Acton Commentary

Minimum Wage, Maximum Suffering


We pastors often tell the parable of the laborers in the vineyard. A landowner needs workers, so he offers them terms to pick for the day. The moral is intriguing and fascinating, and it concerns ownership, contract, jealousy, and other matters.

But the moral is not what concerns me here. Let's imagine the story if there had been a bureau to monitor the setting of all wages, ensuring that none fell below a set minimum.

What the vineyard owner do? If the minimum were very low, it might not make any difference. If it were high, the response would be obvious: he would hire fewer workers. The moral of the story might have turned out differently!

But today, we think nothing of putting government in charge of decisions that, in the past, were made by owners and workers. This has had huge implications that affect us in big and small ways.

The minimum wage is going up but in real terms—that is, adjusted for inflation—but it has generally fallen since its height in 1968, at which point it exceeded $9 in today's dollars. The unemployment rate was at 6 percent and it would go higher and higher through the 1970s.

Today the legally mandated minimum wage is very low by postwar standards. Indeed, we have just completed the longest period when the minimum has not be raised. And what is happening to the unemployment rate? It is rock bottom and nearing 4 percent (which many economists would consider full employment).

Do you see a connection? With few dictates, more people work. That's the bottom line. What the minimum wage does is no more or less than make it illegal for employees to contract for employment at less than a set price floor.

Thus does it take away choice and eliminate a range of options, particularly for those who are least able to market their wares at high prices. Whether you favor or oppose a higher price floor, there is no denying this essential reality.

But this big picture can be a bit distorting. Let's think of this problem from the point of view of a parent of a disabled child who struggles in school and has few options for the future. When the girl turns 16, she has the opportunity to work – which is a wonderful source of life and vitality for a young person. She can contribute to society and learn so much in the process. She senses that she is valued by others.

Now, it is not the case that her labor contribution will be equal to her wages, at least not initially. But there is an employer out there who wants to help this girl. She is hired at $5.85, a wage that puts pressure on the business but it's bearable. What happens when the legal minimum is raised to $6 and $7? At some point, the wage becomes unviable. The boss's charity can only extend so far. She will probably be fired as a direct result of Congress's attempt to do good.

Now, before you say that the answer is simple (just force the employer to fork over), remember that nothing in this world is truly free of resource costs. What is subsidized in one area is cut from another area. So the requirement that employers pay more comes at others' expense. That increases anger and breeds discontent. It could come at the expense of inventory, which hurts business, which is in no one's long term interest.

Am I just making this case up? No. It is a real case of which I have personal knowledge but it is hardly the only one. Whenever the minimum wage is raised, there are victims and those victims are the people who are the most marginal members of society, the people without work experience, the young, those who are likely to be discriminated against.

Now, it's true that there are empirical studies that downplay the cause and effect relationship between increased minimum wages and unemployment. And it is true that the data do not always bear out this relationship, and the reason is that macroeconomic data is not always so clean and clear. What we need to do is use logic and use our heads to think through this issue.

Whenever a price floor is raised, the tendency is to create a surplus of goods beyond which there might not otherwise have been. Whenever a wage floor is raised, it creates a surplus of workers who otherwise might have had jobs. Sometimes the effect can be small, as it will undoubtedly be this time since it has been so mercifully long since the minimum wage has been raised. But let there be no mistake: at the microeconomic level, the effects are real and tragic.

Why would anyone support such a policy? There is plenty of economic ignorance out there, and surely that is one explanation. But another explanation is uglier. Labor unions don't like competition, particularly from low-wage, inexperienced employees. They believe that they drive down their own wages. So they prefer higher minimum wages as a means of blocking certain people from getting a foothold in the workplace. If you doubt this, consider that labor unions are the main lobbyists for the minimum wage. No union member works for anywhere near the minimum wage. Do you have a better explanation?

The beauty of non-coercive means of negotiating wages is that they rely on human consent, cooperation, and voluntary assent. This is the humanitarian way to raise wages. Introducing the force of government into the exchange causes friction, exclusion, and unforeseen problems such as the exclusion of some of society's most vulnerable people.