by Nicholas Freiling
Employment law is a mainstay of state economic policy. Few question its efficacy as a means to correct “market failures”—like unlivable wages for meaningful work—that would leave society in shambles. In fact, no serious debate exists among American policymakers about the benefits of such laws. Their utility is simply assumed.
But laws that restrict or stipulate the terms of voluntary employment contracts stifle economic progress and make life harder for everyone—even those for whom the laws were designed to aid.
Minimum wage is the most basic example of such a law. By outlawing employment below a certain wage-rate, the state ensures that no one works for less than what its officials consider a “living wage.” The first federal minimum wage legislation was the Fair Labor Standards Act. Since its passage in 1938, the bill has been amended many times—usually to adjust the minimum wage to account for inflation. Today, the federal minimum wage is $7.25 per hour.
In the act, Congress determines that “the existence … of labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers” causes inequity, burdens commerce and “the free flow of goods in commerce,” and leads to labor disputes that further hamper free commerce. Minimum wage is their solution to this problem.
But what Congress did not know (or chose to ignore) was that employers cannot pay an employee more than that employee’s discounted marginal revenue product—their contribution to the employer's firm's revenues. For example, if an employee generates $10 of revenue for their employer every hour, their employer will not pay them more than $10 per hour. Otherwise, their contributions to the firm would amount to net loss. Employers cannot simply raise every employee’s wages without regard for the employee’s marginal revenue product.
The unseen effect of minimum wage is now made clear: all workers who are unable to generate more revenue per hour for their employer than the legal minimum hourly wage are laid off. As Murray Rothbard writes,
If the minimum wage is, in short, raised from $3.35 to $4.55 an hour, the consequence is to dis-employ, permanently, those who would have been hired at rates in between these two rates. Since the demand curve for any sort of labor (as for any factor of production) is set by the perceived marginal productivity of that labor, this means that the people who will be dis-employed and devastated by this prohibition will be precisely the 'marginal' (lowest wage) workers … the very workers whom the advocates of the minimum wage are claiming to foster and protect.The "marginal" workers Rothbard describes often include inexperienced teenagers, immigrants, and the disabled. For these people, employment is legally impossible under a minimum wage law. They are permanently dis-employed. To deny this effect, according to Ludwig von Mises, is “tantamount to a complete disavowal of any regularity in the sequence and interconnectedness of market phenomena.”
Why, then, do so many continue to advocate minimum wage as a means to subsidize the working class?
The fact is, many such advocates choose to ignore economic reality in favor of more “nuanced” arguments. Consider attorney and writer Carolyn Rosenblatt. In a Forbes.com column published last winter advocating minimum wage for home care workers, she writes,
For anyone who might think [extending minimum wage to home care workers] is not a good idea or that it puts too much burden on the small business employer who has to pay more now to the worker, think about this: would you want your aging loved one to stay in his or her home as long as possible? Are you willing to do all the physical chores of care-giving yourself?For Rosenblatt, economic law, small business, and market forces are not important. What matters for her (and her intellectual allies) is cognitive resonance—feeling like home care workers are paid as much as she thinks they deserve, all the while refusing to acknowledge that wages are market prices determined by supply and demand.
Arguments like this are all too common among proponents of minimum wage. They acknowledge the economic problems with their ideas yet advocate them anyway. There is no other explanation. While Rosenblatt and those like her may have the best of intentions, their willful ignorance of economic reality is blatant and hardly forgivable.
Of course, not all advocates of minimum wage are ignorant. Unions, for example, have a strong interest in supporting minimum wage. By doing so, they eliminate competition from those willing to do their work for less. Racists and prejudiced people also benefit from minimum wage. If employers must pay a minimum wage to whomever they hire, they can disregard the wage-demands of potential employees and simply ignore applications from those they hate. This was the reasoning behind the predominantly white Mine Workers’ Union of South Africa when they wrote regarding the application of minimum wage equally to both whites and blacks,
The real point on is that whites have been ousted by coloured labour. It is not because a man is white or coloured, but owing to the fact that the latter is cheap … when that [minimum wage] is introduced we believe that most of the difficulties in regard to the coloured question will automatically drop out.Minimum wage, then, is hardly the innocent idea its supporters suspect it to be. Like all other forms of market intervention, it is hijacked by those with evil intent—those who seek to use the violence of the law to serve their own ends.
Needless to say, the harms of minimum wage are hardly a mystery to economists—especially those of the Austrian bent. So why bring this up now?
Because despite the liberty movement’s success in undermining the intellectual foundations of state interventionism, the most basic economic truths have yet to be absorbed into public opinion. In fact, just two years ago the Public Religion Research Institute found that two-thirds of Americans support raising the minimum wage to $10 per hour. Among these supporters are 41 percent of self-described Tea Partiers and 43 percent of “Americans who most trust Fox News”—those who claim to be advocates of economic liberty.
No doubt, libertarians have come a long way. Austrian economics is more popular now than ever. Even on Capitol Hill, the ideas of sound money, financial austerity, and economic liberty have become impossible to ignore. But if two-thirds of the American people maintain support for the flawed idea of minimum wage, libertarians still have a long way to go.
Fair Labor Standards Act. United States Department of Labor. http://www.dol.gov/whd/flsa/
Fair Labor Standards Act of 1938, as amended (revised May 2011). US Wage and Hour Division. http://www.dol.gov/whd/regs/statutes/FairLaborStandAct.pdf