Friday, May 5, 1995

FISCAL FITNESS: False remedies

In his State of the Union speech earlier this year, President Clinton proposed raising the federal minimum wage from $4.25 an hour to $5 an hour. (California has since proposed a $5.75 minimum wage). Since then the president and his secretary of labor, Robert Reich, have continued to press for the increase. Recently Richard Gephardt, House Democratic majority leader, said that we need to "make the minimum wage a living wage.»

Minimum-wage laws have been described as a monument to the power of shallow reasoning. Even so, the debate over the advisability of minimum-wage laws offers numerous lessons about, among other things, the often messy mix of politics and economics.

Here's a question to ponder: Why do most people earn much more than the minimum wage? The answer is that they are worth more than that amount. Their higher wages are not the result of legislation.

Workers produce value for their employers, or themselves if they are self-employed, in excess of $4 or $5 an hour. People who have skills, talents, experience or training are competed for by employers.

Some people, unfortunately, particularly new entrants into the labor force, are simply worth less than the minimum wage.

Our economy is based on voluntary exchange. Employers are not forced to hire certain numbers of workers. If someone produces less than the minimum wage, an employer would be irrational to hire such a person.

The problem is not that employers are paying workers less than they are worth. There is enough competition among employers to prevent that from being a major problem. If you don't believe that, you need to explain why most workers get much more than a minimum wage.

Minimum-wage laws reduce employment opportunities. They retard the best means most people have for increasing their productive value Ñ on-the-job training.

The fundamental problem is that some people have an insufficient value in the labor market. That is the problem we need to focus on if we want to give everyone a "living wage."

Minimum wage laws attack the symptom instead of its source. By reducing opportunities for on-the-job training, they actually worsen the problem.

Speaking of voluntary exchange, it's that aspect of minimum-wage laws that is perhaps the most obnoxious. If one adult wants to work for another adult for $3 an hour (or 3 cents for that matter), what right does anyone else have to interfere with that agreement? The same people who oppose laws against consensual sex between adults advocate restrictions against consensual economic relations between adults. Shouldn't civil rights include economic freedom?

The most powerful interest group supporting the minimum wage is organized labor. Since practically all union members earn more than a minimum wage, why is it an important issue for them?

Think of it this way: If you were General Motors, wouldn't you like to see a law forcing Ford to raise its prices? An important determinant in the demand for any product is the price of substitutes. If the price of Wheaties goes up, the demand for Cheerios will increase. Unions don't want employers to have the option of hiring lower priced workers.

Most goods in our economy can be produced with different combinations of resources Ñ labor, capital, energy. A given quantity of output can be produced with various combinations of these resources.

Which combination to use depends in part on the relative prices of labor and machinery, for example. If the price of labor goes up, the likely outcome will be the substitution of machinery for people. Machines don't require payroll taxes, health insurance or vacations. Again the result is fewer employment opportunities.

If reducing poverty could be reduced as easily as simply passing a law that increased minimum wages to $5, why stop there? Why not reduce poverty even more with a minimum of $10 or $20? A small dose of a bad idea is OK?

Minimum-wage laws illustrate the limits of legislative solutions to real world problems. Economists point out that many of the laws in existence are equivalent to a law prohibiting rain on Sundays.

It could be said that having a minimum wage law makes us feel better. Buying a better feeling at the cost of increased unemployment and prolonged denial of the sources of low wages is no bargain. Focusing on false remedies like minimum-wage laws only take our attention away from real remedies.


FISCAL FITNESS: False remedies - North Coast Journal May 1995

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at

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