Tuesday, July 11, 2006

Will the real minimum wage please stand up?

I have just discovered an example of what is possibly the worst argument against increases in minimum wage (in the US). I feel the impulse to comment because it pains me each time I read a variation of it.
Over at Cafe Hayek, Don Boudreaux argues:

Most visitors to the Cafe know the familiar arguments against minimum-wage legislation. Allow me here to spin the core argument -- that minimum-wage legislation prices many low-skilled workers out of their jobs -- by wondering aloud if proponents of higher minimum wages would ever make the following claim:
The market prices of most used-cars are too low for sellers of those cars to support their families. This fact is especially true for poor people, who, when they sell their old cars, almost always have only old, high-mileage, often dilapidated used-cars to sell. These people aren't selling two-year-old Lexuses or BMWs. They're selling 15-year-old Chevys and 20-year-old Hondas. So let's enact legislation mandating that no used-car can sell for less than, say, $25,000. That way, anyone who sells a used-car is assured that he or she will earn at least enough money to support a family for a year. I doubt that many people would argue that government should legislate a minumum price for used-cars. But why not? If merely identifying a problem with a low price (such as "At the current minimum wage, even full-time workers can't support a family of four") is sufficient to justify legislative action to raise that price, why won't such action work for used-cars as well as it will work for labor
Of course, the consequences will be the same: used-cars worth less than the $25,000 will not be sold; the owners of such cars will either remain stuck with them or they will have to spend lots of money and effort repairing and remodelling these cars so that each one is worth at least $25,000 to prospective buyers.

So, there's Don Boudreaux's argument. He also continues to reinforce it. Egad. My beef is that such an argument ignores the fact that in order to assess the effect minimum wage has on employment we need to consider wages in real terms. Consider that the real wage is W/P. From the period that wages were last set, prices will slowly rise due to inflation, which will lower the real wage while the nominal wage remains the same. By not allowing the real wage to adjust with inflation, minimum wage earners become worse off over time. I won't go on with this, because it's really not so complicated.
I guess this issue frustrates me because it seems that people who echoe Boudreaux's sentiment are either purposely ignoring the discrepency between real vs. nominal terms to win support for their cause, or they're continuously confused. Or is it me?

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