Guest Post: The Minimum Wage Myth that Won’t Die

Submitted by Logan Albright via the Ludwig von Mises Institute,

The economic theory behind why minimum wage hikes are not good for prosperity is so simple and has been repeated so many times, it’s almost not worth addressing anymore. Yet every year, some ill-informed politician comes out loudly proclaiming that higher wages mandated by the government will help the poor and reduce income inequality, so apparently we have to keep going down this road until it sinks in.

The latest offender is Senator Barbara Boxer, who is shooting her mouth off with ignorant claims that a $10 an hour minimum wage is just the thing to help the plight of the working poor. This is wrong on so many levels that it’s hard to know where to begin. Let’s start with an obvious truth that is all too often forgotten in discussions about labor regulations: labor is a product. The worker is the producer, and the employer is the customer. When you hire someone to cut your hair or paint your house, you think of yourself as the customer, but this intuition tends to break down in office or service sector jobs. If you work as a cashier for McDonald’s, the hungry people who come in and order burgers from you are not your customers. McDonald’s itself is your customer, and your time is the product they are buying from you, just like people buy burgers from them.

Boxer claims that a mandated increase in the price of your labor will benefit you, the seller. If that is true, than a mandated increase in the price of hamburgers should benefit McDonald’s, the seller, right? But there is nothing to stop McDonald’s from raising their prices. If $10 an hour is a good price for labor, why do they not charge $10 for a hamburger? The answer should be clear. At $10 a burger, McDonald’s would have many, many fewer customers. Even if every food product on the market fell under the same requirement so that customers couldn’t substitute to another eatery, people would still eat less in general, and McDonald’s would lose money. An arbitrary hike in the price of a product does not benefit sellers, it drives away buyers. Labor is no different than any other product in this regard.

When we think of labor as a product in this way, discarding abstract and meaningless notions of what is a “fair” wage, it becomes quite easy to see why high minimum wages do not benefit the poor. The price of labor rises, and so people buy less of it. Unemployment rises, and people with jobs find themselves either laid off or forced to work fewer hours in order to reduce costs. Since there will be fewer jobs available at the new minimum wage, production will decrease across the entire economy. Lower production levels mean that consumers must compete more aggressively for available goods by bidding up prices. So even though the workers lucky enough to keep their jobs may see an increase in pay, their dollars will not stretch as far as before.

According to Boxer, “There’s one word we always have to focus on and that’s ‘fairness’.” Leaving aside what a stupid thing that is to say, let’s take her at her word and focus on fairness. Is it fair to the man working for $8 an hour to be put out of work, because the government rules this productive contract illegal? Is it fair to young, uneducated workers trying to gain experience to be forbidden from competing across the only dimension they are able? Is it fair to mandate higher wages for a few, privileged workers while the same legislation throws many others into joblessness? Is it fair to saddle businesses with higher costs in a weak economy with an already draconian regulatory environment?

Maybe I need to buy a new dictionary, but none of these things seems to me to fit the definition of fairness. To me, fairness is allowing individuals to freely contract with one another, negotiating a mutually agreeable price. Fairness is treating everybody equally, not offering preferential treatment to protected classes or union members. It is bad enough that politicians know next to nothing about economics, but when they try to justify their destructive policies with misguided appeals to fairness that necessitate a near total redefinition of the term, it makes one wonder what hope there can be for the future.