An Argument Against Minimum Wage Laws

Economics often carries the description “the dismal science.” Historically, the term described a response by from Thomas Carlyle on a disturbing economic report written by Thomas Malthus. A deeper look into the science, however, can lead to an interesting revelation on various economic activities. Minimum wage laws – more commonly known as price controls in economic terms – are just one area which needs further analysis to move the dismal science into an advantageous free market activity.

Uninformed individuals typically believe that a lack of minimum wage laws will result in workers receiving $1 hourly wages. The anti-free market supporters believe that fewer laws placed on employers benefit just one side of the economic equation: big business. And yet another group – union supporters – believes that true economic reform for wages is only possible when workers form a collective bargaining group. Unfortunately, neither of these theories or beliefs is correct; at least not in classical economic terms.

The preceding beliefs often have a base in the perceived socially or morally acceptable attributes of economic theory. That is, a government has the responsibility to implement laws that benefit those at the lower levels of an economic society. The problem with this theory is that wages represent a price; effectively, it is the price paid for a specific amount of labor. Therefore, minimum wage laws represent a price control, which is often illegal in many economic activity types.

Henry Hazlitt, an American economist and philosopher, has much to say about minimum wage price controls. He writes:

“Thinking has become so emotional and so politically biased on the subject of wages that in most discussions of them the plainest principles are ignored. People who would be among the first to deny that prosperity could be brought about by artificially boosting prices…will nevertheless advocate minimum wage laws, and denounce opponents of them, without misgivings” (Hazlitt, 1979, p. 134).

This description alone overturns the three misguided beliefs mentioned earlier. In economics, attaching a moral or political bias can set serious false premises on future market actions.

In a free market, price is the main item that separates a willing buyer from a willing seller. The belief that a lack of minimum wage laws will result in $1 hourly wages is simply a false premise. While wages for certain jobs will certainly go down, they will only fall to a point where a group of workers is willing to take the wage. The biggest issue it seems is why those who purport a minimum wage law as necessary never discuss the effects of overpaying wages to a group of workers.

A minimum wage can result in a company over paying for labor. For example, if a job would pay $6.00 an hour but the minimum hourly wage is $7.25, the company loses $1.25 each hour for each worker. Milton Friedman calls this overpayment forced charity. Additionally, if a company’s goal is to make a profit for owners or other stakeholders, then forced charity essentially spends someone else’s money, namely those individuals financially invested into the business.

Economic theory also describes price in terms of benefits received for a given resource. In terms of wages, a company earns an individual’s labor as the benefit received for compensation. When a company must overpay workers due to minimum wage laws, the business will lose economic value. In order to make up for this shortcoming, a business will most likely raise prices to cover the losses on higher wages. This results in higher prices paid by all individuals, even those workers who benefit directly from a higher minimum wage.

Confusion also exists between the terms minimum wage and living wage. A minimum wage is a price control arbitrarily set by a government. In most cases, few economic considerations exist when a government sets the minimum wage. A living wage, in contrast, is the minimum amount an individual or family needs to pay for all essential items, such as housing, clothes and food, among other necessities. Governments cannot usually set a living wage as this has several factors, chief among them regional characteristics, such as cost of living and current wages for specific jobs.

Overall, a return to a true free market is necessary for success in business. Henry Ford, the American entrepreneur and automotive magnate, knew this all too well. Ford believed in a five-day workweek, higher than average wages, and sustainable work environment. If fact, Ford never chose to use unions in his automotive factories, believing them to bring less value to his business. When given the correct elements, the free market can often provide an adequate recipe for success, regardless of activity.

References

Hazlitt, H. (1979). Economics in one lesson. New York, NY: Three Rivers Press.