Perhaps the best example of this phenomenon involves
the minimum wage, which involves a government-mandated minimum amount that
employers are required by law to pay their hourly workers. Of all the policies
that characterize the statist philosophy, this one is quite possibly the most
ludicrous of them all.
Yet, otherwise smart people continue to promote this
economic nonsense. A recent example is an editorial published last Saturday by
the New York Times. Calling for an increase in the federal minimum wage, the
Times stated: “The federal minimum wage has been stuck at $7.25 an hour since
2009…. President Obama promised to take on this fight back in 2008, when he
called for a federal minimum wage of $9.50 an hour by 2011, indexing to
inflation. It is past time to keep the promise.”
Suppose we were to ask the Times why it doesn’t pay
its hourly workers the sum of $100 an hour? How would it respond? After all, in
its editorial the Times said that raising the minimum wage would “counter the
accelerating trend toward low-wage work and growing income inequality.” If the
Times were to pay its workers $100 an hour, wouldn’t that “counter the trend
toward low-wage work and growing income inequality”?
Most likely, after giving the matter some careful
thought, discussion, and debate, the Times’ editorial board would respond as
follows: “Why, that’s a ridiculous proposal. We love our lower-paid workers but
they’re just not worth $100 an hour to us.”
And therein lies the key to the fallacy of
minimum-wage laws. The fallacy involves the concept of subjective value.
In any economic exchange or proposed exchange, the
respective traders place a value on the thing they are giving up and the thing
they’re getting. That value is entirely subjective — that is, it lies in the
eyes of the beholder. If they place a higher value on the thing they’re
getting, they’ll make the trade. If not, then they won’t.
Thus, in every economic exchange both sides benefit
because they are each giving up something they value less for something they
value more. In an exchange in which John gives Bill 100 apples and receives 5
oranges in return, both John and Bill have gained by the exchange because they
each have given up something they value less for something they value more.
The principle of subjective value applies not just
to exchanges of goods and services but also to labor exchanges. When an
employer and employee agree on a job, both sides gain, regardless of what the
particular agreed-upon wage rate happens to be. That’s because they both have
given up something they value less for something they value more.
Suppose a worker agrees to work at a wage rate of
one dollar an hour. Does the principle still apply? Can we really say that the
worker has gained from that transaction?
Absolutely! The principle applies there as well. By
entering into the transaction, the worker is giving up something he values less
for something he values more. Through the agreement, he has improved his
economic well-being, from his own, individual, particular standpoint at that
point in his life.
Enter the statists. They come along and say, “That’s
outrageous! That’s exploitation! That employer is a no-good, profit-seeking,
bourgeois, capitalist pig. Nobody can live off that amount of money. Pass a law
that sets the minimum wage at $9 an hour.”
So, what happens? The employer is now required to
pay much more than what he had agreed to pay. He has to weigh whether it’s
worth it to him, just like the New York Times would weigh whether the payment
of $100 per hour to its workers would be worth it to it.
Let’s assume that the employer decides that it’s not
worth it to him — that from a subjective standpoint, he places a higher value
on the money ($9 per hour) than he does on the labor services of the worker.
In that case, the employee will be laid off. Notice,
after all, a crucial aspect of a minimum-wage law: It doesn’t force employers
to hire people. It simply says that if an employer does hire people, it must
pay them the legally established minimum.
Thus, the logical effect of a minimum-wage law is
that it puts out of work every single worker whose labor is valued in the
marketplace at less than the legally established minimum. It locks that person
out of the labor market.
Suppose a black teenager in Harlem is willing to
work at a dollar an hour. Why would he do that? Let’s say he wants to learn a
particular business. He wants to see how it’s operated. He wants to master
various skills associated with the different jobs in the business. His dream is
to ultimately own his own business, perhaps even in competition against the
business he’s working for.
Alas, under the minimum-wage law, he is never
permitted that opportunity. While willing to hire him at a dollar an hour, the
employer is unwilling to hire him at $9 an hour, just as the Times is willing
to hire workers at $7 an hour but not at $100 an hour?
Moreover, those at the bottom of the economic ladder
are prevented by the minimum-wage law from establishing businesses in which
they hire friends, relatives, and people in the neighborhood who are willing to
work at a wage rate lower than the legally established minimum. That, of
course, protects established firms from the threat of competition from
companies that are started by poor people.
So what happens to those people who are locked out
of the labor market by the minimum-wage law? They are normally consigned to
live in some public housing project the rest of their lives, dependent on the
government for their monthly welfare checks.
Statists say that’s a good thing. Maybe that’s why
they favor minimum-wage laws in the first place.
About the author: Jacob G. Hornberger is founder and
president of The Future of Freedom Foundation.
This article was published by The Future of Freedom
Foundation.
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