Federal and state politicians are eager to raise the minimum legal wage—again. They have raised the minimum legal wage many times before, but they complain that it is never enough. The last rise in the minimum wage wasn’t enough because the prices of food, clothing, and shelter keep going up faster than wages.
Why do the prices of food, clothing, and shelter keep going up? Could this have something to do with the behavior of politicians and government?
A general rise in prices is caused by government monetary policy. Yes, Ben Bernanke and kids at the Federal Reserve Bank had fun printing a couple trillion dollars over the past decade. As it takes more and more dollars to buy the same goods, the value of wages, savings, and pensions falls.
Politicians could tell the Federal Reserve Gang to stop printing money, but they don’t. They don’t stop it because printing more money is useful to the spending plans of politicians. In this manner, politicians rob the value of wages, savings, and pensions.
State politicians are also responsible for rising prices. They don’t print money, yet they raise prices by raising taxes on nearly everything. State politicians could give workers an effective pay raise by reducing taxes on the earnings, savings, and purchases of workers. But they don’t. Politicians don’t cut taxes because tax revenues are useful to the spending plans of politicians.
Federal and state politicians could also lower prices in the islands by ending the Jones Act, a very old law that severely restricts shipping to the islands. Bloomberg editors recently commented on the effect of the Jones Act stating, “By some estimates, this makes goods in Hawaii a third more expensive than they otherwise should be.”
Wouldn’t it be nice for politicians to end the Jones Act and give workers an effective pay raise of that size? But politicians won’t. Indeed, politicians rarely offer solutions that reduce their own power. As L. Neil Smith puts it, “The government is a disease masquerading as its own cure.”
Politicians want to make it illegal to work for less than $9 or $10 an hour. The idea is quite popular because higher wages are popular.
But a minimum wage law is not just an expression of desire. It is a threat of jail. And who is threatened? The law threatens voluntary behavior between consenting adults.
If an employee voluntarily agrees to work for $5 an hour, and the employer volunteers to pay, they both benefit or they wouldn’t do it. They don’t threaten each other. But politicians think that people are too stupid to make voluntary decisions for themselves. Politicians prefer threats.
Politicians won’t let people work voluntarily for $5 an hour, but they will allow people to work for nothing. When someone agrees to work for $0 an hour, then politicians call it “volunteer” work or an “internship.” Volunteering to work at $0/hour for experience or for a cause is usually considered noble and virtuous. Volunteering to work for $5 an hour is usually considered nasty and exploitation.
Politicians like “volunteers” who work for nothing. Politicians are always asking people to work as volunteers for their elections, as volunteers for legislative internships, or as volunteers to clean up campaign litter.
Either politicians aren’t very good at math or they aren’t as concerned about workers as they pretend. Working voluntarily for $0 an hour is less than working voluntarily for $5 an hour. And, yes, all work in the marketplace is volunteer.
So when politicians ask volunteers to work for nothing, they are encouraging people to work for less than the legal minimum wage. This is legal because politicians have granted exceptions to the law.
LEGAL NEGATIVE WAGES
Small business owners are also granted a unique exception. It is legal for a business owner to pay himself or herself less than $5 for each hour worked—or even less than $0 an hour when his or her business loses money. But it is not legal for that small business owner to pay any of his or her employees less than the legal minimum wage, even if it would save an unprofitable business and future employment opportunities from bankruptcy.
There is another exception for schools. How does this work?
Businesses like to pay inexperienced workers to get trained while working. But minimum wage laws make it too expensive to train many of these potential workers on-the-job. So inexperienced potential workers must give money to schools for training instead of receiving money from businesses.
Schools are then allowed to arrange for students to work in business as unpaid interns. Since student interns must pay tuition to schools in order to get work for a business at $0 an hour, students are really earning negative dollars an hour.
Negative dollars? Yes. Students pay far more to schools in tuition than they receive in pay from business while working as interns. Students pay for a notation on school records called “credits,” certifying proof of the experience.
This certification and credit system earns a lot of money for schools, but schools don’t always work so well for students who graduate and still can’t find jobs. By the time that young people even start to register as university sponsored interns, most have already spent 12 years of their lives, largely in government schools, having obtained surprisingly few skills for earning a living in the marketplace.
$100 AN HOUR?
For example, if state politicians in my home state of Hawaii could simply raise wages by passing a law, then why not pass a law that would raise the legal minimum to $100 an hour? Surely every worker would be happy with this—until customers got the bill.
The cost of a vacation in Honolulu might soar from $4000 to $40,000 and tourists would flee for the resorts of Florida. The cost of an aloha shirt might soar from $50 to $500 and customers would scramble for shirts from Mexico instead of Hawaii. The cost of university tuition in Hawaii might skyrocket from $10,000 to $100,000 and students would transfer to California instead. Businesses in Hawaii would shut down, automate, or move away. And crowds would race to the state capitol demanding the repeal of such a law.
Therefore the key to a popular minimum wage law is to demand only a modest rise in wages—raising it just $1 an hour instead of $100 an hour. Raising the wage a little bit divides the workers between those who get raises and those who lose jobs.
Those who lack seniority or skills are the least influential and the first to lose their jobs. Once these people are pushed off the career ladder, they join the unemployment roll, the welfare roll, or the school roll. People who had a chance at being independent through their own earnings, suddenly become dependent on politicians and the earnings of others.
Economist Walter Williams calls these minimum wage laws “The New Jim Crow Laws” because of the harmful effect on young people—especially ethnic minorities. In the 1940’s, recounts Williams, the minimum legal wage was low and covered few jobs. The unemployment rate of young white men was 10% and the unemployment rate of young black men was actually lower at 9%.
As the minimum legal wage was raised, and as coverage expanded to more jobs, the unemployment rate of young white men nearly doubled to 18% and the unemployment rate of young black men quadrupled to 37%. In some cities Williams reported that it was as high as 70%. To these people, a higher minimum wage isn’t helpful if they don’t have a job.
Politicians claim to help the very people whom they hurt the most with such laws. Yet sometimes the injury can even become too much for the politicians to ignore.
In 2007 the U.S. Congress passed a law mandating an annual rise in the minimum legal wage in American Samoa. The result was a major reduction in employment as cannery operations shifted to Thailand where wages are only a fifth as much. The General Accounting Office reported that despite a rise in the minimum wage, the average-inflation adjusted earnings fell in the islands.
This prompted Congress to pass another law in 2012 to freeze these automatic increases in American Samoa at less than $5.60/hour, still well below the ultimate goal of matching the federal minimum of $7.25/hour. President Obama signed the freeze into law rather than to see the Samoan people suffer even more with continued increases.
A PENNY AN HOUR?
Politicians talk about the minimum wage as if the law was the only obstacle to greedy employers. Wouldn’t greedy employers pay workers a penny an hour if it was legal to do so?
But this does not explain why most employers pay most workers far more than the minimum legal wage. Employers aren’t required by law to pay people more, but they do so most of the time. Why?
They pay more because a wage that is higher than the legal minimum is worth it to both parties. When an employer and an employee agree on a wage that is satisfactory to both, they voluntarily enter into a contract. Their values and motives may be different, but this is how the market mediates the values of millions of players in a free society.
Politicians don’t understand this. Politicians believe that their own values and motives are superior and that they can dictate value to others through the force of law. But they cannot force value to exist where it doesn’t exist. They can force prices, but not value. If a person contributes $6/hour of value to a company and a business is required to pay the same person $8/hour, the employer will lay off the worker or will eventually have to close up shop, move away, or automate…and still lay off the worker.
Politicians don’t understand this. To raise their own wages, they just pass a law and force taxpayers to pay them…regardless of the value of their hours of “work.” How to test the value of politicians’ work? Allow the citizens, the ultimate employers of politicians, to voluntarily decide how much to pay them.
Mainstream economists wax eloquent about cost-benefit analysis in determining the supposed effect of price controls “on balance.” This approach completely ignores the importance of individual rights to a free society.
Suppose three skilled workers rob an unskilled worker and an employer. Would it make sense to conduct cost-benefit analysis on the transfer of wealth? Perhaps the thieves plan to spend the money right away for beer and pretzels, while the unskilled worker and employer have other plans for the money. Perhaps the thieves share the plunder with many others. Would the shrewd economist weigh the financial cost to the unskilled worker and employer against the presumed benefits of redistribution?
Perhaps. But doing so ignores the value of individual rights and the incentives essential to wealth creation. This is true when one person robs another. This is also true when larger numbers of people ask officials with fine hats to use the force of government to coerce the “transfer” of wealth that belongs to others. The violation of rights is not a part of the typical economist’s cost-benefit equation.