Whither The Wage Floor? Better That It Wither: Part I

On Liberty & Labor

Should the federal minimum wage of $7.25 be raised?

No, not a bit.

            Increasing the minimum wage provides the lowest-earning Americans with a pay raise. That’s the benefit. But lifting the wage floor reduces employment. That’s the detriment.

            Recent research finds that modest wage increases have little or no negative employment effects. Proponents can now claim cost-free prosperity. Other current studies support the archaic theory that raising the minimum wage causes a labor surplus. The debate today revolves largely around the correctness of these competing findings. But it needn’t.

Raising the minimum wage is unwise notwithstanding the dueling academic research. First, the minimum wage abridges people’s freedom and is anti employment. Second, a federal mandate restricts states from addressing the needs of their local economy and from serving as an important testing ground. And third, the minimum wage is an ineffective policy prescription for assisting the working poor.

Part One discusses the first point, Part Two discusses the second point, and Part Three the third point. Part Two and Part Three are forthcoming. Part One follows.

LIBERTY & LABOR, LOST

A minimum wage limits the rights of consenting adults to negotiate pay for lawful employment. This is a concern of principle. A minimum wage also prohibits all work below the mandated wage floor. This is a concern of practice.

Against Liberty

Jean wants to do work, Jane has work that needs to be done, and both agree that $6.50 would be a fair hourly pay for the job. All other negotiation terms are proper. But under federal law, Jean and Jane aren’t permitted to decide for themselves whether or not to enter into the arrangement.

This simple scenario underscores the insidiousness of the problem. Here, Jean and Jane should be free to manage their own affairs, free to assess the fairness of the bargain, and free to decide whether the exchange is worthwhile. But they aren’t. That’s because on the issue of hourly pay, our federal lawmakers think, without abashment, that they can protect Jean and Jane better than Jean and Jane can protect themselves.  

           

Which isn’t novel. A law requiring bicycle riders to wear a helmet, for example, presumably implies lawmakers’ contention that the rule’s risk-prevention is greater than its impingement on riders’ liberty. Usury laws, which proscribe loans at a high rate of interest, suggest that the laws’ protection against financial distress is more important than the freedom of borrowers and lenders to decide for themselves on appropriate lending terms.

These laws bar people from making choices; they are coercive, necessarily antithetical to personal liberty. One immediate dilemma to a social order that accepts these kinds of impositions is determining which burdens are worthwhile and which aren’t. It’s true that limitless freedom today is a fiction. So, in F.A. Hayek’s assessment, “The only question . . . is whether . . . the advantages gained are greater than the social costs which they impose.” But surrendering people’s self determination to a series of weights and measures represents misplaced faith in the wisdom and goodness of the governing class. This danger can’t be overstated: Without a limiting principle, any legislative measure in the name of protection is foreseeable.  

 

Milton Friedman reasoned that hubris is at the heart of such government intervention. Friedman succinctly wrote, “Humility is the distinguishing characteristic of the believer in freedom, arrogance of the paternalist.” Lawmakers forbid people from making certain choices convinced of the welfare served thereby. In their confidence, lawmakers fail to consider that the ostensibly incorrect path may prove the better one. That’s at the heart of a minimum wage, and it’s too bad.

            Against Labor

            One of the most striking practical costs of a minimum wage is its prohibition of work. A wage floor renders illegal all below-level jobs. Currently, any jobseeker willing to accept less than $7.25 is precluded from doing so; it’s illegal, for example, to work for $6.50. Which is precisely the point. Effectively, lawmakers have determined that people are better off without a job than with one that pays $6.00, $6.50, or $7.00 per hour.   

Not everyone willing to work for below minimum is left jobless. The other possibility is that the jobseeker obtains higher pay. Jean and Jane agree to employment at $6.50. Under current law, Jean is without the job unless Jane pays an additional $0.75. If so, Jean will receive $7.25 for work she would have accepted $6.50 to do. Thus, Jean would benefit from the government’s surrogate negotiation. But considerable barriers complicate that likelihood. 

First, Jane might not be able to afford the additional cost. Second, Jane might consider the cost too high compared to the expected productivity gained. Third, Jane might find a job candidate more qualified than Jean upon offering a higher rate of pay. Fourth, and finally, Jane might invest in workplace efficiencies rather than hire a new employee.

The debate often emphasizes workers whose pay would rise upon a wage-floor increase. But a minimum wage creates a barrier for jobseekers to obtain a job in the first place.   

During the discussion it was suggested that the point is purely theoretical since no one would actually work for wages below the minimum. This contention conflates a minimum wage’s effectiveness and its design. 

The contemplated scenario goes something like this. Jane seeks an employee at $5.00, but no one, not even Jean, is willing to accept the job at that rate. Jane is therefore offering below-market wages and is forced to either increase pay or forgo help. In this case, a minimum wage of $5.00 or less is too low to affect the labor market. This is supply and demand in action.

Here’s the problem. A wage floor only works if it’s sufficiently high to achieve its purpose: to force employers to pay employees a minimum amount. If it were otherwise, market forces alone would define hourly wages. The minimum wage’s objective includes employment obstruction, and its usefulness is measured by the extent of its compulsion. That’s not good.   

            A minimum wage frustrates individual liberty and deters employment. Refraining from raising the minimum wage mutes these corrosive forces even if such restraint doesn’t eliminate them.  

            Part Two to follow.

            Viva PRPR!