Two Minds On The Minimum Wage

If the new leadership of the U.S. Congress keeps its word, then legislation to mandate a higher minimum wage will have been introduced by the time you read this. As far as potential impact, the issue is a yawn. Almost 99 percent of Americans with jobs already earn more than the minimum wage. Still, any such change offers the potential to pressure other wages, so the issue is worth watching. When it comes to the question of whether we should have a minimum wage at all, my reasoning brings me to two utterly contradictory positions. Let me simply offer them both.

Position One: The minimum wage is a price control, and price controls lead to shortages.

Price controls lead to shortages because the price, in a free market, is the device by which buyers and sellers work out whose needs best match the available supply. Consider gasoline. If the price goes up because supply goes down, then casual users will buy less. Most truckers will still pay the price, but weekend drivers may decide to stay home. But if government decides to “help” by holding the price down by force, then cheap gas simply goes to whoever can get to the pump fastest. Everyone else must wait out the shortage.

The minimum-wage price control holds the price of labor up instead of down. People selling labor (employees) are not allowed to charge less. The result is a shortage of jobs. This shortage affects the least skilled and least desirable employees, who might have better prospects if they had the option to charge less. The law forbids that option.

Some dispute this, saying employment data don’t prove this effect. If so, if the impact on jobs is hard to see in this way, then this is only because the minimum wage is so low. Raise it spectacularly—say, to $15 an hour—and we could easily imagine how many lower-skill employees would be shut out because they couldn’t justify this rate.

Position Two: Government should not mess with prices in a free market, but the labor market arguably is not free.

One of the hallmarks of a free market is freely flowing information. The labor market doesn’t offer this. To understand, think about the market for retail goods. If you want a DVD player, you can compare the features and prices of different models in a store. You can visit other stores to see if their prices are better. You can talk to friends about their DVD players, and you can search for product information on the Web. The labor market offers nothing like this level of disclosure.

Particularly among lower-skill employees, employers have dramatically better information about labor pricing than the prospective employee does. At the very least, the employer knows specifically what the other employees of the company are already earning. The employee does not know this, and is prevented by social custom from knowing what even the people he knows well are earning. Thus, the employee does not have a practical way to “shop around” for the highest price for his labor. Indeed, if he did shop around—that is, if his history showed numerous job changes—then this would reduce his value as an employee.

These circumstances make a small minimum wage appropriate. One of the roles of the law is to define what values we keep, and humbling ourselves to work for one another is one of the most honorable things we do. It is acceptable, therefore, for government to say there is a minimum price. Employers should not be allowed to fill positions paying less, and impressionable job seekers should not be persuaded to work for less, because the labor itself is sacred and its dignity deserves to be safeguarded.

Granted, this is not the standard reason people cite for supporting the minimum wage. I wish it was. It would be wonderful if all of our society’s values could be treated with something like the same respect.