On June 14 of this year, Los Angeles mayor Eric Garcetti signed into law a bill which will raise the minimum wage in the city from $9 to $15 an hour over the next five years. However, this is only the latest in a series of efforts to drastically raise the minimum wage. Last November, San Francisco voted to increase its minimum wage to $15 an hour by 2018. San Diego, Seattle and Chicago have done similar things, all raising their minimum wage rates. Gov. Cuomo of New York State has recommended that the minimum wage in his state be raised to $15. This is earning praise from labor organizers and low-wage workers everywhere.
But the economist Bastiat teaches us that, in economics, there is what is seen, and what is not seen. Minimum wage is an excellent example of the common blindness to economic law. Let’s look briefly at the concept of the minimum wage, and its outcome.
Minimum wage was, as is so often the case, conceived as an anti-poverty measure. If, the thinking went, we force employers to pay a minimum wage, it will help the poor since they’ll be guaranteed a minimum income. While this is a noble sentiment and helping the poor is a civic and Christian duty, it does not truly help the poor.
Here’s the economic logic behind minimum wage laws. By creating a minimum wage, a price floor is created. A price floor is a price below which you cannot buy or sell something on the market. A price floor on wages means a limit for how low the price of labor can go. This means that any worker who isn’t worth paying the minimum wage isn’t a good choice for a new hire. Who does this hurt? It hurts teenagers, high school and college drop outs, the mentally disabled, and others who lack the skills to perform more advanced work. Minimum wage often hurts the very people it was meant to help.
It’s argued, by minimum wage advocates, that the minimum wage has to be in place to protect workers against the exploitation of capitalist business owners. These advocates are often persons who don’t pay the price of their advocacy for wage laws. The cost of their convictions is exported to a minority of persons, business owners, who are then forced to either pay up, or be denounced. While it is true that some minimum wage laws have been instituted, without significant increase in unemployment, this is likely due to the raise in wages not greatly different from what the market would put them at.
A recent New York Times article argues that economists aren’t certain what will happen with an increase in minimum wage laws. But this author holds that minimum wage laws, with one or two exceptions, are always harmful to laborers.
A minimum wage establishes a minimum price for buying labor on the market. That labor is almost always unskilled. Skilled laborers don’t bother about minimum wage. If the price of unskilled is forced above the market rate for that kind of labor, then employers will buy less of it, they will employ fewer laborers. A recent example of this is the closing of Borderland Books, a science fiction store in San Francisco, which closed because it could not afford the wage hike.
The final piece of the puzzle, which is almost always left out, is the impact of minimum wage laws upon real wages. Real wages is the value of your pay, in relation to the price of things you buy. An income of $200k per year goes a long ways in places where cost of living is low, but won’t mean much in Palm Beach or Aspen, where prices are much higher. Income, in terms of dollars, is significant only in relation to the cost of goods to be bought with that income. If income is high, and so are prices, then a high income is meaningless. Increasing the wages a worker makes does not increase their real income, since prices will inevitably go up in response to the increase. This is how economic theory proves minimum wage laws to be harmful to workers. Now, some will say, “Wait! You don’t know what you’re talking about, you’re a writer, college-educated, how could you know about the plight of low-wage workers?
This writer has spent many years working in low-wage occupations. I have worked since I was 16, and spent most of my 20s working in variety of low-wage occupations. When this author was about to finish college, the economy went belly-up, and this author spent over 5 years in low-paying work, struggling to get by, before he could return to college. What was irksome was not the low wage I was paid, often around $9 an hour, but the cost of everything else. On that wage, it is impossible to afford to live independently, or to own a car. Among the most common complaints of low-wage workers is their pay. What my co-workers so often misunderstood was this: We add little value to our employers, therefore we are paid less for it, no matter how deserving we think ourselves. Notions of our own value confuses two things, our moral worth and our economic worth. As moral beings at the lower end of the socio-economic spectrum, we often look for ways to assert our worth in an economic world which demands that we provide value. A key way of doing that is by demanding a higher wage, giving our complaints of how little we have, how we struggle to pay the rent, fix the car, buy mandated health coverage, etc.
The hardship of low-paying work is certainly undeniable, we work hard and are paid little. There are good economic reasons for the latter, but that gets ignored in our rush of complaints about how hard it all is. In it all, we fail, or do not wish, to see the hard truth of a free market. In a free market, no one but you is truly responsible for where you are economically. Hardships and unexpected things certainly come, but the final responsibility lies with the individual.
It is impossible to begrudge workers their desire to make more and to better their material condition. Rather than think of minimum wage as a moral desert, think of it as what it is: a price control. A better way forward is to see that the productivity of labor is increased, for this is what raises wages. American labor is worth more than labor in China or Thailand, why? Because our laborers are more productive than theirs, not because government dictates a wage. It is better to allow wages to rise on their own, on a free market, through freely operating mechanisms, than to dictate the economic action of employers. The more this is done, the less and less employers will want to hire labor, or to remain in business.
Let the market work.