cn:r+ir xix

:ii:u: v:oi i:vs

We hae already seen some of the harmful results of arbitrary goern-
mental eorts to raise the price of faored commodities. Ihe same
sort of harmful results follow eorts to raise wages through mini-
mum wage laws. Ihis ought not to be surprising, for a wage is, in
fact, a price. lt is unfortunate for clarity of economic thinking that
the price of labors serices should hae receied an entirely dier-
ent name from other prices. Ihis has preented most people from
recognizing that the same principles goern both.
Ihinking has become so emotional and so politically biased on
the subject of wages that in most discussions of them the plainest
principles are ignored. leople who would be among the rst to deny
that prosperity could be brought about by articially boosting prices,
people who would be among the rst to point out that minimum
price laws might be most harmful to the ery industries they were
designed to help, will neertheless adocate minimum wage laws,
and denounce opponents of them, without misgiings.
Yet it ought to be clear that a minimum wage law is, at best, a
limited weapon for combatting the eil of low wages, and that the
possible good to be achieed by such a law can exceed the possible
harm only in proportion as its aims are modest. Ihe more ambitious
such a law is, the larger the number of workers it attempts to coer,
and the more it attempts to raise their wages, the more certain are
its harmful eects to exceed any possible good eects.
Ihe rst thing that happens, for example, when a law is passed
that no one shall be paid less than ]106 for a forty-hour week is
that no one who is not worth ]106 a week to an employer will be
employed at all. You cannot make a man worth a gien amount by
making it illegal for anyone to oer him anything less. You merely
117
118 r:r+ ii +ni iisso :rriiir
deprie him of the right to earn the amount that his abilities and
situation would permit him to earn, while you deprie the commu-
nity een of the moderate serices that he is capable of rendering. ln
brief, for a low wage you substitute unemployment. You do harm all
around, with no comparable compensation.
Ihe only exception to this occurs when a group of workers is
receiing a wage actually below its market worth. Ihis is likely to
happen only in rare and special circumstances or localities where
competitie forces do not operate freely or adequately, but nearly all
these special cases could be remedied just as eectiely, more exibly
and with far less potential harm, by unionization.
lt may be thought that if the law forces the payment of a higher
wage in a gien 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. :uch shifts, howeer, are not easily made, nor
are the consequences of articial wage-raising so easily escaped. A
higher price for the product may not be possible it may merely drie
consumers to the equialent imported products or to some substi-
tute. Cr, if consumers continue to buy the product of the industry
in which wages hae been raised, the higher price will cause them to
buy less of it. While some workers in the industry may be beneted
from the higher wage, therefore, others will be thrown out of em-
ployment altogether. Cn the other hand, if the price of the product
is not raised, marginal producers in the industry will be drien out
of business, so that reduced production and consequent unemploy-
ment will merely be brought about in another way.
When such consequences are pointed out, there are those who
reply 7ery well, if it is true that the X industry cannot exist except
by paying staration wages, then it will be just as well if the minimum
wage puts it out of existence altogether. Lut this brae pronounce-
ment oerlooks the realities. lt oerlooks, rst of all, that consumers
will suer the loss of that product. lt forgets, in the second place,
that it is merely condemning the people who worked in that indus-
try to unemployment. And it ignores, nally, that bad as were the
wages paid in the X industry, they were the best among all the alter-
naties that seemed open to the workers in that industry, otherwise
the workers would hae gone into another. lf, therefore, the X in-
dustry is drien out of existence by a minimum wage law, then the
:ii:u: v:oi i:vs 119
workers preiously employed in that industry will be forced to turn
to alternatie courses that seemed less attractie to them in the rst
place. Iheir competition for jobs will drie down the pay oered
een in these alternatie occupations. Ihere is no escape from the
conclusion that the minimum wage will increase unemployment.
ii
A nice problem, moreoer, will be raised by the relief program de-
signed to take care of the unemployment caused by the minimum
wage law. Ly a minimum wage of, say, ]2.6 an hour, we hae for-
bidden anyone to work forty hours in a week for less than ]106.

:uppose, now, we oer only ]70 a week on relief. Ihis means that
we hae forbidden a man to be usefully employed at, say, ]90 a week,
in order that we may support him at ]70 a week in idleness. We
hae depried society of the alue of his serices. We hae depried
the man of the independence and self-respect that come from self-
support, een at a low leel, and from performing wanted work, at
the same time as we hae lowered what the man could hae receied
by his own eorts.
Ihese consequences follow as long as the weekly relief payment
is a penny less than ]106. Yet the higher we make the relief payment,
the worse we make the situation in other respects. lf we oer ]106
for relief, then we oer many men just as much for not working
as for working. \oreoer, whateer the sum we oer for relief, we
create a situation in which eeryone is working only for the dierence
between his wages and the amount of the relief. lf the relief is ]106
a week, for example, workers oered a wage of ]2.7 an hour, or
]110 a week, are in fact, as they see it, being asked to work for only
]4 a weekfor they can get the rest without doing anything.
lt may be thought that we can escape these consequences by of-
fering work relief instead of home relief , but we merely change
the nature of the consequences. Work relief means that we are pay-
ing the beneciaries more than the open market would pay them for
their eorts. Cnly part of their relief-wage is for their eorts, there-
fore, while the rest is a disguised dole.
lt remains to be pointed out that goernment make-work is nec-
essarily inecient and of questionable utility. Ihe goernment has
120 r:r+ ii +ni iisso :rriiir
to inent projects that will employ the least skilled. lt cannot start
teaching people carpentry, masonry, and the like, for fear of com-
peting with established skills and arousing the antagonism of ex-
isting unions. l am not recommending it, but it probably would
be less harmful all around if the goernment in the rst place
frankly subsidized the wages of submarginal workers at the work
they were already doing. Yet this would create political headaches
of its own.
We need not pursue this point further, as it would carry us
into problems not immediately releant. Lut the diculties and con-
sequences of relief must be kept in mind when we consider the
adoption of minimum wage laws or an increase in minimums al-
ready xed.
*
Lefore we nish with the topic l should perhaps mention an-
other argument sometimes put forward for xing a minimum wage
rate by statute. Ihis is that in an industry in which one big com-
pany enjoys a monopoly, it need not fear competition and can oer
below-market wages. Ihis is a highly improbable situation. :uch a
monopoly company must oer high wages when it is formed, in
order to attract labor from other industries. Ihereafter it could the-
oretically fail to increase wage rates as much as other industries, and
so pay substandard wages for that particular specialized skill. Lut
this would be likely to happen only if that industry (or company)
*
ln 19.8, when the aerage hourly wage paid in all manufacturing in the United
:tates was about 6. cents an hour, Congress set a legal minimum of only 2 cents.
ln 194, when the aerage factory wage had risen to ]1.02 an hour, Congress
raised the legal minimum to 40 cents. ln 1949, when the aerage factory wage
had risen to ]1.40 an hour, Congress raised the minimum again to 7 cents. ln
19, when the aerage had risen to ]1.88, Congress boosted the minimum to
]1. ln 1961, with the aerage factory wage at about ]2..0 an hour, the minimum
was raised to ]1.1 in 1961 and to ]1.2 for 196.. Io shorten the account, the
minimum wage was raised to ]1.40 in 1967, to ]1.60 in 1968, to ]2.00 in 1974,
to ]2.10 in 197, and to ]2..0 in 1976 (when the aerage wage in all priate
nonagricultural work was ]4.87). Ihen in 1977, when the actual aerage hourly
wage in nonagricultural work was ].26, the minimum wage was raised to ]2.6
an hour, with proision made for notching it up still further in each of the next
three years. Ihus, as the preailing hourly wage goes higher, the minimum wage
adocates decide that the legal minimum must be raised at least correspondingly.
Ihough the legislation follows the rise of the preailing market wage rate, the myth
continues to be built up that it is the minimum wage legislation that has raised the
market wage.
6
:ii:u: v:oi i:vs 121
was sick or shrinking, if it were prosperous or expanding, it would
hae to continue to oer high wages to increase its labor force.
We know as a matter of experience that it is the big compa-
niesthose most often accused of being monopoliesthat pay the
highest wages and oer the most attractie working conditions. lt is
commonly the small marginal rms, perhaps suering from exces-
sie competition, that oer the lowest wages. Lut all employers must
pay enough to hold workers or to attract them from each other.
iii
All this is not to argue that there is no way of raising wages. lt is
merely to point out that the apparently easy method of raising them
by goernment at is the wrong way and the worst way.
Ihis is perhaps as good a place as any to point out that what
distinguishes many reformers from those who cannot accept their
proposals is not their greater philanthropy, but their greater impa-
tience. Ihe question is not whether we wish to see eerybody as
well o as possible. Among men of good will such an aim can be
taken for granted. Ihe real question concerns the proper means of
achieing it. And in trying to answer this we must neer 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.
Ihe best way to raise wages, therefore, is to raise marginal labor
productiity. Ihis can be done by many methods by an increase
in capital accumulationi.e., by an increase in the machines with
which the workers are aided, by new inentions and improements,
by more ecient management on the part of employers, by more
industriousness and eciency on the part of workers, by better ed-
ucation and training. Ihe more the indiidual worker produces, the
more he increases the wealth of the whole community. Ihe more he
produces, the more his serices are worth to consumers, and hence
to employers. And the more he is worth to employers, the more he
will be paid. keal wages come out of production, not out of goern-
ment decrees.
:o goernment policy should be directed, not to imposing more
burdensome requirements on employers, but to following policies
122 r:r+ ii +ni iisso :rriiir
that encourage prots, that encourage employers to expand, to in-
est in newer and better machines to increase the productiity of
workersin brief, to encourage capital accumulation, instead of dis-
couraging itand to increase both employment and wage rates.