The minimum wage doesn't really help the poor …

One day, a man named Bob goes to the store to buy some milk for his family. Since the price is only $2.00 per gallon that day, he decides to buy 2 cartons of it for a grand total of $4.00. But when he goes to the store again a week later, he finds that the price has risen to $4.00 per gallon. Consequently, he decides to buy just 1 carton this time around for the same price, and wait until the price goes down to buy more. Some people would cut back more than that, and others would cut back less than that. But the demand for the product is not decided by just one customer's purchases. You have to add up the purchases of all of the consumers in that economy to get an accurate demand number. This is known as an “aggregate” figure, and represents the total demand for a given product in a given place at a given time. When you look at these “aggregate” numbers, we can say that the quantity demanded still goes down as the price goes up. Even if some people are still purchasing the same amount of milk as before, the total demand for that milk still goes down. (Applied to your own pocketbook, that logic will probably make sense, at least for some products.)

Well, imagine now that you're McDonald's, and you're hiring people to do inexpensive labor. In this thought experiment, let's just say that McDonald's is allowed to pay its employees whatever they want; and they decide to pay them $5.00 per hour. For simplicity's sake, let's say that everyone else in the fast-food industry is charging the same thing. Right now, the local McDonald's chain has 40 employees, and is able to give them each a 40-hour week. Thus, it is said to be purchasing 1600 “person-hours” of labor in a week – or, in other words, 40 employees with 40 hours each, every week. But now, a law is passed in Washington saying that they have to pay their employees $10.00 per hour, thus doubling their current wages. “People need a decent living wage,” they say, “and $10.00 per hour is more 'fair.' They work themselves to the bone, after all, and they have families to support. Don't they need the money, after all? Shouldn't our society put a 'high value' on their working?”

United States Capitol

So how does this local McDonald's react to all of this? Probably, they react pretty much the same way that Bob did, when the price of milk went up for him. When the price of their employees' labor-hours goes up, for example, they cut back on the number of hours that they will purchase of that labor. Instead of purchasing 1600 “person-hours” per week, they might possibly purchase only 800 “person-hours” per week, if they want to keep their labor costs the same. If they want to continue giving everyone a 40-hour week, they may have to cut back on the number of employees that they have, laying off a certain portion of their workforce. If they have only half the number of employees as before, they'll be spending exactly the same amount on labor costs after the doubling of those wages as they did before – just with fewer employees. If they don't want to lay off any of their current employees, they might instead reduce the number of hours for each of them. If they half the number of each employee's hours to just 20 hours per week, for example, they'll be spending the same amount on labor costs after the doubling of those wages as they did before, even though the number of hours for each employee has gone down. It's true that they're all still employed in this scenario, but they are somewhat underemployed when you look at their work hours. In fairness, they're still making the same amount of money in this latter scenario, since their hourly wages have theoretically doubled; but their employer is likely to look for ways to cut labor costs, such as by automating some of their worker tasks. Thus, their total earnings are likely to go down in the long run.

Alternatively, they might try to find some balance of the layoffs and the cut hours – perhaps cutting back to 25 employees with 32 hours each, which still multiplies out to 800 “person-hours” per week if you do the math. That way, they could cut only 8 hours from each of their work weeks, although they would have to lay off 15 workers to do that. Alternatively, they could cut back to 32 employees with 25 hours each, which also still multiplies out to 800 “person-hours” per week if you do the math. That way, they could lay off only 8 workers, but they would have to cut a full 15 hours from each of their work weeks. Other balances could also be tried, to obtain much the same result.

This, of course, assumes that the local McDonald's is actually going to spend the same amount on their labor costs as they did before. Some businesses might decide to spend exactly the same amount on labor-hours as they did before, even if they're getting less of a return on that investment – leading some to assume that the minimum wage has “no effect” on the market demand for labor. But in a similar way, some people might decide to purchase exactly the same amount of milk after the price increase as they did before, while others won't – as the purchasing decisions of some individual consumers don't matter as much as the “aggregate” number for the entire economy. Chances are, if the price of milk goes up, the total demand for milk at that time and place will go down, even if some individual consumers are still buying as much as before. In a similar way, if the price of employees' labor-hours goes up, the total demand for people's labor-hours of that kind will go down, even if some businesses are still buying the same number of labor hours as before. The employment decisions of some individual firms don't necessarily represent those of the broader economy, which will suffer from unemployment and underemployment as time goes on – particularly after businesses cut costs through automation, and cut the amount that they're spending on labor hours.

This is why the minimum wage is such a bad idea – because it decreases the number of labor-hours available to those whose occupations don't make that much money. They will either find the number of available jobs shrinking, or the number of hours available at each job shrinking instead. They may have to get a second job, and deny another poor person the opportunity to get that same job. Either way, the dwindling supply of available hours is going to be a curse to the poor – the very people that it is supposed to help. If people do indeed need a “decent living wage,” as minimum-wage supporters commonly tell us, then it follows that they need some hours with which to make this wage. With a minimum-wage law in place, it will be harder for them to find the hours with which to make it; and consequently, it will be harder for them to make the “decent living wage” that we are so often (and correctly) told they “need.”

Thus, far from putting a “high value” on their working, the minimum wage actually puts a LOW value on their working, by making it harder for them to obtain the work that they need to actually obtain this wage. The higher the minimum-wage becomes, the harder it becomes for people to find adequate working hours. And the harder it becomes for them to find adequate working hours, the harder it becomes for them to support their families in the process. If you really want to help the poor, it would seem that the best way to do so is by helping them to get a job with adequate working hours, and this simply cannot be done when minimum wages stand in the way of these hours.

Unemployment lines in the Great Depression

If the price of something you want goes up enough, chances are that you'll eventually want to cut back on how much you purchase of that product. Even if you yourself don't cut back, the likelihood is almost certain that several other people will, enough to cause the total demand for that product to go down eventually. Labor hours are no different, and they are subject to the same laws of supply and demand that every other product has. We can't wave a “magic legislative wand” to make people's earnings go up by price controls. If you're actually getting the hours, the minimum wage is great; but if you're not getting the hours, you have the minimum-wage laws to thank for it (at least in part).

Waving a magic wand, in Harry Potter and the Sorcerer's Stone

We could no more repeal these laws of supply and demand than we could repeal the law of gravity. As long as people want to buy low and sell high, the laws of supply and demand are here to stay. The broader economy will continue to supply more when the prices go up, and will continue to demand less when the prices go up. As the price of labor in an occupation goes up, the supply of people willing to enter that occupation also goes up; but the demand for people entering that occupation also goes down far below that. Thus, the supply of available applicants for these limited working hours creates increased competition for every one of those hours, which is not a situation that people in these occupations would particularly want. They might think that they want this when they are told that the “magic legislative wand” can fix the problem of their low wages, but the results of these policies fall far short of their intentions, to put it mildly. Thus, the minimum wage doesn't really “help” them, as it is so often claimed to do.

A parody of arguments for the minimum wage that dismiss the laws of supply and demand, as though they could be repealed

Actions in economics often have unintended consequences, and nowhere is this more true than with the minimum-wage laws. If we really want to help the poor, we should discard all forms of minimum-wage laws. Barring that, we should resist all increases to them (at the ballot box or anywhere else), and slow this unfortunate expansion of the gap between the supply and demand for labor.

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