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.
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Those who favour the minimum wage often do so because they believe it decreases income inequality. It particular, they see it as a government scheme to advantage the less fortunate (i.e., poor, hard-working, employees) at the expense of the more fortunate (i.e., nasty, exploitative, employers).
Let’s suppose that this is true, even though it isn’t (because employers may pass on the extra labour costs to poor consumers instead, etc.) Even so, the minimum wage still increases income inequality at another level: between different potential employees.
Consider potential employees whose labour costs lie around the margin of employability defined by the minimum wage. Here, the marginally more productive potential employees get hired and earn, whereas the marginally less productive never get hired and languish. (In contrast, those potential employees whose productivity far exceeds the minimum wage are not going to have their hiring prospects affected by it; and those productivity is far below it are hardly going to be worthwhile employing at all.)
Now, both these groups lie adjacent to one another, near the bottom of the income distribution. An employer will hence be making hiring decisions between members of both groups. However, all the minimum wage will accomplish is to make members of one of them do better than members of the other. Concretely, a minimum wage, at say $10 per hour, takes away the possibility that two raw, unskilled potential employees will both be hired at $5 per hour, and makes it more likely that, instead, one experienced, semi-skilled employee at $10 per hour will be hired. But who “needs” the job more: the more “disadvantaged” former or the less “disadvantaged” latter?
Thus, all the minimum wage is is a scheme for helping potential employees on the second bottom rung of the ladder–who are liable to enjoy comparative greater social “advantage”–prosper at the expense of the employees on the bottom rung of the latter–who are liable to enjoy comparatively lesser social “advantage”. Thus, the minimum wage just promotes discrimination against the worst off at the expense of the not-quite-worst off.
There many arguments against the minimum wage. However, this one, which make the point that it increases inequality and promotes discrimination, may prove particularly persuasive to advocates of “social justice”, for whom sentimental affection for the poor, or animus towards the rich, precludes rational calculation about what actually helps or hurts the poor.
Great post!
I love it when the tables get turned like this
Another fun thing to point out, particularly to adherents of class theory, is that minimum wages constitute a premium on labor, not unlike a law that you can only buy cars that are at least as good as a BMW. This premium makes the price of labor inaccessible to poor people willing to hire labor, thus perpetuating the possession of the means of production in the hands of the wealthy.
“(because employers may pass on the extra labour costs to poor consumers instead, etc.)”
There exist no employers which can pass any costs to consumers without enduring terrible business consequences.
People will shop elsewhere, stop spending, cut spending, buy a cheaper substitute.
…unless every employer is suddenly hit with these costs, and they all pass them on, as is the case when minimum wage is increased. Note that passing the cost on doesn’t necessarily mean a higher sticker price; it might mean lower quality, less variety, etc. Government regulation increases costs of products, rather than merely reducing profit (which proponents believe is astronomical).
@Freedom Fighter:
Considering minimum wage is (usually) geographically uniform, all businesses will incur the same expense of minimum wage, relative to total number of employees. But, yes, you’re right. People (who have discretionary income because they have jobs) will seek other alternatives if they have them.
But, stopping spending, and cutting spending are *bad* for the economy. You’ve added to the cycle: customers will not buy, businesses can’t make payroll, and layoffs occur, meaning more customers who will not buy…
You are all right that if the additional costs is spread uniformly across a same geographical area, that no one company will have an advantage over other companies.
But minimum wage does raise the total real cost of products and services and therefore will cause consumers to simply spend less if there is no cheaper alternative.
Instead of buying two sandwiches they will buy one, etc.
I have often wondered about the affects of minimum wage. It seems to be a battle between short-run and long-run. In the short-run, you have a political advantage by making a large number of people (minimum wage recipients) happy, while only (seemingly) affecting a smaller number of business owners. The long-term affect, as with most economic policies, are much less overt. In the long-run, society as a whole suffers the consequences.
If you were to abolish the minimum wage requirement, the opposite happens. You anger a large group of people (would be recipients) while only (seemingly) pleasing a small number of business owners. As with most logical economic policies, advocation and implementation would be political suicide
There’s an article on Drudge this morning about McDonalds testing self-serve ordering stations to eliminate the need for cashiers. We already scan and bag our own groceries, pump our own gas, etc. The minimum wage angels are not helping the poor. You cannot legislate productivity.
Minimum wage, Obamacare and Dept of Labor in action.
http://www.zerohedge.com/article/so-much-mcdonalds-jobs-renaissance-burger-maker-hire-computers-going-forward
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