Deconstructing the Minimum Wage Law

by Alex Burwasser, Guest Contributor

Whether you are in favor of or opposed to minimum wage laws, know these five axioms:

1. One’s labor has no intrinsic value over and above what another is willing to pay for it (which is to say that there is no such thing as a “fair” wage aside from that established by the forces of supply and demand in a free marketplace).

2. The economic return on an employee’s labor must exceed what the employer pays for that labor (which is to say that we cannot expect businesses hire workers at a loss).

3. Like all production costs, the cost of labor must always be passed along to the consumer in the form of higher prices (which is to say that businesses cannot serve as charities).

4. Regardless of any legislated minimum wage, the default minimum wage is always zero. This is the hard reality created by minimum wage laws that effectively make it illegal for employers to hire low-skill workers at a fair market (sub-minimum wage) price.

5. The minimum wage law is a stealth welfare program funded by employers and customers.

Proponents often make the argument that were it not for minimum wage laws the vast majority of Americans would be working for sweat-shop wages. This emotional and poorly thought out argument is easily demolished, however, by recognizing that the vast majority of workers including most of these proponents) earn significantly more than the minimum wage. (As an extreme counter-argument, there are no minimum wage brain surgeons.) The larger reality, however, is that wages are set by markets rather than by employers.

Proponents also argue that there is no (or minimal) down-side to minimum wage laws, citing questionable (mostly union-sponsored) “studies” that show such laws do not significantly increase unemployment or raise prices. If this were truly the case, then why not raise the minimum wage to $20/hr., $30/hr., or even $50/hr.? Once proponents concede that such elevated minimum wages could never be absorbed, their argument immediately crumbles.

The best argument one can make for a minimum wage law is that it raises the standard of living of certain marginal workers whose jobs cannot easily be eliminated, outsourced, or replaced with capital (i.e., automated). Cases in point are jobs are found in the restaurant, hospitality, and other direct manual service industries.

Nonetheless, the truth is that minimum wage laws cause serious market distortions that result in commensurate collateral economic damage. Although the proponents invariably argue that minimum wages do not significantly increase unemployment, any reasonable person with any economic awareness would have to know that this not the case.

To amplify on this unemployment issue, when faced with minimum wage hikes, employers are forced to take steps to remain competitive and profitable. As a case in point, outsourcing (often to offshore domiciles) becomes more attractive. Similarly, employers will replace legal with illegal workers and labor with capital (i.e., rely more on automation). They will also reduce benefits to help offset the higher wages. Finally, many marginally profitable businesses will become unprofitable and will be forced to close.

If the price of beef goes up, people buy less of it. Ditto cars, refrigerators, TVs, movies, electricity, fuel, and video games. Given this incontrovertible reality, it would take real chutzpah for someone to walk in the room and claim with a straight-face that the same is not true for labor. Clearly, if the price of labor goes up, employers will buy less of it.

It is equally disingenuous to argue that minimum wage laws do not raise prices. As per Axiom #3 above, all costs of production (including labor and taxes) must be passed along to the consumer. The hard truth is that businesses exist to produce goods and services for society at a profit and cannot be expected to serve as charities. Readers looking for hand-outs should visit the Red Cross or Salvation Army to see if there is a program available for them.

Minimum wage proponents often try to frame the debate with the “fair wage” argument. As per Axiom #1 above, however, this is sophistry. In economics, there is no such concept as a “fair wage” over and beyond that resulting from the interaction of the forces of supply and demand in a free market place. In this context then, a “fair wage” is really a market wage.

Those promoting a “fair wage” are really arguing for a living wage. Although the merits of a living wage law are beyond the purview of this brief essay, its burdens should be borne by society as a whole rather than unfairly thrust disproportionately on the backs of employers.

Minimum wage proponents also argue for elevating the minimum wage based on its not having kept up with inflation, claiming that if the Federal minimum wage had been indexed to inflation since 1969, the current minimum wage would exceed $10/hr. However, this inflation indexing argument can cut both ways since if 1938 (the year the Federal minimum wage was enacted) is used as the base year, the current minimum wage would be only $4.08. Also, if the minimum wage law is bad social policy, the inflation adjustment argument is moot.

Before continuing, let’s frame the debate by posing this very reasonable question: What greater social good do proponents hope to accomplish by legislating a minimum wage law?

I think it’s fair to say that the only principled argument for a minimum wage law is to improve living standards of at least some low-skill and other marginal workers.

The corollary questions then are: 1) Does a minimum wage law accomplish this social goal? 2) Do the benefits of a minimum wage law outweigh the collateral social costs?

Addressing the first question, the answer clearly is “not very well.” Although some workers will benefit, other workers will lose their jobs for the reasons discussed above. Also, minimum wage laws make it very difficult for teenagers and others to find entry level work at all since employers cannot afford such inexperienced and low-skill workers (see Axiom #2 above). As a result, many young people are deprived of an early opportunity to learn valuable on-the-job work skills that everyone must eventually acquire in order to become productive workers.

Addressing the second question, the high collateral social costs (higher unemployment, higher prices, and marginal producer shutdowns) are a very high price to pay for the very marginal benefits of minimum wage laws. Clearly, there are many more losers than winners.

This begs the obvious question: Given the high social costs versus the meager social benefits, why does the Left champion minimum wage laws so vigorously? Although readers likely understand that the Baracks, Nancys, and Harrys of the world are not brilliant thinkers, neither are they stupid. They have to be aware of the above-mentioned economic realities.

It should come as no surprise to readers that this is an issue where politics trumps good economics resulting in poor governance. As per Axiom #5 above, the minimum wage law is a really a stealth welfare program packaged as an unfunded mandate at the expense of employers and consumers. Since its collateral social damage is mostly invisible to an inastute public, minimum wage law advocacy is a sure political winner for unprincipled politicians.

Given that it is driven by crass politics rather than sound economics, it is doubtful that a minimum wage law is a well-crafted answer to raising living standards. In fact, there is no doubt that its social costs far outweigh it social benefits, and that its primary virtue is that it buys votes for cynical statist politicians more interested in winning elections than promoting good governance.

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