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Word Gems
exploring self-realization, sacred personhood, and full humanity
Henry Hazlitt
Economics In One Lesson
Minimum Wage
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WE HAVE already seen some of the harmful results of arbitrary governmental efforts to raise the price of favored commodities. The same sort of harmful results follows efforts to raise wages through minimum wage laws. This ought not to be surprising; for
It is unfortunate for clarity of economic thinking that the price of labor's services should have received an entirely different name from other prices. This has prevented most people from recognizing that the same principles govern both.
Thinking has become so emotional and so politically biased on the subject of wages that in most discussions of them the plainest principles are ignored. People who would be among the first to deny that prosperity could be brought about by artificially boosting prices, people who would be among the first to point out that minimum price laws might be most harmful to the very industries they were designed to help, will nevertheless advocate minimum wage laws, and denounce opponents of them, without misgivings.
Yet it ought to be clear that a minimum wage law is, at best, a limited weapon for combating the evil of low wages, and that the possible good to be achieved by such a law can exceed the possible harm only in proportion as its aims are modest.
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The more ambitious such a law is, the larger the number of workers it attempts to cover, and the more it attempts to raise their wages, the more likely are its harmful effects to exceed its good effects.
The first thing that happens, for example, when a law is passed that no one shall be paid less than $50 for a forty-hour week is that no one who is not worth $50 a week to an employer will be employed at all.
You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering. In brief, for a low wage you substitute unemployment. You do harm all around, with no comparable compensation.
The only exception to this occurs when a group of workers is receiving a wage actually below its market worth. This is likely to happen only in rare and special circumstances or localities where competitive forces do not operate freely or adequately; but nearly all these special cases could be remedied just as effectively, more flexibly and with far less potential harm, by unionization.
It may be thought that if the law forces the payment of a higher wage in a given industry, that industry can then charge higher prices for its product, so that the burden of paying the higher wage is merely shifted to consumers.
Such shifts, however, are not easily made, nor are the consequences of artificial wage-raising so easily escaped. A higher price for the product may not be possible: it may merely drive consumers to the equivalent imported products or to some substitute.
Or, if consumers continue to buy the product of the industry in which wages have been raised, the higher price will cause them to buy less of it. While some workers in the industry may be benefited from the higher wage, therefore, others will be thrown out of employment altogether. On the other hand, if the price of the product is not raised, marginal producers in the industry will be driven out of business; so that reduced production and consequent unemployment will merely be brought about in another way.
When such consequences are pointed out, there are a group of people who reply: "Very well; if it is true that the X industry cannot exist except by paying starvation wages, then it will be just as well if the minimum wage puts it out of existence altogether." But this brave pronouncement overlooks the realities. It overlooks, first of all, that consumers will suffer the loss of that product. It forgets, in the second place, that it is merely condemning the people who worked in that industry to unemployment. And it ignores, finally, that bad as were the wages paid in the X industry, they were the best among all the alternatives that seemed open to the workers in that industry; otherwise the workers would have gone into another. If, therefore, the X industry is driven out of existence by a minimum wage law, then the workers previously employed in that industry will be forced to turn to alternative courses that seemed less attractive to them in the first place. Their competition for jobs will drive down the pay offered even in these alternative occupations. There is no escape from the conclusion that the minimum wage will increase unemployment.
A nice problem, moreover, will be raised by the relief program designed to take care of the unemployment caused by the minimum wage law. By a minimum wage of, say, $1.15 an hour, we have forbidden anyone to work forty hours in a week for less than $46. Suppose, now, we offer only $30 a week on relief. This means that we have forbidden a man to be usefully employed at, say $40 a week, in order that we may support him at $30 a week in idleness. We have deprived society of the value of his services. We have deprived the man of the independence and self-respect that come from self-support, even at a taw level, and from performing wanted work at the same time as we have lowered what the man could have received by his own efforts. These consequences follow as long as the relief payment is a penny less than $46. Yet the higher we make the relief payment, the worse we make the situation in other respects. If we offer $46 for relief, then we offer many men just as much for not working as for working...
... We cannot distribute more wealth than is created. We cannot in the long run pay labor as a whole more than it produces.
This can be done by many methods: by an increase in capital accumulation--i.e., by an increase in the machines with which the workers are aided; by new inventions and improvements; by more efficient management on the part of employers; by more industriousness and efficiency on the part of workers; by better education and training.
The more the individual worker produces, the more he increases the wealth of the whole community. The more he produces, the more his services are worth to consumers, and hence to employers. And the more he is worth to employers, the more he will be paid.
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