I was on my drive home from work today when I ran across a fairly uninformed argument concerning the idea of a global minimum wage on one of the XM stations. It's a talk show that I often listen to as I make my way around the belt. The show is set up similar to the Howard Stern show and the subject of politics or economics rarely comes up. I managed to come in on the tail-end of it.
A couple of the show's hosts were batting away some of the callers' pessimisms about the idea. Granted, the callers were doing a pretty terrible job of defending against the suggestion, but nevertheless I was kind of surprised that the hosts were actually advocating the idea. I was dismayed by the fact that no one called in (that I heard) to make some of the more obvious and concise arguments against the idea of a global minimum wage...or a minimum wage at all for that matter. It made me wonder exactly how many people out there would actually advocate something like this without even thinking about it. And then I got a little scared thinking how few people would probably actually oppose it. So I thought that I would try to explain to those who might be unsure as to why this idea is and should be dead in the water.
Lately, I've been thinking more and more about how some basic economic concepts elude people so much that the only true way to appeal to people is through the ethical prism of any given political action. In homage to Rothbard, I have to first insist that I oppose any form of minimum wage simply because I believe it violates the premise of natural law: the freedom of individual beings to associate and negotiate with others as they see fit. For the same reason it would seem crazy to force a child selling lemonade on a street corner to sell it for a minimum price, so too is it crazy to force producers and consumers to pay minimum costs for labor. If someone wishes to sell their property, time, or labor for X and I wish to purchase it for X, that is between me and that person, and any disruption of this dynamic would clearly be a violation of property rights and more generally freedom itself.
A second, and possibly more obvious, point I'd like to make before delving into the economics of it all is that as government structure currently exists, there is no vehicle to enforce ANY kind of international law. Simply put, what sovereign global governing body would enforce such a law? Some may say the UN in haste, but the UN is not a sovereign body. To the contrary, the UN is a VOLUNTARY organization made up of sovereign countries. Any agreements or so called "international law" considered in such organizations are really just reflections of mutually agreed upon legislation in cooperating sovereign countries. There are no global executives. There are no global justices. Short of invading various sovereign nations or placing sanctions against them, these co-ops have no power over any other countries. No such body, as things are today, exists to carry out such a law.
Now to the good stuff:
The argument of minimum wage, whether local or global, gives us a great opportunity to examine the great lesson of Henry Hazlitt. Here we have a classic example of what is seen and what is not seen. So, what is "seen" when we discuss raising minimum wage? What most people see is a higher wage and thus a higher standard of living for those who undertake the most remedial jobs (this in itself is a mis-labeling but I'll address this another time). And this general concern for the welfare of others is what inspires most supporters of minimum wage to blindly accept the need for such regulations. But what about the implications of such a move is unseen?
To understand what is so wrong with the ideas of our well-intentioned friends, we must first understand the nature of prices and money in any economic system. Price, in and of itself, is simply the aggregation of individual value-based decisions made by consumers. The concept of collective pricing isn't in itself hard to understand. But what has plagued economists for years is the idea of value. Even great economists like Adam Smith struggled with the idea that something without much utility (like diamonds) could outweigh the value of something so desperately needed (like water). To make a long story short, the marginalist revolution of the 19th century (through great economists such as Carl Menger) revealed that all values are ultimately subjective. It is now widely understood that collectively these values determine the price of goods and services...not utility...not the costs of production...just simply the collective cardinal value of such items.
Money is simply an accepted medium of trade. It doesn't have to be coin or paper...it can be gold nuggets or even wool or cattle. It is simply whatever people ultimately choose to trade with. This medium is what peoples' subjective values are pressed against to determine price (in terms of the medium). The numbers associated with prices simply reflect the scarcity of the medium against the value of the good. For instance, if there are 10 identical houses in an economy, and 100 gold bars then each house would be worth 10 gold bars. However if we introduced 5 identical cars into the economy, as long as people desired them, we would find that their subjective value system would now reflect the subjective worth of the cars as well as the houses. We may expect to find that houses may now be worth 9 gold bars a piece and the cars may be worth 2 gold bars. We can see in this way that what anything is worth in terms of a monetary medium is simply based on the total amount of the medium and the total wealth of the economy. This understanding is essential in realizing why wages cannot be raised arbitrarily without negative effects.
Many people don't consider it this way (unfortunately) but wages are actually a market price. It is the price of contractual labor in any given capacity. In the same way that the collective value of the product determines the overall price of the product, so too does it determine the price of the labor that contributes to its creation. This is part of the theory of marginal productivity. While we learned earlier that the cost of production (including labor) does not itself determine the price, we realize it's impossible for a business to create a product for more than the public's subjective value will yield it in terms of market price. For this reason employers, particularly large ones, must consider the marginal value of each additional worker. That is to say, they must examine, against the law of diminishing returns, what number of workers for what price will be the most productive and not cause him to lose money. This complex system (whether it forms intentionally or organically) is largely what decides the price of wages.
So now that we have a passive understanding of these subtle economic phenomena, let us consider what might happen if we decide to arbitrarily raise the wages (ie: cost of labor) for all workers compensated under a chosen level. We discussed how price is determined by collective subjective value against a fixed amount of money. By raising wages through regulation without a) growing the actual wealth in the economy or b) adding additional base-money units to the economy, we are going to affect the basic coordination value of prices in a very negative way.
The first and most immediate thing that all businesses will need to address are operation costs. One of several things can happen if an employer finds themself in a position where the cost of employment is increased several fold. Obviously the best outcome would be if said businesses had enough capital to continue paying their employees the new wage while doing whatever restructuring they may need to do. But for most businesses, particularly small-to-medium size businesses, employees will find themselves subject to the blade of marginal productivity costs. If an employer has figured that he gets maximum productivity by hiring ten retail salesman at $6.00 an hour because he has calculated their marginal productive value to be $8.00 an hour, then what is he to do if these wages are artificially raised to $10.00 an hour. If his workers only bring in what amounts to $8.00 an hour, then he will obviously start losing money very quickly unless he readjusts. His only choice is to reduce the amount of employees until their marginal productivity justifies their wages. In this case, it is very obvious that reducing wages can easily contribute to increased unemployment. What's worse is that even though the employer may be able to pay his workers and stay out of the red, his company, on the whole, will now be far less productive with less workers to deal with customers. This will also make it much harder for the employer to accumulate additional capital which may ultimately contribute to added worker productivity or even more workers. In this way, arbitrary wage increases, much like a tax, actually discourages new employment, particularly in businesses that deal in lower order goods and services (which tend to consist of the low-income workers these people claim to be trying to help).
But the negative consequences of wage controls don't stop there. We discussed how at any given point in time there is a fixed amount of a given monetary medium. So without increasing the monetary base, we can understand that if we are forced to pay more for one good, we must therefore spend less on other goods. Sometimes it is useful to shrink macro-economic matters into more understandable examples. Let's suppose that you represent the whole world economy for a week. You have $150. This represents all the money in the economy. And the goods and services in your town represent all the goods and services available in the world this week. Gas normally costs you $20. Food normally costs you $80. Clothes and various household items normally costs you $50. The government has decided that item-checkers and courtesy-clerks at your food stores aren't making enough money. They pass legislation to double their wages. As a result, your food now costs $130 a week for the same amount of goods. You now have a serious dilemma. The money in the economy (your wallet) hasn't magically increased. The wealth (amount of goods and services) haven't either. You obviously place a primary value on food so you reluctantly purchase $130 worth the groceries for the week. You realize that without gas you cannot get to work and earn another paycheck. On your way home you fill up your tank on your last $20. So what are the results of these choices?
The results are two-fold. While you have surely helped the people working in the grocery store by paying their absurd prices and supporting their newly increased wages, you've now neglected to spend the usual $50 on clothes and various household items. Who gets hurt by this? Most obviously the people who produce those clothes and various products are now hurting because of those shoes or that bottle of detergent you didn't buy. In this way, we realize that we cannot truly subsidize any given industry without hurting another. Our well-intentioned friends have fought valiantly for a better standard of living for their grocery-store workers, but they have unwittingly crushed various other businesses because they have failed to consider where the additional money you now spend on food went to before their ridiculous regulations.
But someone else was considerably hurt in this analogy. Can you guess who? It's you. Increased costs have meant that you now have to deal with that torn shirt instead of buying a new one this week. Before the legislation, you could have purchased the same amount of food and gas as well as purchased additional clothing and other goods. Arbitrary wage-fixing has actually diluted the purchasing power of your money. Such regulation in the real world causes a shift of consumer investment from long term capital-driven investments in higher order goods (computers, planes, cars) to lower order consumer-based goods (like food, clothing, etc.). Since our money would buy less in the long run after purchasing the lower-order goods we need from week to week, we would obviously have to sacrifice supplemental spending on things we don't really need as much like TVs, computers, and cell phones. Now take our little thought exercise back into the real world. Now we're not just talking about you...we're talking about everyone. Everyone is now having to make the choice between food and clothes in any given week. And subsequently, what happens, as we discovered, is that the standard of living of the average consumer is actually lowered! This happens when the government arbitrarily raises the price of anything in an economy. Whether it's raising minimum wages or levying taxes on gasoline...the consumer always pays...and their standard of living suffers from it.
There are several other negative effects of wage and price controls, but there are economists (even very liberal ones) who could wax and wane on it far more eloquently than me. But my hope is that the basic thrust of why such regulations should be considered more seriously before being turned into law will be acknowledged more readily, and that people may generally be more critical of government action in all forums. Understand that my view, and likely the view of many economists, is not that we wish those who receive low compensation to suffer lower standards of living. It's rather that we hope to educate people as to why payment structures exist as they do and what the repercussions of meddling with such structures may be. In either case, understand that I and others like me do not wish to keep any group of people poor by refusing to help push them all up arbitrarily so they can reach the bar. We simply feel that the true road to prosperity is ultimately the production of wealth, and subsequently continuing to pull the bar down until everyone can reach it.