The Bogus Basis of the Minimum Wage

[This article was originally published on April 19, 2016.]

In the fall of 2013, nationwide protests pushing for drastic increases in the minimum wage—and the endorsements of politicians like President Barack Obama—revived the perennial controversy over the wisdom of this three-quarter-of-a-century old federal policy. Advocates of minimum wage hikes have now won their latest victory in California, where the legislature recently voted to raise that state’s minimum wage from its current rate of $10 an hour to $15 by 2022. Professional economists will continue to debate whether the minimum wage makes low-skilled workers better off or prices them out of work and costs consumers more in higher prices. What usually goes unmentioned in the discourse, however, is that the concept of a mandatory “living wage” makes little sense in principle. Employers’ duty is to pay workers according to the value of their labor, not to pay them enough to cover their cost of living—or any other arbitrary benchmark.

Support for minimum wage hikes stems from the belief that all full-time work is worthy of compensation generous enough to enable employees to live comfortably. This well-meaning misconception treats jobs as if they were social programs, designed to lend a helping hand to people who need it. In reality, workers are not charity cases; they do the work that their bosses need them to do in order to accomplish those employers’ missions. McDonald’s, Burger King and Wendy’s don’t hire their cashiers and burger-flippers in order to help them out; they pay them to produce and serve their customers food, hopefully at a tidy profit.

Indeed, this reality applies to all employers, not only to profit-seeking businesses. Police officers are paid to enforce laws and protect the public; employees at charities and non-profits are paid to serve certain principled causes; teachers are paid to educate their students. None of their employers hire them out of sheer goodwill, for the purpose of putting roofs over their heads, food in their bellies, and clothes on their backs. Those organizations all keep workers on payroll for fundamentally the same reason: to get certain jobs done.

The purpose of paying employees is to compensate them according to the value of the services that they provide to their employers. There’s no better mechanism for ascertaining that value than market forces, which spontaneously aggregate the various factors that determine the supply of and demand for labor: the number of job seekers and competing employers, the amount of specialization and training that are necessary to develop the skills required for the job, etc. As one economist puts it, “Market prices coordinate the actions of billions of people pursuing their myriad goals, by communicating the changing, particular knowledge of everyone about the availability and potential uses of everything.”

In many unfortunate cases, workers’ labor may be worth less than what it costs to live decently in certain locations (especially if the cost of living is artificially inflated by misguided government policies like restrictive zoning regulations). Yet that situation isn’t inherently unjust. There’s nothing about unskilled tasks like flipping burgers, stocking shelves, ringing up purchases, or other menial work that necessarily merits pay generous enough to enable employees to support themselves or their families. That kind of labor is too unspecialized and requires too little training to entitle its practitioners to any arbitrary minimum pay. If you find this pill too bitter, consider how few American workers actually have to swallow it in any case: in 2012, less than 2.8% of the workforce made minimum wage; over half were under the age of 24, and ¾ of them worked part-time.

The idea isn’t that people who can’t hack it on their own should be left in the lurch; it’s just that it’s not their bosses’ job to lift them out of it. Given their institutional character, it makes more sense in principle for governments to provide that support, at least wherever private charity and voluntary mutual aid aren’t up to snuff. For this reason and more, a basic income guarantee of some kind might do the trick better than the minimum wage. It’s also critical, of course, to make educational and economic opportunity as widely available as possible—partly by keeping labor markets flexible—so that people in low-wage jobs can move on up to better-paying work as quickly and as fluidly as possible. Just as consumers are empowered when they can penalize incompetent firms by taking their business elsewhere, workers are empowered when they can respond to sub-optimal pay or working conditions by taking their labor elsewhere.  

For all of that, I’m not opposed to raising the minimum wage under all circumstances; as long as we have the existing system instead of the aforementioned alternative, it makes sense to adjust the minimum wage periodically to keep pace roughly with the rising cost of living. (The key is to avoid hiking it too far, too fast, which would almost certainly cost at least some unskilled jobs.) In the long run, however, the general approach that I advocate here would make a great deal more sense than imposing an arbitrary wage floor, with all the unintended consequences that can come with it. A job is not a social program or a charitable endeavor; it’s a business transaction in the labor market, plain and simple. Your boss’ job is to pay you whatever your work is worth, not to take care of you.