Capital And Labor Both Suffer Under Minimum Wage Mandates

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President Biden and the Democratic Party have pushed hard to more than double the national minimum wage from $7.25 per hour to $15 per hour over the next four years. This aggressive intervention in the functioning of labor markets has been heavily criticized, including in two recent Mises Wire articles. Resorting to both theoretical arguments and results of empirical studies, Robert Murphy and Martin Jones show in a convincing way that such a drastic increase in the minimum wage is bound to have a negative impact on employment and in particular on low-skilled workers. Yet their case focuses primarily on the short-term job losses stemming from such an ill-suited policy. One should not overlook that the minimum wage hike is likely to impair capital accumulation, productivity growth, and future wages as well. It means that this supposedly welfare-increasing measure is actually going to hamper not only employment, but the improvement of standards of living in general.

As Ludwig von Mises wrote in Human Action, wages are set on a free market in accordance with the marginal productivity of the labor services provided. As the types of labor supplied and their performance are very specific, there is no uniform wage rate throughout the economy. In that respect, setting a universal wage rate for the whole economy, even if it is a minimum threshold, doesn’t make sense either. Moreover, once the government or trade unions succeed in imposing a wage level above the marginal productivity of labor, institutional unemployment results. It is hard to imagine how a mandated national minimum wage of $15 per hour would remain below the marginal productivity of all current employees in the US and would not produce additional unemployment. As a matter of fact, the proposed increase would make the US minimum wage the highest among OECD (Organisation for Economic Co-operation and Development) countries and probably in the world, both in absolute terms and relative to the median wage in the economy (graphs 1 and 2). The closer the minimum wage is to the median one, the larger is the probability that lower-productivity workers cannot be hired at an artificially imposed minimum wage level, and will be swallowed by the ranks of the unemployed. The risk of a large increase in unemployment is quite high given that a nonnegligible 19 percent of the wage-earning workforce currently makes less than $15/hour.

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