The "Minimum" in Minimum Wage

I can't stand minimum wage laws. They're terrible policy. Anyone with even a basic level of understanding of economics knows and can explain why. Since I don't have one :), I had to read Stossel's. One of the most obvious reasons minimum wage laws are bad policy is that the cut the bottom rungs off the wage ladder. As Stossel explains:

"The law of supply and demand, which operates whether we like it or not, says that when the price of something goes up, people buy less of it. That's why environmentalists like higher gasoline taxes, and anti-smoking activists back higher cigarette taxes."

Given that explanation, when the cost of labor goes up then people (employers) buy less of it. In other words, they don't employee as many people.

As much as I like Stossel (and anyone that's read Stupid in America can attest that I do) even he misses one important point here. I believe that increasing the minimum wage will only increase the number of illegal immigrants that are hired. I know this isn't terribly intuitive so let me try to explain it with an analogy that most people are more familiar with.

Years ago the NBA considered raising the height of the basket. The thought was that there were so many really tall people playing that the 10' height had become outdated. People who were 7'+ tall had an unfair advantage over 6' people because they were so close to the 10' basket height. They did some test to see how effective raising the height of the basket would be in leveling the playing field between people that were 6' and 7' tall. In tests that were done (can anyone find one of those old tests for me to link to?) raising the height of the basket didn't level the playing field as they hoped it would. Instead, it further exaggerated the disparity. It put the 10' goal even further away from the 6' tall person and increased the advantage that the 7' person had.

So how does this basketball analogy have to do with minimum wage laws? Right now mimimum wage is $5.15. That's our 10' basketball goal. The 6' tall people are American citizens that are currently being employeed at minimum wage. The 7' tall people are illegal immigrants. Their advantage is that they can work for a cheaper rate. Surely most companies are law abiding in their hiring policies but some try to break the law and get an advantage by hiring some 7' tall people on their team. They're cheaper to employ. When the height of the basket is raised (when minimum wage is increased) then the 7' tall people (illegal immigrants) have even more of an advantage. They have more of an advantage because whereas currently it costs $5.15 to employ a US citizen versus potentially $4 for an illegal immigrant raising the minimum wage to $7.25, as the house as just voted to do, pushes that disparity from $1.15 to $3.25.

I'm not condoning companies for hiring illegal aliens. Certainly regardless of the money that can be saved it's not a justification for breaking the law. It will encourage a lot of unscrupulous companies to do just that, though. It increases their incentive the break the law. It may not be worth them risking the fines and bad publicity and everything else that goes with getting caught to save $1.15 but it's going to become worth it to more companies for $3.25. The easier it is for illegal immigrants to get a job the more that are going to be streaming across our border. That's the real low point of increasing the minimum wage.