Legal Minimum Wage

According to the economic theory, an increase in the minimum wage increases unemployment, because employers stop employing people whose productive capacity is less worth than the increased legal minimum. This is only true, if employers actually know exactly how much a potential employee is worth to their business. This is almost never the case. If a business has several employees and uses capital equipment, it is almost impossible to determine accurately how much an individual employee contributes to the income of the business. Accounting tools for determining this do not exist.

The result is that most employers do not know what a potential employees is worth to the business. Therefore, they do not know if they are worth more or less than the legal minimum. (The television program Under Cover Boss shows that most bosses do not have a clue about what their employees are worth).

Most employers of unskilled staff just take the easy way out. They do not bother trying to work out how much a potential staff member is worth, they just pay them the minimum wage instead. Some will pay a few dollars above the minimum wage, so that they feel better. The minimum wages does not just affect the poor, it has also corrupted employers, causing them to stop thinking about what their employees are worth. They just take the easy way out and pay what the state dictates.

This behaviour makes the minimum wages the benchmark for many low paid people, not just those who are at the minimum. It means that the minimum wage will have to be increased from time to time, because that is the only way that wage rates benchmarked to it will change. Employees cannot rely on employers to work out what they are worth and pay them more when they deserve it, so they need an adjustment in the minimum wage rate to give them any increases that they may deserve.

While we have a minimum wage and high level of inequality, regular increases in the legal minimum will be needed. Arguing that the minimum wage increases unemployment is irrelevant, because though in theory it should, in practice it does not. This has been confirmed by statistical studies.

The only argument against the minimum wage is that is immoral. The government should not be intervening in wage contracts. That will only be realistic, if employers get much better at working out what their employees word, and pay those at the bottom a margin to allow for the potential errors in their assessment.