Testing the Logic of Minimum-Wage Legislation

by Don Boudreaux on June 21, 2006

in Prices, Regulation, Work

A frequently heard justification for raising the minimum wage is that someone who works full-time at the current minimum wage cannot support a family.  Here, for example, is just one of countless news reports in which a politician or a pundit attempts to justify a higher minimum wage with this assertion.

Put aside questions about the truth of the claim.  In fact, assume that the claim is true beyond any doubt.

Even if true, the fact that someone who works full-time at the minimum wage cannot support a family does not justify raising the minimum wage.

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 hours?

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.

I sense a retort: "Well, if those who manage to raise the market value of their used-cars to at least $25,000 and then sell it, aren’t these used-car sellers made better off by the minimum-used-car-price legislation?"

Some of these people who then sell their revamped used-cars at a price of $25,000 or more might be made better off by the legislation.  It’s possible that some of these people didn’t realize that profit was available by spending time and money revamping their old junker into a highly desired vehicle — so the legislation nudged them into a worthwhile course of action that they otherwise would haven’t thought of and, hence, would have disregarded.

But surely the better presumption is that those owners of used-cars that can profitably be revamped to sell at a price of $25,000 or more are aware of this profit opportunity and will take advantage of it when it exists.  A corollary of this presumption is that many of the used-car owners who do, in response to the minumum-used-car-price legislation, revamp their cars so that these cars are now worth at least $25,000 are worse off than they would have been without this legislation.  The reason is that, without this legislation, the opportunity was still there for used-car owners who wished to do so to revamp their cars to a value of $25,000.  But with the legislation, some used-car owners who would have preferred to sell their cars unrevamped at a price lower than $25,000 will now — only because of the legislation — find the best available course of action to be spending their time and money revamping the car to raise its market value to $25,000.


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