Minimum Wage Laws   1 comment

The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group, but for all groups.

This is an ongoing series of posts on Henry Hazlitt’s Economics in One Lesson. You can access the Table of Contents here. Although written in 1946, it still touches on many of the issues we face in 2017, particularly the fallacies government economic programs are built upon.

 

Image result for image of minimum wage

Yes, Hazlitt foresaw the fight for $15. Arbitrary government attempts to raise wages through minimum wages has the same basic effects as price fixing for favored commodities. Most people don’t recognize that the same principles govern both. It’s a very emotional and political issue.

People who would be the first to deny that prosperity could be brought about by artificially boosting prices often advocate for minimum wage laws and to denounce opponents without misgivings.

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.

First consequences of a law that says no one may be paid less than $15 an hour is that no one who is worth less than $15 an hour will be employed. You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less. 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 of the moderate services that he is capable of rendering. By doing away with low wages, you increase unemployment. You do harm all around, with no comparable compensation.

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 as consumers may simply shift to a 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 will be benefited from the higher wage, others will be thrown out of employment altogether. 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.

Image result for image of minimum wage

Some people may argue that if X industry cannot exist without paying starvation wages, then it’s good that the minimum wage will drive it out of existence altogether. Let’s use the example of fast food. Workers will be replaced by robots. Consumers will suffer a loss of quality and the people who were working in the fast food field will now be unemployed with little prospect of finding another job. How do we know that? If they’d had alternative employment available that paid better than fast food, they would have already migrated into those industries. There is no escape from the conclusion that the minimum wage will increase unemployment.

So then they sit around on their butts at home, collecting government benefits, deprived of the independence and self-respect that comes from self-support. Some might suggest we can escape the consequences by offering “work relief ” instead of “home relief;” but we merely change the nature of the consequences. “Work relief ” means that we are paying the beneficiaries more than the open market would pay them for their efforts. Only part of their relief wage is for their efforts, while the rest is a disguised dole.

All this is not to argue that there is no way of raising wages … the apparently easy method of raising them by government fiat is the wrong way and the worst way. … What distinguishes the reformers from those who cannot accept their proposals is not their great philanthropy, but their greater impatience.

There are some facts to be considered.

  • We cannot distribute more wealth than is created.
  • We cannot pay labor as a whole more than it produces.

 

The remedy for low wages is to raise labor productivity so that the market can afford to pay higher wages.

 

How do you do that?

  • Increase capital accumulation by increasing the machines that help workers be more productive.
  • Introduce new inventions and improvements
  • Introduce more efficient management on the part of employers.
  • Give workers better education and training, so as to improve their efficiency.

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. Real wages come out of production, not out of government decrees.

By the way, there is now evidence showing the results of Seattle’s minimum wage increase to $15 an hour and it’s not good news for low-skilled workers.

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Posted February 3, 2017 by aurorawatcherak in economics

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  1. Pingback: Introduction to “Economics in One Lesson” | aurorawatcherak

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