The Historical Argument Against the Minimum Wage

Guest post by: Ben R. Crenshaw

In my last post I argued that the minimum wage is immoral since it violates social contract law by forcing employers (who must hire laborers) to abide by arbitrary wage regulations that are not mutually agreeable. This week I shall advance the historical case against the minimum wage by showing the discriminatory origins of this popular public policy.

The first minimum wage law appeared in Kansas in 1891, with New York quickly following in 1894. However, it wasn’t until 1927 that the push for a federal wage law in certain industries began, culminating in the Davis-Bacon Act of 1931 which set prevailing wages and benefits on all federally subsidized construction projects. As economist Walter E. Williams extensively documents in his book Race and Economics, the Davis-Bacon Act was proposed specially to protect local, white, unionized workers from competing cheap labor. This cheap labor took the form of mostly unskilled black American and non-European immigrant workers in construction, agriculture, and domestic service industries who were increasingly migrating north, putting pressure on northern labor markets dominated by whites. The Act intentionally sought to disrupt this trend and protect these white workers from “colored labor” that “sought to demoralize wage rates.” It worked. Prior to the Davis-Bacon Act, black and white employment in the construction industry was virtually equal; yet after the Act, black unemployment rose dramatically relative to white unemployment. This Act paved the way for the Fair Labor Standards Act of 1938 that established a federal minimum wage for employees producing goods for interstate commerce, and which has since been greatly expanded so that it now covers 85% of the American workforce.

In addition to excluding blacks and immigrants from certain labor markets, the eugenics movement of the early twentieth century was making effective use of minimum wage laws. Eugenicists had long been opposed to immigration, fearing “race suicide,” or the overwhelming of the Anglo-Saxon race by those who were considered racially inferior, defective, and dependent. As Thomas C. Leonard compelling shows in his article “Eugenics and Economics in the Progressive Era,” Progressive economists used minimum wage laws to rid the labor force of the “unemployable” of society – from immigrants to the disabled to the delinquent. Eugenically, minimum wage laws operated in two ways: first by deterring possible immigrants and other “parasites” from working at all, and second by actually causing unemployment among these individuals. Such results were lauded, since protecting deserving workers from unfit workers was considered a social benefit as it helped maintain a race and culture that was economically efficient and independent. Minimum wage laws were popular among Progressive economists and eugenicists precisely because the laws worked so well to cull from the labor force those who were thought to be a burden on society.

At this point some might accuse me of committing the genetic fallacy by casting aspersion on the minimum wage by attacking its origins. However, this is not the case, as those who proposed, implemented, and supported minimum wage laws were fully aware of the laws’ effect on the labor force that provided employment for certain privileged social groups to the detriment of others. In short, minimum wage laws worked exactly as they were designed to work, both then and now. The difference is that today many are ignorant of the social costs of minimum wage laws and think their good intentions can atone for bad economic outcomes. The victims of the minimum wage continue to be blacks, immigrants, and unskilled and uneducated workers who are effectively priced out of the labor market as their productivity cannot meet the ever-increasing minimum wage standards.

Despite the popular public perception that the minimum wage is a humane policy design to help the poorest among us, the historical origins and consistent results of the minimum wage refute such belief. The minimum wage was originally designed to protect skilled, unionized (and usually white) workers from cheap labor and the socially “unfit.” That cheap labor, both historically and presently, has mostly been comprised of unskilled, inexperienced, uneducated, disabled, and delinquent persons – the “undesirable” workers who “pollute” the labor force according to eugenicists – willing to work at low wages to provide for themselves and their families. Demographically, black Americans, various immigrants populations, and the poor in general have comprised this social group. Thus, in practice, and despite the good intentions of policy-makers today, the minimum wage ends up being an anti-black, anti-immigrant, and anti-poor policy that denies jobs for those who desperately need them the most. If you support the minimum wage today, whether you realize it or not, you are supporting a discriminatory and unjust policy that hurts blacks, immigrants, and the poor. Knowledge of the nefarious origins and devastating consequences of minimum wage laws for these individuals should compel us to work to end this destructive public policy.

The Moral Argument Against the Minimum Wage

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.