Problem of low wages not easily solved

It seems like an easy fix for social injustice: pass a law requiring employers to pay workers more than they would otherwise. Magically, everyone has more wealth.

It would be nice if it were so easy and simple. Looking at only the immediate effects and listening to the rhetoric of some politicians and editorial writers, it would seem that a higher minimum wage is good. But considering all effects of a higher minimum wage reveals a different situation.

As Milton Friedman writes in Capitalism and Freedom:

Minimum wage laws are about as clear a case as one can find of a measure the effects of which are precisely the opposite of those intended by the men of good will who support it. Many proponents of minimum wage laws quite properly deplore extremely low rates; they regard them as a sign of poverty; and they hope, by outlawing wage rates below some specified level, to reduce poverty. In fact, insofar as minimum wage laws have any effect at all, their effect is clearly to increase poverty. The state can legislate a minimum wage rate. It can hardly require employers to hire at that minimum all who were formerly employed at wages below the minimum. … The effect of the minimum wage is therefore to make unemployment higher than it otherwise would be.

There are those who say that increasing the minimum wage won’t have any impact on the demand for labor, and therefore people won’t lose jobs. But that is false. If it weren’t false, why not raise the minimum wage to, say, $25? Most people would say that at that level, employers wouldn’t hire low-skill workers because they aren’t “worth” that much. But some workers aren’t “worth” even the present minimum wage, or they could find jobs at this wage.

(When we say workers aren’t “worth” a certain wage, we are really saying that the marketplace — that’s you and me — places a certain value on the output the worker is able to produce. It has nothing to do with their worth as a person. It has everything to do with their ability to produce goods and services that people are willing to pay for.)

Furthermore, if we are willing to agree that raising the price of employing certain workers won’t decrease the demand for their labor, we also have to be willing to ignore the law of supply and demand, which states that as the price if something increases, less will be demanded. I am confident that this law applies.

The problem is that an increase in the minimum wage does nothing to increase the productivity of workers, and increasing productivity is the only way that workers can make real progress.

How do we increase worker productivity? One way is through education. Sadly, as documented in many articles on this website, our public education system is failing children badly.

Capital — another way to increase wages — may be a dirty word to some. But as the economist Walter E. Williams says, ask yourself this question: who earns the higher wage: a man digging a ditch with a shovel, or a man digging a ditch using a power backhoe? The difference between the two is that the man with the backhoe is more productive. That productivity is provided by capital — the savings that someone accumulated (instead of spending on immediate consumption) and invested in a piece of equipment that helped workers to increase their output. Those who call for higher taxes — often the same people calling for a higher minimum wage — make it more difficult to accumulate capital.

These are the things we must do to increase productivity, and with it, real wealth. If the solution was really as simple as some claim, that in order to increase the wellbeing of low-wage workers we could merely pass a law, shouldn’t we be outraged that this law wasn’t passed a long time ago?

Then, if a law is passed to raise the minimum wage to x, shouldn’t we insist that it have been increased to x + $1, or x + $2, or x + …?

No, the solution to low wages is much more difficult than that.

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