Minimum Wage, Maximum Intervention

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Many workers in my state of Florida received a pay raise this past May. No, Floridians did not suddenly become more productive and demand a salary increase because they are now more valuable to their employers. And no, Florida businesses did not suddenly become more profitable and decide to share their good fortune with their employees.

The reason many workers in Florida received a pay raise is that they voted for it. The new Section 24 in Article X of the Florida constitution annually and permanently raises the minimum wage in the state of Florida. It resulted from a constitutional amendment approved by Florida voters back on November 2, 2004. There are actually seven paragraphs (a—g) in Section 24 regarding the minimum-wage increase. Paragraph (c) contains the substance of the new requirement:

Employers shall pay Employees Wages no less than the Minimum Wage for all hours worked in Florida. Six months after enactment, the Minimum Wage shall be established at an hourly rate of $6.15. On September 30th of that year and on each following September 30th, the state Agency for Workforce Innovation shall calculate an adjusted Minimum Wage rate by increasing the current Minimum Wage rate by the rate of inflation during the twelve months prior to each September 1st using the consumer price index for urban wage earners and clerical workers, CPI-W, or a successor index as calculated by the United States Department of Labor. Each adjusted Minimum Wage rate calculated shall be published and take effect on the following January 1st. For tipped Employees meeting eligibility requirements for the tip credit under the FLSA [Fair Labor Standards Act], Employers may credit towards satisfaction of the Minimum Wage tips up to the amount of the allowable FLSA tip credit in 2003.

What Florida voters saw on their ballots is this summary of the amendment:

This amendment creates a Florida minimum wage covering all employees in the state covered by the federal minimum wage. The state minimum wage will start at $6.15 per hour six months after enactment, and thereafter be indexed to inflation each year. It provides for enforcement, including double damages for unpaid wages, attorney’s fees, and fines by the state. It forbids retaliation against employees for exercising this right. The impact of this amendment on costs and revenues of state and local governments is expected to be minimal.

What is missing from this summary is the amendment’s impact on the businesses that pay some of their employees the minimum wage as well as its impact on unskilled workers trying to find employment. One does not have to be an economist to see the detrimental effects of minimum-wage legislation. An increase in the minimum wage will increase a business’s labor costs.

It doesn’t matter if anyone thinks that businesses exploit their workers and should pay them all a higher wage because they can “afford it.” It is an undeniable fact that their labor costs will go up. And if a business’s costs increase, that business’s profits will go down unless it can offset its increased costs by raising prices, lowering expenses, increasing productivity, or making use of some combination of the three. If a reduction in profit cannot be offset by any of these measures, then a business can go out of business, live with a lower profit margin, or stagnate because of a lack of funds to expand its operations. The minimum wage causes unemployment because it prices unskilled workers out of the market.

Florida voters probably also did not realize that up until the passage of this amendment, Florida had no minimum-wage law. In fact, the states of Alabama, Arizona, Louisiana, Mississippi, South Carolina, and Tennessee currently do not have a minimum-wage law. There are also two states with a minimum wage that is less than the federal minimum: Kansas ($2.65) and Ohio ($4.25).

This does not mean that employers in states with no minimum wage can pay their employees Third World wages. The federal minimum wage of $5.15 an hour applies to any employee in any state who is covered by the FLSA. And according to the U.S. Department of Labor,

All employees of certain enterprises having workers engaged in interstate commerce, producing goods for interstate commerce, or handling, selling, or otherwise working on goods or materials that have been moved in or produced for such commerce by any person are covered by FLSA.

The FLSA basically applies to everyone in the United States because employees of firms that are not covered enterprises under FLSA still may be subject to its minimum-wage, overtime-pay, and child-labor provisions if they are individually engaged in interstate commerce or in the production of goods for interstate commerce or in any closely related process or occupation directly essential to such production. Such employees include those who work in communications or transportation; regularly use the mails, telephones, or telegraph for interstate communication or keep records of interstate transactions; handle, ship, or receive goods moving in interstate commerce; regularly cross state lines in the course of employment; or work for independent employers who contract to do clerical, custodial, maintenance, or other work for firms engaged in interstate commerce or in the production of goods for interstate commerce.

The reason Florida can raise its minimum wage is that the FLSA also permits states and cities to set their minimum wage higher than the federal minimum. In this case, the state minimum trumps the federal minimum. So, in addition to Florida, the following states have a minimum wage that is higher than the federal minimum: Alaska ($7.15), California ($6.75), Connecticut ($7.10), Delaware ($6.15), Hawaii ($6.25), Illinois ($6.50), Maine ($6.35), Massachusetts ($6.75), New York ($6.00), Oregon ($7.25), Rhode Island ($6.75), Vermont ($7.00), and Washington ($7.35). The rate in the District of Columbia ($6.60) is also above the federal minimum. And also like Florida, the District of Columbia and the states of Illinois, New York, Oregon, Vermont, and Washington just raised their minimum wage this year.

Increases in state minimum-wage rates are destined to continue. The new Florida minimum-wage law also contains an indexing provision. This means that Florida joins Oregon and Washington as the only states to index their minimum wage to inflation. The minimum wage is already scheduled to increase in New York to $6.75 in 2006 and $7.15 in 2007. New Jersey is increasing its minimum wage to $7.15 by October of 2006. Movements are also under way in Hawaii, Pennsylvania, New Hampshire, and Minnesota to boost their state’s minimum wage.

Because of agitation by “living-wage” advocates such as the Association of Community Organizations for Reform Now (ACORN), some cities and counties have passed living-wage ordinances that raise the minimum wage within their jurisdiction. The city of Sonoma, California, recently mandated that “covered” employers pay a minimum of $11.70 an hour with health benefits or $13.20 without health benefits, indexed annually to the consumer price index. There are today about 125 cities and counties with living-wage ordinances.

Origins of
the minimum wage

The minimum wage began as part of the Fair Labor Standards Act (FLSA) of 1938. Along with the Davis-Bacon Act and the National Labor Relations (Wagner) Act, the FLSA is one of the three major pieces of New Deal employment legislation that survive today. The original FLSA curtailed child labor, set the maximum work week at 44 hours, and established a minimum wage of 25 cents an hour.

That’s right. There was no federal minimum wage in the United States until 1938. Since the turn of the century the states had sought to regulate child labor, the hours in the work day, and overtime pay, but in Adkins v. Children’s Hospital (1923), the Supreme Court ruled that a minimum-wage law passed in the District of Columbia was “an unconstitutional interference with the freedom of contract included within the guaranties of the Due Process clause of the Fifth Amendment.” The Court concluded that there was a fundamental difference between regulating hours and regulating the rate of pay. But a few years later, in the case of West Coast Hotel v. Parrish (1937), this ruling was overturned when the Court upheld a Washington state law setting a minimum wage for women. This prepared the way for Congress to pass a federal minimum wage law.

The work week was lowered to 40 hours in 1945, where it remains today, and the minimum wage has been raised 18 times, with the last increase being in 1997.

All arguments for the minimum wage come down to this: since no family can survive on an income lower than the minimum wage, it is the job of government to mandate a minimum wage to keep people out of poverty. No matter how elaborate the argument, this is the bottom line.

Even if that were a true statement it would still not be a valid argument for the minimum wage. If someone can’t support a family on his salary, then he should not have a family until he has a higher salary. It is not the fault of business or society that an unskilled and uneducated worker decides to have a family and then finds out that he can’t make ends meet. Moreover, why should the person who is giving him a job be forced to fund his excess expenses? Indeed, why should anyone be forced to do so?

The case against the minimum wage from an economic standpoint has been made many times. It increases the price of goods and services, since it raises employers’ costs. It limits economic growth by increasing the cost of labor. And because it raises employment barriers for the unskilled and uneducated, it causes unemployment. As the Austrian economist Murray Rothbard (1926—1995) explains,

In truth, there is only one way to regard a minimum wage law: it is compulsory unemployment, period. The law says: it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars an hour. This means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment. Remember that the minimum wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result.

If raising the minimum wage will truly lift people out of poverty and not lead to unemployment, then why raise it only a dollar or two? That still won’t be enough for the typical family of four to make ends meet. Why not raise it to $12.50 an hour, as the Green Party advocated in its 2000 party platform? Why not just mandate that every employee is to be paid a minimum of $50 an hour? That would give everyone an income high enough that the government could end all transfer-payment programs. The trouble with a $50 per hour minimum wage is that the government could end all transfer payment programs but one — unemployment compensation. Massive unemployment would result from such a draconian increase in the minimum wage, as Rothbard again explains:

It is obvious that the minimum wage advocates do not pursue their own logic, because if they push it to such heights, virtually the entire labor force will be disemployed. In short, you can have as much unemployment as you want, simply by pushing the legally minimum wage high enough.

But if raising the minimum wage is bad economics, why is there always agitation for its increase? The answer is that raising the minimum wage has everything to do with politics and nothing to do with economics. If the members of Congress really wanted to help the economy, they would adopt a laissez-faire approach to the economy instead of an interventionist one.

Naturally, those who are looking for an entry-level job, those who are currently making the minimum wage, and those who make more than the minimum wage but stand to benefit from its increase — as long as they can get a job, keep a job, or receive a wage increase that keeps up with an increase in prices — are happy to see any increase in the minimum wage regardless of the consequences. And so are the politicians in Congress, who are trying to pick up votes while they pander to the numerous “anti-poverty” special-interest groups.

Other arguments
against the minimum wage

In addition to the economic arguments, there are also philosophical and pragmatic arguments against the minimum wage.

First, all minimum-wage laws are based on the fallacy that selling one’s labor on the market is something special compared with selling one’s goods on the market. This Marxian fixation on the primacy of labor cannot overthrow the fact that the price of labor is ultimately determined by the forces of supply and demand, just like the price of anything else.

Second, if minimum-wage laws are needed to “protect” employees, then why aren’t minimum prices needed to “protect” employers? If the government is going to establish a floor under which wages cannot fall, then why not a floor under which prices of goods cannot fall? Why doesn’t the state just set minimum prices for everything? Unless one subscribes to the primacy-of-labor fallacy, this is the logical conclusion. This, of course, would be absurd. Can you imagine a store having to keep track of the minimum prices on a bar of soap, a pack of gum, a loaf of bread, and a can of peas — along with 50,000 other items?

Third, the making of minimum-wage laws by the government, whether federal, state, or local, means that the government must be able to determine the “correct” or “just” price for labor. But if the government can determine the “correct” or “just” price for labor, then it must also be able to determine the proper price of everything else. Allowing the state to intervene in the labor market merely opens the door for the state to intervene in every other market. Intervention begets more intervention.

Fourth, minimum-wage laws advance the notion that the government is responsible for our well-being and prosperity.

Fifth, all minimum-wage laws are based on the myth that businesses will exploit their workers without such laws. Supporters of the minimum wage act as though people would still be working for less than the original 25-cent-an-hour minimum wage without government intervention. But if businesses will exploit their workers without the minimum wage, then why do so many people make well above the minimum wage? Why can’t businesses just force people to work for the minimum wage? The theory of the exploitation of labor is the foundation of Marxism and has no place in a capitalist society.

Sixth, minimum-wage laws are egalitarian because they foster the notion that everyone should be paid the same regardless of the employee’s ability or the employer’s benevolence.

Seventh, minimum-wage laws imply that everyone has a right to a “living wage.” Everyone has the freedom to work or not work in whatever industry he chooses. Everyone also has the freedom to get or not get the necessary education or skills to obtain a good-paying job. But no one has the right to anything beyond what he and his employer agree to. If someone can’t “make it” on the minimum wage, he has a variety of options: find a better job, take a second job, send a family member to work, get the necessary education or skills to obtain a good-paying job, or simply work hard and get promoted out of the minimum-wage job.

Sure, entry-level workers at McDonald’s make the minimum wage, but McDonald’s needs managers too, and it doesn’t require a college degree. And who is more qualified to be a manager than someone who has worked his way up through the ranks? There is an imperative to work and strive to better one’s self, but there is no right to a “living wage.”

And finally, minimum-wage laws violate freedom of contract. They infringe the right of an employer and an employee to make whatever wage agreement they choose. This is what is done with most aspects of employment. According to the U.S. Department of Labor,

While FLSA [the Fair Labor Standards Act] does set basic minimum wage and overtime pay standards and regulates the employment of minors, there are a number of employment practices which FLSA does not regulate. For example, FLSA does not require: vacation, holiday, severance, or sick pay; meal or rest periods, holidays off, or vacations; premium pay for weekend or holiday work; pay raises or fringe benefits; and a discharge notice, reason for discharge, or immediate payment of final wages to terminated employees. Also, FLSA does not limit the number of hours in a day or days in a week an employee may be required or scheduled to work, including overtime hours, if the employee is at least 16 years old.

The U.S. Department of Labor says about the things the FLSA doesn’t require, “The above matters are for agreement between the employer and the employees or their authorized representatives.” That statement says a mouthful, for it is exactly the way things ought to be — for every aspect of employment. There is no good reason that what the government says about these things ought not to apply to wages as well.

The solution is obviously to abolish all minimum-wage laws, whether federal, state, county, or city.

If you thought that the Republicans in Congress were conservatives who favored limited government intervention in the economy — think again. Republicans are not at all averse to raising the minimum wage — as long as their plan is adopted. A recent proposal by Senate Democrats to raise the minimum wage to $7.25 in three increments over 26 months garnered the support of only four Republicans.

But a Republican plan to increase the minimum wage to $6.25 over 18 months received the support of 38 Republicans. Sen. Rick Santorum (R-Pa.), the author of the Republican proposal, was quoted as saying, “I have not had any ideological problem with the minimum wage.” This vote and this quotation show that the only difference between the Republicans and the Democrats when it comes to the minimum wage is the amount and the timing of its increase.

It is unfortunate that the party responsible for the minimum wage (the Congress) is also the only party that can abolish the minimum wage. Therefore, it is the members of Congress and their constituents who must be educated in the philosophy of liberty — a liberty that includes absolute freedom of contract when it comes to employment.

This article was originally published in Freedom Daily.

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