The Minimum Wage Law and Welfare Payments

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I think it important to pulverize the case for the minimum wage law. I am guided in this determination by the Jesuit notion of the preferential option for the poor. (Hey I have spent 14 years teaching at Loyola University New Orleans, a Jesuit institution; some of it had to rub off on me). What is this principle? It is to ask of any public policy, how will it affect the impoverished. Why is it important to do so? In my own words, it is because the poor occupy the most precarious role in society. If the rich are financially hurt, they move down into the middle class. If the latter get it in the financial neck, they become poor. But they are still alive. Whereas if the poor are stabbed in the back, there isn’t much room below them; they can fall into great destitution and even in extreme cases into death. Since every human life is precious, it is imperative, when we examine social policy, to take special precautions not to further immiserate the poor. The minimum wage law is one of the most vicious and depraved piece of legislation ever launched as an attack on the poverty stricken, since it all but ensures the members of this class of people will become unemployable. Why? This is because the poor are likely to be the least skilled, and, in the words of Milton Friedman: “A minimum-wage law is, in reality, a law that makes it illegal for an employer to hire a person with limited skills.”

Assume a downtrodden young man with skills sufficient, only, to produce $5 worth of goods and services per hour, and a minimum wage law stipulating that all workers must be paid a minimum of $7 per hour. Will he get a job? Not bloody likely, as any employer foolish enough to hire him will lose $2 per hour. Entrepreneurs don’t get rich doing things like that, and if there is anything we can trust, it is that capitalists have a strong urge to earn profits, not suffer losses. For publications of mine that have made this and similar points see here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here and here. I use the “n” word in this analysis of minimum wages. Hey, do you think I’ve written too much about the minimum wage? After all, there are only so many things you can say about this dreadful enactment. No and no. I swear to you gentle reader, if you plow through all of these essays of mine, there’s new stuff in each of them. And, also, I feel about this law roughly the way Robert Heinlein felt about that fort in Colorado in his book The Moon is a Harsh Mistress. He wanted to pulverize it. I highly recommend this book, and indeed, all of Heinlein’s science fiction. (But purchase this book on Amazon, indeed, ALL books, via the Mises web). For further excellent analyses of this pernicious law go here and search for “minimum wage law.”

What, then, is the lesson for the day? It is to combat a defense of the minimum wage law on the basis of “living wage.” An objection is concocted along the following lines, that purports to show that this evil legislation actually helps the poor.

Consider the following chart

Min wage no min wage
Welfare A: $300+0=$300 B: $300+$200=$500
No welfare C: 0+0=0 D: 0+$200=$200

 

Assume worker productivity equal to $5 per hour, a 40 hour week, welfare of $300 per week, no taxation and a minimum wage of $7/hour.

Under A, there is a welfare payment of $300 but no wages are earned, since the person is unemployed (at a minimum wage of $7, the employer would lose $2 per hour if he hired him). Under B, there is a welfare payment of 300, plus wages of $200 (40 hours x $5 per hour) for a total of $500. Under C, there’s no welfare payment and the worker is unemployed, due to the mininimum wage; so we reach a graned total of zero. Under D, there’s no welfare, but wages again equal $200, since the worker is paid an amount equal to his productivity (this is true only in equilibrium, which we rarely if ever attain, but the market is always tending in that direction). Which is better for the worker? A or B? B is better, since $500 is larger than $300. Which is better for the worker, C or D? D is better, since $200 is better than nothing at all.

But the critics don’t want to compare A with B or C with D. They want to compare A and D. They say that A is better than D, since $300 is greater than $200. Since A has a miniumum wage, and D does not, this “proves,” for them, that the minimum wage benefits workers more than its absence. But this is nonsense, since it does not hold other things (welfare, in this case) constant. Only comparisons of A versus B and C versus D do that.

Note, I abstract from the fact that if the worker can get a job, which is possible only without the minimum wage, he will benefit from on the job training, and thus increase his productivity, and eventually be able to earn a much higher wage. I also focus only on money payments, and ignore the deleterious effects of welfare payments; they break up the family and thus create poverty (See on this Losing Ground by Charles Murray. Yes, that Charles Murray.). Here, I am limiting myself to a strict and very narrow financial calculation, which is misleading because of what I am purposefully ignoring. I do so in order to shed light on, and obviate, an argument sometimes made in behalf of the minimum wage law: it leads to a “living wage.” Sure it does, but only because of the welfare payment that obscures the effect of the minimum wage law.

But is it not true that the government will not give the worker $300 in welfare if he is earning $200 in wages? Yes, in some jurisdictions, no in others, entirely irrelevant in all cases. For, we have to keep our eyes on the ball, if we are to make any sense of a complex reality. We have to, in a word, utilize ceteris paribus (that is, keep other things equal in our mind’s eye). So what that the extant law says our mental experiment is illegal. This law is totally beside the point. The law, schmaw. If we are to understand the underlying economic reality, what causes what, what benefits the worker (in the narrow sense of dollars received) we must ignore a law that implies we should compare A and D. No. The only fair, proper, legitimate, rational comparisons, if we want to understand the operation of the minimum wage law, are between A and B on the one hand, or C and D on the other.

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