Guest post by: Ben R. Crenshaw
The minimum wage has been in the news recently, as there are a number of movements to raise the minimum wage from its national rate of $7.25 an hour. The largest battleground has been in Seattle, where a $15 minimum wage is scheduled to be phased in over the next two to seven years. This has prompted a vigorous national debate about the utility and wisdom of having national or state-mandated minimum wage laws. While there are multifarious aspects of the minimum wage, I want to focus on one issue that is rarely considered: the moral case against the minimum wage.
The minimum wage is immoral. To understand why, we must first explore its social and economic dimensions. Socially, the minimum wage is a type of social contract. Two parties, the employee and the employer, are involved in negotiating a contract over labor and compensation. The negotiation is voluntary in that the employer is not being forced to hire any specific person and the employee is not being forced to work for any particular company, and consensual in that both employer and employee mutually agree to the terms and conditions of the labor contract. Within the philosophy of social contract theory, one’s moral obligations are relative to the contract that is agreed upon. In this case, once the contract has been signed, the employee is morally bound to fulfill their work responsibilities, and the employer is morally bound to compensate them for their labor (through wages, medical benefits, vacation time, paid time off, sick leave, etc.). If either side fails in their duties, the contract can be broken; the employer has the right to fire the worker or the employee can look for work elsewhere.
Economically, wages are determined by the labor market. It’s important to realize that value in economics is subjective, being determined by supply and demand, which is dictated by what people value most. The old labor theory of value, followed by Karl Marx and David Ricardo, made the error of pinning value objectively to the amount of labor inputted to a specific task. Wages cannot be determined by any objective, universal standard of labor compensation but rise and fall with subjective valuations. These subjective valuations are driven by both endogenous and exogenous factors. Productivity, or the value an employee adds to the company, is a major endogenous component. Productivity is determined by internal and external factors: internally, education, skill, work ethic, and behavior can positively or negatively impact productivity; externally, business management and organization, technology, and employee care can impact productivity. The greater the productivity, the higher the wage. However, exogenous factors also determine wages, namely, supply and demand. If there is a large demand for engineers, but few people qualified to do that work, companies will compete for that labor by offering higher wages. Conversely, if there is a surplus of manual laborers competing for a limited number of jobs, wages will drop as companies are able to hire at the lowest wage accepted. In short, wages are subjectively determined by various internal and external factors that fluctuate over time as markets expand and contract. Finally, employers are not prohibited from paying more than the market-determined wage out of their own abundance and generosity, but no dictate of justice or fairness requires them to do so and the government should never force them to.*
Proponents of the minimum wage make two mistakes. Economically, they falsely reason that wages should be determined by what is minimally needed to support a person or family (known as a “just wage”). While this minimum amount may rise with inflation, it suffers from the fact that no one really knows what a minimum standard of living is, and that it is an objective theory of labor value that completely ignores subjective value. Socially, the minimum wage represents a breach in the social contract as one party (employee) enlists the help of a bully with a big stick (the government) to force the other party (employer) to accept their terms (higher wages). This means that employers are being compelled against their will to abide by a labor contract they don’t agree with. This is immoral conduct by employees, unions, and the government that harms businesses. The only time this would be acceptable is if the employee could demonstrate that wages are unjust or their employer is abusing them. However, since wages are not determined by an external standard of living, until employees show the injustices in productivity and supply and demand, their case fails. Appeals to a standard of living are superfluous and irrelevant.
The minimum wage is immoral because it involves one party enlisting the government to force the other party into accepting a contract that is not mutually voluntary or agreeable. Since proponents of the minimum wage misunderstand the economics of wages, they falsely appeal to a standard of living to make their case for justifying their coercive acts. The result is violence against employers and severe distortions in labor markets that lead to higher unemployment and businesses closing.
* For further reading about the economics of labor and wages, see Thomas Sowell, Basic Economics: A Common Sense Guide to the Economy 4th ed. (New York: Basic Books, 2011), 207-291.