(L120 & 125) The Broken Window Fallacy: Minimum Wage Requirements

Why wouldn’t someone voluntarily offer you a job at twice today’s minimum wage?

Story time! Let’s say that a small business opens up selling handmade jewelry and other goods in the middle of a New Hampshire town. Let’s also say that the current minimum wage in New Hampshire is $10.00 an hour. At this rate, the business owner can really only afford to hire 5 employees (in total). So the owner hires his employees, and business is alright; they are new in town, so large profit margins and excessive foot traffic are not to be expected.

After about 6 months of being open, business is rapidly growing. The owner is finally getting out of the red, and into the black! There is so much business in fact, that the owner needs to hire more workers just to keep up. He decides to add 2 more people to the team; it won’t quite cover all of his needs, but because of the high minimum wage, it is all that he can afford right now.

The night that he interviews for his two new employees, a woman comes in asking for nearly $20.00 an hour. Her skills are extensive, and she would be able to bring brand new products into the shop without any training whatsoever. Not only would she save him time, but she would make him money! He thinks back on his other employees; no prior knowledge or skills, no new ideas, nothing even nearly as valuable as this employee would be worth to him. If it were up to him, he would be paying his employees exactly what he deemed their skills to be worth; maybe that would mean $8.00 an hour for a cashier, $8.75 an hour for an opener and a closer, etc. However, since he was forced to overpay for their basic services due to government intervention, he cannot afford to hire this valuable and worthwhile prospective employee.

In short, he is in need of two more workers. He would be able to afford both the above average woman and another cashier/clerk if it was not for minimum wage requirements. With these requirements however, he must choose between superior product and a shortage of man power, or basic work and enough workers to scrape by. In the end, a shortage of workers is just not something that a business (owner) can afford, and so he must kiss this great opportunity goodbye. This issue could have been completely avoided had he and the employees been able to come to an agreement on a fair hourly wage without government intervention or mandate.

When an owner is forced to pay someone more than they’re worth, they lose out on opportunities to hire higher quality employees for a greater cost. This is the broken window fallacy; the seen and the unseen. While we do see that an average worker is being paid very well, we do not see that a better worker is being paid less than they deserve or not being hired at all (because of the average worker’s forced wage).

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