The Detrimental Side Effects of Minimum Wage Laws

• Published date: 01 December 2013
• Author: Walter E. Block,Devaja Naik,Claire Hovenga
• Date: 01 December 2013
• DOI: http://doi.org/10.1111/basr.12018

The Detrimental Side Effects

of Minimum Wage Laws1

CLAIRE HOVENGA, DEVAJA NAIK, AND WALTER E. BLOCK

ABSTRACT

The adverse effects of minimum wage legislation demon-

strate how a government policy presumably intended to

help people worst off in society can actually end up

causing far more harm than good. In this case, the victims

are unskilled laborers. By making it illegal for employers

to pay unskilled workers wages equal to their marginal

revenue productivity, it causes unemployment for all

workers whose productivity happens to be below the

minimum wage. It also widens the wage gap between

whites and minorities because there are disproportionate

numbers of unskilled and uneducated minorities com-

pared with whites.

INTRODUCTION

For decades, people have increasingly relied on government

to promote social justice2by intervening in the economy.

However, these government policies can have unintended

Claire Hovenga is a Research Assistant, Joseph A. Butt, S.J. College of Business, Loyola

University New Orleans, New Orleans, LA. E-mail: cmhoveng@loyno.edu. Devaja Naik is a

Research Assistant, Joseph A. Butt, S.J. College of Business, Loyola University New Orleans,

New Orleans, LA. E-mail: dsnaik@loyno.edu. Walter E. Block is Harold E. Wirth Eminent

Scholar Endowed Chair and Professor of Economics, Joseph A. Butt, S.J. College of Business,

Loyola University New Orleans, New Orleans, LA. E-mail: wblock@loyno.edu. http://www

.walterblock.com/.

JEL category: J64

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Business and Society Review 118:4 463–487

© 2013 Center for Business Ethics at Bentley University. Published by Wiley Periodicals, Inc.,

350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.

negative consequences. One example of a highly popular yet

unjust regulation is the minimum wage law.

In the second section, we criticize this legislation from an

economic perspective. The third section is devoted to a political

economic analysis of this enactment. The burden of the fourth

section is to trace its secondary effects. We conclude in the fifth

section.

ECONOMIC ANALYSIS OF MINIMUM WAGES

Proponents of minimum wages argue that it is unjust to pay

somebody wages that are insufficient to cover the costs of living at

a decent level, and that this law prevents that injustice. Although

this may be a noble goal, there are many negative side effects of

a price floor on wages, such as increased unemployment for

unskilled workers, particularly teenage minority members. Many

studies have attempted to measure the effects minimum wage

laws have on unemployment, but they often produce very different

results because it is difficult to control for all factors that could

affect employment rates.3Because of these methodological diffi-

culties, it is helpful to analyze the situation from a praxeological

standpoint; this method uses logic to evaluate the incentives and

actions of individuals under minimum wage legislation and under

free market conditions. From this perspective, it can be argued

that minimum wage laws render illegal transactions and contracts

that would normally be voluntary in the free market, and there-

fore necessarily mutually beneficial; this decreases welfare and is

inherently unjust. Minimum wage laws thus cause unemployment

to be higher than it would be under free market conditions.4It is

always unprofitable for an employer to hire a worker at a wage

that is higher than his productivity. Thus, minimum wage laws

make it all but impossible without undergoing losses to employ

unskilled workers, particularly teenage minorities who have low

education levels. The higher wages might also attract skilled stu-

dents, inducing them to abandon their education, either by drop-

ping out of high school or choosing to forgo college. This

legislation distorts the labor market by changing incentives,

opportunity costs, and perspective of workers, both skilled and

unskilled. It is imperative that those who demand minimum wage

464 BUSINESS AND SOCIETY REVIEW