Yes, the Minimum Wage Harms the Economy
The 2021 Nobel Prize in Economic Sciences was awarded to David Card, Joshua Angrist, and Guido Imbens. David Card received the award for his paper (coauthored with Alan Krueger) “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.” This was used by some as scientific proof that the minimum wage does not create unemployment and should be raised. However, this is untrue, and even Card and Krueger do not draw this conclusion.
Why the Minimum Wage Creates Unemployment
According to Austrian economic thinking, the scientific method (isolating variables and changing others to verify the possible relationships between them) is not applicable to economics, which is not a natural science.
Instead, Austrian economics relies upon praxeology, the study of human action, which is complex and not very predictable since one cannot use control variables in this context. It is only possible to carry out “pattern predictions” as F.A. Hayek explains and Jesús Huerta de Soto mentions in this book:
These predictions are of an exclusively qualitative and theoretical nature and refer to the prediction of mismatches and effects of lack of social coordination caused by institutional coercion (socialism and interventionism) that is exerted on the market.
Here are some examples:
- The increase in the money supply tends to cause prices to increase, but it is not possible to know exactly what the level of price inflation will be. The government releases several price inflation indices, but for many reasons, they do not represent the actual price.
- Taxes harm the economy because the government wastes resources in unnecessary and unsustainable ventures since the government does not operate under the profit/loss mechanism.
- Artificially low interest rates create malinvestments that lead to business cycles. This prevents efficient resource allocation since interest rates do not represent real time preferences.
The minimum wage is a barrier to entry for people with little or no work experience or skills. If the minimum wage is above the value that a person creates, there will be no incentive for the company to hire.
Thus, like other government interference in voluntary transactions between an employee and an employer, the minimum wage harms the weakest party of the transaction. The employee gets a lower salary (since the company must bear these costs) and consumers ultimately pay higher prices. The cost of any imposed law or of a voluntary transaction is always paid by the weakest party in the transaction.
The freer the market, the greater the degree of competition or potential competition. Companies must invest in product
Article from Mises Wire
