Economics in One Lesson

by Henry Hazlitt

The Lesson Applied

Minimum Wage Laws

Section 2

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A nice problem, moreover, will be raised by the relief program designed to take care of the unemployment caused by the minimum wage law. By a minimum wage of, say, $2.65 an hour, we have forbidden anyone to work forty hours in a week for less than $106.[5] Suppose, now, we offer only $70 a week on relief. This means that we have 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 have deprived society of the value of his services. We have deprived the man of the independence and self-respect that come from self-support, even at a low level, and from performing wanted work, at the same time as we have lowered what the man could have received by his own efforts.

These 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. If we offer $106 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 $106 a week, for example, workers offered a wage of $2.75 an hour, or $110 a week, are in fact, as they see it, being asked to work for only $4 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, while the rest is a disguised dole.

It remains to be pointed out that government make-work is necessarily inefficient and of questionable utility. The government has to invent projects that will employ the least skilled. It cannot start teaching people carpentry, masonry, and the like, for fear of competing with established skills and arousing the antagonism of existing unions. I am not recommending it, but it probably would be less harmful all around if the government in the first 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 relevant. But the difficulties and consequences of relief must be kept in mind when we consider the adoption of minimum wage laws or an increase in minimums already fixed [*]

Before we finish with the topic I should perhaps mention another argument sometimes put forward for fixing a minimum wage rate by statute. This is that in an industry in which one big company enjoys a monopoly, it need not fear competition and can offer below-market wages. This is a highly improbable situation. Such a “monopoly” company must offer high wages when it is formed, in order to attract labor from other industries. Thereafter it could theoretically fail to increase wage rates as much as other industries, and so pay “substandard” wages for that particular specialized skill. But this would be likely to happen only if that industry (or company) was sick or shrinking; if it were prosperous or expanding, it would have to continue to offer high wages to increase its labor force.

We know as a matter of experience that it is the big companies —those most often accused of being monopolies—that pay the highest wages and offer the most attractive working conditions. It is commonly the small marginal firms, perhaps suffering from excessive competition, that offer the lowest wages. But all employers must pay enough to hold workers or to attract them from each other.

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* In 1938, when the average hourly wage paid in all manufacturing in the United States was about 63 cents an hour, Congress set a legal minimum of only 25 cents. In 1945, when the average factory wage had risen to $1.02 an hour, Congress raised the legal minimum to 40 cents. In 1949, when the average factory wage had risen to $1.40 an hour, Congress raised the minimum again to 75 cents. In 1955, when the average had risen to $i.88, Congress boosted the minimum to $1. In 1961, with the average factory wage at about $2.30 an hour, the minimum was raised to $1.15 in 1961 and to $1.25 for 1963. To 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 1975, and to $2.30 in 1976 (when the average wage in all private nonagricultural work was $4.87) Then in 1977, when the actual average hourly wage in nonagricultural work was $5.26, the minimum wage was raised to $2.65 an hour, with provision made for notching it up still further in each of the next three years. Thus, as the prevailing hourly wage goes higher, the minimum wage advocates decide that the legal minimum must be raised at least correspondingly. Though the legislation follows the rise of the prevailing market wage rate, the myth continues to be built up that it is the minimum wage legislation that has raised the market wage. [6]