Writing from Miami, Florida
Last week I explained how a column in The Wichita Eagle (see How a Good Column on the Bad Lottery Fell Apart) started out well but took a sharp turn downwards.
What Mr. Scholfield did to destroy this potentially valuable newspaper column was to propose higher minimum wage laws as the solution for people who aren’t paid enough. He even proposes a living wage law that reflects the costs people face rather than the value of what they are able to produce.
Either of these proposals will harm the very people that Mr. Scholfield seeks to help. 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.
The great appeal of a higher minimum wage, or a living wage rate as some localities have passed, is that it seems like a wonderfully magical way to increase the wellbeing of many people. Those earning less than the new lawful wage and keep their jobs after the increase are happy. They are grateful to the lawmakers, labor leaders, newspaper editorialists, and others who pleaded for the higher minimum wage. News stories will report their good fortune.
But as Frederic Bastiat wrote a long time ago: “Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse.”
The not-so-visible effect of the higher wage law is that demand for labor will be reduced. Those workers whose productivity, as measured by the give and take of supply and demand, lies below the new lawful wage rate are in danger of losing their jobs. As Dr. Friedman says, the law says if you hire someone you must pay them a certain amount. The law can’t compel you to hire someone, or to keep workers on the payroll.
The difficulty is that people lose their jobs in dribs and drabs. A few workers here; a few there. They may not know who is to blame. The newspaper and television reporters will not seek these people, as they are largely invisible, especially so in the case of the people who are not hired because of the higher wage law.
If we are truly concerned about the plight of low-wage workers (and I am very concerned, personally), we can face some harsh realities and deal with them openly.
The simple fact is that some people are not able to produce output that our economy values very much. Passing a law that requires employers to pay them more doesn’t change the fact that we still don’t value their output very much. So a law that requires these employees to be paid more than their output is worth means, in all likelihood, that their jobs disappear.
Some may say that it is a harsh judgment to say that someone’s work isn’t valued very much. But it really isn’t the greedy evil employers that make that judgment is it? If so, why are some employees, say physicians, paid very well? Is it because the hospital likes to pay high salaries? Or that we as healthcare consumers like to pay high doctor bills? Instead, it’s realizing that we place a high value on the output of a physician. And because it’s difficult to become a physician, and therefore the supply of physicians is low, we have a situation where there is a high demand for something that is in short supply. That means high wages for physicians.
Henry Hazlitt, writing over 50 years ago in his important work Economics In One Lesson explained how to increase wages:
The best way to raise wages, therefore, is to raise marginal labor productivity. This can be done by many methods: by an increase in capital accumulation — i.e., by an increase in the machines with which the workers are aided; by new inventions and improvements; by more efficient management on the part of employers; by more industriousness and efficiency on the part of workers; by better education and training. The more the individual worker produces, the more he increases the wealth of the whole community. The more he produces, the more his services are worth to consumers, and hence to employers. And the more he is worth to employers, the more he will be paid. Real wages come out of production, not out of government decrees. (emphasis added)
One way to increase the value of workers’ output, as explained above, is 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 increased the output of our economy. Those who call for higher taxes make it more difficult to accumulate capital.
Technology, innovation, and efficiency improvements are important, too. But I feel the two most important things that government can do to help low-wage workers are these: First, get out of the way of progress in education. Let parents have more control over education. Let markets rather than bureaucrats shape the future of education. Second, eliminate taxes and policies that promote immediate consumption rather than saving and investment, that is, eliminate policies that work against the accumulation of capital.
If the solution was really as simple as Mr. Scholfield claims, 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.