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Minimum-Wage Folly

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One of the most interesting, albeit frustrating, aspects of being a libertarian is having to repeatedly show the fallacies behind statist thinking. No matter how many times we libertarians destroy statist reasoning behind statist policies, the statists just keep coming back and proposing the same fallacious and destructive policies.

Perhaps the best example of this phenomenon involves the minimum wage, which involves a government-mandated minimum amount that employers are required by law to pay their hourly workers. Of all the policies that characterize the statist philosophy, this one is quite possibly the most ludicrous of them all.

Yet, otherwise smart people continue to promote this economic nonsense. A recent example is an editorial published last Saturday by the New York Times. Calling for an increase in the federal minimum wage, the Times stated: “The federal minimum wage has been stuck at $7.25 an hour since 2009…. President Obama promised to take on this fight back in 2008, when he called for a federal minimum wage of $9.50 an hour by 2011, indexing to inflation. It is past time to keep the promise.”

Suppose we were to ask the Times why it doesn’t pay its hourly workers the sum of $100 an hour? How would it respond? After all, in its editorial the Times said that raising the minimum wage would “counter the accelerating trend toward low-wage work and growing income inequality.” If the Times were to pay its workers $100 an hour, wouldn’t that “counter the trend toward low-wage work and growing income inequality”?

Most likely, after giving the matter some careful thought, discussion, and debate, the Times’ editorial board would respond as follows: “Why, that’s a ridiculous proposal. We love our lower-paid workers but they’re just not worth $100 an hour to us.”

And therein lies the key to the fallacy of minimum-wage laws. The fallacy involves the concept of subjective value.

In any economic exchange or proposed exchange, the respective traders place a value on the thing they are giving up and the thing they’re getting. That value is entirely subjective — that is, it lies in the eyes of the beholder. If they place a higher value on the thing they’re getting, they’ll make the trade. If not, then they won’t.

Thus, in every economic exchange both sides benefit because they are each giving up something they value less for something they value more. In an exchange in which John gives Bill 100 apples and receives 5 oranges in return, both John and Bill have gained by the exchange because they each have given up something they value less for something they value more.

The principle of subjective value applies not just to exchanges of goods and services but also to labor exchanges. When an employer and employee agree on a job, both sides gain, regardless of what the particular agreed-upon wage rate happens to be. That’s because they both have given up something they value less for something they value more.

Suppose a worker agrees to work at a wage rate of one dollar an hour. Does the principle still apply? Can we really say that the worker has gained from that transaction?

Absolutely! The principle applies there as well. By entering into the transaction, the worker is giving up something he values less for something he values more. Through the agreement, he has improved his economic well-being, from his own, individual, particular standpoint at that point in his life.

Enter the statists. They come along and say, “That’s outrageous! That’s exploitation! That employer is a no-good, profit-seeking, bourgeois, capitalist pig. Nobody can live off that amount of money. Pass a law that sets the minimum wage at $9 an hour.”

So, what happens? The employer is now required to pay much more than what he had agreed to pay. He has to weigh whether it’s worth it to him, just like the New York Times would weigh whether the payment of $100 per hour to its workers would be worth it to it.

Let’s assume that the employer decides that it’s not worth it to him — that from a subjective standpoint, he places a higher value on the money ($9 per hour) than he does on the labor services of the worker.

In that case, the employee will be laid off. Notice, after all, a crucial aspect of a minimum-wage law: It doesn’t force employers to hire people. It simply says that if an employer does hire people, it must pay them the legally established minimum.

Thus, the logical effect of a minimum-wage law is that it puts out of work every single worker whose labor is valued in the marketplace at less than the legally established minimum. It locks that person out of the labor market.

Suppose a black teenager in Harlem is willing to work at a dollar an hour. Why would he do that? Let’s say he wants to learn a particular business. He wants to see how it’s operated. He wants to master various skills associated with the different jobs in the business. His dream is to ultimately own his own business, perhaps even in competition against the business he’s working for.

Alas, under the minimum-wage law, he is never permitted that opportunity. While willing to hire him at a dollar an hour, the employer is unwilling to hire him at $9 an hour, just as the Times is willing to hire workers at $7 an hour but not at $100 an hour?

Moreover, those at the bottom of the economic ladder are prevented by the minimum-wage law from establishing businesses in which they hire friends, relatives, and people in the neighborhood who are willing to work at a wage rate lower than the legally established minimum. That, of course, protects established firms from the threat of competition from companies that are started by poor people.

So what happens to those people who are locked out of the labor market by the minimum-wage law? They are normally consigned to live in some public housing project the rest of their lives, dependent on the government for their monthly welfare checks.

Statists say that’s a good thing. Maybe that’s why they favor minimum-wage laws in the first place.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.