Edgar the Exploiter

Simon's new at the factory. If you ask him, he'll tell you it's a lousy job. He has to sweep up and carry things around. He only earns three dollars an hour. Even so, Simon prefers working here to the alternatives he sees for himself right now.

Although his wage is low, Simon appreciates the independence it gives him. Next week, he'll learn how to use a forming machine. That will make things more interesting. That's Edgar, the owner of the factory. The only thing he really cares about is making profit. Edgar would prefer to pay his workers a tiny fraction of their current wages to keep more money for himself. But he knows that wouldn't work.

Edgar is in competition with many other business owners. They all need a steady supply of human labour. When deciding whether or not to trade with an employer, workers consider wages but also working conditions and other benefits. If Edgar's offers aren't attractive enough, workers won't sell him the labour he needs to run his factory. So, reluctantly, Edgar ends up paying market prices for the labour he buys.

In another part of town, there's a celebration. This group of concerned citizens just got a minimum wage law passed. They were appalled that miserly employers like Edgar could get away with paying so little to workers like Simon. The new minimum wage is nine dollars an hour. Unfortunately, this doesn't mean that everyone in the town will now earn nine dollars or more. We already saw how the existence of competing buyers of labour influences the lower limit on what Edgar can get away with paying his workers.

The upper limit on what Edgar will pay any worker is the amount of extra revenue he expects that worker's labour will create for him in a given period. In other words, employers won't knowingly pay workers more than the extra income they generate. They'd be losing money if they did that.

So what does the introduction of the minimum wage law mean for the workers at Edgar's factory? Vicky's work generates twenty-three dollars an hour for Edgar. And her wage is fifteen dollars an hour. For every hour that Vicky works for Edgar, he's left with an extra eight dollars after he's paid her wage. Because Vicky's wage is higher than nine dollars an hour, the new law doesn't affect her directly.

Bob's labor at the factory generates ten dollars an hour for Edgar, and his wage is eight dollars an hour. After paying Bob's wage, Edgar is left with an extra two dollars for every hour that Bob has worked. But because Bob's wage is less than the legal minimum, if Edgar wants to keep him on, he'll have to pay him more. Edgar calculates that if he raises Bob's wage to the new minimum of nine dollars, he'll still be gaining one extra dollar for every hour of Bob's labor after his wages have been paid.

Although Edgar will profit less from employing Bob at nine dollars instead of eight, a little profit is better than none. So Bob gets a raise. But the new law is bad news for Simon. Simon's labour generates only four dollars an hour for Edgar. The nine dollar minimum wage is five dollars more than that. Edgar would be losing five dollars an hour by keeping Simon on at the new legal minimum. So Simon doesn't get a raise. Instead, he loses his job.

Edgar is irritated. The minimum wage means that if he wants to stay in business, he has to either invest in machines to do the work that unskilled labourers like Simon were doing, or he has to move production to another country where minimum wage laws aren't a problem. Edgar believes both of these options are less profitable for him than employing local workers; otherwise, he wouldn't have hired Simon.

For Simon, the outlook is bleak. Losing his job would have been bad enough, but the minimum wage continues to disadvantage him even while he's unemployed. Because he's young and doesn't have much experience, it's likely that the extra revenue Simon's labour would create for any employer would be low. Potential employers expect to lose money hiring Simon at the minimum wage, so they turn down his applications.

Simon was glad of his factory job, even with its low wage. He hoped to build up experience, which would raise his productivity and give him a chance to move to better-paid and more satisfying work. But the new law prevents him from doing so. This is why the minimum wage has been described as removing the bottom rungs from the economic ladder.

When we see social interactions that seem unfair, one response is to demand that the behaviour we disapprove of be outlawed. But we should keep in mind that this kind of intervention has unintended consequences. Some people suspect that prohibiting voluntary exchange often does more harm than good. They believe the proper function of law is to discourage the initiation of force, and that we shouldn't create barriers that prevent people from doing their best to peacefully improve their lives. Do a web search for some of these terms if you're interested in learning more.