Are minimum wage laws wrecking small town economies?
My claim is that minimum wage laws create an economic distortion that may be more severe than appears on the surface. They exaggerate pressure for the demographic shift from smaller poorer cities, to bigger and richer ones. In turn further inflating demand and prices for housing in the bigger cities, for where those cities have artificial constraints on the development of housing supply.
Minimum wages sound like a nice idea. They make sure that no-one, as we assume, is unacceptably under-paid. But to see minimum wages that way is simplistic thinking. Here's the flip-side:
"Minimum wages make if illegal for the most disadvantages people in our society to sell their labour at the price it will be bought for, and in turn it forces them into joblessness and total welfare dependency".
Hmmm...not so nice and protective after all, right? Especially when that unemployed person would have far prefered to work for say $7 per-hour for 20 hours a week, to top up their benefit by $100 per-week, and have the opportunity to prove themselves in the workforce and develop skill and experience. From here minimum wage laws can look stupid, or even cruel.
But there's another concerning dynamic to having high minimum wages that are standardised throughout a nation, such as New Zealand, which is the crux of my article. Small town economies whose natural (market) bottom-level wage is much lower than the legislated minimum, are artificially forced to have high unemployment.
Now you might not think that having high unemployment with respect to low-skilled workers is all that important to the prosperity of an economy overall, as we assume that low-wage workers are not highly productive workers. However I would argue that that interpretation is a mistake. I will make my point clear with the following example:
Many people confuse market value with inherent value, as though they are the same. Oxygen gives us a great example: The market value of oxygen is basically zero because it's immediately accessible, self replenishing, and universally abundant - and so its sale price is zero, and so its market value is zero. But its inherent value is as absolute as the fact that you're dead without it.
And that's just it. I would argue that that great army of low-skilled workers is more the "human oxygen" of a successful economy than we typically appreciate. The somewhat low price we pay for unskilled labour may have more to do with its abundance, than its inherent worth.
In turn, in having high legislated minimum wages in small town economies that struggle to pay them, we may be starving those economies of the cheap labour force that they may desperately need to optimize. The result? People flee the regions for the big cities at a rate that's probably much more aggressive than it would be, for if it were not for an excessively high minimum wage helping to suffocate those small town economies. Artificially exaggerating their situation of high unemployment, and low productivity.
For interest: What would be the effect of no minimum wage?
What would happen overall if we cut the minimum wage back to say $8 per-hour, which is a radical reduction from about $15 per-hour, as it stands today. I will speculate.
First, no-one will starve because we have a comprehensive welfare system that doesn't let that happen. So don't freak out. Indeed you would make it a heck of a lot easier for the poorest in our society to earn some extra cash, so bottom-level incomes will generally go up.
On top of this the country as a whole would be considerably richer because there would be a lot less waste in productive potential, as we're not wasting labour.
As I previously indicated, unemployment would quickly drop off in the smaller towns as cheap labour is capitalized upon, by entrepreneurs and also other established companies maybe wanting to outsource parts of their operation to cheaper labour pools.
It would also be good for people on a pension, who want to earn a bit more cash and stay in contact with the workforce. It's okay to be a bit slower if your boss doesn't have to pay you so much. You can still sell your labour.
Over time wages would appreciate naturally (not legislatively) as economic development allows wages all-round to rise. Always this is the best way to let wages rise.
...I think it was Milton Friedman who explained that minimum wage laws were originally driven by special interests, and not public compassion?
Friedman's words: https://youtu.be/ca8Z__o52sk
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