from Carpe Diem and Mark Perry, a simple and effective analogy on the minimum wage, What economic lessons can we learn about the $15 minimum wage law from an ‘$8 per pound minimum beef price law’?
Economist Walter E. Williams has used the following example to illustrate the competition described above between unskilled and skilled workers by looking at the market for different qualities of beef (see examples here, here, and here). Suppose that hamburger sells for $4 per pound and sirloin steak sells for $8 per pound. Hamburger is a much lower quality variety of beef compared to sirloin steak, but can attract a significant number of buyers who choose hamburger over the higher quality option for the 50% savings in price. Likewise, many employers may choose lower quality, unskilled workers over higher skilled employees for the significant savings in labor costs.
But now suppose the government imposes a “$8 per pound minimum beef price law.” In that case, most shoppers who buy beef will then purchase more sirloin steak and less hamburger because the lower quality meat has lost it main weapon to successfully compete against higher quality sirloin steak – a significantly lower price that compensates for the lower quality. Result? Hamburger sales will suffer due to the “minimum beef price law” and sirloin steak sales will increase. Just like in the labor market, a $15 an hour minimum wage will remove the most effective weapon that unskilled workers currently have to compete against skilled workers – the ability to work for a lower wage. Result? Employment opportunities for unskilled and limited-experience workers will contract, while employment opportunities for skilled workers will increase.
A few economists content that some studies show no relationship between a higher minimum wage and unemployment, but the majority of studies (and common sense) show otherwise. There are conditions where the cost is muted such as where the market wage is already higher than the statutory minimum wage.
If market forces do not apply then why not raise the minimum wage to $25 an hour and why should we wait to phase it in over five years? And who decides what the minimum wage should be and where it should apply? What genius possesses the insight to know the correct wage for ALL workers in ALL states in ALL industries?