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IPFS News Link • Minimum Wage

The Minimum Wage Is The Enemy Of The Poor

•, by Jacob Hornberger

Wonderful, right? What an easy way to abolish poverty and make everyone rich, right?

I think most people can see the fallacy of trying to end poverty in this manner. Businesses could not afford to pay all of their workers $1,000 an hour. If the government were to force them to do so, they would quickly go bankrupt.

How does the employer know how much to pay an employee? It is entirely subjective. He subjectively places a value on the employee's work and then decides whether it's worth it to him to pay that amount. The employee does the same thing. He decides whether the amount being offered is worth it to him. If they both agree that the amount is worth it, they enter into the deal.

The natural laws of supply and demand play a role here. If there is an extreme shortage of workers, the price for labor will go up because the employee has lots of job offers coming in. Some employers simply will not be able to pay what other employers are paying. Conversely, if there is an abundance of workers, the price being offered will tend lower.

Suppose an employer is paying his workers $10 an hour. That's the value that the employer has subjectively placed on the work of the employee. Congress suddenly decides to raise the minimum wage to $1,000 an hour. What happens? At that point, the employer says to himself: "The employee's work is not worth $1,000 an hour to me, and if I pay that amount, I'll go bankrupt after one day."