One of the great persistent political myths is the illusion that governments have it in their power to manipulate and control the marketplace. One particularly common myth is the widely held belief that government legislation can make things and people worth whatever value those in political authority think they should be worth.
The minimum wage is one perverse example of this. Some workers are not paid a wage that others think they should be paid in terms of a “fair wage” or a “living wage.” Thus, they simply pass a law that declares what those in government think they should be paid. The money to pay the decreed higher wages merely will be extracted from the ill-gotten profits of those who employ them. The costs of doing so to any workers or to the consuming public or to the companies employing those workers is presumed to be zero or negligible. It is a form of a “free lunch” that comes out of the pockets of the business owners, who are presumed to already have more than they really need. “Social justice” via the stroke of the legislative pen.
The pervasiveness of this minimum-wage myth can be seen with the coming of the new year.
As of January 1, 2025, 21 state and 48 city and county governments around the United States increased the mandatory minimum wage. According to the Economic Policy Institute, an organization supportive of government intervention in labor markets, over 9.2 million American wage earners will be impacted. If none of those currently employed were to be negatively affected by the increased compulsory wage rates by loss of employment, the institute estimated that the additional cost to employers would total $5.7 billion.
Raising wages by government fiat
Many of those local and county governments have imposed higher increases in their minimum wages by even more than their respective state governments. In California, the minimum-wage rate has now gone up to $16.35 per hour, and in Connecticut to $16.35 an hour. In parts of New York State, it is $16.50 an hour, and $16.66 an hour in Washington State. In Washington, D.C., the minimum wage is rising to $17.50 an hour, while in Seattle, Washington, the local minimum wage has reached $20.76 per hour.
In Ohio in 2024, there was an attempt to add the minimum-wage law as an amendment to the state constitution, which, fortunately, failed to garner enough signatures to make it onto the November 2024 state ballot. The misplaced assumption was that a guaranteed minimum wage in the workplace was an inherent “human right,” similar if not equal to an individual’s right to freedom of speech or freedom of religion.
If passed, the Ohio initiative would have locked in permanent government manipulation of wage rates through annual automatic increases matching changes in a cost-of-living index. Rather than, in principle, being able to reduce or even abolish the minimum wage through simple legislation, removing it would have required a new constitutional amendment to repeal the earlier one, if it had made it onto the ballot and passed. Enough Ohioans showed the good sense not to sign up for this during the signature drive in the first half of 2024.
The attempt to establish minimum-wage laws
Government attempts to impose either maximum or minimum-wage laws are centuries old. In the case of the United States, proposals for minimum-wage laws were widely discussed in the decade before and during the First World War, particularly at the state level. And not too surprisingly, there were affirmative and negative judgments at that time concerning the feasibility of government-imposed minimum-wage laws.
At the federal level, a national minimum wage of $0.25 per hour was established in 1938 by act of Congress and raised to $0.30 per hour in 1939, where it remained throughout the Second World War — being raised to $0.40 an hour only in 1945. In the postwar years, it was periodically increased, especially in the face of price inflation, with the current federal minimum wage of $7.25 per hour coming into effect in 2009.
Market demand and competitive wages for labor
In understanding the effects from imposing minimum-wage legislation, it is important to realize that wages are nothing more than the market price for hiring workers of different skills, experience, knowledge, and education. And as such, they are determined by the same laws of demand and supply that govern all other goods and services offered and purchased in the marketplace.
We all know in a common sense way that as the price of some desired product rises or falls, potential buyers tend to purchase less or more of the good. If something becomes more expensive to buy, some buyers may find that the financial means at their disposal are not sufficient to purchase as much or even any of it as they had been able to before the rise in price. Even if they have the financial means to purchase as much as before, buyers must ask themselves if it is worth buying the same amount when to do so will require reducing their spending on other things, since everyone is constrained by scarcity of their monetary means to purchase everything they desire. In other words, all of us have a budget constraint that imposes choices and trade-offs in acquiring the things we would like to have.
As something becomes more expensive, consumers tend to purchase and use less of it “at the margin.” That is, they incrementally reduce the amount they buy to economize their expenditures in the face of this changed price. At the same time, people often shift their buying to less-expensive substitutes. If the price of a pound of coffee increases while the price of a package of tea bags has not changed, or has not changed by as much as coffee prices have, some coffee drinkers may purchase tea as an alternative hot drink.
The same applies to those who employ labor. No employer has any revenue out of which to hire and pay workers other than what they hope to earn from selling a product or service to consumers in the marketplace. Therefore, the employer must ask himself, at least implicitly, whether hiring any one or several workers will enable him to produce more of a commodity or product and earn additional revenue from doing so that justifies the wage he would have to pay the worker or workers in question.
For instance, suppose that an employer estimates that hiring one additional worker would enable him to produce, say, 10 more units of output in a day, each unit of which he believes he could sell to interested consumers at a price of $10 a piece. Thus, the additional revenue from hiring such a worker would be $100. Let us suppose that he could hire this worker for $12.50 per hour for an eight-hour day. This employer would just break even, with an additional labor cost for that day’s work of $100, equal to additional revenue of $100.
Now, of course, if it were possible for him to hire that worker for $10 an hour, his additional labor expense for hiring him for that eight-hour day would be $80. He would be making $20 more from selling those 10 units of output at $10 apiece, compared to the $80 it costs him to hire that worker. But could this employer continue to make this $20 over his labor cost in this way in a competitive labor market?
The answer is, “No.” This worker, clearly, has the skills, knowledge, experience, and education to help produce 10 units of a product that has a market value of $100. Some other employers in the same or some other market who sees the “value added” that this worker can contribute will, over time, have the incentive to hire him away from his current employer by offering him a higher wage than the $10 an hour he is presently earning. We could imagine that this rival employer offers the worker $11 an hour to draw him away from his current job. This worker now would be earning $88 for an eight-hour day. But given the remaining $12 of net revenues from hiring him, the worker, seeing the greater value of his labor services would have an incentive to search around for an alternative employer willing to pay him, for instance, $12 per hour, which would bring him a $96 for that eight-hour day of work. The worker’s search to find an employer willing to pay him as close to what his eight hours of labor actually generates in additional revenue, and the incentive of employers to employ workers netting them some increment of additional revenue, brings about a situation in which the wage earned by a worker tends to equal the value of his marginal product (10 units of output in an eight-hour work day sold at $10 per unit) that his labor services are worth.
Supply and demand conditions are constantly changing for a wide variety of reasons — consumer demands for various goods change due to a change in people’s preferences, or changes in the prices of related goods that results in that substitution effect, or changes in the technological ways of producing goods, for instance — all of which results in the market value of different kinds of workers with those different type of skills, experience, education, and knowledge —changing in various ways. But, nonetheless, the competitive forces of the market always tend to establish wages that reflect the (marginal) value of those workers in different kinds of employment in the process of bringing about a match between demands and supplies.
Minimum-wage laws reduce the demand for poorly skilled workers
If the logic of this argument is correct, and it is a logic the reality of which is seen every day in the marketplace as supplies and demands are brought into balance over time for shoes, hats, bananas, computers, smartphones, houses, and automobiles — along with people’s labor services in helping to produce such goods — then we can deduce what will be the impact and effects from imposing minimum-wage laws.
Other things held the same, a minimum wage must tend to bring about a loss of employment or employment opportunities for those members of the labor force whose value in producing a desired good or service in the eyes of prospective employers is now less than the legal minimum wage. Let us use our earlier example of that worker’s market value. We saw that the value of that worker’s marginal product was equal to an hourly wage of $12.50. If the prevailing government-imposed minimum wage is $7.25, it has no effect on such a worker’s employment, since any employer interested in hiring him and needing to match or exceed competing wage bids from rival employers will ensure that his hourly wage is significantly above $7.25.
This also means that low-skilled workers with limited work experience whose value to employers is less than $7.25 are likely to have been priced out of the market. That is, those with a productive value of less than $7.25 per hour are pushed into the ranks of the unemployed. This would also be the case for the worker whose market value is currently $12.50 an hour, if the minimum wage were to be increased to some amount above that dollar value.
If the federal or a state government-imposed minimum wage of $15 an hour is implemented, this worker would now be priced out of the market and would be facing possible unemployment. The maximum he is worth to any potential employer is, as we saw, $12.50 an hour. Retaining him in his job at the higher minimum wage would now require his employer to pay him $120 for an eight-hour day of work ($15 per hour times 8 hours), while the 10 units of output he is able to assist in producing during that time only have a market value of $100. To retain him results in a $20 a day loss to the employer. Therefore, all employees, the value of whose marginal contribution to production is less than $120 a day, face the possibility of being unemployed.
Raising prices may not cover the higher minimum wage
Raising the price of the good this employer sells offers no certain method of being able to cover the higher labor costs that the raised minimum wage is imposing on him. We saw that as the price of any good or service goes up, the quantity demanded for it tends to decrease. Suppose the employer were to raise the price of his product to the consuming public by an additional $2, that is, to a new higher price of $12 per unit. If he were still able to sell the same 10 units at $12 apiece, then he would have the needed revenue of $120 to pay the higher hourly minimum wage to keep employing that worker.
However, as he raises his price, the total number of units sold at the higher price is likely to decrease. For instance, at $12 per unit, the employer might sell only eight units, bringing him an additional revenue from their sale of only $96. If, instead, he were to increase the price to $11 per unit and sell a total of 9 units, the additional revenue would still only come to $99, far short of the $120 he must pay that employee for the eight hours of work under the minimum wage of $15 per hour. Even if raising the price to $12 per unit resulted in the quantity demanded for that good decreasing to only 9 units from the initial 10 units at $10 per unit, the employer’s additional revenue would only be $108, still far short of the $120 he must pay his employee under the minimum wage. In other words, the price elasticity of demand for the product limits the employer’s ability to increase the price of what he is selling to cover the higher labor costs resulting from the minimum wage imposed on the labor market.
The inescapable result is that it will be more profitable (or loss-avoiding) for that employer to let that worker go, or if he had been thinking of adding to his labor force, to decide not to. Either way, existing jobs are lost, or potential additional jobs do not come into existence. What is true in this example of an imposed $15 an hour minimum wage, as we saw, is no less true for all those whose value added in the labor force is less than that $7.25 an hour under the existing federal minimum wage. In other words, all those whose value to employers in the workforce is less than $7.25 per hour due to limits of their knowledge, skills, experience, and education have lost out on job opportunities that otherwise might have been theirs.
Lowest skilled the most negatively impacted by the minimum wage
This highlights the fact that the ones most adversely affected by minimum-wage legislation tend to be those about whom the proponents of such laws express the most concern: the unskilled, the poorly educated, the novices with little or no experience, who have limited opportunities in the marketplace to earn that “decent” or “livable” income. By pricing them out of the market with a minimum wage above what any employer considers their labor to be worth, they lose the chance of getting their feet on the bottom rung of the employment ladder. Only from that beginning can many of them have the chance to acquire the on-the-job work experience and skills necessary to make them more valuable and marketable so they earn higher salaries commensurate with their improved capabilities.
According to the Bureau of Labor Statistics (BLS), those most affected by the minimum wage are the young. While workers under 25 made up only about 20 percent of all salaried employees in the United States in 2022, they represented around 45 percent of all those earning the minimum wage or less in the economy. About 95 percent of those earning the minimum wage or less have not received a high school diploma. Also, those in the minimum-wage category are clustered in the service sectors, particularly food service and entertainment; in fact, 75 percent of those earning the minimum wage were employed in this part of the U.S. economy.
What is also significant is that in 2022 (the last year for which the BLS has published data), less than 1.3 percent of all hourly paid workers earned the minimum wage of $7.25 per hour or lower. That is, most salaried employees in the United States earn more than the current federal minimum wage. Its impact and significance are precisely on those in the American labor force with the least skills, education, and experience, those who are concentrated in labor-intensive sectors of the economy.
Equally significant is that while in November 2024 the overall unemployment rate in the United States was 4.2 percent of the labor force, the unemployment rate was 13.2 percent, or more than three times higher than the national average, among those between 16 and 19. For those with less than a high school diploma, the unemployment rate was 6 percent, or 50 percent above the national average. This pattern of who the minimum-wage law most negatively impacts — the young, the poorly educated, the low or unskilled — has been a persistent one for decades.
Potential racial biases reinforced by minimum-wage laws
The minimum-wage laws also disproportionately impact racial and ethnic minorities. Again, according to the BLS, in November 2024 the unemployment rate among whites 20 years of age or above was 3.8 percent, while among blacks in the same age category, it was 6.4 percent. And among Hispanics, the unemployment rate was 5.3 percent. Economists like Thomas Sowell and Walter Williams have argued for years that minimum-wage laws reduce the cost of practicing racial or ethnic prejudices. For instance, before the imposition of the federal minimum wage in 1938, black youth unemployment was equal to or even below white youth unemployment, including in the segregated South. For the first 10 years after the imposition of the minimum wage, the same pattern prevailed between black and white youth unemployment. But in the post–World War II period, as the federal minimum wage was increased at various times, black youth unemployment began the current pattern of exceeding white youth unemployment.
Labor union pressures and machines replacing low-skilled workers
One group often found among the supporters of the minimum wage are labor unions. Most union members make significantly more than the current minimum wage of $7.25 an hour, but by having a minimum wage, a “floor” is set below which any wage may not legally be paid in the labor market, enabling labor unions to protect themselves from the competition of those less-skilled workers who might otherwise be employed in place of some union members due to the lower wage those workers might accept. The minimum wage acts like an import tax that raises the cost of purchasing a foreign producer’s version of a product to secure the domestic producer a higher price and a larger market share than would have been the case without the tax. Thus, labor-union members partly protect their union pay scale and some of their jobs at the expense of others in the labor market who are far less well off than themselves.
Another effect that minimum wages can have in the marketplace is to bring about an unnecessary substitution of capital for labor by raising the cost of hiring low-skilled workers relative to machines, tools, or robots used in their place. For instance, minimum-wage laws were part of the reason elevator operators were replaced by automated elevators. More recently, state and local government-imposed minimum wages of $15 per hour or more have resulted in robots and self-service ordering on menu tablets beginning to replace restaurant personnel.
The higher cost of employing human labor due to the minimum wage may merely have accelerated from the time when such labor-saving devices would have been installed anyway. Or it may have been the case that if not for this artificial or contrived increase in the cost of labor, such lower-skilled workers might never have been replaced due to the profitability of investing capital in other directions in the economy. Either way, jobs for less-valued members of the labor force have been and are reduced or lost in the marketplace. For these types of jobs have also served as the gateway to higher-paying forms of employment as skills, education, and workplace experience are acquired.
Prices and wages have work to do
The United States has an estimated population of over 336 million people. Out of a working-age population of more than 269 million, there are nearly 168 million in the American labor force. That is, half of the entire population is working to earn a living or is among the 4.2 percent currently unemployed, numbering 7.1 million people.
Some of those unemployed are between jobs, either after having been let go or choosing to leave; many of them will find alternative jobs as part of the usual change and churning of a dynamic economy. Others are temporarily retooling themselves through training or other educational tools to fit the new demands and qualifications of a technologically transformative and competitive marketplace. They, too, will find alternative and possibly better paying jobs.
Others, however, are victims of minimum-wage laws at either the federal, state, or local level. Their unemployment is not necessarily temporary. Instead, minimum-wage-created unemployment may be said to be artificial, or even “contrived.” Whether by design or as an unintended consequence, this type of unemployment in American society is the product of interference with the competitive price system. A market-based labor market has the purpose of bringing together all those interested in being employed with those looking for people to hire at wages mutually agreed upon by the individuals themselves, and that brings about a coordinated balance between labor demand and labor supply.
To do so, employers and employees, just like consumers and producers in general, must have a way to communicate and inform each other about what they want and what they might be able to do to bring about mutually beneficial gains from trade. Prices and wages make up the market economy’s communication network. Through the prices they are willing to pay for goods and services, consumers inform producers what they want to buy. Through the same network of market-generated prices, producers inform consumers what they might be able to produce and the selling prices at which it would be sufficiently profitable for them to do so.
In turn, wages serve as the communication mechanism to inform potential employees what prospective employers think their labor skills for performing various types and forms of work are worth in the production and marketing of various goods and services. Likewise, the wages that workers with different types of skills, experience, and knowhow would be willing to accept to take on a job informs the prospective employers what the opportunity costs of those workers are, that is, what the appraised value of their labor services doing something else in the workforce are, and below which they will not accept any given employer’s offer.
Prices and wages are the language of the marketplace and need to be free if people are to share essential information so each can be doing what they are best skilled and qualified to do as the means to effectively earn a living. Minimum-wage laws, like price controls in general, prevent people from talking to each other and continuously informing each other about how best to use labor and other scarce resources to make all the necessities, amenities, and luxuries of everyday life. Market-based competitive prices and wages make all this possible.
Liberty versus the minimum wage
Minimum-wage laws succeed only in rigidly closing off a crucial element to any effective and efficient economic system doing its job of putting people to work where they will do what they are best qualified to do, given their existing skills, talents, knowledge, and experience. Instead, such laws create artificial and contrived amount of unnecessary unemployment. And in the process, minimum-wage laws lock out those most needing the low-skill, entry-level jobs precisely so they have a pathway to acquire the additional skills, experience, and knowhow to put them on an employment track to earn the higher incomes that all people of goodwill wish for their fellow Americans.
But what must not be lost sight of in appreciating and understanding the economic and employment consequences from compulsory minimum-wage laws is the wider, more fundamental opposition there should be due to their inescapable infringement on individual liberty and freedom of association in the form of the labor contract.
A free society is based on the presumption that individuals are possessed of certain inherent rights that even the most well-intentioned in government should not presume to interfere with. While no one is free from the potential of error and mistake, it is taken for granted that every person is best fit to determine and judge things for themselves. Whether it is a shirt to buy, a toothpaste to purchase, a house to rent, the breakfast cereal to acquire, or a job offer to accept, individuals should be free to make such decisions for themselves. To deny any or all of this through government interference with the free choices of individuals inside and outside of the marketplace reduces the individual to a pawn in the plans of those in political power.
This article was originally published in the March 2025 issue of Future of Freedom.
