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The Moral Case Against Minimum Wage Laws

The legally mandated minimum wage is an economic issue, of course; but it is more fundamentally a moral issue. Unfortunately, usually only the left, with its claims about the alleged fairness of higher minimum wages, talks about the moral dimensions of the policy. That needs to change.

Obviously minimum wage laws are a big deal politically. Various states and localities have higher minimum wages than the national level. In Colorado, we’re looking at a ballot measure to raise the hourly minimum wage to $12 by 2020. We already have a higher minimum wage than federal law mandates, and it’s indexed to inflation. One of the big fights between Bernie Sanders and Hillary Clinton was whether to raise the federal minimum wage to $15 or “only” $12. Donald Trump, as we might expect, has flip-flopped over whether he wants to increase the federal minimum wage or leave it the same.

I can think of no politician today who vocally advocates the repeal of minimum wage laws, even though that is still a fairly common position among free-market economists. The reason for this, I think, is that advocates of economic liberty have largely ceded the moral high ground on the issue. Today the usual view is to see anyone who calls for the repeal of minimum wage laws as a cold-hearted bastard who wants to see children starve in the streets. But that’s all wrong.

What are the moral issues at stake? I see three main ones.

1. It is wrong to forcibly prevent someone from negotiating a salary at which he or she can find a job and is willing to work.

The moral debate is, of course, bounded by economic realities. If we could pass a magic law that would result in everyone getting paid at least $15 per hour (or $100 per hour) without making anyone worse off, no one would oppose it. For people who live in reality, the debate is a little more complicated.

No sane economist would claim that a sufficiently low minimum wage (say, $3 per hour) would increase unemployment. At the same time, no sane economist would deny that a sufficiently high minimum wage (say, $30 per hour) would cause dramatic job loss.

The academic debate largely revolves around the employment effects of relatively modest changes in minimum wage laws. Minimum wage-change deniers aside, this much is clear: Any increase large enough to substantially boost many people’s wages is also large enough to throw some people out of work and to chill future creation of certain jobs.

Ultimately, almost no employer is going to keep an employee around who loses money for the business. If Alison, a business owner, can make more money by laying off Benjamin than by paying him $12 per hour (or whatever the law says), then Benjamin goes to the unemployment lines. For each employee and each job, there is an upper pay boundary beyond which an employer will not go. (I’m assuming here that no one is crazy enough to suggest that government force employers to hire people at a loss.)

If the minimum wage is set at $12 per hour, then a person who can contribute only $11 per hour to a business will not find work. The real minimum wage is zero, and minimum wage laws force people to accept zero rather than even a penny below the legal minimum.

Nor is such legally mandated unemployment justified by utilitarian concerns. One could argue, for example, that if total wage gains surpass total wage losses due to cut jobs, then that would be a net benefit. Or one could argue that total wage increases would have to outweigh losses by some multiple. But such calculations do not justify forcibly harming some people by outlawing their employment.

People are individuals, not averages, and individuals have rights—including the right to engage with others by mutual consent.

2. Minimum wage laws treat entry-level, unskilled, and other low-paid workers as incompetent to manage their own affairs and negotiate their own contracts without the intervention of politicians and bureaucrats.

For many people, a minimum wage job is an entry-level job, the first step on a long path of career advancement. As the Bureau of Labor Statistics reports for 2015, “Although workers under age 25 represented only about one-fifth of hourly paid workers, they made up about half of those paid the federal minimum wage or less.”

A person does not earn only money on the first job; he or she earns invaluable experience. One critical skill that people need to learn is how to negotiate employment contracts with employers. Minimum wage laws essentially communicate, “Don’t worry about thinking carefully about what you can contribute to a business and what your time is worth to employers, and don’t worry about standing up for yourself at work; we the elites will take care of your pay negotiations for you.”

In some cases, the compensation is the work experience, which is why many people sign up to work for free as interns when they are legally allowed to do so.

Some people seek out a side-job, sometimes with low pay, to supplement a family’s income. This group can include teens and young adults living at home who want extra pocket money while going to school, spouses who split time between kids and work, and people in semi-retirement. Around two-thirds of all minimum wage workers are part-time (although not always by preference). David Neumark finds that many minimum wage workers contribute to greater household income, one reason why, at a $10.10 minimum wage, around half of the financial gains would go to families over twice the poverty line, while around a third of the gains go to families over triple the poverty line.

In the name of fighting poverty, minimum wage laws can interfere with the job choices of people who are not poor. Some employers respond to a higher minimum wage by eliminating or never offering certain jobs; some demand that employees become more productive during each paid hour. Minimum wage laws communicate, “We’re from government, and we know best: You may not negotiate a lower wage based on the expectation of assuming fewer responsibilities, having more flexibility, or enjoying less stress while at work.”

Then there are some people who really are trying to support a family on a single minimum wage income. That’s a tough situation, no doubt. The best path out of that situation is not to work the same entry-level job for a little more pay; it is to build more-marketable skills and get a better job.

Bear in mind that the main problem is not that some heads of households make only the minimum wage; it is that, in most poor families, no one works at all.

Rather than “help” struggling families by violating people’s rights and throwing some people out of work, government should respect people’s rights to cooperate consensually with others and to decide how to dispose of their own wealth. For example, government should repeal job-killing licensure laws starting with the most obviously irrational ones, such as laws requiring hair braiders to undergo hundreds of hours of pointless instruction.

Forced wealth transfers violate people’s rights (a large issue to pursue further elsewhere); however, even momentarily granting the assumptions of welfare statists, minimum wage laws are a bad approach. Targeted welfare addresses the problem it’s intended to solve (at least superficially) without directly disrupting the labor market.

It is telling that some people would rather increase the minimum wage than, say, repeal the 15.3 percent federal payroll tax, which is extremely damaging to the poor. For such activists, government taking more control of people’s lives seems to be the point.

Of course, private efforts to help the poor can be morally appropriate and economically sensible; for example, people who wish to do so can contribute to charities that help people on low incomes get on their feet and improve their job skills.

So far, we have focused on the employee and job seeker. Next we turn to the other side of the employment relationship and our third reason why minimum wage laws are immoral.*

3. It’s wrong to force employers to pay more than they can negotiate on a free market.

The employer often is the “forgotten man” or woman in policy debates about the minimum wage, but let’s not forget who actually creates the jobs in question. It ain’t the politicians or the street activists.

The premise of the “fairness” argument for minimum wage hikes seems to be that employers easily could afford to pay their employees more, but they just refuse. Most people with such presumptions have never actually tried to run a business or make payroll. In the real world, most businesses fail within ten years. In the real world, many business owners run losses some years. Those who think it’s easy to run a business and pay low-skilled employees high wages are welcome to try.

Employers are not society’s beasts of burden, to create higher-paying jobs out of thin air as demanded by those who create no jobs. (Even politically subsidized projects are funded ultimately by private-sector producers.) Employers, no less than employees, have rights—including the right to engage with others by mutual consent.

Every dollar a business pays in expenses has to come from somewhere. If a business owner pays one employee more, that money has to come out of others’ pay, facility expansion, job training, computer upgrades, higher prices paid by customers, or the like. A business owner has a moral right to negotiate freely with the various suppliers, employees, and customers of the business in ways the owner judges best for the business overall.

Employers do not create the problem that some people can demand only a (relatively) low wage. Employers help solve that problem by helping employees develop marketable skills.

When people have more marketable skills, employers have to pay them more, or employees quickly find better terms elsewhere. That’s why only a small fraction of people earn the federal minimum wage and why only about one in five employees would be directly affected by a $12 minimum wage.

In the main, people don’t make more money because government says they must; they make more money because they become more productive. People become more productive primarily with better capital—the best-educated person in the world with access only to a shovel will produce very little. Capitalists, not politicians, are why people on average increased their earnings from $4,200 in 1900 to $33,700 in 1999 (both figures using 1999 dollars). At a given time, some people earn relatively more than others because they can persuade employers that they can produce relatively more wealth for the business.

Minimum wage laws scapegoat employers for problems that they did not cause. And those laws forcibly interfere with employers’ efforts to address the problems, as an indirect consequence of running their businesses, by offering people the opportunity to gain work experience.

In short, minimum wage laws treat low-wage employees as though they needed a government nanny and employers as though they deserved a government yoke. These laws violate the rights of employers and employees alike. On moral grounds, minimum wage laws should be repealed, not expanded.

* This paragraph and the previous four were updated on September 3, 2016.

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