Capitalism vs. minimum wage laws

Many people, especially liberals, still widely accept the view that we need minimum wage laws to provide the working poor with a fair wage. A minimum wage is a legally mandated price floor for labor — for instance, in California it is illegal to hire a worker for less than $8 an hour.
On the surface, this sounds perfectly reasonable. After all, it would be unfortunate to receive such low wages that one would struggle to acquire basic goods such as food or health care.

This is just one example of how many who claim to support capitalism believe it needs to be mitigated or controlled in some way; otherwise it leads to exploitation.

Unfortunately, these views are mistaken; indeed, they are flawed from both an economic and a moral perspective. Economically, because minimum wage laws create unemployment among some lower skilled laborers (those very groups they are designed to protect). Morally, because these laws attack people’s rights to negotiate their income and moreover imply that an employer has a moral obligation to provide workers with a certain income (she doesn’t).
These two aspects are interrelated, of course, but I will start by first discussing the economic flaws and then move to the moral argument.

It is important to remember that wages are essentially no different than any other price: the price of one’s labor. Furthermore, this price reflects certain facts: it reflects facts about how much an employer values your work (if they valued it less than your wage, they would not hire you at that wage) and whether, everything else being equal, you find that work worth doing at that wage. A worker’s value to her employer depends on factors, such as how much training she needs, her employment history and her ability to efficiently carry out tasks.

But if this is true, then surely increasing a minimum wage via legislation cannot alter these facts. As 20th century economist Henry Hazlitt once wrote, “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 to him to earn, while you deprive the community even of the moderate services that he is capable of rendering.”

The attempt to change those facts creates unemployment, as those whose work is worth less than the minimum wage cannot be employed at a profitable wage. In other cases, where hiring fewer workers is too detrimental, employers might simply increase the prices of their goods and services, which in turn reduces the purchasing power of lower-income people (who suffer more from price inflation than other groups).

But who are those whose work might be worth less than the minimum wage? It is inexperienced or low-skilled people (such as students!). The wages of middle and high-income workers are not directly affected by the minimum wage.

We can see now why we cannot eliminate poverty by simply dictating a minimum wage of, say, $50 an hour. This would likely result in drastic price increases, massive unemployment among low-skilled laborers, or both.
Minimum wage laws are immoral insofar as they constitute a violation of our rights — specifically, our ability to trade freely in the labor market. To be able to make the decisions to live the best possible lives we can, we need to be free to rely on our independent, rational judgment.

Sometimes, it will be advantageous for me to accept a low-paying job, if I need to build experience or I have other sources of income to supplement it. Similarly, employers will sometimes find it profitable to hire workers with less skills, and therefore will sensibly want to pay them less than other workers. This does not constitute exploitation: one could only reach that conclusion by dropping the context that employers are offering a positive benefit to potential employees, and that the relationship between a worker and her employer is a trade.

Laws that regulate economic activity, of which minimum wage laws are merely one example, attack our ability to engage in trade with others and force us to act against our rational judgment and our values.

In a laissez-faire system, wealth creation and productivity are unfettered by government interference, and everyone (including the working poor) can benefit the most from the rational and productive behavior of others. It may be true, though, that even in a free society, poverty will exist. And to the extent that people see it as a problem, we can help those in need through private charities.

In doing so we can recognize the fact that charity is and ought to be the voluntary decision to support causes that we value, not the redistribution of wealth or regulation of economic activity by force.

In conclusion, I would like to stress that the primary issue is not “how to provide the working poor with a ‘fair’ wage,” (which is not the province of a proper government) but rather how to achieve society governed by justice and a rational economic policy, which themselves depend upon a foundation of political theory (individual rights) and ethics (rational egoism). The answer, once again, is freedom.

TRISTAN DE LIEGE can be reached at tflenaerts@ucdavis.edu.

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