Amid the fast food worker walkouts reportedly taking place in 150 cities across the country, calling for a raise of the minimum wage to no less than $15 per hour, we thought it apt to pass along the simplest and clearest explanation as to what happens when government raises wages by fiat.
The below is a free lesson for SEIU, which is organizing the walkouts, as well as all others interested in the economics of the minimum wage.
The excerpt comes from Henry Hazlitt’s classic, “Economics in One Lesson,” first published in 1946. All emphasis is ours.
Thinking has become so emotional and so politically biased on the subject of wages that in most discussions of them the plainest principles are ignored. People who would be among the first to deny that prosperity could be brought about by artificially boosting prices, people who would be among the first to point out that minimum price laws might be most harmful to the very industries they were designed to help, will nevertheless advocate minimum wage laws, and denounce opponents of them, without misgivings.
The first thing that happens, for example, when a law is passed that no one shall be paid less than $30 for a forty-hour week is that no one who is not worth $30 a week to an employer will be employed at all. You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering. In brief, for a low wage you substitute unemployment. You do harm all around, with no comparable compensation.
The only exception to this occurs when a group of workers is receiving a wage actually below its market worth. This is likely to happen only in special circumstances or localities where competitive forces do not operate freely or adequately; but nearly all these special cases could be remedied just as effectively, more flexibly, and with far less potential harm, by unionization.
It may be thought that if the law forces the payment of a higher wage in a given industry, that industry can then charge higher prices for its product, so that the burden of paying the higher wage is merely shifted to consumers. Such shifts, however, are not easily made, nor are the consequences of artificial wage raising so easily escaped. A higher price for the product may not be possible: it may merely drive consumers to some substitute. Or, if consumers continue to buy the product of the industry in which wages have been raised, the higher price will cause them to buy less of it. While some workers in the industry will be benefited from the higher wage, therefore, others will be thrown out of employment altogether. On the other hand, if the price of the product is not raised, marginal producers in the industry will be driven out of business; so that reduced production and consequent unemployment will merely be brought about in another way.
When such consequences are pointed out, there is a group of people who reply: ”Very well; if it is true that the X industry cannot exist except by paying starvation wages, then it will be just as well if the minimum wage puts it out of existence altogether.” But this brave pronouncement overlooks the realities. It overlooks, first of all, that consumers will suffer the loss of that product. It forgets, in the second place, that it is merely condemning the people who worked in that industry to unemployment. And it ignores, finally, that bad as were the wages paid in the X industry, they were the best among all the alternatives that seemed open to the workers in that industry; otherwise the workers would have gone into another. If, therefore, the X industry is driven out of existence by a minimum wage law, then the workers previously employed in that industry will be forced to turn to alternative courses that seemed less attractive to them in the first place. Their competition for jobs will drive down the pay offered even in these alternative occupations. There is no escape from the conclusion that the minimum wage will increase unemployment.
The natural response to the newly created unemployment will be unemployment relief. Hazlitt argues that this poses significant problems in and of itself.
[T]he higher we make the relief payment, the worse we make the situation in other respects. If we offer $30 for relief, then we offer many men just as much for not working as for working. Moreover, whatever the sum we offer for relief, we create a situation in which everyone is working only for the difference between his wages and the amount of the relief. If the relief is $30 a week, for example, workers offered a wage of $1 an hour, or $40 a week, are in fact, as they see it, being asked to work for only $10 a week—for they can get the rest without doing anything.
It may be thought that we can escape these consequences by offering “work relief” instead of “home relief;” but we merely change the nature of the consequences. “Work relief” means that we are paying the beneficiaries more than the open market would pay them for their efforts. Only part of their relief wage is for their efforts, therefore (in work often of doubtful utility), while the rest is a disguised dole.
The question is not whether we wish to see everybody as well off as possible. Among men of goodwill such an aim can be taken for granted. The real question concerns the proper means of achieving it. And in trying to answer this we must never lose sight of a few elementary truisms. We cannot distribute more wealth than is created. We cannot in the long run pay labor as a whole more than it produces.
The best way to raise wages, therefore, is to raise 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.
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