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The Minimum Wage Is Destructive To Both Workers And Freedom

The Minimum Wage is Destructive to Both Workers and Freedom

By Richard M. Ebeling

Most of us both value and take for granted the ability to make decisions about our own lives. When busybodies put their noses into our personal affairs, we often say, or at least think, “Mind your own business!” And yet, we live in a world in which government won’t leave us alone, and instead, very actively tries to mind our business for us.

Take, for example, the legal hourly minimum wage. The federal government began dictating the minimum lawful amount an employer must pay someone working for them in 1933, as part of Franklin Roosevelt’s New Deal legislation. It was declared unconstitutional in 1935 by the U.S. Supreme Court, but was reinstituted in 1938 as part of the Fair Labor Standard Act, and the Supreme Court upheld it in a 1941 decision.

The Minimum Wage vs. Personal Choice

When first implemented, the federal hourly minimum wage was set at 25 cents/hour. Today, it ranges at $7.25/hour. But, in recent years, there has been a call to significantly increase it to as much as $15/hour. A variety of cities around the country have, in fact, instituted such legislation within their jurisdictions, with a number of state governments proposing increases in that direction within their respective boundaries.

The assertion is made that anything less than an hourly wage in that general amount (or more!) is denying a person the chance to earn a “living wage.” It is offered as paternalistic intervention in the labor market, meant to improve the working and living conditions of those who may be unskilled or poorly experienced to have a chance to earn enough to get ahead in life.

Who, after all, can be against someone having some minimal amount to live decently? Only the cold, callous, and uncaring, surely; or those who are apologists and accomplices of the greedy, selfish, and profit-hungry businessmen who have no sense of humanity for those who are in their employ. That’s why there needs to be a law.

Left rarely asked and less often answered is, who is the government or those behind such legislation to tell people at what hourly pay they may work in the marketplace and how much an employer is required to pay them? Essential to human freedom is the liberty for each individual to say “yes” or “no” to an offer made by another concerning some potential association, interaction, or exchange among two or more persons.

Forcing or Prohibiting Exchange

Suppose I go into a shoe store and, after looking around and trying on a few pairs, I decide to leave the store empty-handed because the store does not have the styles or the fit I’m interested in, or because the shoes are not offered at prices that seem worth paying. But suppose, now, that a large gruff fellow stands in the doorway, and declares, “The boss says that you can’t leave ‘til you buy shoes at the price he says you gotta pay.”

I think most of us would consider this to be outrageous and unethical. Most of us would no doubt say to ourselves, who is this guy or his boss to tell me what shoes I have to buy, and at a price that I consider to be more than those shoes are worth to me, or which is beyond what my budget can afford?

Suppose, then, that the bouncer replies to any such remark you might make by saying, “Unless you buy a pair of shoes at this minimum price, then the boss says he can’t afford to pay me and de other employees a ‘living wage.’ Buy shoes here – or else.” Many of us might try to pull out our cell phones and dial 911 for police assistance.

We take it for granted that no one, regardless of the rationale, should be able to force us into an exchange or a relationship not of our own choosing and voluntary consent. Otherwise, we are a victim — a slave — to the other person’s wants and wishes, at our coerced expense.

We would also be much aggrieved if there was a mutually agreeable association or exchange opportunity we did want to enter into, but someone comes along and tells us that we can’t, even if that association or exchange didn’t physically harm or defraud anyone else in the process.

Yet, this is precisely what government-mandated minimum wage laws demand of market participants in American society. What are some of the consequences from government-legislated minimum wage intervention into the marketplace?

The Minimum Wage and Low Skilled Unemployment

First, it results in preventing some who might have found acceptable and gainful employment from doing so. This is especially true of the unskilled and workplace inexperienced in the labor force. The only source of revenues from which an employer can pay salaries to all those he may employ is from producing, marketing, and selling a product to willing consumers at a price they are willing to pay for what he is offering for sale.

The employer, therefore, must ask himself if an existing or a prospective employee would contribute a value-added to his production process. But more importantly, will it be a value-added that is less or more than the value of the finished product said employee may assist in manufacturing? All of us like to get a bargain (paying less for something than we think it is worth to ourselves), but we never intentionally pay more for something than what we prospectively consider it to be worth. A worker whose value-added comes out as more than the value of the finished product will be paid for his hire by the employer.

When the government imposes a legal minimum hourly wage above the wage currently prevailing for various types of labor services, the law necessarily threatens the employment of any and all workers whose estimated value-added is now less than the mandated legal minimum wage.

Suppose that a worker helps to produce an addition to marketable output that has a competitive value of, say, $5 an hour. But the government has now imposed a minimum wage of $7.25/hour. Those workers whose value-added is only $5 an hour will find themselves priced out of the market: From the employer’s perspective, they cost more to employ than they’re worth in terms of value-adding revenue to be earned from their hire at a minimum wage of $7.25. A private enterpriser cannot successfully maintain or establish a profitable competitive edge in the long run, if (at the margin) he has to pay $7.25 for what has had, up until now, a market worth of $5.

The Minimum Wage vs. Earned Labor Skills

But the harm runs deeper for the employee, who either loses his job due to the legal minimum wage or who, to begin with, never gets a job due to the law. The lowest earners in the labor market are usually those with the least skills and work experience. That is why their productive worth is at the lower end of the wage scale.

But how can they ever acquire the on-the-job training, experience, and workplace skills if the minimum wage so prices them out of the market? Priced out, they may never have the opportunity to get their foot on the bottom or lower rungs of ‘the ladder of success.” By being priced out of the market in this way due to minimum wage legislation, some of them may be condemned to permanent unemployment.

In this day-and-age of the modern redistributive — welfare — state, such persistent unemployment, due to the minimum wage, means that those who are gainfully employed find themselves taxed even more than would otherwise have been the case. Their salaries must provide the needed government tax revenues to cover the income transfer costs that the welfare system is expected to incur to meet the “needs” of those the government’s own minimum wage policy has forced into and left in the rolls of the unemployed.

Minimum Wage Laws and the Black Market

An additional, unintended consequence is that those thus left in the limbo land of unemployment but who wish to make more money than what the welfare state redistributes to them, will turn to alternative lines of work: the underground and black market economies. Both are market economies, but the underground economy is often the arena in which income may be earned away from the prying eyes of the tax-collectors, even though the type of product or service offered for cash is completely legal. It just usually has less of a paper trail for the taxing authorities to follow.

The black market usually connotes goods or services that are legally prohibited by the government from being openly produced, sold, and used, such as narcotics and other drugs, prostitution, and various forms of gambling. While both underground and black markets have their seamier sides, especially the trade in prohibited, heavily restricted, or controlled products tend to attract market participants of a violent, cruel, and deadly type. Thus, some individuals thrown into unemployment due to the minimum wage are drawn into arenas of crime, corruption, and thuggish coercion to earn a livable income. This is an outcome, surely, that few who campaigned for minimum wage laws originally had in mind.

Who Decides Wages: People or Politicians?

But, behind all of these negative and usually unintended consequences of imposing a government-enforced hourly minimum wage, remains the fundamental ethical issue: who shall have the right to decide the terms and conditions people will have to enter gainful employment? Shall it be the individuals who are directly affected by these laws who decide what an acceptable wage is, given their own skill set and the market opportunities they find? Shall it be the prospective employers who offer work to others based on their market-based estimate of the potential value-added of a possible employee?

Or shall it be the politicians and bureaucrats, pressured by various interest groups with their own motives for asserting a right to dictate and determine the wage at which individuals who they personally know nothing about will be allowed to find a job? There is an inescapable arrogance, a hubris, on the part of those who claim to know what a person is worth in the marketplace and the wage at which he may or may not be hired.

In this the political paternalists who insist on setting minimum wages through government command and control closely resemble the socialist central planners of the twentieth century. They suffer from that same “pretense of knowledge” that F. A. Hayek criticized nearly 45 years ago in his Nobel lecture. They suffer from the dangerous delusion that they possess enough wisdom to know better than people how they should live and work, and the terms under which they may contract and exchange for mutual gain.

Freedom requires that every individual have the liberty to peacefully decide how best to direct and plan his own life and in voluntary association with others in the various corners of society. They are not free when the government can interpose itself and dictate the wage at which a human being may offer his labor services and another may choose to employ him. Anything less makes everyone an economic victim and tool of the coercing control of those commanding the halls of government.

Richard M. Ebeling
Richard M. Ebeling is BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. He was president of the Foundation for Economic Education (FEE) from 2003 to 2008.
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