Explaining How Minimum Wage Laws Work Against Social Justice
First, I want to present the argument developed by Professor Walter Block, one of Rothbard's many outstanding students, thirty two years ago. It's as true today as it was then. Minimum wage laws are most harmful to the very group of people that its supporters most wish to help. Then I look forward to engaging any arguments in the comments section.
THE FAT CAPITALIST-PIG EMPLOYER by Walter Block, 1976
“If not for the minimum wage law and other progressive legislation, the employers, the fat-capitalist-pig exploiting employers, to be precise, would lower wages to whatever level they wanted. At best, we would be pushed back to the days of the sweatshop; at worst, to the days of the industrial revolution and before, when mankind waged an often losing battle with starvation.”
So goes the conventional wisdom on the merits of minimum wage legislation. It will be shown, however, that this conventional wisdom is wrong, tragically wrong. It assumes a villain where none exists. What does the law actually accomplish and what are its consequences? The minimum wage law is, on the face of it, not an employment law but an unemployment law. It does not force an employer to hire an employee at the minimum wage level, or at any other level. It compels the employer not to hire the employee at certain wage levels, namely, those below the minimum set by law. It coerces the worker, no matter how anxious he may be to accept a job at a wage level below the minimum, not to accept the job. It obligates the worker who is faced with a choice between a low-wage job and unemployment to choose unemployment. Nor does the law even push any wage up; it only lops off jobs which do not meet the standard.
How would wages be determined in the absence of minimum wage legislation? If the labor market consists of many suppliers of labor (employees) and many demanders of labor (employers), then the wage rate will tend to be set in accordance with what the economist calls the “marginal productivity of labor.” The marginal productivity of labor is the extra amount ofreceipts an employer would have if he employs a given worker. In other words, if by adding a given worker to the payroll, the employer’s total receipts rise by $60 per week, then the marginal productivity of that worker is $60 per week. The wage rate paid to the worker tends to equal the worker’s marginal productivity. Why is this so, in view of the fact that the employer would prefer to pay the worker virtually nothing, no matter what his productivity? The answer is competition between employers.For example, assume the worker’s marginal productivity is equal to $1.00 per hour. If he were hired at 5¢ per hour, the employer would make 95¢ per hour profit. Other employers would bid for that worker. Even if they paid him 6¢, 7¢, or 10¢ an hour, their profit would still make the bidding worthwhile. The bidding would end at the wage level of $1.00 per hour. For only when the wages paid equal the worker’s marginal productivity will the incentive to bid for the worker stop.
But suppose the employers mutually agree not to hire workers at more than 5¢ per hour? This occurred in the Middle Ages when cartels of employers got together, with the aid of the state,to pass laws which prohibited wage levels above a certain maximum. Such agreements can only succeed with state aid and there are good reasons why this is so. In the noncartel situation, the employer hires a certain number of workers—the number which he believes will yield the maximum profit. If an employer hires only ten workers, it is because he thinks the productivity of the tenth will be greater than the wage he must pay and that the productivity of an eleventh would be less than this amount. If, then, a cartel succeeds in lowering the wage of workers with a marginal productivity of $1.00 to 5¢ per hour, each employer will want to hire many more workers. This is known as the “law of downward sloping demand” (the lower the price, the more buyers will want to purchase). The worker whose productivity was, in the eyes of the employer, just below $1.00, and therefore not worth hiring at $1.00 per hour, will be eagerly sought at 5¢ per hour. This leads to the first flaw in the cartel: each employer who is a party to the cartel has a great financial incentive to cheat. Each employer will try to bid workers away from the others. Theonly way he can do this is by offering higher wages. How much higher? All the way up to $1.00, as we have seen before, and for the same reason. The second flaw is that nonmembers of the cartel arrangement would want to hire these workers at 5¢ per hour, even assuming no “cheating” by members. This also tends to drive up the wage from 5¢ to $1.00 per hour. Others, such as would-be employers in noncartel geographical areas, self-employed artisans who could not before afford employees, and employers who had previously hired only part-time workers, would all contribute to an upward trend in the wage level. Even if the workers themselves are ignorant of wage levels paid elsewhere, or are located in isolated areas where there is no alternative employment, these forces will apply. It is not necessary that both parties to a trade have knowledge of all relevant conditions.
It has been said that unless both parties are equally well-informed, “imperfect competition” results, and economic laws somehow do not apply. But this is mistaken. Workers usually have little overall knowledge of the labor market, but employers are supposedly much better informed. And this is all that is necessary. While the worker may not be well-informed about alternative job opportunities, he knows well enough totake the highest paying job. All that is necessary is that the employer present himself to the employee who is earning less than his marginal productivity, and offer him a higher wage. And this is exactly what naturally happens.
The self-interest of employers leads them “as if by an invisible hand” to ferret out low-wage workers, offer them higher wages, and spirit them away. The whole process tends to raise wages to the level of marginal productivity. This applies not only to urban workers, but to workers in isolated areas who are ignorant of alternative job opportunities and would not have the money to get there even if aware of them. It is true that the differential between the wage level and the productivity of the unsophisticated worker will have to be great enough to compensate the employer for the costs of coming to the worker, informing him of job alternatives, and paying the costs of sending him there. But this is almost always the case, and employers have long been cognizant of it.
The Mexican “wetbacks” are a case in point. Few groups have less knowledge of the labor market in the United States, and less money for traveling to more lucrative jobs. Not only do employers from southern California travel hundreds of miles to find them, but they also furnish trucks or travel money to transport them northward. In fact, employers from as far away as Wisconsin travel to Mexico for “cheap labor” (workers receiving less than their marginal product). This is eloquent testimony to the workings of an obscure economic law they have never heard of. (There are complaints about the poor working conditions of these migrant workers. But these complaints are mainly from either well-intentioned people who are unaware of the economic realities, or from those not in sympathy with these hapless workers receiving full value for their labors. The Mexican workers themselves view the package of wages and working conditions as favorable compared to alternatives at home. This is seen in their willingness, year after year, to come to the United States during the harvesting season.) It is not the minimum wage law, therefore, that stands between Western civilization and a return to the stone age. There are market forces and profit maximizing behavior on the part of entrepreneurs, which ensure that wages do not fall below the level of productivity. And the level of productivity is itself determined by technology, education, and the amount of capital equipment in a society, not by the amount of “socially progressive” legislation enacted. Minimum wage legislation does not do what its press claims. What does it do? What are its actual effects?
What will be the reaction of the typical worker to a legislated increase in wages from $1.00 to $2.00? If he is already fully employed, he may want to work more hours. If he is partially employed or unemployed, it is virtually certain that he will want to work more. The typical employer, on the other hand, will react in the opposite way. He will want to fire virtually all of the workers he is forced to give raises to. (Otherwise he would have granted raises before he was compelled to.) Now, he has to keep production up, so he might not be able to adjust this situation immediately. But as time passes he will replace his unexpectedly expensive unskilled workers with fewer but more skilled workers and with more sophisticated machinery, so that his total productivity remains constant. Students of an introductory economics course learn that when a price level above equilibrium is set, the result is a surplus.
In the example, when a minimum wage level above $1.00 per hour is set, the result is a surplus of labor—otherwise called unemployment. Iconoclastic as it may sound, it is, therefore, true that the minimum wage law causes unemployment. At the higher wage level it creates more people willing to work and fewer jobs available. The only debatable question is: how much unemployment does the minimum wage law create? This depends on how quickly the unskilled workers are replaced by equivalently productive skilled workers in conjunction with machines. In our own recent history, for example, when the minimum wage law increased from 40¢ to 75¢ per hour, elevator operators began to be replaced. It has taken some time, but most elevators are now automatic.
The same thing happened to unskilled dishwashers. They have been and are still being replaced by automatic dishwashing machinery, operated and repaired by semi-skilled and skilled workers. The process continues. As the minimum wage law is applied to greater and greater segments of the unskilled population, and as its level rises, more and more unskilled people will become unemployed. Finally, it is important to note that a minimum wage law only directly affects those earning less than the minimum wage level. A law requiring that everyone be paid at least $2.00 per hour has no effect on an individual earning $10.00 per hour. But before assuming that the minimum wage law simply results in pay raises for low-wage earners, consider what would happen if a $100.00 per hour minimum wage law went into effect. How many of us have such great productivity that an employer would be willing to pay $100.00 for an hour of our services? Only those thought to be worth that much money would retain their jobs. The rest would be unemployed. The example is extreme, of course, but the principle which would operate if such a law were passed does operate now.
When wages are raised by law, the workers with low productivity are discharged. Who is hurt by the minimum wage law? The unskilled, whose productivity level is below the wage level legislated. The unemployment rate of black male teenagers is usually (under-) estimated at 50 percent, three times the unemployment level of the 1933 depression. And this percentage does not even begin to take into account the great numbers who have given up searching for a job in the face of this unemployment rate. The lost income that this represents is only the tip of the iceberg. More important is the on-the-job-training these young men could be receiving. Were they working at $1.00 per hour (or even less) instead of being unemployed at $2.00 per hour, they would be learning skills that would enable them to raise their productivity and wage rates above $2.00 in the future. Instead they are condemned to street corners, idleness, learning only those skills which will earn them jail sentences at some early future time.
One of the greatest hurdles facing a black teenager is looking for his first job. Every employer demands work experience, but how can the young black get it if no one will hire him? This is not because of some “employer conspiracy” to denigrate minority teenagers. It is because of the minimum wage law. If an employer is forced to pay for an experienced-level worker, is it any wonder that he demands this kind of labor? A paradox is that many black teenagers are worth more than the minimum wage but are unemployed because of it. In order to be employed with a $2.00 an hour minimum wage law, it is not enough just to be worth $2.00. You have to be thought to be worth $2.00 per hour by an employer who stands to lose money if he guesses wrong and may go broke if he guesses wrong too often. With a minimum wage law, an employer cannot afford to take a chance. And, unfortunately, black teenagers are frequently viewed as “risky,” as a class.
When confronted with a reluctant employer, a Horatio Alger hero could stride over manfully and offer to work for a token salary, or even for nothing, for a term of two weeks. During this time our hero would prove to the employer that his productivity deserved a higher wage rate. More important, he would bear with the employer part of the risk of hiring an untried worker. The employer would go along with this arrangement because he would be risking little. But the Horatio Alger hero did not have to do battle with a minimum wage law which made such an arrangement illegal. The law thus insures that there is less chance for the black teenager to prove his worth in an honest way. The minimum wage law hurts not only the black teenager, but the black ghetto merchant and industrialist as well. Without this law, he would have access, in a way which his white counterpart would not, to a cheap labor pool of black teenager labor. The young black worker would be more accessible to him since he tends to live in the ghetto and would have easier access to the job site. He would undoubtedly have less resentment toward, and a smoother work relationship with, a black entrepreneur. Since this is one of the most important determinants of productivity for jobs of this type, the black employer could pay his workers more than the white one could—and still make a profit.
Unfortunate as the effects on young black workers are, a greater tragedy of the minimum wage law concerns the handicapped worker (the lame, the blind, the deaf, the amputee, the paralyzed, and the mentally handicapped). The minimum wage law effectively makes it illegal for a profit-seeking employer to hire a handicapped person. All hopes of even a modicum of self reliance are dashed. The choice the handicapped person faces is between idleness and governmentally supported make-work schemes which consist of trivial activities and are as demoralizing as idleness. That such schemes are supported by a government which makes honest employment impossible in the first place, is an irony few handicapped people would find amusing. Recently, certain classes of handicapped people (the slightly handicapped) have become exempt from the minimum wage law. It is, therefore, in the interest of employers to hire the “slightly handicapped,” and they now have jobs. But if it has been realized that the minimum wage law hurts the employment chances of “slightly handicaped” people, surely it should be realized that it hurts the chances of others. Why are seriously handicapped people not exempt? If the minimum wage law does not protect the individual it seems designed to protect, whose interests does it serve? Why was such legislation passed?
Among the most vociferous proponents of minimum wage legislation is organized labor—and this must give us pause for thought. For the average union member earns much more than the minimum wage level of $2.00 per hour. If he is already earning $10.00 per hour, as we have seen, his wage level is in accordance with the law, and is not, therefore, affected by it. What then accounts for his passionate commitment to it? His concern is hardly with the downtrodden worker—his black, Puerto Rican, Mexican-American and American-Indian brethren. For his union is typically 99.44 percent white, and he strenuously resists the attempts by members of minority groups to enter his union. What then stands behind organized labor’s interest in minimum wage legislation? When the minimum wage law forced up the wages of unskilled labor, the law of downward sloping demand caused employers to substitute skilled labor for unskilled labor. In the same way, when a labor union, composed mainly of skilled laborers, obtains a wage increase, the law of downward sloping demand causes employers to substitute unskilled laborers for skilled laborers! In other words, because skilled and unskilled laborers are, within certain bounds, substitutable for each other, they are actually in competition with one another. It might well be that it is 10 or 20 unskilled workers who are in competition with, and hence substitutable for two or three skilled workers, plus a more sophisticated machine. But of the substitutability itself, especially in the long run, there can be no doubt.
What better way to get rid of your competition than to force it to price itself out of the market? What better way for a union to insure that the next wage hike will not tempt employers to hire unskilled, nonunion scabs (especially minority group members)? The tactic is to get a law passed that makes the wage of the unskilled so high that they cannot be hired, no matter how outrageous the wage demands of the union are. (If minority groups could get a law passed requiring all union wages to rise ten times their present amount, they could virtually destroy the unions. Union membership would decline precipitously. Employers would fire all unionists, and in cases where they could not, or did not, they would go bankrupt.) Do the unions purposefully and knowingly advocate such a harmful law? It is not motives that concern us here. It is only acts and their effects. The effects of the minimum wage law are disastrous. It adversely affects the poor, the unskilled, and minority group members, the very people it was supposedly designed to help.