Productivity and Minimum Wage

"You know what, Mrs O'Rourke? You don't know me at all. I broke up with my girlfriend this year. I lost my job at All American Burger and two other places. I wake up at 5:30 to go to work at Mi-T-Mart. Then I go to school and go back to Mi-T-Mart. My grades aren't that bad. And you're telling me the fun is over. Man, I'm still waiting for the fun to start!"
--Brad Hamilton (Fast Times at Ridgemont High)

We have frequently observed that minimum wage laws amount to compulsory unemployment. This video employs a productivity argument to demonstrate.

California's recently passed minimum wage law does not require employers to pay at least $10/hr to every worker. It forces employers to pay $10/hr to every worker they choose to keep. Workers who are laid off, or who never get hired in the first place, get $0/hr.

For example, an owner of a hamburger restaurant hires workers perceived as being sufficiently productive. Productivity equals output / input. The primary objective of an operation is to produce output that is worth more than the input. This is not just a self-interested entrepreneurial goal. It is in society's best interests as well, because production that results in the opposite--output that is worth less than input--squanders scarce resources. Society is worse off when scarce resources are inefficiently employed.

Suppose the restaurant owner hires three workers of varying abilities (i.e., the productivity of each worker is different) to flip burgers. Workers A, B, and C produce 110, 120, and 90 burgers per hr respectively. If the owner makes $0.10 on each burger sold before paying workers, then A, B, and C produce $11, $12, and $9 per hour in pre-labor expense value to the owner.

Suppose that the owner pays each worker $8/hr. After paying the workers, the owner makes $3, $4, and $1 per hour per respective employee.

An important point to make is that, despite differences in individual workers productivity, the owner is motivated to retain all workers that generate a profit for the owner. In fact, the owner is motivated to look for additional workers whose productivities can generate even more profit.

Now let's inject California's recently imposed $10/hr minimum wage law. Productivity of A, B, and C doesn't change, meaning that they still produce $11, $12, and $9 per hour of pre-labor expense value. However, the owner is now forced to pay $10/hr to any worker that is employed at the restaurant. If the owner pays the three workers accordingly, then the owner makes $1, $2, and -$1 per hour per respective employee.

C no longer generates a profit for the owner; he generates a loss. The owner would be $1 per hour better off if C was fired.

A and B are better off. They now earn $2/hr more than before. But if C is fired, he is now $8/hr worse off. In relative terms, A and B each gain 20%, but C loses 100%.

And unemployment has just increased by one person.

As the video observes, one way to view the impact of minimum wage laws is that they benefit more productive workers at the expense of less productive workers. But is a minimum wage law even necessary to help more productive workers? After all, owners are motivated to raise the wages of productive workers because if they don't, competitors are motivated to hire those workers away to improve their own situations.

Meanwhile, marginally productive workers such as C who are willing to work for lower than the legal minimum wage are forced to the sidelines.

While they may be well intentioned, minimum wage laws exert the most pain on those people that the laws are purportedly intended to help.