Tuesday, 8 February 2011

Minimum wage, why it cannot work.

A minimum wage scheme is a tariff and price fixing method against people’s labour and ability to sell themself freely.

The major fallacy in this discussion is one that has occurred not just now, but since the 18th century with philosophers such as M. de Saint-Cricq stating fallacies such as “Labour constitutes the wealth of the people”. These fallacies let to the refutation by Claude F. Bastiat of the “Broken window falacy” but still manage to persist.

The error is that we see the imposition of a minimum wage whilst still maintaining the status quo, equilibrium if you will.

This is a fallacy that must be countered.

An employer does not seek to exploit in the Marxist vein, rather to maximise ones profit. This is best achieved through enhanced productivity, not lowered wages. Where an employer can bring into play the services of another, that employer will purchase them if and only when s/he expects to be able to do so at a profit, for to do so at a loss it to create a diminished capital base and reduce the basis for further investment.

The imposition of a minimum wage does nothing to raise wages; rather, it imposes an arbitrary floor under which any individual willing to work for an amount under that arbitrarily imposed rate cannot work.

It means that a person who could earn a minimal wage can no longer earn any wage legally.

Those who had been employed under the preceding conditions were employed as they could provide services to the capital enterprise productively for the skills and ability that they have. A minimum wage does nothing to increase this low level of productivity and hence that person is unemployed as a result of the imposition of the wage minima.

This does nothing to stop poverty, in fact, the increase of those now unable to work for any allowed wage means an increase in poverty.

The means of making more people valuable at a higher wage is to increase their productivity.

The comment that you could “evenly distribute production throughout the globe” completely ignores the issue of productivity. Production would be more centralised. If all countries had the same minimum wage, then those with the best capital equipment and hence productivity would draw all work into them as they would have an imposed near monopoly on production at a suitable price.

The state goals to “Elevate underdeveloped nations” and “Greater distribution of wealth globally” would also fail dismally.

The migration of capital away from those nations with lower levels of capital investment and hence productivity would create a greater divide and concentration of wealth.

A fallacy here is that the poor nations are being exploited such as with the mercantilist system of centuries back. This is quantitatively false. Wealth is created, the natural state is destitution, it is enhanced productivity that has allowed us to escape scarcity and not the exploitation of developing nations.

A minimum wage is simply the imposition of a price floor. A wage floor hits workers with limited skills, primarily young people in developed nations and correspondingly those in developing nations.

The political demand for the minimum wage does not come from low-wage workers. It comes from those who seek to impose controls on them to “better their lives” without looking to the consequences of their actions.

Good intentions, bad results and the road to hell for those who can no longer find employment.

Henry Hazlitt put it best in his laconic quote:

You cannot make a man worth a given amount by making it illegal for anyone to offer him less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering. In brief, for a low wage you substitute unemployment. You do harm all around, with no comparable compensation.”[1]

There is a net loss to society in any such price floor. These include:
(1) The loss of employment to the individual effected from the imposed restrictions,
(2) the dwindling of the economic pie by the loss of productive contribution from those no longer to work productively due to an imposed price floor,
(3) the financial loss to society in supporting those now unable to sell their labour at any legal rate and the imposed idleness this results in (unemployment, welfare, etc.),
(4) the monetary loss in funding inadequate job training programs and other government efforts to make these people more productive and hence employable at a higher rate, and
(5) the net loss to society that is a consequence of higher consumer prices that naturally come as a consequence of increase labour costs associated with the wage floor

In this, a loss of market share to foreign competition is likely to occur, mostly likely in those countries once again with lower capital investment. That is those countries who least can afford this.

There are distinctions between being underpaid as being underproductive.

[1] Heny Hazlitt, Economics in One Lesson (New York: Arlington House Publishers, 1979), p. 135.

Written with the help of Lynn Wright


Andrew said...

(5) the net loss to society that is a consequence of higher consumer prices that naturally come as a consequence of increase labour costs associated with the wage floor

Isn't that theoretically zero-sum? The wealth is transferred from the customer through the business and onto the employees?

Craig S Wright said...

No, because there is no perfect transfer method. There is a cost of imposed regulations that are paid by the businesses and which is then passed to the consumer as higher prices.

One example of the costs comes from enforcement costs. Just adding the regulation does little. It requires a group of people (who are themselves not productive and consume the productivity of society) to enforce the imposition.

This is a cost that is paid in taxation.

Tax is also required to cover the welfare payments to those now out of work due as a result of the wage floor.