by Josef A

Created on: May 12, 2009   Last Updated: May 21, 2009

To answer this question it is important to clearly distinguish between socio-political arguments and the optimal choice according to economic rationality. It is not surprising that the idea of raising the minimum wage finds a lot of political support. Most people regard a compensation that allows individuals to maintain a meaningful life as fair and desirable. Guaranteeing a higher minimum wage looks like a good measure to achieve this goal. Arguing purely economically it is, however, not.

People often stress that it is a social injustice if people do not earn sufficient funds to make ends mean. That might be a justified point, but unfortunately free markets have not heard of social justice as of yet. As cruel as it sounds, the market determines the value of an individual's work and if it is below maintenance level so it is. Economic actors are simply not willing to pay a higher price for certain kinds of employment as ,for example, in parts of the service sector and other low qualified work. If a new minimum wage is introduced that is higher than the former wages, many of those jobs will simply disappear. In cases where it is possible, the work will be done in other parts of the world or the corresponding service will just cease to exist. To be fair, for some parts of the service sector, it might work and consumers have to foot the bill, which makes it not exclusively positive either. In addition, a higher minimum wage has a similar effect as a corporate tax increase, what goes along with sub-optimal allocation choices.

The easiest and best way would simply be to let markets decide on an equilibrium wage and subsidize those who earn below a certain threshold afterwards. This can be done through negative income taxes, that is to say low income employees do not pay taxes at the end of the year but receive compensation according to their income.

Some argue now that this is still degrading when looking at your pay check and it is obvious you only sustain your family through state assistance. True, but a minimum wage is just another kind of state assistance. If people understood this connection better, they might see that a minimum wage is an inferior choice. However, this is an economic view and if the majority of people and voters still prefer the installation of higher minimum wages, it is their legitimate choice. Not everybody has to see the world the way an economist does.

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