Minimum wage laws: unemployment not the only opportunity cost?

I was pondering minimum wages while washing my car today, and it hit me.  I have not seen it considered, at least in what I have read on Austrian Economics, that minimum wage laws not only breed unemployment, but they are also a force for the passing up of productive efforts all together.  For example, an entrepreneur may figure the costs of everything, and conclude that as long as his labor cost is <x he will make a profit.  If minimum wages are high enough to make his <x labor cost unrealistic, he will not pursue the opportunity.  ex; if say the UAW pushed wages for all car manufacturers up to 1 million dollars an hour, it is safe to say nobody would build cars.  Just food for thought... I have not seen this discussed.  What are your thoughts?

Hi Kris,

I think what happens is that entrepreneurs adapt and use less labor in their projects. The minimum wage and other labor regulations generate a bias against employment and a higher demand for capital compared with the absence of regulations. Who is more likely to own capital? The rich or the poor? So those who say they defend the poor by introducing minimum wage laws and protective labor regulations are producing a series of negative consequences for that group.

Libertad o Muerte, Jorge.

suppose i have a project in which I need no less than X number of employees to make a profit. I have found the bare minimum number of people required for my project, and they've agreed to wages that make my venture profitable. In comes minimum wage laws and pushes their wages up. Since I cannot finish my project with less people, and now it is illegal to pay them at or below an amount that would make my actions profitable, I would then forgo the opportunity (or rather the opportunity has been destroyed). Why can we not assume this is one of the side-effects of minimum wages?

Hey Kris, Thanks for your service. I am also a USMC vet and current USCGR officer, and also an aficionado of Austrian Economics. I terms of your question, I think the wage laws are a double edged sword. Yes, its good for society, since people need a 'minimum' wage just to survive in the current environment. We all know that prices go up, they rarely go down. Coupled with inflation, it makes surviving that much more difficult. In the case you provided above, when wage laws are enacted and the variables costs go up, making you less of a profit, you either raise your prices to make more of a profit or to make a profit in general. In reality, other companies who participate in the introduction of wage laws will either have to raise their prices as well so that they can make a profit. This schema will either have companies drop out of the race if they can't make enough money, or they will continue to participate.

Wow, happy Memorial Day! I appreciate your enthusiasm for freedom! To respond to the idea that a business simply needs to raise prices in order to make up the difference; that is fine for products an elastic demand curve, such as the automobile industry. However, some products do not have elastic demand curves... meaning consumers will not tolerate a much higher price. On the issue of minimum wage laws. There are two main issues with such laws. 1. a law dictating a wage floor overrides free choice. No laborer has to accept pay lower than what they are willing to accept. That is a fundamental fact of the *free* market. Such laws force one group at the expense of another. 2. While minimum wages are good for the actual employee, they are also a force for unemployment... and as you pointed out, also drive up prices. There is no net gain for the entire economy, only for few at the expense of other less-experienced/skilled workers and consumers. Also, if we are to go the route I suggest and assume less-efficient producers would be regulated out of the marketplace since they could not cover the new labor costs, it is safe to say at the expense of other entrepreneurs as well. (who may over time learn to be efficient enough to compete adequately in the marketplace) Since such laws require coercive action by the government, it can be said minimum wages are a form of legalized theft. There can be no room for that in a free society.

Hey Kris. Sorry for not responding sooner. I agree with you in that some products are inelastic; consumers will not be willing to pay the higher price. You are also correct in that a law dictating a wage floor overrides free choice. No laborer has to accept pay lower than what they are willing to accept. What happens then? They'll just quit and work for the other guy who is willing to pay more. I do believe minimum wages are good for the economy, but dont fully agree they are a force for unemployment. Wages have to be raised upon a certain 'price point' where the company can still make money and stay competitive. When its above that threshold and it cuts into their margins, then it becomes a problem. What is the actually threshold? Well, I would say that is an equation involving the CPI, risk free rates and some other variables. Companies can borrow capital at a certain cost, pretty cheap right now, and still make a lot of money due to the cost of capital. So, at the end their profits are high because their borrowing costs are low. So I believe there is a little wiggle room there for minimum wages. Take care!