MINIMUM WAGE LAWS
WE HAVE ALREADY seen some of the harmful results of arbitrary
governmental efforts to raise the price of favored commodities.
The same sort of harmful results follow efforts to raise wages
through minimum wage laws. This ought not to be surprising,
for a wage is, in fact, a price. It is unfortunate for clarity of
economic thinking that the price of labor's services should have
received an entirely different name from other prices. This has
prevented most people from recognizing that the same principles
govern both.
Thinking has become so emotional and so politically biased
on the subject of wages that in most discussions of them the
plainest principles are ignored. People who would be among
the first to deny that prosperity could be brought about by
artificially boosting prices, people who would be among the
first to point out that minimum price laws might be most
harmful to the very industries they were designed to help, will
nevertheless advocate minimum wage laws, and denounce opponents
of them, without misgivings.
Yet it ought to be clear that a minimum wage law is, at best, a
limited weapon for combatting the evil of low wages, and that
the possible good to be achieved by such a law can exceed the
possible harm only in proportion as its aims are modest. The
more ambitious such a law is, the larger the number of workers
it attempts to cover, and the more it attempts to raise their
wages, the more certain are its harmful effects to exceed any
possible good effects.
The first thing that happens, for example, when a law is
passed that no one shall be paid less than $106 for a forty-hour
week is that no one who is not worth $106 a week to an
employer will be employed at all. 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 him to
earn, while you deprive the community even of the moderate
services that he is capable of rendering. In brief, for a low wage
you substitute unemployment. You do harm all around, with
no comparable compensation.
The only exception to this occurs when a group of workers is
receiving a wage actually below its market worth. This is likely
to happen only in rare and special circumstances or localities
where competitive forces do not operate freely or adequately;
but nearly all these special cases could be remedied just as
effectively, more flexibly and with far less potential harm, by
unionization.
It may be thought that if the law forces the payment of a
higher wage in a given industry, that industry can then charge
higher prices for its product, so that the burden of paying the
higher wage is merely shifted to consumers. Such shifts, however,
are not easily made, nor are the consequences of artificial
wage-raising so easily escaped. X higher price for the product
may not be possible: it may merely drive consumers to the
equivalent imported products or to some substitute. Or, if
consumers continue to buy the product of the industry in
which wages have been raised, the higher price will cause them
to buy less of it. While some workers in the industry may be
benefited from the higher wage, therefore, others will be
thrown out of employment altogether. On the other hand, if
the price of the product is not raised, marginal producers in the
industry will be driven out of business; so that reduced production
and consequent unemployment will merely be brought
about in another way.
When such consequences are pointed out, there are those
who reply: "Very well; if it is true that the X industry cannot
exist except by paying starvation wages, then it will be just as
well if the minimum wage puts it out of existence altogether."
But this brave pronouncement overlooks the realities. It overlooks,
first of all, that consumers will suffer the loss of that
product. It forgets, in the second place, that it is merely condemning
the people who worked in that industry to unemployment.
And it ignores, finally, that bad as were the wages
paid in the X industry, they were the best among all the
alternatives that seemed open to the workers in that industry;
otherwise the workers would have gone into another. If, therefore,
the X industry is driven out of existence by a minimum
wage law, then the workers previously employed in that industry
will be forced to turn to alternative courses that seemed less
attractive to them in the first place. Their competition for jobs
will drive down the pay offered even in these alternative occupations.
There is no escape from the conclusion that the
minimum wage will increase unemployment.
A nice problem, moreover, will be raised by the relief program
designed to take care of the unemployment caused by the
minimum wage law. By a minimum wage of, say, $2.65 an
hour, we have forbidden anyone to work forty hours in a week
for less than $106. Suppose, now, we offer only $70 a week on
relief. This means that we have forbidden a man to be usefully
employed at, say, $90 a week, in order that we may support
him at $70 a week in idleness. We have deprived society of the
value of his services. We have deprived the man of the independence
and self-respect that come from self-support, even at a
low level, and from performing wanted work, at the same time
as we have lowered what the man could have received by his
own efforts.
These consequences follow as long as the weekly relief payment
is a penny less than $106. Yet the higher we make the
relief payment, the worse we make the situation in other respects.
If we offer $106 for relief, then we offer many men just
as much for not working as for working. Moreover, whatever
the sum we offer for relief, we create a situation in which
everyone is working only for the difference between his wages
and the amount of the relief. If the relief is $106 a week, for
example, workers offered a wage of $2.75 an hour, or $110 a
week, are in fact, as they see it, being asked to work for only $4 a
week—for they can get the rest without doing anything.
It may be thought that we can escape these consequences by
offering "work relief" instead of "home relief"; but we merely
change the nature of the consequences. Work relief means that
we are paying the beneficiaries more than the open market
would pay them for their efforts. Only part of their relief-wage
is for their efforts, therefore, while the rest is a disguised dole.
It remains to be pointed out that government make-work is
necessarily inefficient and of questionable utility. The government
has to invent projects that will employ the least skilled.
It cannot start teaching people carpentry, masonry, and the
like, for fear of competing with established skills and arousing
the antagonism of existing unions. I am not recommending it,
but it probably would be less harmful all around if the government
in the first place frankly subsidized the wages of submarginal
workers at the work they were already doing. Yet this
would create political headaches of its own.
We need not pursue this point further, as it would carry us
into problems not immediately relevant. But the difficulties
and consequences of relief must be kept in mind when we
consider the adoption of minimum wage laws or an increase in
minimums already fixed.1
Before we finish with the topic I should perhaps mention
another argument sometimes put forward for fixing a minimum
wage rate by statute. This is that in an industry in which one
big company enjoys a monopoly, it need not fear competition
and can offer bellow-market wages. This is a highly improbable
situation. Such a "monopoly" company must offer high wages
when it is formed, in order to attract labor from other industries.
Thereafter it could theoretically fail to increase wage rates
as much as other industries, and so pay "substandard" wages
for that particular specialized skill. But this would be likely to
happen only if that industry (or company) was sick or shrinking;
if it were prosperous or expanding, it would have to
continue to offer high wages to increase its labor force.
We know as a matter of experience that it is the big
companies — those most often accused of being monopolies —
that pay the highest wages and offer the most attractive working
conditions. It is commonly the small marginal firms,
perhaps suffering from excessive competition, that offer the
lowest wages. But all employers must pay enough to hold
workers or to attract them from each other.
1In 1938, when the average hourly wage paid in all manufacturing in the
United States was about 63 cents an hour, Congress set a legal minimum of
only 2.5 cents. In 1945, when the average factory wage had risen to $1.02 an
hour, Congress raised the legal minimum to 40 cents. In 1949, when the
average factory wage had risen to $1.40 an hour, Congress raised the
minimum again to 75 cents. In 1955, when the average had risen to $1.88,
Congress boosted the minimum to $1. In 1961, with the average factory wage
at about $2.30 an hour, the minimum was raised to $1.15 in 1961 and to $1.25
for 1963. To shorten the account, the minimum wage was raised to $1.40 in
1967, to $1.60 in 1968, to $2.00 in 1974, to $2.10 in 1975, and to $2.30 in 1976
(when the average wage in all private nonagricultural work was $4.87). Then
in 1977, when the actual average hourly wage in nonagricultural work was
$5.26, the minimum wage was raised to $2.65 an hour, with provision made
for notching it up still further in each of the next three years. Thus, as the
prevailing hourly wage goes higher, the minimum wage advocates decide that
the legal minimum must be raised at least correspondingly. Though the
legislation follows the rise of the prevailing market wage rate, the myth
continues to be built up that it is the minimum wage legislation that has raised
the market wage.
All this is not to argue that there is no way of raising wages. It
is merely to point out that the apparently easy method of raising
them by government fiat is the wrong way and the worst way.
This is perhaps as good a place as any to point out that what
distinguishes many reformers from those who cannot accept
their proposals is not their greater philanthropy, but their
greater impatience. The question is not whether we wish to see
everybody as well off as possible. Among men of good will such
an aim can be taken forgranted. The real question concerns the
proper means of achieving it. And in trying to answer this we
must never lose sight of a few elementary truisms. We cannot
distribute more wealth than is created. We cannot in the long
run pay labor as a whole more than it produces.
The best way to raise wages, therefore, is to raise marginal
labor productivity. This can be done by many methods: by an
increase in capital accumulation—i.e., by an increase in the
machines with which the workers are aided; by new inventions
and improvements; by more efficient management on the part
of employers; by more industriousness and efficiency on the
part of workers; by better education and training. The more the
individual worker produces, the more he increases the wealth
of the whole community. The more he produces, the more his
services are worth to consumers, and hence to employers. And
the more he is worth to employers, the more he will be paid.
Real wages come out of production, not out of government
decrees.
So government policy should be directed, not to imposing
more burdensome requirements on employers, but to following
policies that encourage profits, that encourage employers to
expand, to invest in newer and better machines to increase the
productivity of workers—in brief, to encourage capital accumulation,
instead of discouraging it—and to increase both
employment and wage rates.
WE HAVE ALREADY seen some of the harmful results of arbitrary
governmental efforts to raise the price of favored commodities.
The same sort of harmful results follow efforts to raise wages
through minimum wage laws. This ought not to be surprising,
for a wage is, in fact, a price. It is unfortunate for clarity of
economic thinking that the price of labor's services should have
received an entirely different name from other prices. This has
prevented most people from recognizing that the same principles
govern both.
Thinking has become so emotional and so politically biased
on the subject of wages that in most discussions of them the
plainest principles are ignored. People who would be among
the first to deny that prosperity could be brought about by
artificially boosting prices, people who would be among the
first to point out that minimum price laws might be most
harmful to the very industries they were designed to help, will
nevertheless advocate minimum wage laws, and denounce opponents
of them, without misgivings.
Yet it ought to be clear that a minimum wage law is, at best, a
limited weapon for combatting the evil of low wages, and that
the possible good to be achieved by such a law can exceed the
possible harm only in proportion as its aims are modest. The
more ambitious such a law is, the larger the number of workers
it attempts to cover, and the more it attempts to raise their
wages, the more certain are its harmful effects to exceed any
possible good effects.
The first thing that happens, for example, when a law is
passed that no one shall be paid less than $106 for a forty-hour
week is that no one who is not worth $106 a week to an
employer will be employed at all. 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 him to
earn, while you deprive the community even of the moderate
services that he is capable of rendering. In brief, for a low wage
you substitute unemployment. You do harm all around, with
no comparable compensation.
The only exception to this occurs when a group of workers is
receiving a wage actually below its market worth. This is likely
to happen only in rare and special circumstances or localities
where competitive forces do not operate freely or adequately;
but nearly all these special cases could be remedied just as
effectively, more flexibly and with far less potential harm, by
unionization.
It may be thought that if the law forces the payment of a
higher wage in a given industry, that industry can then charge
higher prices for its product, so that the burden of paying the
higher wage is merely shifted to consumers. Such shifts, however,
are not easily made, nor are the consequences of artificial
wage-raising so easily escaped. X higher price for the product
may not be possible: it may merely drive consumers to the
equivalent imported products or to some substitute. Or, if
consumers continue to buy the product of the industry in
which wages have been raised, the higher price will cause them
to buy less of it. While some workers in the industry may be
benefited from the higher wage, therefore, others will be
thrown out of employment altogether. On the other hand, if
the price of the product is not raised, marginal producers in the
industry will be driven out of business; so that reduced production
and consequent unemployment will merely be brought
about in another way.
When such consequences are pointed out, there are those
who reply: "Very well; if it is true that the X industry cannot
exist except by paying starvation wages, then it will be just as
well if the minimum wage puts it out of existence altogether."
But this brave pronouncement overlooks the realities. It overlooks,
first of all, that consumers will suffer the loss of that
product. It forgets, in the second place, that it is merely condemning
the people who worked in that industry to unemployment.
And it ignores, finally, that bad as were the wages
paid in the X industry, they were the best among all the
alternatives that seemed open to the workers in that industry;
otherwise the workers would have gone into another. If, therefore,
the X industry is driven out of existence by a minimum
wage law, then the workers previously employed in that industry
will be forced to turn to alternative courses that seemed less
attractive to them in the first place. Their competition for jobs
will drive down the pay offered even in these alternative occupations.
There is no escape from the conclusion that the
minimum wage will increase unemployment.
A nice problem, moreover, will be raised by the relief program
designed to take care of the unemployment caused by the
minimum wage law. By a minimum wage of, say, $2.65 an
hour, we have forbidden anyone to work forty hours in a week
for less than $106. Suppose, now, we offer only $70 a week on
relief. This means that we have forbidden a man to be usefully
employed at, say, $90 a week, in order that we may support
him at $70 a week in idleness. We have deprived society of the
value of his services. We have deprived the man of the independence
and self-respect that come from self-support, even at a
low level, and from performing wanted work, at the same time
as we have lowered what the man could have received by his
own efforts.
These consequences follow as long as the weekly relief payment
is a penny less than $106. Yet the higher we make the
relief payment, the worse we make the situation in other respects.
If we offer $106 for relief, then we offer many men just
as much for not working as for working. Moreover, whatever
the sum we offer for relief, we create a situation in which
everyone is working only for the difference between his wages
and the amount of the relief. If the relief is $106 a week, for
example, workers offered a wage of $2.75 an hour, or $110 a
week, are in fact, as they see it, being asked to work for only $4 a
week—for they can get the rest without doing anything.
It may be thought that we can escape these consequences by
offering "work relief" instead of "home relief"; but we merely
change the nature of the consequences. Work relief means that
we are paying the beneficiaries more than the open market
would pay them for their efforts. Only part of their relief-wage
is for their efforts, therefore, while the rest is a disguised dole.
It remains to be pointed out that government make-work is
necessarily inefficient and of questionable utility. The government
has to invent projects that will employ the least skilled.
It cannot start teaching people carpentry, masonry, and the
like, for fear of competing with established skills and arousing
the antagonism of existing unions. I am not recommending it,
but it probably would be less harmful all around if the government
in the first place frankly subsidized the wages of submarginal
workers at the work they were already doing. Yet this
would create political headaches of its own.
We need not pursue this point further, as it would carry us
into problems not immediately relevant. But the difficulties
and consequences of relief must be kept in mind when we
consider the adoption of minimum wage laws or an increase in
minimums already fixed.1
Before we finish with the topic I should perhaps mention
another argument sometimes put forward for fixing a minimum
wage rate by statute. This is that in an industry in which one
big company enjoys a monopoly, it need not fear competition
and can offer bellow-market wages. This is a highly improbable
situation. Such a "monopoly" company must offer high wages
when it is formed, in order to attract labor from other industries.
Thereafter it could theoretically fail to increase wage rates
as much as other industries, and so pay "substandard" wages
for that particular specialized skill. But this would be likely to
happen only if that industry (or company) was sick or shrinking;
if it were prosperous or expanding, it would have to
continue to offer high wages to increase its labor force.
We know as a matter of experience that it is the big
companies — those most often accused of being monopolies —
that pay the highest wages and offer the most attractive working
conditions. It is commonly the small marginal firms,
perhaps suffering from excessive competition, that offer the
lowest wages. But all employers must pay enough to hold
workers or to attract them from each other.
1In 1938, when the average hourly wage paid in all manufacturing in the
United States was about 63 cents an hour, Congress set a legal minimum of
only 2.5 cents. In 1945, when the average factory wage had risen to $1.02 an
hour, Congress raised the legal minimum to 40 cents. In 1949, when the
average factory wage had risen to $1.40 an hour, Congress raised the
minimum again to 75 cents. In 1955, when the average had risen to $1.88,
Congress boosted the minimum to $1. In 1961, with the average factory wage
at about $2.30 an hour, the minimum was raised to $1.15 in 1961 and to $1.25
for 1963. To shorten the account, the minimum wage was raised to $1.40 in
1967, to $1.60 in 1968, to $2.00 in 1974, to $2.10 in 1975, and to $2.30 in 1976
(when the average wage in all private nonagricultural work was $4.87). Then
in 1977, when the actual average hourly wage in nonagricultural work was
$5.26, the minimum wage was raised to $2.65 an hour, with provision made
for notching it up still further in each of the next three years. Thus, as the
prevailing hourly wage goes higher, the minimum wage advocates decide that
the legal minimum must be raised at least correspondingly. Though the
legislation follows the rise of the prevailing market wage rate, the myth
continues to be built up that it is the minimum wage legislation that has raised
the market wage.
All this is not to argue that there is no way of raising wages. It
is merely to point out that the apparently easy method of raising
them by government fiat is the wrong way and the worst way.
This is perhaps as good a place as any to point out that what
distinguishes many reformers from those who cannot accept
their proposals is not their greater philanthropy, but their
greater impatience. The question is not whether we wish to see
everybody as well off as possible. Among men of good will such
an aim can be taken forgranted. The real question concerns the
proper means of achieving it. And in trying to answer this we
must never lose sight of a few elementary truisms. We cannot
distribute more wealth than is created. We cannot in the long
run pay labor as a whole more than it produces.
The best way to raise wages, therefore, is to raise marginal
labor productivity. This can be done by many methods: by an
increase in capital accumulation—i.e., by an increase in the
machines with which the workers are aided; by new inventions
and improvements; by more efficient management on the part
of employers; by more industriousness and efficiency on the
part of workers; by better education and training. The more the
individual worker produces, the more he increases the wealth
of the whole community. The more he produces, the more his
services are worth to consumers, and hence to employers. And
the more he is worth to employers, the more he will be paid.
Real wages come out of production, not out of government
decrees.
So government policy should be directed, not to imposing
more burdensome requirements on employers, but to following
policies that encourage profits, that encourage employers to
expand, to invest in newer and better machines to increase the
productivity of workers—in brief, to encourage capital accumulation,
instead of discouraging it—and to increase both
employment and wage rates.
No comments:
Post a Comment