The Minimum Wage: Good Intentions, Bad Results
Ideas have consequences, Richard Weaver once wrote. They pace the course of human history—both good ideas and bad. And while intentions may be honorable, the passing of time has proven that, in the long term, you can’t get good results from bad ideas.
The minimum wage is a classic example of a good intention and a bad idea. The idea behind minimum wage legislation is that government, by simple decree, can increase the earning power of all marginal workers. Implicit in this idea is the notion that employment is an exploitive relationship and that business owners will never voluntarily raise the wages of their workers. Businesses, we are told, must be coerced into paying workers what they deserve, and only politicians know what this is.
Not only does this line of thinking run contrary to the most basic economic principles of a free society, but it is also patently illogical. If government could raise the real wages of millions of Americans by merely passing a law announcing that fact, then why stop at $3.35 per hour, or $4.65, or even $107 Isn’t $500 per hour more compassionate than $50? Absurd, you say, and I would agree. But the “logic” is perfectly consistent with the idea of a minimum wage, once you have accepted the premise that political decrees can raise wages.
What does make wages rise? It is most certainly not government edicts that simply rearrange and redistribute existing wealth. Wages rise in response to the creation of new wealth through greater productivity. The more that a society produces per capita, the more there is to distribute through the marketplace in the form of higher wages, better benefits, and lower prices.
The “bigger economic pie” concept is not complicated in the least, and yet it is a principle that seems to elude us time and again in matters of public policy. We know instinctively that government cannot create or produce anything. It regulates, confiscates, and consumes, all at the expense of the private economy. And yet we still believe that government can wave its magic wand with laws like the minimum wage, and we all will be better off.
Politicians engage in this deception to buy political favor from special interest groups. We keep falling for these political deceptions because our focus is on short-term personal gains rather than on the long-term consequences to the entire nation. We see the apparent benefit of having our own wages increased. But we don’t consider the nameless victims of the minimum wage hike who will lose their jobs because the government has priced them out of the labor market. (It is precisely because minimum wage laws eliminate low-skilled workers from competing in the job market that organized labor lobbies Congress for massive minimum wage hikes.)
Commenting on the minimum wage, economist Henry Hazlitt put it succinctly:
You cannot make a man worth a given amount by making it illegal for anyone to offer him less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering. In brief, for a low wage you substitute unemployment. You do harm all around, with no comparable compensation.[1]
The net loss to society that results from this sweeping act of “wrongful discharge” is staggering. Those losses include: (1) The loss of employment to the individual himself, (2) the shrinking of the economic pie by the loss of his productive contribution, (3) the financial loss to society in supporting him in his idleness (unemployment compensation, welfare, etc.), (4) the financial loss in funding useless job training programs and other government efforts to get him re-employed, and (5) the net loss to society in having consumer prices driven up to cover the higher labor costs, and the loss of market share to foreign competition that may occur.
The cruel irony of the minimum wage is that it harms most the very segments of our society that it is intended to help—the unskilled poor and the inexperienced young. The evidence to support this is overwhelming, and it is the black community that is the hardest hit. in the 1950s, black teenage unemployment was roughly that of white teens. Following years of steady increases in both the level and coverage of the Federal minimum wage, over 40 per cent of the nation’s black teenagers are now unemployed.
Just look at all the jobs that have been abolished by the minimum wage—good and worthwhile jobs for those who are taking their first step on the economic ladder. Movie ushers, gas station attendants, caddies, fruit pickers, dishwashers, fast food help, and a wide variety of other entry-level job opportunities have been either cut back or eliminated because the minimum wage has rendered them unaffordable. How tragic this is, when you consider the true value of these low-level jobs to young and unskilled workers.
Reflecting on his early years in a Philadelphia slum, black economist Walter Williams observed:
None of these jobs paid much, but then I wasn’t worth much. But the real value of early work experiences is much more important than the little change a kid can earn. You learn how to keep a job. You learn how to be prompt, respect and obey superiors, and develop good work habits and attitudes that can pay off in the future. Additionally, there is the self-respect and pride that comes from being financially semi-independent.[2]
If a young person is willing to wash cars for $2.50 an hour to gain work experience and self-esteem, is it the right of Congress to tell him he can’t do it? Is it, in fact, the right of any politician to make these kinds of economic choices for a free people?
Commenting again on the minimum wage, Williams makes this critical observation:
It is important to note that most people acquire work skills by working at “subnormal wages” which amounts to the same thing as paying to learn. For example, inexperienced doctors (interns), during their training, work at wages which are a tiny fraction of that of trained doctors. College students forego considerable amounts of money in the form of tuition and foregone income so that they may develop marketable skills. It is ironic, if not tragic, that low skilled youths from poor families are denied an opportunity to get a start in life. This is exactly what happens when a high minimum wage forbids low skilled workers to pay for job training in the form of a lower beginning wage.[3]
In a free society, people must have the right to offer their services in the marketplace for whatever price they choose, whether they are workers serving employers or businesses serving consumers. It is by this process that productivity, wage rates, and prosperity are maximized. Government has no more business objecting to a low wage rate for a menial job than it has objecting to a business that offers its services or products for a low price. Government intervention in these matters distorts economic decision-making, misallocates scarce resources, and destroys personal liberty.
If we are to remain a free people, we need to start trusting freedom, and jealously guard our right to make our own choices about our own lives. Repealing the minimum wage law would be an excellent place to start. []
1. Heny Hazlitt, Economics in One Lesson (New York: Arlington House Publishers, 1979), p. 135.
2. Walter Williams, “Wage Laws Keep Teens Jobless.” Colorado Springs Gazette Telegraph, May 16, 1986 (syndicated column).
3. Walter Williams, “Government Sanctioned Restraints that Reduce Economic Opportunities for Minorities.” Policy Review, No. 2 (I 977). p. 11, (Quoted in Poverty and Wealth: The Christian Debate Over Capitalism, by Ronald H. Nash. [Westchester. Illinois: Crossway Books, 1986], p, 122.)
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Comment by Chip Ross on 14 October 2009:
This is an outstanding article. But the way things are going, we won’t need to worry about the negative effects of the minimum wage, because there won’t be a private sector left in America.
Comment by Bush on 1 June 2010:
USA was great because it was a free country, now it stincks because it is socialist. People blamed Bush for that and who is going to save them? A good communist friend of Kim Jong Il. Government should mind his own business and leave people alone.
Comment by exploited on 6 September 2010:
This is an excellent article, however there is an aspect of human nature that it doesn’t address, namely: greed. I know a number of privately owned companies where the boss is the owner and has no one to be accountable (save the tax man of course). Greed plays a big role in how such people will decide to compensate their employees. Sure enough, some are nice people and pay a fair wage, but then there are the monsters who are out to earn more money, no matter what. The latter are not going to voluntarily raise wages, regardless how much profit they earn. It is this sort of management that minimum wage attempts to guard workers from. This is not an isolated incident but rather widespread, it is after all, human nature to get greedy.
Comment by Ann on 30 September 2010:
Great article. Even if employers are greedy as the last writer says, they usually have to pay more or give perks to their employees because if they don’t, the workers will leave and go to better paying companies. There is competition for good workers in the free enterprise system, something you are not taking into account. This causes companies to be self-regulating. In fact the better you treat your employees the higher the quality of their work. Why do you think benefits came about in the first place? To attract better workers! No one is required to stay in a job, there is mobility in our system. If one company isn’t good I’ll go to a better one. Therefore your argument doesn’t hold up.
Comment by Hiper on 24 November 2010:
@ Ann;
You are a classic example of a fully institutionalized person.
If the workers were as united as the employers there could be
a healthy balance in trading labor for wealth.
But what freedom does a man with 3 kids and a mortgage have when
he sits down to negotiate his wage?
Exactly… he virtually takes whatever the employers generally pay more or less.
Which is in reality far less as the wealth created by his labor.
It is imperative for the employers to be unified and it is imperative under these circumstances for the workers to be as unified. The later is clearly not the case.
Employers simply exploit the division among workers.
Of course the workers -let- themselves and their valuable labor be exploited. Union’s fundamentally and in practice always have been a joke.
If there was a real balance in the labor-wealth trade it would mean an economy FOR the people.
If there is no balance in the labor-wealth trade it means people FOR the economy. Like we are witnessing.
The maxim divide and rule in action.
Comment by Beth on 3 January 2011:
@ Hiper
Actually, Ann makes very logical and true points.
When an employer hires a worker, and a worker takes a job at a wage even if he wishes it were more, both are better off. Otherwise, neither would have agreed.
This is not exploitation.
A worker taking a job that he feels is paying him less than he is worth is not being exploited at all. This is because this particular job, even though it is not ideal in the eyes of one party, is better than the next available alternative.
I would be beneficial to learn more about economics in this area!
Also, emotions need to be taken out of the discussion as they have no bearing on logic and reason. Most of the arguments about “exploitation” and “fair wages” are really emotional and subjective arguments that have no basis in reason.
Policies like the minimum wage are clearly based upon emotions rather than reason and logic (and morality for that matter) and the results are typical: unintended consequences that far outweigh any projected positive benefits.
But alas, in this day, good intentions trump good results. Too bad for all of us.
Comment by Mark on 26 January 2011:
Ann is partially correct. Exploited hit it right on the head.
The problem with Ann’s argument is that employers can and probably will set a precedent in which most employers would likely emulate. When an employee is underpaid and wants to switch companies, but all related industries are paying similar wages, where does one go?
Elimnate minimum wage and this will likely occur. Only now their wages will more than likely be below current minimum wage. So now instead of hopping from one 7.25/hr job to another, they will be hopping from one below-minimum wage job to another.
Giving humans too much power is rarely a good thing. Some regulation is needed.
Pingback by Tackling youth unemployment in your country on 21 February 2011:
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Comment by bee-free on 8 March 2011:
I don’t think there’s any place in the constitution
that gives the congress the power to regulate peoples wages.
Comment by Zeke on 25 April 2011:
“Giving humans too much power is rarely a good thing. Some regulation is needed.” That statement drips with irony. By definition, a government decree has significantly more power than a voluntary market exchange. One is done by coercion, the other through free choice.
Greed is good, exploited. It is the profit system that ensures the best outcome. If you are making a profit, you are being efficient. If you are not making a profit, you are inefficient. By saying that employers should care more about employees than profits, you claim that businesses exist to provide people with jobs. In reality, business exists to meet the demands of consumers. By having a profit, you are meeting the demands of the consumer. You are using resources efficiently.
But your drivel works the same way for employees. Could not the same “pejorative” term, greed, be applied to employees? Sure, some good workers care about the companies well-being, but must employees are greedy bastards who care only about making their own money. But if we accept that greed is not evil and the desire to have money is not evil, it becomes easy to accept that both employees and employers should seek the most amount of wealth. For an employer that means paying as small wages as possible. For an employee that means attempting to garner the most wages possible. Where both sides agree a deal is struck.
Either employees are all the same, lacking differentiation and not worth minimum wage or employees are different and minimum wage is useless. In the first case, it would be immoral to force someone to pay workers more then they are worth. It also would suggest that a business is pursing an outcome contrary to its best interest. That is to say having a marginal cost that is higher than a marginal benefit. Since this either should not be or cannot exist we can conclude that minimum wage is not necessary. An unnecessary law with negative consequences is a bad law. A bad law should be repealed. Minimum wage is unnecessary and has negative consequences. Therefore, it should be repealed.
Comment by Jason on 24 September 2011:
zealously*
Comment by Rob on 1 October 2011:
@exploited
If an absence of a minimum wage causes low-skilled labour to be undervalued by employer greed, it would surely also cause all other labour to be undervalued too. This cannot be a dominant force in the economy, or else why are some jobs higher paid than others? Supply and demand dictate the price of labour, just like any other commodity. And such principles operate across the entire spectrum of salaries, not just those above some arbitrary threshold.
I’m convinced that minimum wage is a bad thing for the economy. One thing we can do to help low-skilled workers — i.e. the people whose labour is valued at less than minimum wage and who are therefore currently unemployed — is to introduce a negative income tax as an alternative to minimum wage. Instead of having discrete income tax brackets, tax should scale continuously with income. Below a certain threshold, tax goes negative. In order to make the math work, a person’s tax would be calculated as a percentage of their salary + a constant, so that if the person is earning nothing (they are unemployed) their income tax will be -100% * ($0 + $C), so they receive the full $C welfare. How tax scales with income will require some clever mathematical work to find the optimum curve.
The advantage of this is that companies will have access to cheap local labour, which will reduce the need to outsource to other countries, increasing our competitiveness. Standard of living will increase throughout poor areas.
Comment by Jacob on 11 January 2012:
@Rob
I completely agree that we can use taxes to better benefit the needy and remove minimum wages from the private sector. NIT mixed with a little math could provide 1 simple curved tax bracket that benefits all within a society.
Comment by Bob on 20 February 2012:
Why would we build a support network for businesses that can’t manage their resources? Why would I want to subsidize Walmart shareholders by building a support network for their employees who can’t live on the wages they are paid. Either the job is worth doing and worth being compensated for or it is nothing more than indentured servitude and welfare, social assistance, health care and costs of crime make up the difference. It isn’t the imposition of wage rates that causes the market failure. It is the security, for low wage employers, that the state will compensate their employees for mismanagement on their behalf thus ensuring that the proposed invisible hand isn’t needed. Employees stay in low paying jobs because, we continue prop their total compensation with social nets and food banks.
Comment by Ray on 20 February 2012:
The unseen fact of the minimum wage is that by definition it forces the minimum wage earner to pay higher prices for the products that he buys. Additionally just like everyone else he pays for the cost of enforcement (albeit indirectly) to keep the so called “greedy bastards” in check. In reality he is probably worse of (if he is still lucky enough to have a job) than he would have been had he negotiated a wage on the strength of supply and demand.
Making changes to the system would however be inadvisable in a vacuum and I would suggest that one has to start liberalizing from the top. First scrap legal tender laws and implement free banking. That should convince people much quicker of the benefit of economic freedom.
Comment by Anonymous on 14 April 2012:
90
Comment by Cynthia on 17 May 2012:
The price of labor is determined by the size of the labor pool.If there is high employment, wages go up. If you want to encourage higher wages, especially for those unskilled workers, you close your borders. To encourage jobs creation, government needs to create a climate which works for business to expand, thus requiring more employees: lower corporate taxes so American companies can compete globally, call off the Gestapo EPA and eliminate oppressive government regulations, and stop making government give-aways the responsibility of private employers. The Obama administration is doing the exact opposite of what we need now.
Comment by Nodnard the Nasty on 18 May 2012:
A sometime contributor to this periodical and economist Warren Gibson also has some good points on destructive minimum wage jobs : Bad Idea of the Year: Raise the Minimum Wage. Be thankful most of you don’t live in California like Mr Gibson and I do. Raising the minimum wage is actually being considered again, even after all of its failures.
Comment by AdamSmith on 24 May 2012:
@Hiper – I wish I could say you are an fn moron in a 24 yr old blog but I’ll save it for this time. Competition through and through is the best thing for this country and really the only saving grace America has left. Supply & Demand for labor, goods, resources is what makes America great.
@Rob – great points and love the negative tax rate. Minimum wage sucks. Tax reform is essential. The more you make, the more your taxed, but at the same rate through and through. Let’s not penalize those that are able to create more wealth just because they have it. That is pointless.
@Cynthia – probably the best posting I’ve ever seen, and bonus points for it coming from a female. Its not too often you see such intelligence in one statement, even less economical from women. Oslama hasnt done much in terms of making this country a better place to do business since Day 1, so I’m fearful what would happen if he was to be re-elected.
History has shown us time and time again that raising minimum wage, implementing price floors/ceilings, unions are bad for free market enterprise. Don’t break a perfect system and the system won’t break you.