These burdens together reduce a firm’s willingness to hire laborers and — in the long run — must reduce the number of opportunities for those laborers to acquire valuable job skills. Far from increasing opportunities for the working poor, a minimum wage actually restricts their mobility.

In an attempt to compensate for the lack of skills and opportunities among the low-skilled, governments have created a lot of job training programs. However, whatever their intentions, these training programs circumvent the market processes that match skills with jobs. Every person has a unique set of skills, competencies, strengths, and weaknesses that will only be revealed through their activity in the market. Job training and skills assessments may be able to match people with suitable employment to some degree, but the search mechanism inherent in the labor market is a low-cost way of accomplishing the same result more efficiently.

Continue reading at Mises.org.

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