Richard M. Ebeling – March 13, 2018
Most of us both value and take for granted the ability to make decisions about our own lives. When busybodies put their noses and their mouths into our personal affairs, we often say or at least think, “Mind your own business.” Unfortunately, we live in a world in which too frequently government won’t leave us alone, and instead, very actively tries to mind our business for us.
Let us briefly look at one such instance in which Uncle Sam puts his nose in other people’s business, that being the legal hourly minimum wage. The federal government began dictating the minimum lawful amount an employer must pay someone working for them in 1933, as part of Franklin Roosevelt’s New Deal legislation. It was declared unconstitutional in 1935 by the U.S. Supreme Court, but was reinstituted in 1938 as part of the Fair Labor Standard Act, and the Supreme Court (with other judges now on the bench) upheld it in a 1941 decision.
The Minimum Wage vs. Personal Choice
When first implemented the federal hourly minimum wage was set at 25 cents an hour (prices and wages in general were much lower 80 years ago than today, so that represented not a high but a noticeable sum of money at the time). It is currently $7.25 an hour. But in recent years, there has been a call for significantly increasing it to as much as $15 per hour. A variety of cities around the country have, in fact, instituted such legislation within their jurisdictions, with a number of state governments having proposed increases in that direction within their respective boundaries.
The assertion is made that anything less than an hourly wage in that general amount (or more!) is denying a person the chance to earn a “living wage.” It is offered as paternalistic intervention in the labor market meant to improve the working and living conditions of those who may be unskilled or poorly experienced to have a chance to earn enough to get ahead in life.
Who, after all, can be against someone having some minimal amount to live decently? Only the cold, callus, and uncaring, surely; or those who are apologists and accomplices of the greedy, selfish, and profit-hungry businessmen who have no sense of humanity for those who are in their employ. That’s why there needs to be a law.
Left rarely asked and less often answered is, who is the government or those behind such legislation to tell people at what hourly pay they may work in the marketplace and how much an employer is required to pay them? Essential to human freedom is the liberty for each individual to say “yes” or “no” to an offer made by another concerning some potential association, interaction, or exchange among two or more persons.
Forcing or Prohibiting Exchange
Suppose I go into a shoe store and after looking around and trying on a few pairs, I decide to leave the store empty handed because the store does not have the styles or the fit I’m interested in, or because the shoes are not offered at prices that seem worth paying. But suppose, now, that a large gruff fellow stands in the doorway, and declares, “Da boss says you ain’t leavin’ till ya buy a pair of shoes at da price he says you gotta pay.”
I think most of us would consider this to be outrageous and unethical. Most of us would no doubt say to ourselves, who is this guy or his boss to tell me what shoes I have to buy and at a price that I consider to be more than those shoes are worth to me, or which is beyond what my budget can afford?
Further suppose that the bouncer replies to any such remark you might make, by saying, “Unless ya buy a pair of shoes at dis minimum price, da boss says he can’t afford to pay me and de uda employees a “livin’ wage.’ Cough up da dough – or else.” Many of us might try to pull out our cell phones and dial 911 for police assistance.
We take it for granted that no one, regardless of the rationale, should be able to force us into an exchange or a relationship not of our own choosing and voluntary consent. Otherwise, we are a victim, a slave, to the other person’s wants and wishes, at our coerced expense.
We would also be much aggrieved if there was a mutually agreeable association or exchange opportunity into which we did want to enter, but someone comes along and tells us that we cannot, even if that association or exchange did not physically harm or defraud anyone else in the process.
Yet, this is precisely what the government mandated minimum wage laws demand of market participants in American society. Government coercively imposes the terms under which one group of people may accept employment and another group may hire them for jobs to be done. What are some of the consequences from this government-legislated minimum wage intervention into the marketplace?
The Minimum Wage and Low Skilled Unemployment
First, it results in some who might have found acceptable and gainful employment from doing so. This is especially true of the unskilled and workplace inexperienced in the labor force. The only source of revenues from which an employer can pay salaries to all those he may employ is from producing, marketing and selling a product to willing consumers at a price they are willing to pay for what he is offering for sale.
The employer, therefore, must ask himself, does an existing, or would a prospective, employee contribute a value-added to his production process that is less than or more than the value of the finished product that employee may be able to assist in manufacturing? All of us would like to get a bargain (paying less for something than we think it is worth to ourselves), but we never intentionally pay more for something than what we prospectively consider it to be worth.
Any worker whose value-added is viewed by the employer to be greater than the competitive market wage that has to be paid for his hire is offered work by the employer in question. When the government imposes a legal minimum hourly wage above the wage currently prevailing for various types of labor services, the law necessarily threatens the employment of any and all workers who’s estimated value-added is now less than the mandated legal minimum wage.
Suppose that a worker helps to produce an addition to marketable output that has a competitive value of, say, $5 an hour. But the government now imposes a minimum wage of $7.25 per hour. Those workers whose value-added is only $5 an hour will find themselves priced out of the market, because from the employer’s perspective, they cost more to employ than they are worth in terms of value-adding revenue to be earned from their hire at a minimum wage of $7.25. A private enterpriser cannot successfully maintain or establish a profitable competitive edge in the long run, if (at the margin) he has to pay $7.25 for what has a market worth of $5.
The Minimum Wage vs. Earned Labor Skills
But the harm runs deeper for the employee who either loses his job due to the legal minimum wage or who, to begin with, never gets a job due to the law. The lowest earners in the labor market are usually those with the least skills and work experience. That is why their productive worth is at the lower end of the wage scale.
But how can they ever acquire the on-the-job training, experience and workplace skills if the minimum wage so prices them out of the market that they may never have the opportunity to get their foot on the bottom or lower rungs of ‘the ladder of success”? By being priced out of the market in this way due to minimum wage legislation, some of them may be condemned to permanent unemployment.
In our day-and-age of the modern redistributive state, such persistent unemployment due to the minimum wage means that those who are gainfully employed find themselves taxed even more than would otherwise have been the case. Their salaries must provide the needed government tax revenues to cover the income transfer costs that the welfare system is expected to incur to meet the “needs” of those the government’s own minimum wage policy has forced into and left in the rolls of the unemployed.
Minimum Wage Laws and the Black Market
An additional unintended consequence is that those thus left in the limbo land of unemployment who wish to have more money than the welfare state redistributes to them turn to alternative lines of work: the underground and black market economies. Both are market economies, only the underground economy is often the arena in which income may be earned outside of the prying eyes of the tax-collectors, even though the type of product or service offered for cash is completely legal but with less of a paper trail for the taxing authorities to follow.
The black market usually connotes goods or services that are legally prohibited by the government from being openly produced, sold and used: narcotics and other drugs, prostitution, and various forms of gambling, for instance. While both underground and black markets have their seamier sides, especially the trade in prohibited or heavily restricted or controlled products tend to attract market participants of a violent, cruel and deadly type. Thus, some thrown into unemployment due to the minimum wage are drawn into arenas of crime, corruption and thuggish coercion to earn a living. This is an outcome, surely, that few who campaigned for minimum wage laws originally had in mind when doing so.
Who Decides Wages: People or Politicians?
But behind all of these negative and usually unintended consequences arising from the imposing of a government-enforced hourly minimum wage remains the fundamental ethical issue: who shall have the right to decide under what terms and conditions people enter into gainful employment? Shall it be the individuals, themselves, who decide what is an acceptable wage, given their own skill set and the market opportunities they find in the neighborhoods in which they look for work? Shall it be the prospective employers who offer work to others based on their market-based estimate of the worth of a possible employee in relation to the value of the good or service he might assist in producing, in the context of the employer’s hope of profitable success in offering goods to the consumer public?
Or shall it be politicians and bureaucrats pressured by various interest groups with their own motives for asserting a right to dictate and determine the wage at which individuals who they personally know nothing about will be allowed to find a job? There is an inescapable arrogance, a hubris, on the part of those who claim to know what a person is worth in the marketplace and the wage at which he may or may not be hired, separate from the potential trading partners, themselves, respectively interested in finding useful employees to hire and those looking for income-earning employment.
In this the political paternalists who insist upon setting minimum wages through government command and control closely resemble the socialist central planners of the twentieth century. They suffer from that same “pretense of knowledge” that F. A. Hayek criticized nearly 45 years ago in his Nobel lecture. They suffer from dangerous delusion that they possess enough wisdom to know better than people, themselves, how they should live and work, and the terms under which they may contract and exchange for mutual gain.
Freedom requires that every individual have the liberty to peacefully decide how best to direct and plan his own life, and in voluntary association with others in the various corners of society. They are not free when the government can interpose itself and dictate the wage at which a human being may offer his labor services and another may choose to employ him. Anything less makes everyone an economic victim and tool of the coercing control of those commanding the halls of government.
This article was originally published at FFF.org. Richard M. Ebeling is BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. He was president of the Foundation for Economic Education (FEE) from 2003 to 2008.