The Remarkable Logic of the Minimum Wage

In a study published earlier this month, “The Effects on Employment and Family Income of Increasing the Federal Minimum Wage,” the Congressional Budget Office (CBO) estimated that a gradual increase of the federal minimum wage to $15 an hour by 2025 (from the current $7.25) would boost the wages of 17 million workers at the cost of 1.3 million pushed out of employment. (Lower increases in the minimum wage would have similar but reduced effects.)

Minimum Wage Isn’t Even Welfare Economics

The reaction of Rep. Bobby Scott (D., Va.), as reported by the Wall Street Journal (“$15 Minimum Wage Would Bring Mixed Fortunes for U.S. Workers,” July 8, 2019) was typical of what many, if not most, minimum wage advocates believe:

If you look at the whole report, there’s no question there are significant benefits for a massive number of people that far outweigh whatever the cost might be.

This is a most remarkable belief. It means that the state should purposely intervene to harm some citizens in order to favor others. If the state represents all citizens equally, how could this discrimination be justified?

One common answer is that the alternative of non-intervention would similarly discriminate against the other group—in favor of the 1.3 million against the 17 million. However, this idea that non-intervention is merely another form of intervention is difficult to defend in a free society. It assigns the same value to a constraint generated by the equal liberty of everybody, and a constraint imposed by the power of some people. It negates the moral difference between “I cannot earn more because no consumer wants to pay more for what I can produce,” and “I cannot earn more because some group of individuals have decided to forbid anybody to pay me a wage I am willing to accept (instead of being unemployed).”

Interestingly, minimum wages don’t even satisfy the criterion of welfare economics (and cost-benefit analysis) according to which imposing costs on some individuals in order to generate benefits for others is justified if the benefits are greater than the costs and the gainers could theoretically compensate the losers and still be better off. Since minimum wages create some unemployment, it necessarily reduces the total value of production, which implies that some individuals must be harmed. In the case under consideration, the CBO estimates that American families would incur a net loss of $8.7 billion in real income (in 2018 dollars). Real individuals must shoulder this loss.

Is There a Social Contract? 

At a less philosophical but related level, what we know about economics contradicts the idea that economic efficiency could be improved by politicians and government bureaucrats fixing the minimum (or the maximum) level of wages or other prices.

Even if the minimum wage increased the total value of production, it would still be a strange belief to view it as a desirable public policy. For it amounts to accepting that the state actively discriminates against some of its subjects (or supposed citizens). It amounts to accepting what Anthony de Jasay called “the adversarial state,” which, instead of being an impartial arbiter, actively takes sides among its subjects (see my Econlib review of his book The State).

One way to argue with the 1.3 million American workers unemployed because of the minimum wage increase is to tell them something like the following.

Sure, you are unemployed in order that 17 millions of your comrades earn more. But this is part of your cost of living in society, and you do obtain overall net benefits from your participation in the social contract. In this case, you are the ones harmed, but in other cases—like, say, Medicaid or public education for your children—you win.

This contractarian argument, however, does not satisfy the sort of (tacit) social contract that would be beneficial to everybody as theorized by James Buchanan. It is extremely doubtful that a unanimous social contract can be seriously invoked to defend the minimum wage. Being denied the opportunity to participate in the labor market, even if one’s wage would otherwise be low, is a major handicap, both financially and psychologically.

Even if one supports some state redistribution in some circumstances, the minimum wage exemplifies a most coercive and arbitrary form of redistribution.

And this handicap hurts the least productive and flexible workers (this is why they are the ones to lose their jobs), those who are already at the bottom of the social ladder and are far from overprivileged by the status quo. As a means of redistribution, the minimum wage often amounts to taking from the poorest in order to give the less poor. (I say “often” because many minimum wage earners, like second earners or children, live in non-poor families.) How can we imagine everybody consenting to a social contract allowing that?

Even if one supports some state redistribution (or social insurance) in some circumstances (as Buchanan did), the minimum wage exemplifies a most coercive and arbitrary form of redistribution.

This article is republished with permission from the Library of Economics and Liberty.