In response to Friday’s Forbes article, a friend asked how we would all be better off if the washerwoman who has higher earnings as a result of the minimum wage takes a pay cut. The employment effect of a minimum wage is a classic example of the law of unintended consequences and Frederic Bastiat’s insights about the seen and the unseen. It also illustrates William Graham Sumner’s thesis about The Forgotten Man. Sumner writes:
The type and formula of most schemes of philanthropy or humanitarianism is this: A and B put their heads together to decide what C shall be made to do for D. The radical vice of all these schemes, from a sociological point of view, is that C is not allowed a voice in the matter, and his position, character, and interests, as well as the ultimate effects on society through C’s interests, are entirely overlooked. I call C the Forgotten Man.
C might be the employer, but in the case of the minimum wage, there are other forgotten men and women E, F, and G who are harder to see but whose lives and interests are no less important. E is a forgotten man, as well: he is the person who is no longer employable as a result of the higher minimum wage. Popular treatments of the minimum wage point to Wanda Washerwoman and declare the policy a success because she now earns higher wages than she used to. If we focus solely on Wanda and ignore how the policy affects Helen Housekeeper and David Dishwasher, we aren’t telling the complete story and will likely enact policies that oppress the poor. Here are a few points explaining exactly how the minimum wage hurts the poor both in theory and practice.
1. No amount of legislation can repeal the law of demand. When low-skill labor is made more expensive, people hire less of it. And we’re all, on some margin, demanders of labor. The distinction between “employers” and “workers” helps as a clarifying assumption when you’re drawing graphs but can lend itself to an incorrect class analysis if you’re not careful.
2. We have to consider everyone affected by the policy. The people who are most affected by the minimum wage are those who are now unemployed (they don’t have jobs) or under-employed (they can’t work as many hours as they would be able to without a minimum wage) as a result of the minimum wage. Even if we can point at Wanda Washerwoman and say that she has higher wages, Helen Housekeeper and David Dishwasher might be out of a job.
3. Tragically, the workers who now earn higher wages might be worse off, too. First, higher wages can be made up for on other margins because there is a lot more to a labor contract than wages. Wanda has higher wages, but she might end up working in a less attractive environment (no AC, perhaps, or less-than-diligent floor workplace maintenance, or less safety equipment, or fewer bathroom breaks, or…) and her schedule is less flexible. Perhaps she has to put up with more sexual harassment (overt or covert). If she doesn’t like this, there might three other people who applied for her job who are willing to put up with it. It’s tempting to respond “so we should pass a law against discrimination,” but notice that there’s a legislation snowball effect here. Thomas Sowell describes economic analysis as a process of asking “and then what?” We can also do the same analysis of whatever law we come up with to fix the unintended consequences of minimum wages, and then come up with more laws to fix the unintended consequences of whatever we did to fix the unintended consequences of the minimum wage.
In addition, Wanda has to spend more time and energy hustling to get or keep the job. In theory, we can expect people to invest the difference between the minimum wage and the minimum they would be willing too accept in a job search. This is social waste: people are standing in line at the unemployment office when they could be doing something productive. The reason they don’t have the “do something productive” option is because those productive activities have been shut off by restrictions on the labor market.
4. Some of the most pernicious effects occur over the long run. The prospect of a higher wage encourages people to drop out of school and participate in the labor market (where they might crowd out those who are even less productive). The low productivity worker who loses a job is clearly worse off. The fortunate teenager who gets a job might have higher earnings now, but since he or she has dropped out of high school, future earnings might be lower. Other young, low-skill workers who aren’t so fortunate are denied the opportunity to learn the kinds of skills that come with having a job. Their lifetime earnings are now lower. There is more poverty than there would otherwise be. In this 2006 Policy Study, David Neumark summarizes the evidence. If you’re inclined to dismiss Neumark’s summary because it was written for a free-market think tank, here’s the NBER Working Paper of Neumark and William Wascher’s comprehensive review of the minimum wage research and here’s the Google Books preview of their 2008 book Minimum Wages, published by MIT Press.
5. Policies have to be evaluated in terms of their actual effects rather than their hoped-for results. This has been one of the most important elements of Thomas Sowell’s scholarship and popular writing, particularly his book A Conflict of Visions. Meaning to help poor people isn’t the same thing as actually helping poor people. When we consider the systemic effects of policies like minimum wages, meaning to help poor people too often translates into actively (albeit unintentionally) oppressing poor people.
6. Minimum wages translate into more discrimination. Competition constrains employers’ ability to to discriminate on the basis if race/gender/etc. in well-functioning markets. Minimum wages mean than more labor is supplied than is demanded. This gives racists the ability to be choosy about who they hire. Free markets don’t imply that people won’t make mistakes or do horrible things, but they do imply that people will know when they have made mistakes and be punished for doing horrible things because mistakes and discrimination will hurt the bottom line.
The effects of minimum wages are among the most tragic examples of the law of unintended consequences. Wages are determined by competition, and employers’ willingness to pay is fundamentally determined by an employee’s ability to produce. When governments pass laws mandating wages that are greater than the value of what Helen Housekeeper can produce, it is no longer advantageous to employ Helen. The best thing we can do for her is stop “helping” her with labor market interventions and start finding was to expand her opportunities and help her become more productive. To paraphrase my friend David Henderson, people who work to get you fired are not your friends no matter how much they claim to care.