Minimum Wage Laws: A Popular Falacy-The Libertarian View

Those of you who are familiar with the Libertarian Party, or have at least visited our Web site, have probably encountered our little “Nolan” quiz that helps determine if you are liberal, conservative, libertarian, etc. It amazes me that the question that gets the least libertarian answers is the one about repealing the minimum wage. Based on our testing there are more people in favor of legalizing drugs than of repealing minimum wage laws. Yet minimum wages laws are based on false notions about economics. They are internally self defeating in that they do no good to anyone and actually harm the population they purport to aid.

The essential fallacy rests in the assumption that employers have some arbitrary power to set wages. Tell them that the people they pay $5 per hour must now receive $10 and they can’t simply smile and comply. Wages are not a function of employer whims. If they were why would any employer offer more than the legal minimum wage to any employee? Unless you’re hiring a relative and trying to help them out rather than make a profit, you, as an employer, are compelled by the labor market to offer the market’s determined “minimum” wage for whatever type of work you desire to be performed. You are in competition against other employers for the right to purchase the labor of qualified persons.

The labor market is not uniform. There are many types of labor and there are separate markets for each type. If the going rate to hire a full-time secretary with the computer skills you require is $1,800 per month, you’re not going to get someone with those skills for half that amount. The supply and demand factors of the labor market are represented by the gross number of workers available in the numerous categories, (supply), and the level of consumer demand for the types of goods and services that are ultimately to be supplied, (demand). There is quite a bit of interplay and adjustment as workers may retrain to enter a more lucrative field, or leave a specialized field for one, such as bookkeeping, that is in more general demand.

Setting a minimum wage above the market wage for any sort of employment must by logic reduce the level of that employment. There has been no increase in demand or reduction in supply. A new law has come about, nothing more. To pay more in wages than the market value for any type of labor means the employer loses money on the transaction. Employers hire people to make money off of their labor not to provide a charitable benefit. Remember that the price the employer can sell his goods and services for is set by the market for those goods and services. Minimum wage laws have no effect on that price. For an employer to attempt to raise prices to cover minimum wages increases will mean a decrease in sales volume and profitability. It doesn’t matter that all his competitors face the same problem. Consumers’ habits aren’t affected. Industries that hire the most number of unskilled workers become less profitable in relationship to all other ventures. The market adjusts for this factor by reducing the size and employment levels in the effected industry.

The public misses the relationship between reduction in employment and minimum wage increase because they are unwilling to look beyond the end of their noses. When minimum wages tend to be low and increases small the effect on existing employees is marginal. This is because an employee’s value to a firm generally increases over time as they acquire job experience. A counter clerk at a fast food restaurant with three years on the job is not equivalent to one hired yesterday. With the higher minimum wage law the new employee would not have been hired at all. Since he was never hired he never shows up in the tables or statistics. After all, liberals will argue, unemployment didn’t go up when they raised the minimum wage.

People also falsely assume wages for current minimum wage earners would plummet if the minimum wage law was eliminated. Why? If someone is worth 6 dollars an hour in the labor market there’s no reason why he would be offered any less because someone who is only worth 4 dollars an hour can also be employed. If it’s not profitable to the firm to have someone earning more than 4 dollars an hour doing a certain piece of work why would they be paying them 6 to begin with? They’d be better off leaving the work undone altogether, which is what minimum wage laws cause them to do. An employee’s value is based on the state of the labor market and his own productivity. Minimum wage laws do not change either factor. Hawaii has the highest effective minimum wage in the world. One should remember that our prepaid health law is a part of the cost of employing anyone who works over 20 hours per week. Add workers comp, TDI, SUTA, FUTA, employer FICA, etc and you’re over 10 bucks an hour before you bat an eyelash. Small wonder Hawaii’s welfare to work program has the worst success rate in the Nation.

Since markets set wages and employers can’t pay higher than market wages without suffering loss, minimum wage laws cannot increase anyone’s wage. Yet such laws can do many harmful things; chief among them being the legal prohibition against any work done for pay for which the market value is less than the minimum set by law. These laws have a disturbing impact on non-profits, many of whom would like to compensate their volunteers in some way, but can’t without running into the steep requirements made of employers. Do you ever wonder why it’s legal for volunteers to put in long unpaid hours, but a crime to pay them less than the minimum wage?

The higher the minimum wage is set the greater the number of unemployable people. Living as we do in a civilized society some provision for their basic needs as consumers must be substituted for the productive earnings the government has denied them from having. This support comes at the expense of others, reducing their standard of living as well. Plus the loss to the community of the work that could be done by this legally unemployable population means a reduction in the supply of goods and services available in the market and a consequent additional reduction in the standard of living. The minimum wage is truly a lose-lose proposition. Direct handouts to people in need actually do far less harm than interfering with the price mechanisms of the labor market. The minimum wage is an entirely vain attempt to raise purchasing power in the absence of market forces to support that effort.

”’Tracy A. Ryan is the head of the Hawaii Libertarian Party. She can be reached via email at:”’ mailto:tracy.ahn.ryan@worldnet.att.net ”’or by phone at (808) 534-1846.”’

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