Labor Pains

Acting on your best behavior
Turn your back on Mother Nature
Everbody wants to rule the world
--Tears for Fears

My sister and I were discussing the validity of minimum wage laws last nite. Reaching decisive conclusions on such an issue using moral or ethical arguments is unlikely, because we know that people vary in their beliefs of what is right and just. For example, some people believe that it is right that individuals should be free to decide how to deploy income earned from their labor, while others believe that it is right that some of an individual's income should be appropriated to satisfy the needs of others.

A decision to implement a minimum wage law is therefore a political one, dependent on a group's ability to get its brand of justice enacted via the political system.

What we can do is evaluate minimum wage rules from an economic standpoint--to see if policies proposed by special interest groups actually lead to the results that their advocates desire. As a body of scientific thought, economics is incapable of rendering ethical or political judgement. But because economics is grounded in laws that govern nature and human behavior, it is quite possible to assess minimum wage rules, or any other social arrangement for that matter, in light of predictable economic and social consequences.

Minimum wage laws are a form of triangular intervention. Triangular intervention occurs when an invader compels a pair of people to make an exchange or prohibits them for doing so. In the case of minimum wage laws, the triangular intervention takes the form of a price control, where the State prohibits the exchange of labor below a certain price. The State enforces this 'price floor' by police action, inflicting penalty on all violators.

In free markets, each person's wages tend to be valued relative to the individual's potential for uniquely adding to an operation's productivity. A minimum wage law means that those whose marginal value is below the legal minimum are prevented from working. The worker is willing to take the job, and the employer wants to hire the worker. But the decree of the State prevents exchange from taking place.

The effect is compulsory unemployment. Compulsory unemployment removes competition for marginal workers and raises the wage rates of the workers remaining.

Although the commonly articulated aim of minimum wage law is to improve the condition of marginal workers, the actual effect is just the opposite. Minimum wage laws render marginal workers unemployable at legal wage rates. The higher the minimum wage rate relative to free market rates, the greater the resulting unemployment.

There are other, longer run issues to consider as well, such as the influence of minimum wage laws on a) an employer's propensity to move elsewhere in search of cheaper labor, b) potential for higher prices of goods and services as consumers absorb higher labor costs, and c) capacity of those workers whose job is protected by minimum wage laws to adapt to environmental change.

However, the direct effect should be clear enough. Put a floor under gas prices at, say, $4/gallon, and it is likely that less gas will be bought. Put a floor under labor at the current legal rate of $7.25/hr, and it is likely that less labor will be bought.

If the purpose behind minimum wage laws is to protect or enrich special interest groups (e.g., labor unions, political parties, etc), then there is a case to be made that the policy will be effective--at least in the short run.

However, if the purpose behind a minimum wage policy is to improve the condition of the marginal worker, then this policy is sorely ineffective, because these workers will be largely unemployed.