What’s Wrong With Minimum Wage Laws? Everything!

2/27/2013  Last week’s article concerned what is perhaps the most devastating unforeseen consequence of minimum wage laws, their effect on teenage unemployment, especially black teenagers.  This week we look as some of the false assumptions people make when they support minimum wage laws.

A few years ago, Governor Richardson said about raising New Mexico’s minimum wage, “It’s just good economics.”  Unfortunately, most people agree with him. Of course, most people who support minimum wage laws do not actually employ anybody themselves.  It’s easy to be generous with somebody else’s payroll.

While economics is not a strong suit for most of us, I think the average person, if they think about minimum wage laws, will conclude that such laws are NOT good economics.  Let’s look at the assumptions behind minimum wage laws, most of which people don’t know they are making, and all of which are wrong.

Assumption number one: Poverty can be fixed by passing a law. If this were true, Haiti could become prosperous by passing a high enough minimum wage, and Mexico could eliminate our illegal immigrant problem if they would just pass a high enough minimum wage, and all their workers would stay home.. A moment’s reflection, and most people see this as the silly idea it is.

I call it Camelot thinking. As Lerner and Loewe wrote in their wonderful musical, Camelot, it was against the law for rain to fall before sundown, or for the snow to surpass its “legal limit”, etc. How wonderful. Not surprisingly, it was said to be JFK’s favorite musical.

Assumption number two: Employers cause poverty.  The reasoning here is that people are poor because they aren’t paid enough.  Since the employer pays the wages, it is therefore the employer’s fault people are poor. Ergo, pass a law that requires employers to pay more, and if they don’t, put the bastards in jail. There is embedded in this assumption another, very subtle assumption:

Assumption number three: Employers pay wages.  This may be a little hard to grasp, but all the bills a business incurs, e.g. materials, heat and light, taxes, wages, etc., are paid for by the customers.  Start a business, hire a few people, and you‘ll get the point. Most people realize this assumption is false when confronted with the idea that, if the minimum wage is such a good idea, why not raise it to $20 an hour, or $100 an hour? The minimum wage advocate quickly says, “Well, the employers can’t afford that.”  AND WHY IS THAT?

Assumption number four: Low-wage employees need the government’s protection.  The thinking is that low-wage  earners lack the power to do anything about being exploited by their employers. They are VICTIMS in need of the government’s protection. Let me quote what the economist Walter Williams had to say about “exploited” foreign workers, comments just as applicable to domestic workers:

“Some U.S. companies have been accused of exploiting Third World workers with poor working conditions and low wages. Say that a U.S. company pays a Cambodian factory worker $3 a day. Do you think that worker had a higher-paying alternative, but stupidly chose a lower-paying job instead? I’m betting the $3-a-day job was superior to his next best alternative.  Does offering a worker a wage higher than what he could earn elsewhere make him worse off or bettor off? If you answered better off, is the term exploitation an appropriate characterization for an act that makes another better off? If pressure at home forces a U.S. company to cease its Cambodian operations, would that worker be worse off or better off.”   (From his column, Nonsense Ideas,  February 21, 2007)

And, if a minimum wage increase forces a company to lay off workers, are those workers better off or worse off?  Is the government really protecting a worker who would willingly and happily take a job below the minimum wage? (If anybody has a $5 per hour night watchman job, give me a call. I won’t tell a soul.)

Next week: How minimum wage laws violate basic economics.

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