Raising the Minimum Wage: 

A Threat to Jobs

Molinari Economic Institute
 
Issue CLXV - June 29, 2008
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Labour Minister Xavier Bertrand has announced a rise of 0.9% in the French minimum wage (known as the SMIC) as of 1 July. This follows an earlier increase of 2.3% that took effect on 1 May.

According to a new study from the Institut économique Molinari, these successive increases are potentially harmful to the economy and to employment. Moreover, the existence of a legal minimum wage is a cause of structural unemployment and of exclusion from the labor market.

The minimum wage: a cause of structural unemployment

The minimum wage is a prohibition on employees receiving wages below a certain threshold. It thereby prevents employers and employees from agreeing on contracts and in this way creates unemployment.

Its total cost to an employer is about 1500 euros a month. Thus, all workers whose productivity is below this threshold are, in practical terms, excluded from the job market.

Examples from around the world make this clear.

In Germany, a minimum wage was instituted in the postal sector in December 2007, at a level far higher than wages paid until then. The effects were immediate. Pin Group, a company operating in this sector, had to lay off more than half its 11,000 employees.

The negative effects that the minimum wage has on employment are all the greater because of the wage’s high level. This is why successive increases in the SMIC cannot fail to have an impact on jobs.

The minimum wage: a factor of exclusion

This unemployment has its greatest impact on workers whose productivity is lowest, in other words the least qualified and young people without experience.

To be able to work, some of them have to put themselves on the fringes of the labour market. Thus, the study concludes, working on the black market is often a way of getting around the rigidities of labour law, with the minimum wage first and foremost among them.


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