On the morality of minimum wage laws

Listening to a podcast this morning that briefly talked about minimum wage laws, my mind drifted to a slightly different framing of the issue than I typically consider and wanted to jot down some quick thoughts for posterity.

When considering minimum wage laws, I believe one should always reflect on the wisdom of Frederic Bastiat:

In this case, the obvious visible effect (the “seen”) of a minimum wage law is that some people who are working for wages below the new minimum will receive a pay increase which would benefit that person and their family. But what are the other effects that must be foreseen? And what can we say of the morality involved? To examine the situation, I will construct a simple example society to run through the possibilities.

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Welcome to Bastiatville

Bastiatville is a very small society located on a remote island with no connection or communication to any other group of people. There are 100 inhabitants on the island and the government consists of a council of 10 people who make laws and regulations. One citizen, Fred runs a pizza restaurant where he employs 3 of his fellow citizens. This is the 1st job for these 3 employees (and Fred’s Pizza was the 1st job for several other fellow citizens), and as such, their compensation is not very high at $8/hr. All other businesses in town require higher level of skills and thus pay substantially more (all other businesses pay at least $12/hr).

Some folks in town (including several powerful city council members) believe $8/hr is too low for anyone to work and propose creating a minimum wage of $10/hr. When the city council unanimously approves this measure, the local papers enthusiastically report the news of how the generous council members are helping the poor in the community.

Let’s now consider whether possible effects of this can be foreseen. Note these are not mutually exclusive, there can be a combination of these effects (and others):

• Possible effect 1

  • With the 20% increase in labor costs, Fred determines that he can no longer afford to employ 3 people. He decides to lay off the least experienced (and productive) of them & Fred will need work additional hours himself to make up for the work employee 3 was doing.

Morality check: The council (10 people) has decreed that 2 of Fred’s employees shall receive a pay increase (yay!), while the 3rd will be unemployed (the least productive of Fred’s employees is unlikely to find another job in town when all other businesses are paying $12/hr). In addition, this scenario increases Fred’s workload, which as the owner of the company essentially implies a pay decrease per hour worked.

• Possible effect 2

  • With the 20% increase in labor costs, Fred needs to raise the price of his pizzas in order to make a sufficient profit.

Morality check: The council (10 people) has decreed that Fred’s 3 employees will receive a pay increases (yay!). Unfortunately all 100 people in town will now pay more for pizza, resulting in either eating less pizza than they would like or sacrificing some other goods or services they would buy with the money they are now using to cover the higher pizza costs.

• Possible effect 3

  • With the 20% increase in labor costs, Fred decides he needs to reduce other expenses and therefore cancels his plans to have Bastiatville’s best artist paint a mural in the restaurant.

Morality check: The council (10 people) has decreed that Fred’s 3 employees will receive a pay increases (yay!). Unfortunately, the town artist will no longer be contracted for a mural to be painted in Fred’s restaurant. This represents a pay decrease for the artist as well as loss of beauty within the restaurant that may have been enjoyed by Fred’s employees and patrons.

• Possible effect 4 (the one they all want)

  • Fred does not change his staffing, his pricing, or his planned projects, he simply is resigned to bringing home less pay than he previously did before the minimum wage law.

Morality check: I am confident this is the scenario politicians are hoping to occur when they enact minimum wages. They are hoping that Fred will not reduce his staff, not raise prices, and not reduce his business with other providers. The politicians are hoping a fat cat like Fred will just absorb the additional labor costs, and his filthy profits will be reduced. Let’s examine how effed up this is, shall we.

In a town of 100 people, Fred alone has provided employment to 3 low skilled workers (I say “alone” because if other businesses were willing to employ them for the $12/hr they are paying, presumably these 3 workers would decide to work there). A council of 10, through their generosity and wisdom, have determined that Fred is not paying them enough and votes to raise their wages by 20%. The council’s intent is that Fred, and Fred (and his family, presumably) alone, should bear the costs of this pay increase. Three people get pay increases (yay!) and Fred pays all the cost. How is this generous or moral on the part of the council? Any of the council members could run a business and pay Fred’s employees more than Fred is paying. If I pledge $1MM to a charity and force someone else to pay for it, that is not generosity (or moral) on my part. It would be particularly galling if the person I made pay for it was already the person who had done the most to benefit that charity in the 1st place (as Fred is the person already who has done the most to benefit the incomes of his employees).

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As with what seems like an increasing number of things in our world today, it would seem the general narrative is completely backwards. Politicians who enact minimum wage laws are not acting in any morally justified way…. they are simply decreeing from on high that some people deserve a benefit (the “seen”) while others (not them!) should pay for it (the “unseen”).