Unemployment is rising as the international economy is struggling to recover. Individuals are losing their jobs and looking to the government for answers. One common proposal is an increase in minimum wage. However, this is a purely nominal fix and can be detrimental to fragile economies. Many nations are already torn between decreasing national debt and increasing the welfare of individuals. Minimum wage increases not only make the poorest worse off, they also damage national debt.
The British unemployment rate recently increased to 8% in May. The national minimum wage was increased last October to £5.80 for workers aged 22 years and older. No policy is the sole cause of the recent spike. Still, it is important to examine contributing factors. The most tragic and heavy adverse effect of minimum wage is unemployment. Basic supply and demand tells us any time a price is inflexibly set over the market price, a shortage occurs. This is due to the shifted opportunity cost of the employer. The minimum wage is a marginal wage. The lowest paid unskilled workers are let go because the value of the work is lower than the price. Alternatively, the employer will increase hours of higher skilled workers already employed or decrease production. This unintended side effect hurts youth and those already at an economic disadvantage. It does not allow them to take a lower wage and gain on the job skills to improve. They are not only unemployed, they are also robbed of essential experience that would ensure better future wages.
It is vital that during an economic downturn governments do not allow such policies. This artificial change in minimum wage is not a change in real wealth.
Instead, during these times of frantic budget cuts, politicians should make employment less costly and flexible.