In this part, I’ll focus on some of the main misconceptions surrounding minimum wage laws and their intentions. In the second part, I’ll focus on the actual effects of minimum wages, both theoretically and in practice. Be warned that some thinking may be involved.
You’ve probably heard something like this before:
“Greedy companies will do anything for a profit, including exploiting workers by underpaying them while raking in millions. That’s why we need the government to enforce an official minimum wage to protect workers and ensure they earn at least a decent living.”
Alas, like most government policies which interfere with free markets, the apparent motivation behind implementing minimum wage laws is founded upon fallacies and misconceptions about how economics actually works. Let’s break it down.
1) Greed has nothing to do with it.
Some may point to the rich as being good examples of greedy people, but you don’t become rich by being greedy. You become rich from people giving you money. And believe it or not, people don’t usually like to give away their money unless they’re getting something for it. In many ways, money acts like receipts for services rendered. The more money you have, the more transactions you’ve made which benefited others (an exception is if you inherited wealth, but being greedy doesn’t increase your chances of inheriting a lot of money).
If greed was proportional to income, children would be earning more than their parents (have you ever seen siblings fighting over something?). In reality, your income tends to be determined by things like skills, hard work, good decision-making and, admittedly, some degree of luck.
Greed is better measured by looking at how money is spent rather than how it is earned. Bill Gates is probably more accurately categorised as generous than greedy. I would go so far as to say that greed is more common among lower income earners (but people seldom even consider this possibility since greed among poorer people is harmless and of little interest). One of the best ways to progress economically is to figure out what people want and give it to them efficiently. To arrive early and leave late. To leave a good impression by working harder than you are required to. That doesn’t sound like the typical way of thinking for a greedy person.
If by greed we mean “acting in your own self-interest”, then everyone is guilty of it. Even Mother Teresa (she didn’t go around promoting Islam or Buddhism, she did what mattered to her). It’s healthy and wise to act in your own self-interest.
2) How do you decide if someone is being “underpaid”? Compared to what?
We need some kind of baseline. How much is anything truly worth? I have a deck of playing cards with me. How much is it worth? We might look at how worn it is, whether any cards are missing, is it a rare brand, is magic currently popular and so on. But there’s an easier way to answer the question: it’s worth however much people are willing to pay for it (in a free market, so no coercion, no government involvement).
You may be a wonderful guitar player but if there is no demand for guitar music, you will struggle to get money for your services. Or there may be hundreds of guitar players even better than you who make it difficult for you to find work. On the other hand, if people love guitar music and you’re a one-of-a-kind performer, you’ll probably be living in a mansion soon with
gold digging whores attractive women swarming you wherever you go. Now here’s the key point.
Prices are not arbitrary.
They are determined by supply and demand; by competition among buyers and competition among sellers.
Note that this balance can change and prices will change accordingly. Note also that there is no simple formula for prices or a way to predict exactly how they will change in certain situations. We are simply recognising that they depend on the interplay of supply and demand.
Wages are the price of some kind of labour. When it comes to low-skilled jobs, the wages may be very low indeed since capable workers are abundant. So are they “underpaid”? No. Unfortunately, their labour is just not very valuable (until they develop some skills). And there is no quick fix for this factual reality (however much politicians may proclaim the opposite). Mandating a price does not change the supply/demand situation. Nor can it increase a person’s skills or in any way make them more attractive to an employer.
Finally, if by underpaid we mean a person who is paid less than they feel they should get paid, then everyone is underpaid. Especially me.
3) What is exploitation?
It’s one of the most loosely and over-used terms I can think of, but what does it really mean? Slavery comes to mind as a good example of exploitation. A slave lacks freedom and must do whatever he is told to do or else face injury or death. His owner gains from his work while he gains nothing. Are workers slaves? No. The existence of an employer willing to hire someone only increases their options. Workers are not forced to work. The alternative may not be ideal but no-one’s forced to obtain money. Indeed, many societies have lived without money in the past (although few would envy the lifestyle). Any sane person would only work for a particular wage if they felt it was in their best interest based on their available options.
If you offer a desperately thirsty man in a desert a drink of water in exchange for $1,000,000 in cash, is that exploitation? You have only increased his options and he can refuse if he so chooses. But if he has the money, he may be quite happy to be “exploited” so that he can continue to live. To take this hypothetical a little further, if someone else also had water in the nearby area, it would greatly benefit them to hurry over and offer a slightly better deal, say $900,000 for some water. The two water suppliers could then compete for the man’s money, acting in their own self-interest while decreasing the price of their water. In fact, if the price remained high and more remote people were aware of it, they might be willing to travel at great expense just to bring this man some water and make a profit. But let’s not digress any further.
If by exploitation you mean that the employer is making a profit from the employee’s work, then anyone who works for someone else is being exploited, including movie stars, sports professionals, investors, bankers and countless other occupations. A quite possible exception would be various government employees whose salaries are not determined solely by supply-and-demand but also by the personal whims of bureaucrats and politicians. They aren’t being “exploited” in some cases because they’re representing a net loss (which taxpayers bear). Indeed, they may be getting “overpaid” relative to their value in a free market.
4) Not all businesses are making huge profits.
Many businesses which hire low-skilled workers are modest in scale and resources. They can and do go bankrupt on occasion. It’s worth remembering that the workers get paid first with the company only making a profit if there is money left over after that. Meanwhile, the multi-million dollar profits of large companies will often be distributed among many stock-holders. Banks may invest in large companies as well so if you have money in a bank, you may be affected by the growth/decline of such companies (interest rates or fees may need to change for the bank to stay afloat).
Most importantly, the income of an individual has nothing to do with the total profits of the company he works for. His income depends on how much value he is personally adding to the company. If he is adding $10/h worth of value, at most the company can pay him $10/h or else they’ll be losing money by hiring him. Setting a minimum wage forces businesses to either make losses or fire unskilled workers. It’s not rocket science.
6) Workers didn’t ask to be “protected”.
And it’s hardly protection to limit someone’s options by taking away their right to work below a certain amount. Actually, I’m wrong here. Some workers are most definitely protected but it’s those who are already paid a bit above the minimum wage. However, they’re not being protected from “greedy” companies looking to take advantage of them, they’re being protected from the competition of other workers willing to work for less.
That’s why labour unions are such strong proponents of keeping and increasing the minimum wage, even though all of their workers are usually earning comfortably above the proposed limit – it prevents employers from having the choice of hiring less-skilled workers at a lower price. On the other hand, have you ever seen unemployed or low-skilled workers demanding the “protection” of minimum wage laws? I think they’d prefer a job first.
7) What constitutes a “decent living” and who gets to define it?
A person is paid based on their productivity, not on the lifestyle they wish (or “need”) to maintain. If a job doesn’t pay enough for their liking, that’s a physical reality in the real world. This creates incentives for people to do whatever they can (including paying attention in school, studying and avoiding wasteful activities) to actually make themselves useful in society and earn money for themselves rather than getting paid a set amount as some God-given “right”.
In all this, there is an inherent presumption of the need for the government to do something. To fix the problem. To come up with an expedient solution. And to blame the free market for creating the problem in the first place. But what is the “problem”? Some people are paid less than what third parties (politicians looking for votes) deem tasteful. This judgement is made without considering the basic economics involved which determined these low wages in the first place. An unfortunate reality is still a reality.
“There are no solutions. There are only trade-offs.” – Thomas Sowell
All that can be done is to try to provide ways for these people to make themselves more valuable. And free markets happen to be great at this. But you can’t expect people to progress if you take the bottom rungs of the economic ladder away from them which is precisely what the minimum wage does. Hopefully this has cleared up any false assumptions you may have had about the necessity of minimum wages. Next time we’ll look at the effects of the policy in a bit more detail, in various contexts.