Rants & Raves

(Don Chance)

Minimum Wage Laws and Economic Hypocrisy


There are some very powerful politicians and even economists who argue for minimum wage laws.  They even convince ordinary citizens that this is the right thing to do.  Who could be opposed to a minimum standard of living, they say?  Setting aside the fact that any specific level of the minimum wage is chosen in an arbitrary and not scientific or economic manner, it is easy to prove that they are wrong.  They’re wrong because it makes no logical sense and hurts the very people it is designed to help – the economically disadvantaged – but advocates of minimum wages ignore those facts.  A better approach is to show them that they themselves do not live their lives in a manner consistent with the position they advocate.   

Labor is a service sold by individuals to employers.  It is easy to show that if an employer is forced to pay more than is necessary to obtain employees, he will operate with fewer employees.  This will hurt the most economically disadvantaged people, the very ones these laws are supposed to help.  Sadly, it also discriminates along racial lines. 

Let’s first note that minimum wage laws encompass the full cost to the employer.  So, they include mandatory benefits. 

Consider a person who is a minimum wage advocate, who we’ll call MWA.  MWA wants to buy a house and is thinking that he’d spend in the range of $300,000 to $320,000.  He finds a house he likes but the seller is asking $350,000.  MWA makes an offer that will be on MWA’s low end.  He’s hoping seller will bite.  Seller is insulted and doesn’t even make a counteroffer.  MWA comes back a little higher.  Seller has a range too and if MWA and seller can get their ranges to overlap, a sale can be made.  Hey, you’ve seen enough House Hunters to know how it works.  Let’s say they agree on $315,000. 

Now, what does this have to do with minimum wage laws?  It proves that no one pays more than they have to.  MWAs know this is right, because this is exactly how they behave when they buy a house or anything else that is negotiable. 

Now, suppose the government says, “No, you cannot sell a house of that type for less than $400,000.” There will be no sale (actually it could happen on the black market).  Think this is ridiculous?  That’s what minimum wage laws are.  New York and other cities have rent control and almost all cities set taxi fares.   

This kind of bargaining process is how markets work and everyone – repeat, EVERYONE – behaves in this manner.   

Let’s say MWA goes down to Mexico and finds a flea market stall selling a t-shirt he wants at $25 (or equivalent pesos).  MWA thinks this is probably artificially low, because there are dozens of flea markets right there, all offering the same thing.  MWA believes markets fail, because they don’t guarantee minimum income to the poor.  Does Mr. Compassionate MWA say, “The owner is a poor little old lady and the market is holding down her revenue, so I’m going to offer $35.”  Owner speaks English decently well but is not sure she heard right.  He’s offering me MORE than I’m asking?  It’s absurd because no one does it.  MWA does what everyone else does, “How about $10?”  “$20,” she says.  They meet at $15.  You know this is how it goes.  Don’t deny it.  The numbers might be different, but MWA does not offer more than the asking price.  He bargains to find the equilibrium price.  This is how markets work because it is how people behave. 

Let’s say MWA cuts his own grass.  A service would charge $100 and MWA enjoys the exercise.  But there is unquestionably a price at which MWA would give up grass-cutting.  Let’s say the kid next door wants to make a little money so he offers to cut MWA’s grass for $40.  MWA won’t bite, and the kid comes back with $30.  “No, thanks,” says MWA.  But the kid wants the job, has nothing else to do with his time that would earn some money, and counteroffers.  They eventually whittle it down to $10 and MWA now thinks it’s a good deal.  Except the city regulates the prices of services and it is well below the established rate.  They can do it and break the law, but MWA won’t allow that to happen.  The two of them bargained and reached an equilibrium, but the government interfered. So, the kid doesn’t get the job. 

The end result of minimum wage laws is that the marginal workers, those who have the least opportunities and do the lowest paid work will either not get jobs or will be underemployed.  The demographics tell us that this worker will tend to be young black males.  Minimum wage laws are racially discriminatory. 

This is economics, plain and simple.  Minimum wage laws discriminate against the very people they are intended to help.  And the people who support them do not behave in a manner consistent with them.  MWA will not pay the mandated minimum price.  You know he won’t.  He also won’t offer more for the t-shirt than the lady is asking.  And he won’t hire the kid unless the price is so attractive that he can’t afford not to pay $10 and create some more leisure time for himself. 

Reader, you know this is true.  When you bargain, do you offer the highest price in your range first?  No, you bargain for the lowest possible price.  No one pays more than they have to in order to buy something, and they brag endlessly about the bargains they got.  Do you offer sellers more than they’re asking?  Of course not.  Do you really want to help the economically disadvantaged?  Isn’t it really better if more people are helped at least a little?  Advocates of minimum wage laws are economic hypocrites because when they buy product and services, they pay as little as they possibly can.  It is simple supply and demand.  If they won’t do it themselves, how can they force others to do it? 

But wait, you say, what about tipping?  Isn’t that an example of people paying more than they have to?  Tipping is a system in which hourly wages are set artificially low so that differential pay can be earned based on the quality of service.  Americans are so accustomed to tipping that they factor it into the total cost of the service.  There are some non-tippers and bad tippers, but they do pay a social cost.  So, tipping is just part of the price.  If you think this violates the law of supply and demand, start tipping the grocery store, the car dealer, the person from whom you buy the house.  And don’t even think of going to a flea market without paying more than the list price. 

What about charity?  No, charity doesn’t violate the laws of supply and demand, because you are not engaging in a commercial economic transaction.  And in any case, those who advocate liberal policies have been shown to be far less compassionate than are those who advocate conservative policies, such as no minimum wage.  Arthur Brooks, a formerly liberal professor, has shown with data, not just arguments, that conservatives are more compassionate than liberals and the difference isn’t even close.  In his book Who Really Cares? and numerous scholarly articles, he shows that conservatives overwhelmingly donate more of the three things we can donate – money, time, and blood – than liberals, who confuse taxes with compassion.  This doesn’t mean liberals aren’t compassionate at all.  Those who characterize themselves as religious give more than conservatives who aren’t religious.  Religion is the driving force in compassion. But as a whole, conservatives are far more religious.  These aren’t just arguments.  They are backed by data.  As Brooks explains, it’s why he switched from liberal to conservative. 

So, it is an absolute fact that minimum wage advocates behave in a manner inconsistent with their positions. Why?  Because they’re normal people when it comes to their own money.  But they behave differently when it comes to other people’s money.  They are economic hypocrites.  And in their efforts to help people, they end up leaving the most economically disadvantaged people behind.  This is not compassion.  


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Last updated: April 11, 2020