The Minimum Wage Myth that Won’t Die

barbara_boxerThe economic theory behind why minimum wage hikes are not good for prosperity is so simple and has been repeated so many times, it’s almost not worth addressing anymore. Yet every year, some ill-informed politician comes out loudly proclaiming that higher wages mandated by the government will help the poor and reduce income inequality, so apparently we have to keep going down this road until it sinks in.

The latest offender is Senator Barbara Boxer, who is shooting her mouth off with ignorant claims that a $10 an hour minimum wage is just the thing to help the plight of the working poor. This is wrong on so many levels that it’s hard to know where to begin. Let’s start with an obvious truth that is all too often forgotten in discussions about labor regulations: labor is a product. The worker is the producer, and the employer is the customer. When you hire someone to cut your hair or paint your house, you think of yourself as the customer, but this intuition tends to break down in office or service sector jobs. If you work as a cashier for McDonald’s, the hungry people who come in and order burgers from you are not your customers. McDonald’s itself is your customer, and your time is the product they are buying from you, just like people buy burgers from them.

Boxer claims that a mandated increase in the price of your labor will benefit you, the seller. If that is true, than a mandated increase in the price of hamburgers should benefit McDonald’s, the seller, right? But there is nothing to stop McDonald’s from raising their prices. If $10 an hour is a good price for labor, why do they not charge $10 for a hamburger? The answer should be clear. At $10 a burger, McDonald’s would have many, many fewer customers. Even if every food product on the market fell under the same requirement so that customers couldn’t substitute to another eatery, people would still eat less in general, and McDonald’s would lose money. An arbitrary hike in the price of a product does not benefit sellers, it drives away buyers. Labor is no different than any other product in this regard.

When we think of labor as a product in this way, discarding abstract and meaningless notions of what is a “fair” wage, it becomes quite easy to see why high minimum wages do not benefit the poor. The price of labor rises, and so people buy less of it. Unemployment rises, and people with jobs find themselves either laid off or forced to work fewer hours in order to reduce costs. Since there will be fewer jobs available at the new minimum wage, production will decrease across the entire economy. Lower production levels mean that consumers must compete more aggressively for available goods by bidding up prices. So even though the workers lucky enough to keep their jobs may see an increase in pay, their dollars will not stretch as far as before.

According to Boxer, “There’s one word we always have to focus on and that’s ‘fairness’.” Leaving aside what a stupid thing that is to say, let’s take her at her word and focus on fairness. Is it fair to the man working for $8 an hour to be put out of work, because the government rules this productive contract illegal? Is it fair to young, uneducated workers trying to gain experience to be forbidden from competing across the only dimension they are able? Is it fair to mandate higher wages for a few, privileged workers while the same legislation throws many others into joblessness? Is it fair to saddle businesses with higher costs in a weak economy with an already draconian regulatory environment?

Maybe I need to buy a new dictionary, but none of these things seems to me to fit the definition of fairness. To me, fairness is allowing individuals to freely contract with one another, negotiating a mutually agreeable price. Fairness is treating everybody equally, not offering preferential treatment to protected classes or union members. It is bad enough that politicians know next to nothing about economics, but when they try to justify their destructive policies with misguided appeals to fairness that necessitate a near total redefinition of the term, it makes one wonder what hope there can be for the future.

Tags: ,

29 Responses to “The Minimum Wage Myth that Won’t Die”

  1. Bee says:

    All you Mises worshipers say that you should just go get another job. Well, when we have cut almost 3 million production and service jobs in this country and hired 3 mil in countries that pay 5 cents an hour without labor or environmental regulation or requirements (so draconian to regulate that 8 yr olds should not spend 12 hours a day in a coal mine!), you are assuming a heck of a lot that is downright psychotic. It is well known in the soft sciences that sociopaths make the most effective slave-drivers and profit generators. Where is the fairness in those laid off by corporate America with 30 yrs experience looking two and a half years to find a replacement for his six-figure job as a business analyst with an entry level job at 30K. The jobs are gone. Go ahead, call any corporate help desk, good luck understanding a word they say, they don't understand what your problem is anyway, because life is different in India. The jobs in most industries are overseas and not coming back. So your services suck and it takes hours to weeks to get your problems resolved. This brings down the value of those services and should bring down the price.

    • Jerry says:

      Have you ever considered WHY many jobs have moved overseas? Labor is like any commodity, sorry to say. A commodity is the sum of all labor to produce it. Money flows like water. You want to prevent jobs leaving for foreign countries? How you going to do that? Close all borders? Hmmmm seems one country tried that. They even shot their own people for trying to leave the paradise. Further what would you have to pay for the same products made here at home if the price of labor is that much greater. That mnimum still wouldn't be able to buy. Like a dog chasing it's tail. And lastly, That foreign worker needs a job too. But you wouldn't mind if he starved would you.

  2. Bee says:

    As far as getting a wage you deserve, which sounds suspiciously like a "fair wage" for skills acquired, what do you propose when corporations lay off workers with 30 years of experience in their field, who know the progression of systems, the best, self-made, corporate specific knowledge, closing in on retirement? That worker trains his replacement, a newly graduated neophyte with no expectation of longevity with the company, no expectation that they will ever need healthcare nor retirement, NO hand whatsoever in building the success of the company and will work for less than half the wage. How did my brothers skills, experience and education affect his vanishing industry…of banking?

  3. Ken Long says:

    What this article seems to omit is the effect of inflation on wages. Without increases to keep up with inflation we are basically lowering the minimum wage. Raising the minimum wage to $10.00/hr would not be a high minimum wage, it would simply be a mandatory wage adjustment.

    Having a high minimum wage is important. It helps to minimize the working poor.
    Likewise having a progressive income tax is important. It helps to limit the rich.

    The goal should not be greater disparity between the rich and poor, but a stronger middle and fewer rich and poor.
    If this costs us slightly more for some products and limits the spending of some people, then so be it. That is the cost of a civilized and progressive society that takes care of all its people.

    • Jerry says:

      Too bad. The article went right over your head. You also need to catch up on the affects of inflation. Inflation in effect LOWERS the real price of ALL labor. People feel that wages are going up becaue of the increase in dollars the recieve but in reality they are further behind because prices also rise. Not necessarily in uniform but overall. The only thing that lessons the affect is the increases we see in production due to echonolgy and cheap imports. There is one winner though, the government because the tax rates increase as well as we all move into higher tax brackets. When inflation is 2% and we receive increases to match that we only get part of the increase due to the marginal tax rates which apply. A 2% increase is really only somewhere between 1% to 1.5% for most people. Slick eh?

  4. Bob says:

    Minimum skills = minimum value to employer = minimum wage

    If someone wants to be paid more, he needs to make his services worth more.

  5. A.LC. says:

    " What fools these mortals be!" A lesson in economics should pre-empty any large increases in minimum wages. Only socialist thinkers consider otherwise. ALC

  6. K W Miller says:

    Average labor productivity has risen dramatically over the past decade, while real wages have stagnated or declined. Most of the productivity gains have accrued to profit…the same trend that occurred in the 1920's and precipitated the Great Depression. Dramatic post war growth in Europe, Canada, US etc. saw commensurate growth in productivity and real wages. These are facts all economists should be aware of.

  7. Doug says:

    Leslie – The view WAS tried from the bottom up. They called it the Russian Revolution. It led to the USSR and ultimately failed miserably, but only after millions died and millions more suffered horribly from the economic failure of that approach. Those who ignore history are doomed to repeat it.

  8. John R. Balfour says:

    It appears that the economist has stepped in it, yet he should feel comfortable that he is not alone.
    His manifesto of a "fairness" for a classic classism philosophy is not conservative, it is a cynical, regressive "people are commodities" myth and assumptive based ideology favoring the few while lording over the mass.
    As an entrepreneur since I was 13, I got to work for minimum wage and slightly above minimum wage a number of times in my teens and early twenties. At times, because that was all there was. As an conservative entrepreneur, there have been many ups and downs, never-the-less, I can identify with those who have been tethered to the lower rungs of the ladder.
    Yet its funny, I have never forgotten what is was like, and find it appropriate to treat "them" with respect. I see more than dregs. These are not just young people, they include people in the 40, 50, and 60 who have had success and are now frozen out of the economy and I find it disturbing.
    This philosophical babble supports an attitude where "Caveat emptor", (Buyer beware) is a licence to steal.
    It must be comforting to berate cheap labor, by those who do not have the limitation of an ethical compass to deter them from blaming those who are struggling. Cheep labor does not control the economy or economics nor do they have the ability to reap by taking away from those who have more.
    Mr. Logan, your cynicism is uncanny, and your approach is just as damaged as our economy and our governments are today. Maybe real solutions would move us forward in a healthier manner.

  9. Dan P says:

    A great example of what NOT to do with minimum wages is Australia. Their minimum wage is over $16.00 an hour. This drives up costs dramatically. As an example, attending a wedding in Adelaide, my two sisters-in-law had a wash and set for their hair for the wedding. The cost was $125.00 each. The same can be had in my city for $25.00. Also, if you could move your house there, they would sell for three to four times as much as in the USA. No thanks, I pass.

  10. Jeff says:

    Even after Logan explains it, many whom have commented on this page still don't get it. Those who tout a much higher minimum wage for the sake of "fairness" are also the same people who keep electing liberal/progressives to office who pander to the poor and keep them there. It's very simple economics. If McDonald's Corp begins paying its unskilled labor $10 per hour, they will pass this price increase of labor to the consumer. This in turn will drive a certain percentage of customers away. Then McDonald's is forced to lay off/reduce hours of the unskilled laborer. Nothing is gained for either party in the relationship. Repeating what Logan said, is it fair that some of the unskilled laborer's should lose their job, or have their hours reduced because the government forced McDonald's to pay a minimum wage of $10 per hour? I think not. Just saying that McDonald's or any other corporation is rich and can afford it is a brainless argument. Minimum wage jobs are not career positions and no one should think they could make a "living" at such a job.

    For those of you who think that business owners have a slave owner's mentality, or that business owner's who treat their employees more humanely by paying a higher wage will garner more loyalty and less absenteeism, let me say this. I worked for a branch of the federal government for 30 years that paid it's employees very, very well. Six figures per year well. I can tell you from first hand experience that they had no sense of loyalty, sicked out regularly and liked to complain regularly about how bad they had it. The working conditions were inside and very comfortable. One last thing, the angst was constantly stirred by the "union".

    And like it or not, all employees offer a product to their employer. Their time, energy and productivity. Unskilled laborer's are paid according to their abilities. Forcing an ever increasing wage that is not based on true productivity gains is no good for the workers at large, the business or the consumer. Wage increases based on individual merit and productivity is the proper solution.

  11. Jim Eisberg says:

    Fairness may be "allowing individuals to contract with one another" but when one individual is a laborer and the other is a multi-billion-dollar corporation fairness goes out the window, which is why we needed labor unions in America to create a middle class.

    I agree that fairness is treating everybody equally, but there's more to it than that. It's just as much a crime for a rich man to sleep under a bridge as for a poor man, but how many rich men have to sleep there? Fairness is a level playing field, Where's the fairness in an executive salary raise for an executive in a flailing company? Minimum wage would be okay if it were only for youngsters getting their first taste of work, but when the average minimum wage earner is 25, something is wrong. Fairness is charging employers in taxes what the government pays in subsidizing their minimum-wage workers. Fairness should probably be a $10 hamburger–we would eat less and be healthier. Fairness is taxing capital at the same rate as wages. Fairness is taking social security and medicare taxes out of every last dollar earned. If minimum wage were a training wage, it would be prohibited after an employee was fully trained.

    Labor is not the same kind of product as paint or burgers, and to think it so exposes a sociopathic view of humanity that doesn't consider human dignity–it is the mentality of slaveowners, who also thought of labor as a product. Employers who treat their workers humanely get better results–more loyalty, less turnover, less absenteeism, more employee mental investment in the company, etc. Government may not be able to legislate morality, but it can nudge behavior by putting disincentives on those who create externalities that diminish people.

    • Jerry says:

      "Labor is not the same kind of product as paint or burgers,"

      The price you see for paint or burgers is the sum of all the labor to produce it. How can it not be the same??

      • @shaunsomers says:

        The price of something is NOT the sum of the labor to produce it.

        • Jerry says:

          Then how does a commodity such as coal or copper come into being for a couple of examples? The minerals exist in nature. They cost nothing. Somebody combines their labor with the mineral to extract it and sell the product to someone else. It may take, and almost always does, many people in a string of production to get to the final product. Each party gets a portion of the final cost assuming it has value and sells. In some cases the final product may have no value at all and all the labor put into it is lost.

    • @shaunsomers says:

      "Minimum wage would be okay if it were only for youngsters getting their first taste of work, but when the average minimum wage earner is 25, something is wrong."

      Exactly. What's wrong is that there is a minimum wage. If an employer is forced to pay a higher rate, they will get the most skilled and reliable person possible to fill the job. Typically a 25yr old makes a better employee than a teenager. Why ever hire a teenager at all? The minimum wage hurts the least skilled workers the most.

  12. I'm all for Mises on most things, and in a vacuum I would agree heartily, but I have to disagree on this one. Why? For each job there are any number of people qualified to do it. Other government policies will subsidize that person's medical care, their food, housing and transportation and a host of other expenses if the wage they earn is below the 'poverty line' or some such.

  13. Leslie says:

    Once again, anyone whom agrees with this draconian view proves why mainly Republicans, Tea party members, etc. will continue to lose election after election. There are far too many examples of why this view is so far outdated that either the minimum wage should be dissolved or revised to reflect an increase to $9-$10. The Reagan's policy of the "Top down" view failed miserably. The Bush years of spending the entire US Trillions of dollars surplus and Bush also releasing millions of dollars of the TARP funds to the banking system without any accountability whatsoever. Also, to mention that Bush should be in jail for lying to the american people about the emanate threat from Iraq, whom the US had trained and used against their enemies in the Middle East, and dragging the country into a very unjust and expensive war that cost many american lives.
    Maybe, the view should be tried from the "bottom up", raise the minimum wage level and as the bottom raises, would not the top rise as well?
    It's not like (McDonald's) are sharing or giving a commission from to the minimum wage workers, however (McDonald's) does compensate monetarily the Manager's, Assistant Manager's and Supervisors but not the minimum wage employer's. Along the same line nor did the Oil company's whom made obscene & insidious windfall profits off of the backs of the american public did not compensate the cashiers who work the 8 hours shifts.
    Needlessly to say, if you do not see the inequality, it means you are either unable or unwilling to see, yes what will be called "fairness". I am neither a Republican or Democratic, I am an Independent/Libertarian with conservative fiscal views. Thank you.

    • Phil Faxio says:

      Leslie, Reagan's supply side economics led to one of the longest sustained periods of economic growth in America's history. Reagan and Bush are the ONLY presidents to cut taxes and watch the subsequent growth.

      Leslie, More Americans have died in Afghanistan under Obama's reign than under Bush's longer reign. http://www.thegatewaypundit.com/2012/04/over-twic

      Leslie, no oil companies employ cashiers. None at all. Every cashier at every gas station is employed by a contractor or a franchisee.

      I did work at Burger King for minimum wage once. That lesson helped me kick my own arse into finishing college and become successful.

  14. Wpaulp51 says:

    Here you go again! "If a worker charges $10/hr. for their time & McDonald's charges $10 for a hamburger…." ! Give us a break! This argument doesn't work, except for the rich yahoos who read it and make similar stupid comparisons. Wages should rise with productivity gains, because that minimum wage worker is increasing McDonalds' sales & profits, but they get no benefit from the profit increases. These youth you so eagerly put down are trying to make decent wages just like you did when you were working for the man. Just think! Maybe they are trying to make enough money to learn a trade, or start a business of their own, or go to college to earn their degree.Try to remember what it was like when you worked for minimum wage, I bet it bought a hell of a lot more then than it does now!

    • "Wages should rise with productivity gains"

      What if, good sir, those productivity gains are not gained because the employee is moving any faster or is any smarter, but because a proprietor spent $10,000 on a new machine? Worker is performing the same, if not less, function…but the business owner is spending more to make his business MORE productive with a similarly educated/experienced employee. Would proprietor be required to raise wages then?

      "These youth you so eagerly put down are trying to make decent wages just like you did when you were working for the man."
      I don't hear any denigrating words. Unskilled labor is just that – unskilled. If someone earns a PhD and we call them doctor, we do not genuflect or subjugate ourselves to them – we are calling them what they are. I made crap money at a part time job in high school. Joined the military – made pretty much crap money there, too… but then I busted my ass, educated myself, and now I make more money. All without demanding that I somehow magically get paid MORE than my actual value to any given business.

      "I bet it bought a hell of a lot more then than it does now!"
      Your point is well taken. Inflation is a function of money SUPPLY – not wages. That's not really what this guy is writing about.

      Bottom line – higher MANDATORY wages cause businesses to figure out OTHER WAYS to produce the same. A GREAT example would be reducing everyone to 32 hours/week because at 33 hours, LAW REQUIRES health insurance benefits.

    • johngalt says:

      Public education—ain't it great? Indoctrinated liberals influencing soon to be liberals. This is the result–not a clue how the real world works.

    • HighPockets says:

      An individual's wages should rise with the rise in productivity of the individual, as it does. Fixed it for ya.

    • Allister says:

      Hi, I am a Community Economic Development specialist by training. My goal in any situation is to increase quality of life of the lowest members of a society while ensure environmental and social sustainability. I have a Masters in Rural Development. I say all this to paint the context and authority by which I say the following.

      While I do agree that minimum wage should be adjusted for inflation (alluded to, but not directly stated, so there it is), I also agree / understand that large corporations that post billions in quarterly profits are an easy target for these minimum wage vs "slave wage" style arguments.

      But what about the mom-and-pop companies? When minimum wage goes up the large corporations barely notice, though they do cry the loudest, the CEOs and other executives don't feel any impact in their well being. The small to medium enterprises, however (which make up greater than 50% of the employment in Canada, and around a 1/4 of the GDP) feel it acutely! They have to decide whether to keep employing that high school student. Without the student at part time they cannot get all the work done they need to, thus they eventually have to close shop. Extreme example, but relevant to the point.

      I AM in favour of some kind of government / forced intervention. But just using one tool when your tool box has 174 different pieces… it is picking a fight you don't need to fight. Yes, an increase in minimum wage might help the people on minimum wage jobs (most of whom are NOT students, but young people starting their families… FYI). But it will hurt the majority of employers, causing a further centralization of economic powers.

      Solutions?
      1) Workers cooperatives (all the workers get together and start their own burger shop, retail store, etc.). Credit Unions happily fund these as the statistics show that co-ops (workers OR customer) are 90% more likely to be successful after 5 years than any (ANY) other form of business.
      2) Workers unions. McDonlads won't let you unionize? Don't work there. You think you work is worth more than $X, tell your boss you deserve a raise. If they don't listen, find another job.
      3) Government loans for further education. Not pretty, but it works.

      I could go on, but you get the idea. Stop beating a dead horse. Especially in the US. Here in Canada the minimum wage depends on the province, in Manitoba it is $10.25. None (NONE) of the doom-and-gloom arguments used to bash minimum wage have or will come true. Not even the ones I used here. Just something to think about.

      • Dan says:

        Your response is interesting because your solutions point out the very nature of arguments against arbitrary minimum wages. If I as the worker and a potential employer can not mutually agree on a price for my labor then I will go elsewhere to seek the rate a which I believe my labor deserves.

        As for unions, the only way unions are legitimate are if all exchanges are voluntary meaning that an employer can not be forced to only hire union members. As such if a union has to show the benefits to potential employers that utilizing its members will greater to the company than hire nonmember employees.

        Worker cooperatives? Great idea. Its an innovative way for people to employ themselves that can gain them leverage to aid in starting businesses.

        The point is all these solutions do not or should not ever involve government force that enslaves a business to its employees. The doom and gloom arguments you say (which are not specified) are what I imagine to be long term unintended consequences of arbitrarily setting wages by the government. Examples of the high initial cost of automation being economically viable as the rising cost of labor incentivizes companies to invest in ways to lower those costs. Like you said who benefits the most? Larger companies as they can absorb those higher cost to a much greater extent than the smaller businesses.

  15. Alan says:

    Has to be one of the worst arguments ever. No examples, completely "loaded" statements, like insisting Barbara Boxer's claim to be ignorant without really any valid reason why. If you get much better at loading your arguments with worthless fluff, then you might be able to start writing soon for the watchtower institute. Anyway, Adam Smith would be dumbfounded and disgusted. "No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable." Page 66, Chapter VIII, Adam Smith 'An inquiry…..Wealth of Nations'

  16. SRV says:

    Another corporate, morally bankrupt disinformation piece on the subject.

    The model is broken, serves only for the top 1%, and to defend it is well, indefensible!

  17. Tony says:

    Eee, gads, Barbara Boxer…another gem from the "great state" of California. Gag me!

Leave a Reply

You must be logged in to post a comment.