It is naught, it is naught, saith the buyer: but when he is gone his way, then he boasteth (Proverbs 20:14).
Once again, Hazlitt returned to the issue of government price fixing. In Chapters 13, 15, and 16, this price fixing was in the form of price floors. It is in this chapter, too.
A minimum wage law is a government-mandated price floor on labor services. It does not apply to machines. It does not apply to computer programs. So, to the extent that a machine or a computer program can perform labor services at a cost per hour lower than the minimum wage, to that extent the law is unenforceable.
One set of owners possess money: business owners. They may also possess capital equipment, which includes land and buildings. They possess business plans. These plans involve hiring human laborers.
Another set of owners possess the ability to deliver labor services. These people are eligible to rent out these services.
A third set of owners will decide at some point whether to purchase goods and services that have been produced by a combination of business capital and labor services. They will determine retroactively which sellers prosper and which do not.
The key fact of ownership is personal responsibility. God holds owners responsible, because He is the original owner. These individuals are His stewards.
The window is a product of a society's moral, legal, and cultural traditions and institutions. It is known as the free market. Those with money to spend work out arrangements with people who want to sell goods to buyers, i.e., spenders of money.
In this system, people who hire workers seek to locate people who rent out these services at some price. Economic exchange always depends on an agreed-upon price. Buyers compete against buyers. Sellers compete against sellers. Only in the final stage of the hiring process does face-to-face bargaining take place: would-be employer vs. would-be employee. The prospective employer does not know how little money the prospective employee will accept, and the prospective employee does not know how much money the prospective employer will pay. In this zone of ignorance, there may be negotiating. But probably not. Time is not a free resource. Employers usually make this offer to entry-level workers: "Take it or leave it. I am too busy to negotiate."
The employer acts as an economic agent of future customers. He will give them an opportunity to buy the output of his production process. The employer also acts as an economic agent of his employees. In order to earn money, employees must sell their services to customers. The employees do not know how to market their services directly to customers, but the employer believes that he does. So confident is the employer that he is willing to pay money to the employees to perform certain tasks, irrespective of the near-term decisions of customers. The business pays these employees until the lack of customers makes it evident to the employer that he has misjudged customer demand. Only then will he fire some or all of his employees.
The wage is a signal to other workers and other employers regarding the prevailing conditions of supply and demand. If this wage is a market-clearing wage, there will be no rival workers offering to work for a lower wage for the same job, and there will be no rival employers offering to pay more.
Members of trade unions face a major problem when workers are willing to work for wages lower than those preferred by the members. These union members cannot find enough employers who will pay them above-market wages, i.e., wages at which employers can hire all the employees they want to hire. The members see a way to reduce competition from low-wage workers: get the government to pass a law making it illegal for employers to pay wages below a minimum. This way, union members may find employers who will pay them above-market wages.
In the year that the first federal minimum wage law was passed, 1938, union members who lived in the North faced competition from manufacturers located in the South, where wages were lower. They preferred not to face this competition. Northern manufacturers were happy to support a minimum wage that was lower than what they paid, but which was higher than what manufacturers in the South paid.
To gain their votes, Northern union members and Northern manufacturers told their representatives in Congress that Congress had to pass a minimum wage law. Beginning in 1938 and ever since, Congress has done exactly that.
Politicians who respond to this political pressure are in need of an acceptable political justification for such a law. There is one that has been used for decades: the workers' need for a living wage. If taken literally, the phrase makes no economic sense. People do not voluntarily accept wages that will not sustain life -- at least not for long. That is because such workers soon die. Their deaths reduce the supply of surviving people who are willing to work for a non-living wage. When the supply of labor falls, market wages rise, other things being equal. So, the phrase "living wage" is a political slogan, not an economic phenomenon. The phrase means this: a wage that is above the wage that other workers are ready to accept, but who are prohibited by the minimum wage law from accepting.
The market no longer clears at the new, higher wage. This means that more workers offer to work at this higher wage than there are offers to hire them. The wage floor creates a glut of labor offers. This is the result of all price floors: more suppliers than buyers. Those workers who offer to work are disappointed. They must seek work elsewhere. Hazlitt described this situation.
The first thing that happens, for example, when a law is passed that no one shall be paid less than $30 for a forty-hour week is that no one who is not worth $30 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.
This situation is a benefit to those workers who have jobs, but only for as long as their employers do not find labor-saving equipment to replace them. They no longer face competition from human beings who are willing to work for less.
It is also a benefit to employers who are willing to break the law. They are now able to find able-bodied workers who are willing to work below the minimum wage -- well below. The supply of unemployed workers has increased. They must take job offers that they would have rejected before the minimum wage law went into effect.
The major losers of minimum wages in the United States are black teenage males with minimal job skills. They are less desirable employees. They live in parts of town that are poverty-stricken. They cannot afford to drive to a part of town where there may be job offers at the minimum wage. Their one tool of employment in their neighborhoods is their willingness to work at a below-market wage. This way, they can gain the experience and skills required to get better job offers. But it is now illegal for employers to accept such offers. Thus, when the minimum wage was raised significantly above entry-level wages in 1961 in the first year of Kennedy's presidency, the unemployment rate for black teenage males rose above the rate for white teenage males and everyone else. It has never come down to match other groups' unemployment rates. Prior to 1961, black teenage males had a lower unemployment rate than white teenage males.
These young males are ready recruits for gangs. The crime rate rises in inner cities. The main perpetrators are black teenage males and unmarried young men.
Basic to economic growth are entry-level jobs for teenagers. Here is where they gain the skills they need. Small local businesses are the usual employers. But this avenue for young people without formal educational certification is cut off by minimum wage laws. This works against small businesses, especially business start-ups, which are the primary sources of job creation.
Ever since the early 1960's in the United States, the black underclass has remained a constant social problem. They never enter the legal labor markets. Wherever there are minimum wage laws, there is an underclass filled with young men who are never integrated into the community of married, employed heads of households. Crime is far above average in these groups. These men do not become productive members of their communities.
There is then political pressure for the state to intervene and create welfare programs to support these men and the women they do not marry. Inter-generational welfare lures these people into lives of dependency on the state.
The minimum wage law is one more state intervention into the market of voluntary exchange: of ownership and its concomitant implication, disownership. It rests on the idea that people must not be allowed to make arrangements with each other that they see as beneficial -- better than the status quo. Politicians and bureaucrats who are distant from the circumstances facing people locally establish the legal terms of exchange for labor services.
The people who have the best information about local employment opportunities are prohibited from pursuing opportunities to improve their conditions. These same people with the greatest motivation to improve their conditions are told by the local agents of distant politicians that they are not allowed to pursue any avenue of improvement at a wage below the national minimum.
The substitution of labor-saving machinery has accelerated since the early 1980's. Today, the rapid development of computerized operations and robotics is threatening low-skilled laborers as never before. The costs associated with replacing human labor are now falling at an exponential rate, and have been ever since the development of the first commercial microcomputers in 1978. This makes the effects of a minimum wage law even more devastating for entry-level workers and older workers with minimum skills. The minimum wage law subsidizes this substitution effect.
Once again, we see that the state's intervention into the free market, in the name of the poor and the downtrodden, has increased the percentage of the poor and the downtrodden. The victims are poorer and more trodden down than they would have been. But in the case of the minimum wage law, it has raised crime, too. People in inner cities bear the brunt of the costs.
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