Chapter 41: Minimum Wage Law
Updated: 1/13/20
Christian Economics: Teacher's Edition
“For the kingdom of heaven is like a master of a house who went out early in the morning to hire laborers for his vineyard. After agreeing with the laborers for a denarius a day, he sent them into his vineyard. And going out about the third hour he saw others standing idle in the marketplace, and to them he said, ‘You go into the vineyard too, and whatever is right I will give you.’ So they went. Going out again about the sixth hour and the ninth hour, he did the same. And about the eleventh hour he went out and found others standing. And he said to them, ‘Why do you stand here idle all day?’ They said to him, ‘Because no one has hired us.’ He said to them, ‘You go into the vineyard too.’ And when evening came, the owner of the vineyard said to his foreman, ‘Call the laborers and pay them their wages, beginning with the last, up to the first.’ And when those hired about the eleventh hour came, each of them received a denarius. Now when those hired first came, they thought they would receive more, but each of them also received a denarius. And on receiving it they grumbled at the master of the house, saying, ‘These last worked only one hour, and you have made them equal to us who have borne the burden of the day and the scorching heat.’ But he replied to one of them, ‘Friend, I am doing you no wrong. Did you not agree with me for a denarius? Take what belongs to you and go. I choose to give to this last worker as I give to you. Am I not allowed to do what I choose with what belongs to me? Or do you begrudge my generosity?’” (Matthew 20:1–15).
“Am I not allowed to do what I choose with what belongs to me?” This verse is the most powerful affirmation of property rights in the New Testament. The context of the statement is Jesus’ parable of the employer who hires men at various times throughout the day. At the end of the day, he pays all of them the same. He broke no contract. They had all agreed to work for him for a full day. They had agreed at various times during the day. But those who had worked all day complained. Clearly, those laborers who were hired late in the day received a much higher payment per hour of work.
In response, the employer affirmed the right of contract and also the right of ownership. But this affirmation applied to them, too. They had possessed the both the ability and opportunity to work for a wage. No one compelled them to accept his offer. As owners of their labor, they had the right to decline the offer. They did not decline. But, after a day’s work, they compared their hourly wages with late-comers’ hourly wages. They grew discontented. They wanted more.
They made it clear to the employer that they no longer regarded their payment as fair. This is typical of people who value their assets, not in terms of what they have done with them in a competitive market, but rather by what others have done with their assets—in this case, far better. They look back in time, and they conclude that they had agreed to accept too low a payment. They want compensation. They think they deserve compensation. “If we had only known what you were willing to pay, we would not have agreed to your offer.” No doubt this is true, but they had not known, and they had agreed. They had not possessed perfect information about the future. Neither had the employer. He did not know that there would be unemployed workers later in the day. The complainers ignored all this. Because others at the end of the day had received more for their hourly wage than they had received, they now resent the source of the payment: the employer. What had looked good at the beginning of the day, when opportunities for wages looked sparse, did not look equally good at the end of the day.
The other laborers did not complain. They had accepted the offer later in the day. They had received a higher wage per hour than the early workers. They were paid what they had agreed to. They had owned their labor. The employer had owned money. They had all done what they wanted with what they had owned. They had all respected each other’s rights of private property, which must always involve the right to make voluntary exchanges, i.e. the right to disown property.
I now extend the economic logic of the parable to the issue of minimum wage laws. At this point, the disgruntled workers join together. “Let us threaten never to work for him again. He will not be able to harvest his crop.” They do this. They tell him that he cannot hire them cheaply ever again. But then they discover two things. First, he can hire others who are willing to work for a wage that he is willing to pay, a wage lower than the one they demand. Second, he does not want to hire complainers. What employer does? They must now find someone else to hire them. But there is no one else. If there were, they would not have worked for him in the first place. He is in no way harmed. They cannot find work.
They get another idea. “Let us go to the town council. Let us persuade the members to pass a law mandating higher hourly wages for all workers. Let us recommend one denarius per hour. We will tell the council that this is a living wage. A lower wage is not. Let us call it a minimum wage. Then he will have to pay us. He will not be able to hire people who will work for less. We will get high-paying jobs.”
The council does this. It violates the property rights of the employer and the other workers. It says, in effect, “you do not have the right to do what you want with what you own.” It violates the judicial and moral principle of Jesus’ parable. The employer may now face bankruptcy. Maybe he cannot afford these higher wages. So, since he is living today and not in Jesus’ day, he buys labor-saving machinery on credit that would not have paid for itself at the old wage rates. Day laborers were cheap. Next, he hires a few skilled men to use the new equipment, and he hires no one else. Dozens of former workers are now unemployed. So are members of the first group that went to the politicians for relief.
Other employers in the region now face artificially high wage rates. Some of them do what the first man did. They buy labor-saving equipment, hire specialists, and refuse to hire anyone else. The unemployment rate soars. The employers know why. “We cannot afford to hire these workers at the minimum wage.”
Some employers who cannot afford to buy labor-saving equipment sell their property to those employers who can afford to pay. Because they are all selling at the same time, the prices of their land and businesses decline below what they were worth before the minimum wage law. They sustain losses. They must now find new businesses to run, possibly in another region where there are no minimum wage laws.
The original workers see this as a threat: a regional exodus of business owners. This will reduce the number of local jobs. Instead of asking the town council to repeal the minimum wage law, they organize nationally to persuade the national legislature to pass a minimum wage law. This way, employers everywhere must pay the same wage per hour. This, they believe, will stop the local exodus of employers. It will take away their opportunities elsewhere.
The national legislature does this. But the local exodus continues. Why? Regions where the cost of living in lower still have a comparative advantage. Their local businesses’ profit margins are higher than in the other regions. Why? Because they pay less for production goods, especially real estate. Businesses in other regions begin to fail. Businesses in low cost-of-living areas survive. Unemployment is higher in high cost-of-living regions than in low cost-of-living regions.
If the national legislature passes the minimum wage low enough for most businesses in low cost-of-living regions to survive, businesses in the high cost-of-living regions will face wage competition from these cheaper regions. Some will go bankrupt.
Then there are workers. High-output workers get jobs. The employers can afford to hire them. Low-output workers do not get jobs. Members of racial minorities also find it more difficult to get jobs. They cannot legally compete in the old fashioned way: by offering to work for less. They remain unemployed. Or maybe they go to work in the black market for cash payments. But because there are now so many of them as a result of the national minimum wage law, they bid against each other. They work for less. This is a subsidy to employers who hire workers illegally at wages below minimum wage.
The free market is a vast auction. So is the labor market. Those workers who are willing to accept lower wages can find employment. They underbid their competitors. Of course, this means a higher bid in terms of hours worked for money paid. There are two currencies here. Workers are bidding in hours. Employers are bidding in money. Wages are set the way all other prices are set in the market: buyers of labor bid against buyers of labor. Sellers of labor bid against sellers of labor. Out of this system of competitive bidding come wages that clear the market. Employers and employees come to agreements in each labor market. All of those workers who are willing to work at this wage can find an employer. All of those employers who are willing to pay this wage can find workers. This is how jobs are created: by competitive bidding.
Minimum wage laws make this system of job creation illegal below the legal wage. So, for these jobs, wages are artificially high. But some employers refuse to pay this wage. At the same time, workers who want jobs at this above-market wage try to find jobs. There is a glut of workers and a scarcity of employers at the artificially high wage rate. The market does not clear. Gluts are the results of price floors. A minimum wage law establishes a price floor.
A buyer of labor services is called an employer. He wants to hire workers at low wages. He wants to buy all factors of production at low prices. He wants to sell the output of these factors of production at a profit. He wants to buy low and sell high, meaning high enough to sell all of his business’s output. This price may be lower than his competitors’ prices.
He has to pay a market wage. The market wage is established by competitive bidding: buyers vs. buyers, sellers vs. sellers. He can offer a wage higher than the market wage, but then more workers will offer their services than before. The most famous example of this in modern business history was when Henry Ford offered $5 a day to workers in 1914. This was double the typical wage for auto workers. But it was actually more than double. He required an eight-hour day, so that he could get three shifts per 24-hour day. This was two hours less than was common. Thousands of men showed up to apply for these jobs, which was far more than he could hire. Ford Motor Company had been suffering from a high job turnover rate. That rate dropped close to zero on the day after he made his announcement. Output rose. He kept cutting the price of the Model T. Sales rose. Profits doubled by 1916. Some of his competitors went bankrupt. Those who survived imitated him. Buyers of labor compete against buyers of labor.
A minimum wage law undermines the bidding process. It is a price floor. So, some buyers of labor cease bidding. These are marginal businesses. They cannot afford to pay the above-market wage. They must find ways to stay profitable under the new conditions. Some may go out of business.
Some non-marginal businesses abide by the law, but they find ways to stay in business. Profits fall, but they remain in business. They buy labor-saving equipment. They fire less productive workers. They cut back on the hours they are open for business. Some may try to raises prices. Customers suffer. They may rebel by no longer spending money in town. Instead, they buy more goods on the Web.
A seller of labor is called a worker. Most workers do not understand the economics of price floors. They do not understand the minimum wage law. They believe that they will be better off under the new law. But then they go shopping for jobs that pay this new wage. They find that such jobs are scarce. Also, they find that more workers are trying to get one of these jobs. There is a glut of such workers. A glut is the result of a price floor. The new wage sends a false signal: “Now hiring.” But “Now Hiring” signs have been removed from store windows.
Workers with remarkable skills can get jobs. But they would have gotten jobs before the minimum wage. Workers without remarkable skills find that the jobs they wanted have already been filled by other people. There are no more job openings. Their hopes had been raised by the false signal: a higher minimum wage. Their hopes are dashed when they find that there are no jobs available. They do not understand this because they do not understand economics. They do not understand that price floors produce gluts.
Some sellers may choose to move away from the city in which a minimum wage law has been enacted. This is expensive financially and emotionally disruptive. Others may choose to seek employment illegally in a black market. These are low-paid jobs without benefits such as health care insurance or a pension. There are no paid vacations. The advantage is that they are paid in currency. They do not report all or even most of this income to the tax authorities. But they worry about getting caught. The most creative and courageous of them will start small businesses. They will no longer be salaried. Most businesses fail, as do most projects. This is a choice that can make a few people rich, but most who attempt it will not have the skills to be successful.
Most workers are initially unaffected by the minimum wage law because they earn wages above minimum wage. They do not lose their jobs. But they may work for a company that sells to low-income workers. Some of these workers will lose their jobs. They will cut back on spending. They will reallocate their budgets. There will be some businesses that win, but most will lose.
Some entry-level workers who would have gained valuable work habits in a low-paying job will not gain these skills because they will not get jobs. This will hamper their careers.
The pencil industry is highly mechanized. Workers possess the skills required to use the equipment. These workers are paid well above the minimum wage in the United States. There are only a few thousand workers. So, minimum wage laws have no direct effect on the industry. There is no glut of workers. The labor market clears in this industry. Because production in the early 21st century moved to China and other low-wage areas, the national minimum wage law has had no effect on the higher-productivity, higher-paid workers who remain in the United States.
Here is an economic rule: some income is better than no income. A low-paying job is better than no job if you have no other source of income. Of course, most people have other sources of income: government welfare, relatives, friends, charities, begging, and criminal activity. This is why there are job offers that no one accepts in most advanced economies. This is why there are signs that say “Now Hiring” in store windows except during recessions. The employers are unwilling to pay a market wage, which is high.
Low-paying jobs are criticized for not paying a living wage. But if this were true, no one would accept such a job offer. It is easier to die sitting at home than going to work. There is no such thing as a voluntary job that does not pay a living wage. Someone is living who has such a job. The rhetoric of “not a living wage” is silly. It is amazing that anyone believes it or uses it to promote minimum wage laws.
Minimum wage laws substitute the knowledge of politicians for the bidding process of the market. Bureaucrats enforce a law that makes voluntary exchanges illegal between employers and job-seekers. The result is reduced liberty. It is therefore also reduced wealth. Wherever men have fewer legal choices than at the same price than before, both their liberty and their wealth have been reduced.
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