A Floor, A Hurdle, or Nonsense on Stilts?
Joe Biden has suggested that as our next president, among his first acts would be to boost the minimum wage level to $15 per hour.
In so acting he will be relying on the theory that this law is akin to a price floor. Raise it, and the compensation of all those now standing on it (those now being paid less than this amount, often at the $7.25 level mandated by present federal legislation) will in effect be able to hitch-hike on the increase, and now be paid at the rate of the aforementioned $15. Not that this level of remuneration is anything to write home about, but at least it beats the roughly half that amount, presently proscribed by law.
Why do most dismal scientists dismiss this justification as blithering economic illiteracy? This is because, if it were but the case, why stop the elevator at the 15th floor? Why not raise the minimum wage, instead, to $150 per hour, or $1,500, or $15,000? If this theory were correct, if people could be made wealthy beyond the dreams of avarice by mere legislative enactment, why in bloody blue blazes settle for $15? If this theory were true, the entire case for foreign aid would vanish in smoke. Instead of shipping goods and services and money abroad, all we need to do is advise present recipients to implement a minimum wage law, and keep raising its level until poverty were ended in these countries. Yet no one, not even Bernie Sanders, advocates any such crazy thing.
Clearly, this theory is nonsense on stilts.
What then is the correct way to look at this matter? It is to see such legislation not as a rising floor, but rather as a hurdle over which a person has to jump in order to be employed in the first place.
Why is this? What determines wages?
In a word, productivity. LeBron James and Michael Milken earn high wages because they are tremendously productive. Hire one of them, and your revenues shoot through the roof. Middle class people also contribute to the GDP, but at a much more modest level. And the person who asks if you “Want fries with that?” or pushes a broom? He or she also does so, but again less so. Suppose a firm has 100 workers, and shows receipts of $10,000 for a certain time period. They hire the 101st employee, and total revenue rises to $10,010. The company properly attributes this rise to that additional member of the staff. His productivity is thus $10/hour.
What will his wage likely be? Well, there are only three possibilities. Either he will earn more than that, say, $12 per hour, exactly that amount, e.g., $10 per hour, or less than that, for example, $4 per hour. We can easily eliminate the first possibility. Any business paying $12 hourly to all their employees who bring in only $10 will face bankruptcy; they will lose $2 every hour, multiplied by their entire staff. But the $4 wage is not sustainable either. The firm will then garner a pure profit of $6 from his labor. Some competitor will offer $4.25; another $4.50 and we will be off to the races. No, the only equilibrium wage rate will be $10. This gives rise to the economic law that compensation tends to equal productivity. Will all those who contribute at that level earn exactly that amount? No, of course not. This theoretical bidding war is not costless. But there is a continual grinding market force that pushes wages in the direction of productivity. The two cannot long remain too far apart.
With a minimum wage of $7.25, will this person who can improve your bottom line by $10 get a job? He certainly has a good chance to do so. But what will ensue with a minimum wage of $15? Any firm foolish enough to hire him will now lose $5 per hour. Bankruptcy will ensue for such an employer, and unemployment for the would-be market participant. This legislation does not undergird wages, precluding very low compensation. Productivity, alone, does that. Before the advent of this law in 1938, people were earning compensation in accordance with their contribution to the bottom line.
It is no accident that the unemployment rate for teenagers is double that of people in their middle years. The former can undoubtedly jump higher over physical hurdles than the latter, but the reverse is true for economic barriers such as productivity levels. Also, black unemployment due to this law is twice that suffered by whites. Joblessness for black teens is quadruple that of white middle-agers. This has nothing to do with “privilege.” These statistics did not exist before this legislation was passed.
Should the minimum wage remain where it is at $7.25? No. Because the exact same analysis applies to those (mainly the mentally handicapped, but some severely physically handicapped), whose hourly productivity is $2, $4 or $6. They are now in effect totally frozen out of the labor market.
Why does this law exist given that it is so deleterious for the weakest economic actors? Northerners favor it since it enables them to better compete with lower skilled southerners. Labor unions support minimum wages since they can use it to compete with the unskilled more effectively. Racists want it since it plays havoc in the black community. The “educated” suffer from invincible ignorance on this matter since instead of enrolling in economics 101, they took courses in sociology, history, philosophy, political “science,” et cetera.
The minimum wage is a vicious, nasty, depraved law. It negatively impacts the “least, last and lost” amongst us. It ought to be repealed, and salt sowed where once it stood.
Walter E. Block is Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University New Orleans