How minimum wage hurts workers (while profit and competition help them)

So this is a video primarily for—to be serious—you've seemed quite taken aback when I said that minimum wage regulations are usually harmful to workers. Now, this is a subject that's already been addressed several times on YouTube, but I think it bears repeating.

First of all, I want to give a really rough indication of the mechanism whereby workers' wages tend towards a lower level in a free market. Imagine a situation where there are several sweatshops in competition with one another; they're making t-shirts. The sweatshops are competing with each other for customers to buy their shirts. That means there's a pressure for each of them to produce and sell the shirts as cheaply as possible without running at a loss.

But the employers in those sweatshops are also competing to hire workers. This is the part that often gets overlooked. Imagine that an employer is making ten dollars a day profit from the work of a single laborer. A competing employer, with similar machines, can offer that same worker five dollars a day more than his current employer is paying, and he would still be making a profit by hiring him. It's in the interests of the second employer to entice the worker away to work for a higher wage because it would increase his overall profit. The third employer can offer a wage that's a little bit higher again while still making a profit, and so on.

This is why, on a free market, there's a tendency for the wages of workers to move towards the point at which the employer is just breaking even by hiring them. So if you leave a competitive system of t-shirt producers to itself, things will approach an equilibrium. If you want to use the term a "fair wage," then there's a natural pull towards this fair wage in a competitive market.

Now, socially concerned people might complain that current wages in these sweatshops are too low right now, and something must be done about it. One thing that might be done about it is to boycott sweatshops whose workers are paid less than a certain wage in an attempt to force an arbitrarily defined fair wage. Without minimum wage regulations, an employer has an incentive to hire any worker as long as he's free to pay them a wage that is lower than that worker's marginal revenue product.

Minimum wage rate restrictions prevent the employer from being able to do this for the workers with the lowest productivity. To illustrate this, if my marginal revenue product as a worker is fourteen dollars but there's a twenty-dollar minimum wage restriction, I'm just not going to get hired, even if I could have supported myself for only ten dollars a day.

Minimum wage regulations are likely to be damaging—whether they're affecting developing areas or industrialized ones—for the same reason: they deny workers with the lowest productivity the option of working. This harms potential workers as individuals and the economy as a whole because a proportion of the possible workforce is effectively being denied work.

Minimum wage regulations would harm the profit of sweatshop employers, who would no longer be able to hire certain workers as they would otherwise have chosen to. And this is bad for workers because it harms the prospects of worker wage improvements in two important ways.

Firstly, profits are a signal to other business people that they too could make a profit in the industry in question. So, more t-shirt manufacturers would go into business. The greater the number of t-shirt sweatshops that exist, the greater the competition between them will be to entice workers. The faster the workers' wages, as well as their general working conditions, would improve.

Secondly, profits attract capital investment. Worker wages increase in line with the productivity of the workers, and capital investment in the form of machines, for instance, can greatly improve productivity. The marginal profits of sweatshop owners are harmed by minimum wage regulations; the less incentive there is for capital investment, which would boost wages.

So this is a very rough sketch, of course, and there are extra complicating factors and real-life situations I haven't gone into here. But I hope that this at least demonstrates how minimum wage regulations are likely to hurt workers more than they're likely to help them.