Submitted by Pater Tenebrarum of Acting-Man blog,
Most of our readers probably know what we think of minimum wages, but let us briefly recapitulate: there is neither a sensible economic, nor a sensible ethical argument supporting the idea.
Let us look at the economic side of things first: for one thing, the law of supply and demand is not magically suspended when it comes to the price of labor. Price it too high, and not the entire supply will be taken up. Rising unemployment inevitably results.
However, there is also a different way of formulating the argument: the price of labor must not exceed what the market can bear. In order to understand what this actually means, imagine just for the sake of argument a world without money. Such a world is not realistic of course, as without money prices the modern economy could not exist. However, what we want to get at is this: workers can ultimately only be paid with what is actually produced.
As Mises has pointed out, most so-called pro-labor legislation was only introduced after enough capital per worker was invested to make the payment of higher wages possible – usually, the market had already adjusted wages accordingly.
However, unskilled labor increasingly gets priced out of the market anyway, which is where the ethical argument comes in. If a worker cannot produce more than X amount of goods or services, it is not possible to pay him X+Y for his work. Under minimum wage legislation he is condemned to remain unemployed, even if he is willing to work for less.
In Switzerland, the unions have recently managed to get the demand for minimum wage legislation on one of the quarterly referendums in the country. An interesting point has been brought up by one of the opponents in the course of the debate, but first a little background information:
“Jasmin Eicher has already axed her sole full-time employee to keep afloat her shop selling cards, candles and paper in a Zurich suburb. If Switzerland approves what would be the world’s highest minimum wage, she says the only option would be to close her door.
The Swiss will vote in a national referendum May 18 on whether to create a minimum wage of 22 francs ($25) per hour, or 4,000 francs a month. While about 90 percent of workers in Switzerland already earn more than that, employers say setting Switzerland’s first national wage floor would push up salaries throughout the economy. When adjusted for currency and purchasing power, it would be the highest minimum in the world.
“We couldn’t pay it,” said Eicher, standing behind the counter in her shop in Schlieren. The employee she let go earned 3,500 francs a month. Now she’s by herself, working 10 hours a day, six days a week, and her hopes of hiring a cheaper helper would be dashed if the proposal passed.
“Of course I understand about people not earning enough, but not everyone is worth 4,000 francs. Here in Switzerland we’re already so well-off,” she said.
The chief backers of the proposal are Switzerland’s biggest trade unions, which argue that pay levels need to reflect the country’s prices – among the world’s highest.”
George Sheldon, professor of economics at the University of Basel, said the Swiss proposal would be counterproductive.
“Unemployment among the unskilled is increasing,” he said in a phone interview. “The solution to their problem can’t be to make them more expensive.”
So, 90% of all employees are already paid more than the proposed minimum wage. It turns out that virtually all the biggest companies pay salaries above what would be the world's highest minimum wage – but that is not the main problem.
Who Would Lose Out?
The point we actually wanted to get at is touched upon in the following excerpts:
“Despite being home to multinational corporations such as KitKat-candy-maker Nestle SA and drugmaker Novartis AG, Switzerland gets two-thirds of its employment from small and medium-sized enterprises.
The Association of Swiss Cleaning Companies, Allpura, opposes the minimum wage, saying it would lead to job cuts and worse working conditions. It says employees in the sector earn between 18.50 francs and 26.50 francs per hour.
Big companies including Nestle, Novartis and Swatch Group AG are against the measure too, saying it will hurt the economy.
“State intervention in the liberal economic system also goes against the market economy principles of our society that have been so successful to date,” Novartis spokesman Dermot Doherty said via e-mail.
At Nestle, the wages of all Swiss employees are above the proposed minimum, spokesman Philippe Aeschlimann said. “A higher cost of labor would however affect companies in our supply chain and our Swiss customers,” he said via e-mail.
“A minimum wage won’t stop poverty,” Economy Minister Johann Schneider-Ammann said at a press conference in Bern in February. “This new system could be counterproductive.”
According to Boris Zuercher, head of the Employment Directorate at the State Secretariat for Economic Affairs, the uniform wage would get passed on to consumers in the form of higher prices and will ultimately result in job losses among low-wage earners. Workers earning between 4,000 and 6,000 francs a month — 40 percent of the full-time workforce — will seek higher pay too, he said.
“The main criticism is that it’s an enormously high minimum wage — it would be the highest internationally,” Zuercher said, speaking by phone from Bern. “It’s not a question of Novartis or UBS not being able to afford to pay 4,000 francs, but some little company in a remote valley.”
By contrast, the Swiss Federation of Labor Unions says a minimum wage wouldn’t lead to higher unemployment because it would mostly affect domestically-oriented sectors where outsourcing isn’t possible.”
The first salient point is the fact that once this new minimum wage law is introduced, upward pressure on all wages would likely ensue. Note in this context that Switzerland is awash in newly created deposit money due to the ministrations of the SNB, which is manipulating the Swiss franc's exchange rate (a few charts on Swiss monetary inflation over recent years can be seen in our article 'How Safe is the Swiss Franc?'. The article is slightly dated, but it still serves to illustrate the point). So there is no brake on prices and wages due to a lack of money supply inflation – rather the opposite. Naturally, wages would not be the only thing rising under these circumstances – prices would be adjusted accordingly, and in the end the purchasing power of the higher wages would not be greater than before.
The second important point is the one about which enterprises would suffer the most on account of such legislation. When the union official cynically comments that 'only businesses that cannot be outsourced will be hit' (i.e., those who cannot vote with their feet and simply flee), he forgets to mention that small and medium-sized companies as a rule cannot 'outsource' their operations either, almost regardless of what they are producing. We felt reminded of something a friend of ours mentioned to us recently: “The problem of today's form of capitalism is that there are not enough capitalists:”
Indeed, an individual entrepreneur running a small business has a very difficult life already, as every new imposition is much harder to overcome for a small business than it is for a large corporation. This is also why we often find that big corporations don't resist new regulations: they reckon they are likely to keep competition from upstarts at bay. It is laudable that several big Swiss corporations are evidently not following this trend.
If Swiss voters agree to introducing a new minimum wage law, they would end up doing incalculable damage to Switzerland's entrepreneurial culture. At the moment, Switzerland is still one of the freest economies in the world. It has been extremely successful so far and its achievements would clearly be put at risk. Hopefully Switzerland's voters won't be swayed by union's arguments.