A potentially great improvement to minimum wage laws to handle both economic efficiency as well as poverty concerns

Min­i­mum wage has the side effect of leav­ing un­em­ployed, the peo­ple who do not pos­sess the req­ui­site skill to com­mand the min­i­mum wage in the mar­ket. This fol­lows from ba­sic micro-eco­nomic the­ory and here is nice short video of Mil­ton Fried­man, the renowned United States economist ar­gu­ing against min­i­mum wage laws. To offset this prob­lem, it is es­sen­tial to have some kind of so­cial se­cu­rity safety net for the un­em­ployed.

In­stead, I would like to pro­pose the fol­low­ing scheme which seems to me as more effi­cient (please let me know in the com­ments if you know of any coun­try that tried this or some­thing close): Set x= 1.5 * min_wage. Have no min­i­mum wage laws. And folks who earn y which is be­low x, re­ceive (x-y)/​2 in so­cial se­cu­rity. This way, we have (1) lower “skil­led” peo­ple con­tribut­ing to the coun­try’s GDP in their own small way in­stead of be­ing un­em­ployed and con­tribut­ing noth­ing. If we have a sig­nifi­cant num­ber of these guys, the num­bers could re­ally add up. (2) The min wage like con­cerns are taken care of with the gov­ern­ment safety net. (3) There is still in­cen­tive for peo­ple earn­ing be­low x to work. If we set the so­cial se­cu­rity to some­thing like (x-y), no one earn­ing be­low x will have any in­cen­tive to work since their net in hand com­pen­sa­tion would then always be x re­gard­less of what they do.

This above scheme looks al­most like a pareto im­prove­ment to me com­pared to min­i­mum wage laws, sup­ported by so­cial se­cu­rity for the un­em­ployed, be­cause it does roughly as good with re­gard to sup­port­ing those whose skills are be­low the min­i­mum wage, while en­sur­ing less gov­ern­ment spend­ing on so­cial se­cu­rity, since many of the formerly un­em­ployed would now be in low wage jobs and the gov­ern­ment sim­ply has to top up their cur­rent salaries which might be well above zero. This is of course a good thing, be­cause the gov­ern­ment then has the op­tion of ei­ther us­ing the ex­tra money to re­duce the bud­get deficit and en­sure bet­ter eco­nomic health of the coun­try, or use the money for other wor­thy en­deav­ors. There is also greater con­tri­bu­tion to the coun­try’s GDP which is a good ob­jec­tive in it­self. Lastly there is rea­son to be­lieve that peo­ple be­ing gain­fully em­ployed is bet­ter for their phys­i­cal and men­tal well be­ing. It will also likely re­duce their propen­sity to in­dulge in anti-so­cial ac­tivi­ties, com­pared to a sce­nario where they are un­em­ployed with a lot of idle time on their hands.

I haven’t spent much time think­ing through the im­ple­men­ta­tion and whether there is greater po­ten­tial for such a scheme to get scammed and ex­ploited etc. At least at first glance it seems to me that this scheme is no more ex­ploitable com­pared to welfare benefits for the un­em­ployed, which must nec­es­sar­ily go with min­i­mum wages for it to ac­tu­ally be hu­mane and bet­ter for the poor. Some peo­ple can prob­a­bly get away by earn­ing a liv­ing and still claiming to be un­em­ployed and col­lect­ing welfare checks un­der the min wage + un­em­ploy­ment welfare method. The same peo­ple can do it un­der the new pro­posed scheme as well, so I am un­able to see any more vuln­er­a­bil­ities and loop­holes in this sys­tem com­pared to the pre­vi­ous one.