❊ Why the Minimum Wage is a Bad Idea

There’s a minimum wage discussion going on in Lebanon so I figured I’ll get my two cents in while I can.

Many in the blogosphere are sympathetic to the position of the workers. This makes sense because they are the weak party and they are the ones who most deserve our sympathy. So, in a way, I understand the emotional outrage at the small increase proposed by the government. In this post, however, I will present the other side of the story: Why the minimum wage is a — really — bad idea.

• The minimum wage increases unemployment.
  Let’s say you own a factory and you want to make a hiring decision for jobs that pay the minimum wage (say, janitors). You have a budget of 2 million Liras per month for cleaning. Previously, you could hire 3 people, but now you can hire only two because the minimum wage has increased. The third person could have been employed but now he won’t be.
• The minimum wage increases unemployment (part 2)
  Let’s say, in the example above, the factory increases its budget for cleaning instead of employing less workers. So now they’ll pay 2.5 million Liras per month for cleaning. The extra 500,000 Liras will be added to the prices of the finished goods, making the Lebanese product more expensive (less competitive). People like me who import Lebanese goods might start finding Turkish or Chinese products more desirable because they’re of similar quality and at a cheaper price. When we start cancelling orders for the expensive Lebanese goods, the Lebanese factory shuts down and the workers will become unemployed.
• The minimum wage will strengthen the informal economy
  There will be more temptation than ever to employ (cheaper) Syrian and Egytpian workers instead of Lebanese workers. This is especially true because our government is not strong enough to enforce the law and punish the cheaters. Also, many Lebanese will secretly accept working for less than the minimum wage because their other alternative is no work at all.
• The minimum wage causes inflation
  Think of the factory above which had to raise the price of its goods because it has to pay higher wages. Now multiply that by all producers in Lebanon (for example, apple farmers who will have to pay more for pickers), and you’ll understand why everything will become more expensive. Prices will keep increasing until we get back to the point where the new wage will buy you the same amount of stuff the old wage did.
• The minimum wage is unfair
  It favors those who already have jobs and those who belong to unions, while it locks out those who are just entering the labor force like the young and unskilled.

There are other reasons that are too technical to get into (other countries’ experience with the minimum wage and statistics that prove my points above). But I will end by saying that it’s okay to feel sympathy for workers who don’t seem to be getting enough money to make ends meet. But the minimum wage, a policy filled with good intention, is not the right solution.