What’s wrong with a minimum wage law (MWL)?:
Let me begin by saying that my objection to a MWL is NOT based on a subjective desire to prevent workers from improving their material lot by increasing their earnings. Quite the opposite, in fact, though this may not be clear on the surface. Surely all people of good will towards fellow men will rejoice if everyone’s lot is improved. But a more detailed analysis is required to determine whether a MWL can really do that. Also, one must consider whether such a law is consistent with “the proper role of the state” in a free society.
This law is wrong-headed on a number of levels. At the highest, most general level, it sets the bad precedent that the government should get involved in transactions and interactions between “consenting parties”. This objection to a MWL, stated thus, should appeal to the modern “liberal”, i.e., left-winger”, as it has long been recognized by most people of that camp that the government has no business getting involved in private interactions between consensual parties. This is of course usually argued in a sexual context. And I agree, that it is a valid principal in that context. But it should be carried further and applied to all cases involving mutual consent among citizens. Once it has been established that the government does have such a role to interfere, then it opens the gates for gradual osmosis into other areas. Hence, I maintain that it should not be within the role of the state to regulate wages (or prices).
There are other practical difficulties with any MWL. One is that it tends to render a certain low-income worker unemployed. Why? Well, look at it this way: in a purely free market system, we can imagine that there is a large spread in the perceived value of workers. Some workers are perceived by employers as being “high risk”, in the sense that they are untrained, with a dubious, or at least un-established, level of responsibility and dependability. An employer operating with a very narrow profit margin might be inclined to take a chance with this type of risky worker if the “price is right”. That is, low enough that the employer can still operate in the black. Let us call such a worker X, and the mutually agreed upon (low) rate r. Further suppose that there is a worker Y that is more responsible and with more established performance record. Suppose Y will only work if for rate q, where q > r. Now a MWL is enacted, stipulating that the employer must pay at or above a pay rate p, where p > r but p ~ q. Then the employer will have to choose between the following alternatives:
Paying X at a rate p, which is more than he deems he is worth (possibly having to cut back any other employee fringe benefits or reduce working conditions, and/or raising the prices of his goods and services)
Hiring Y, figuring that if he has to pay the rate p ~ q, then he might at least get an employee that he deems to be worth that rate (but to maintain operating “in the black” he might try to raise the price of his goods or services).
Deciding to close up shop, because he needs the help but cannot afford to pay the rate required by the MWL
Deciding to try to stay in business, but to limp along without a helper
Note that in 3 of these 4 cases, X loses out because he does not get the job. Now if we postulate that the unemployment rate in Y’s category is zero, then the second alternative may not happen, because all of the Y-types are already making their market rate, p ~ y. In practice, the y class is never fully employed. Furthermore, even if it is, alternatives 3 and 4 still involve leaving X unemployed. And we must assume that X would be happier being employed at the rate r that is below the MW than he is unemployed with the MWL in place.
The often-heard argument that “everyone has a right to a living wage” is naive and untenable for several reasons, one of them being the above reason, that the MWL cannot guarantee that worker X in fact has a job. Other reasons come to mind:
There is no constitutional right to “being paid a living wage”. A cursory reading of the “founding fathers” will show that this is not what was meant by the right to the pursuit of happiness…this phrase was penned in an era where slavery and active suppression by violence was a reality in much of the world (as it still is today)
Who, in any case, would determine what a living wage is? Surely this differs from person to person. Living at what level? Subsistence, or at a level where one can afford a TV and a nice car?
Many people that work for wages in the r regime are not, I believe, primary wage earners for a family; rather they are teenagers earning discretionary income, or retirees working just to keep a foot in the goings on of society. Some are, to be sure, and taking a job at rate r is still preferable to no job. They may have to take two jobs at rate r…it’s a tough world, not to sound callous. The job might be a gateway to a higher salary, once they establish that they help the employer’s business flourish. For once proven, they would be attractive to competitor’s, who might hire the employee away at an increased salary, and a raise would be in the offing to prevent that.
A MWL cannot easily prevent an employer from making trade off in employee benefits or working conditions. Any attempt to try to prevent such trade offs would increase the government bureaucracy and associated government overhead even more, thus contributing to inflation, deficit spending, etc. This eventually hurts everyone in the society.
It can further contribute to employers outsourcing jobs overseas, where the MWL cannot be applied.
The legislated increase in wages will tend to be passed on to consumers, who may choose to reduce their patronage of the employer’s business, thus eventually driving the business under, thus resulting in the loss of X’s job.
A MWL will tend to hit smaller “mom and pop” businesses more than it will the large corporations, because the latter can more easily cope by adjusting other factors, such as fringe benefits. The M&P businesses will not be able to do this. Thus the MWL hastens the depressing trend toward chains taking over in all areas of commerce (restaurants, hardware stores, drugstores, etc).
By increasing the level of unemployment of workers of type X, crime is probably encouraged and increased. Gang-related activity is encouraged by the large number of unemployed people (sadly, youth from underprivileged neighborhoods).