Among the biggest myths in economics is that government intervention is needed to ensure a minimum wage for workers. In fact, not only is such intervention unnecessary, it is actually harmful to those at the bottom of the economic ladder.
Interventionists claim that in the absence of minimum-wage laws, wages would be driven down to below-subsistence levels by employers. The idea is that since employers are greedy, profit-seeking type of people, if the law didn’t force them to pay high wages, they wouldn’t do so.
Oh? Well, if that’s the case then why do so many businesses pay higher than the minimum wage mandated by Congress? If all that these greedy, profit-seeking employers are required to pay is, say, $6 per hour, then why do they pay more than that? Wouldn’t you think that they would be paying only the amount they are forced to pay and not a dime more, especially considering the claim by interventionists that in the absence of the mandated minimum wage, employers would be paying significantly less?
In fact, a minimum-wage law actually hurts those people at the bottom of the economic ladder — those whose labor is valued by employers at less than the mandated minimum. Legislators falsely think that they can repeal the laws of supply and demand. They false believe that they can mandate people’s subjective valuations in the marketplace. A minimum-wage law leaves unemployed those whose labor is valued in the marketplace at below the mandated minimum.
Do employers pay more than the minimum wage because they’re selfless, caring, and loss-seeking?
No. The wages that employers pay to workers is based simply on the supply of workers and the demand for workers.
If the supply of workers is low, wages will be higher and if the supply is high, wages will be lower. By the same token, if the demand for workers is high, wages will be higher and if the demand is low, wages will be lower.
So, how do workers ensure that employers are paying them the best wages under the economic conditions existing at that time? They look around. They see what people are being paid in similar work or even completely different lines of work. If they hear that wages (and benefits) are significantly higher elsewhere, they either ask for a raise or quit and go elsewhere.
Thus, the best protection that workers could ever have is a booming economy in which lots of businesses are opening and expanding. Every one of those businesses is then competing for workers, which tends to drive wage rates upward. Even if an employer is the greediest, most profit-seeking person in the world and wishes to keep wages as low as possible, if he doesn’t match the wages that other businesses are paying, he loses worker and even possibly goes out of business.
Obviously, there is a constraint on how much money businesses can devote to wages. For example, if a business has an annual gross income of, say, $100,000, there is no way that it will be able to pay more than $100,000 in wages, at least not without going into the hole through borrowing. In fact, the total amount paid for wages will by much lower than that given other business expenses. Thus, the total amount produced by the business limits the amount to be devoted to wages.
What if the business doubles its annual production? Then it has more money to devote to wages. How can workers be sure that employers will raise wages in response to increases in production? Again, they look around and see what other businesses are paying. If they can do better elsewhere, they’ll threaten to leave, motivating their business to raise its wages. Again, that’s why a booming economy is in the best interests of workers.
So, how does a business increase production? Through capital — machinery, equipment, tools, computers, and so forth. A farm where workers are using tractors will produce more than a farm where workers are using hoes.
Thus, it’s in the interest of workers that businesses keep everything they earn. That is, no taxes on business income or capital. In that way, businesses are better able to invest their monies in productive equipment, which raises productivity, which provides more income to pay better wages. When every business is free to keep its income and capital, workers in all enterprises benefit.
Thus, contrary to what socialists have been claiming ever since the time of Karl Marx, government intervention is unnecessary to protect workers from greedy, profit-seeking employers. The natural and harmonious forces of an unhampered market economy accomplish that quite well.