Before my trip, someone on Facebook asked me to respond to his perspective on the minimum wage. He thought the free-marketeers, by rushing to their textbooks, were overlooking something important. I’ll try to distill his position down into a single paragraph (in my words), then respond:
CRITIC OF STANDARD FREE-MARKET DISCOURSE ON MINIMUM WAGE: I’m not saying I’m in favor of the government setting a minimum wage, but I think you guys are overlooking a crucial point. All of the food stamps, public education, and other forms of welfare represent an implicit subsidy to businesses. By giving workers the ability to survive on lower wages, the government increases the bargaining power of the employers. They can get away with paying a wage that is literally below subsistence level. So when we rail against the unfairness of violating the sanctity of business profits, let’s not forget this implicit subsidy.
I told this guy that my only objection to the above, was that the economics were totally wrong. Generally speaking, the reality is the opposite of what he says. Welfare payments make wages higher than they would otherwise be. They make the workers have a stronger bargaining position, not weaker.
As usual in these issues, exaggerate the numbers to see it clearly. Suppose the government gave out vouchers entitling people to steak dinners every night and a room with a king sized bed at a posh hotel. Would you see a lot of people working at menial jobs? Probably not. If you could have a decent standard of living by doing nothing, then on the margin you’re less willing to give up your leisure for a little bit of money picking tomatoes.
Suppose there’s no minimum wage law, so employers can charge whatever the market will bear, but we still have food stamps etc. in place. Think about whatever the new equilibrium will be, in terms of people working. Now, in this setting, all of a sudden the government takes away all of the food stamps etc. I submit that this would make workers willing to work for less than they did before. If they hold out now, they will literally starve to death; they need to work or else they’ll die. But before, with food stamps, they could refuse to work and still manage to survive.
One final attempt: You’ve got two guys who get laid off from a factory in Detroit. They both had identical jobs paying $40,000, and would like to get a comparable job. But there’s nothing like that available, so they have to settle for jobs they think are beneath them, like becoming a janitor or working at Wendy’s. The only difference is, one guy has $20,000 in savings in the bank, while the other guy has $200 in savings. Which guy is going to buckle first, and take the menial job? Which guy is going to hold out longer, looking for a job more similar to what he’s used to?
It’s the same logic with government support programs. They allow poor people to survive without earning labor income. It’s as if they are endowed with a bank account and savings, that they can draw down while unemployed. It gives them bargaining power against employers, meaning that they need to be offered a higher wage to make it worth their while to take a job. They can afford to walk away, since the government is providing them with food.
THE PROBLEM: I think what was throwing off my critic was that he is viewing the labor market as being determined by bare subsistence levels. In other words, businesses pay workers the very least amount necessary, to keep them from starving. If that were how labor markets worked, then yes, food stamps etc. would lead to lower wage rates. But that’s not how labor markets work. If it were, then we’d all be earning the minimum wage right now, yet we’re not. Even though it’s imperfect, and even though libertarian economists sometimes exaggerate the beneficence of real-world capitalists, it’s still true that there is enough competition in the labor market so that most of us earn well above the minimum wage. And that insight shows why raising the minimum wage will throw unskilled people out of work, which is hardly a good way of helping them or of taking their side against Big Business.