by Sukrit Sabhlok

Created on: December 24, 2006   Last Updated: April 26, 2007

Imagine you are an entrepreneur. As a businessperson, would you start a venture where you were forced to pay workers $100 an hour, a rate which is well beyond what you could earn from them? No, you wouldn't open a new enterprise if you were guaranteed a loss.

Therefore, the only businesses that will thrive under such conditions are those which are sure to recover the cost of labour plus the cost of capital, and also compensate themselves for the enormous risk of opening a business in the first place. This argument, which is persuasive with a $100 per hour wage rate, can be repeated incrementally down the ladder.

Labour economists have devoted much effort to empirically estimating the effects of minimum wage legislation on the employment levels of various age, race and gender groups. It is now widely agreed that increases in minimum wages do reduce employment opportunities, especially among teenagers. One example comes from 1980 in Zimbabwe, where a government decision to set a minimum wage of $45 a month backfired dramatically, causing the dismissal of more than 5,000 workers.

Studies on the subject of poverty have found that minimum wage legislation has only a minor effect on the distribution of income. This finding is not surprising, because not all low-wage workers are members of poor families. Many workers on the minimum wage, especially teenagers, are second earners in middle or upper class families.

Perversely, the minimum wage ends up hurting those it is supposed to help. It is clear that the poorest and unskilled labourers are the ones who are crowded out of organised job markets when minimum wages are imposed. The minimum wage would not be such an issue if it weren't for politicians who have capitalised on the general public's perception that wage controls protect the poor from exploitation.

If the poor are in trouble, what is required is to upgrade their skills, and to shift their supply to sectors where market demand is growing. This is not an instantaneous process, and it is important that a social welfare system offer temporary relief in the interim. But it is wrong to penalise small businesses by placing on them the burden of making unskilled workers wealthier than the market will support. Why kill the hen (entrepreneur) that lays the golden egg (of jobs)?

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