Minimum wage is an act of government benevolence, but it actually brings devastating results especially to the working poor: unskilled, elders, teenagers, immigrants workers.

1. Free Markets and The Minimum Wage Philosophy and Trade Elad WIND, May 2010 1

2. The Price System Adam Smith in The Wealth of Nations: Prices emerge from voluntary transactions between buyers and sellers, each seeking his own interest such that everyone is better off. Milton Friedman: “The price system works so well, so efficiently, that we are not aware of it most of the time. We never realize how well it functions until it is prevented from functioning, and even then we seldom recognize the source of the trouble” The Invisible Hand The price system is a mechanism that performs this task without central mechanism. 2

3. The Role of Prices Prices hold three inter-related functions: Transmit Information Incentive to adopt the least costly methods of production Distribution of income 3

4. Minimum Price Surplus Price floor – set above the market equilibrium Destroys the clearing and allocating function of prices Consumers – faced a higher price for the same product, reduce purchases or even drop out of the market entirely. Suppliers – guaranteed a higher price, increase production. Surplus – a short run excess of supply is inevitable. An economic waste. Even worse, fixed prices signals to engage inappropriate economic activity that tends to aggravate the original situation. 4

5. Market Intervention Example US gasoline ceiling price President Nixon set maximum prices for gasoline in 1973 Quality Deteriorates Dealers sold gas on a first-come-first-served basis Drivers queued in long lines, a sight not to be seen until then. Black Market Evolves Gasoline was held for friends, preferred customers, the politically well connected and… those who were willing to pay a little cash on the side. 5

6. The Labour Market Uncomfortably, behaves like every market. Wishes are tempered by the reality of competition. When you get a clogged drain Most of us will call plumbers We hire the one who quotes us the lowest price. When quotes are too high? Most of us will grab a plunger and a wrench, and give it our best. Labor markets is the combination of rational beings such as ourselves -high prices keep us at home. 6

7. Minimum Wage Intervention Governments set the minimum wage out of noble intentions: Give low-skilled workers an advantage Make life easier for the poor US Fair Labor and Standards Act of 1938:to provide for “the maintenance of the minimum standard of living necessary for health, efficiency, and the general well-being of workers.” 7

8. Min’ Wages in the Developed World Countries w/o wage control: Brunei, Denmark, HK1, Norway, Singapore Wage bargained by unions: Austria, Finland, Germany, Iceland, Italy, Sweden Rates for example: FR: €8.82 / hour US: $7.25 / hour, Federal2 1 – Minimum wages apply only for foreign labor 2 – States and districts may set it higher 8

9. For Minimum Wage 9

10. Arguments For Minimum Wage A subset of consumers do raise their income as a cause:The benefits of the poor outweigh the added unemployment. Past experience: the unemployment effect is mostly on teenagers. Protect adults from teenagers willing to work for less. Uncontrolled businesses have the power to abuse the labor. Assures a minimal income to survive and pay the bills. To raise the living standards and spending power of individuals. As a reflex: minimum wage law is seen as siding with labor, siding with the poor, the underdog 10

11. Against Minimum Wage 11

12. Why not $100? If minimum wage can be set arbitrarily, why stop at $7.50? Why not $100? The principle remains at lower levels: Wages are a function of productivity not whim A minimum wage set above workers' productivity harms the intended beneficiaries 12

13. Low Skilled Workers Are Hurt "Don't give a beginner a chance." Low-skilled workers compete for employers’ dollars with: Skilled workers Capital investments in technology A receptionist   invest in an automated answering system Fast-food served on paper and plastic   hire dishwashers 13

15. Minimum Wage Abuses Lobbies Often unions and strong firms justify a raise in the min’ wage Strong firms suffer less from a rise in costs A bigger portion of a smaller pie. Unions know: an increase in min wage will lead to further raises Compensate for Inflation Indexing of the minimum wage to the inflation Retain real spending power But, production costs raise again Public pressure “it’s time that the government did something”. Public tends to blame market failure on the free market and 15

16. A Comic Relief 16

17. To Conclude Interferences with the price system lead to unintended and unexpected consequences. The only way to increase wages is to increase worker productivity and to ease the inferred costs of running businesses 17