Freely-floating prices allocate resources efficiently to places where they will take root and boost productivity. By setting a government-specified floor for wages, minimum-wage laws tend to disrupt labour supply and demand.
The labour market is not exempted from the basic economic principle that artificially high prices lead to lower demand. In particular, less-skilled workers will suffer. It has been well documented that instituting a minimum wage destroys jobs.
The reason is that raising the minimum wage induces more people to enter the labour market. With a larger market, employers choose higher-skilled applicants.
Thus, raising the minimum wage hurts low-skilled workers in two ways. First, there will be fewer jobs. Second, with a larger pool of applicants, competition will be stiffer.
What then are better ways to help this group of vulnerable workers? At the risk of sounding somewhat cliched, job retraining and skills upgrading remain crucial for them to escape the vicious cycle of falling real wages.
Social-assistance schemes also play a critical role in helping the truly needy and putting money in their pockets without distorting the price-signalling mechanism of the labour market.
Legislating a minimum wage will backfire on the very people it is intended to help. In most countries, it is more a political measure that plays to a misunderstanding of its impact on lives and the economy.
To lift the most vulnerable segments of our society out of poverty, we need a system that maximises opportunities for their economic well-being. And minimum wage should not be a part of that system.
