Think Freely Media presents Common Sense with Paul Jacob

dollarscentsMost folks think minimum wage laws exist to help the poor in particular and everybody in general. But most economists have known better, and for a long time.

Economist Scott Sumner, exploring “Britain’s new minimum wage: Is there a hidden agenda?” finds Britain’s new Tory double whammy of decreasing welfare payments while hiking mandatory minimum wage something of a mystery:

Why would a Conservative government sharply increase the minimum wage, in a budget that in many other respects favored small government? The minimum wage is currently 6.50 pounds/hour, and 9 pounds/hour is almost $14/hour in US terms. Also recall that average incomes in the UK are lower than in the US.

He finds a possible reason: to dissuade immigration. Migrants usually have low skills, in part because of language difficulties, so they cannot command high wages — market wages, of course, being defined by worker productivity.

Could the new minimum wage be there to influence migration without doing so directly? England, after all — like France and Sweden and other European countries — has something of an immigration problem. Not only are all new workers not exactly peacefully and productively acclimating themselves to their new countries, but the political culture disallows native Englanders (and French, and Swedes) from rationally dealing with the issues presented. So a dishonest sub rosa solution is the most “politic” option. (Which is not to say “best” option.)

At this point, however, we should probably take a step back. Some readers will wonder, what’s all this cynicism about the minimum wage?

Well, economists have expressed this “cynicism” for a long time. The legislation does not do what many people naively think it does.

There are at least two reasons for skepticism about minimum-wage legislation.

First, the “minimum wage” does not hire anyone, or guarantee anyone a job at the set wage. It is a price floor. The wage is the price of labor. The regulation prohibits hiring workers for wages less than the minimum rate, or price. The form the regulation takes is that of a prohibition backed by force.

As such, and on the first level of analysis, it more likely disemploys people than employs them.

Thus, while we are taught that a “minimum wage” raises wages, it does the opposite.

People confuse a government edict with actual job offers.

Second, wages in normal markets are set by supply and demand, with productivity and competition setting limits. This gets complicated, but you can look at it like this: though the initial source of wages is the capital from investors (“capitalists”), these people expect a return on their money, and they invest to make a profit. So whatever it is that the workers produce — in combination with productive goods and other inputs, as managed by entrepreneurs — is the real source of their wages. That is, consumer demand for their services or widgets is what pays for their wages.

That’s the upper limit. If the business does well, it can pay its workers more. If it sells nothing, ultimately, the workers get nothing. (Actually, investors “take a bath,” but you see the point.) What a worker produces, his or her productivity, is the upper limit on the wage. And that depends on sales, and on collaboration with all the other people in the firm.

So, whenever the price of an input goes up — labor being one input among many — entrepreneurs try to shift the various inputs to keep profits coming in, or return to the previous level of profits. (Profits being, once again, the reason to go into business. Businesses don’t exist to hire workers; businesses hire workers to make profits.) So, after a period of adjustments, entrepreneurs who actually employ low-wage workers (not all do, not even most do) who now have to pay more, face tough choices. If the workers all do produce enough to cover their higher cost, no big deal — but this is rare, since the reason they weren’t paid more before was likely the result of the fact that they didn’t contribute more. So they tend to alter the production process to automate more (thus employ folks less), either firing the least productive workers or not hiring replacements when it would have been previously required.

This is all old hat. It is standard economics. It should shock no one. Sure, it gets complicated, but those complications don’t really change the basic picture.

The aforementioned economist Sumner goes on to discuss the racist origins of the minimum wage in America, Australia, and South Africa. The purpose in those cases was to hurt poor workers. Intent was pretty clear. Minimum wage laws were established to protect white workers from cheap competition by darker skinned folk.

This is also not news. Like drug laws, minimum wage laws have a long and ugly history, and the ugly parts are clearer when you study the regulations’ early history. The rise of white unions in South Africa, very clearly showed the widespread understanding among even common people that the purpose of the minimum wage was to disemploy, not increase the wealth and welfare of the poor.

Indeed, some economists of the Progressive Era in America supported the minimum wage precisely for “eugenics” reasons — to make it harder for poor non-whites to reproduce. If they can’t easily make a living, they can’t afford more children. The minimum wage was explicitly seen by more than one economist as a way to curb population growth of “undesirables.”

Now that’s cynical.

Sumner’s postscript is interesting: “The [American] Democratic surge of interest in the minimum wage occurred soon after the GOP surge of interest in immigration restriction. Let’s see if the GOP jumps on the minimum wage bandwagon.”

Will the Republican Party be that cynical? I don’t know. Sumner may be right about Britain’s Tories, I suspect. They are that cynical.

And they can get away with it.


For every advocate of a class-based, favoritist policy who argues deceptively — for every knowing proponent of the minimum wage — there are dozens upon dozens who are merely mistaken, who think raising the minimum wage helps the poor. And the true cynics can take the naivety of the masses and try to shame economists and those like me who see the minimum wage as a major cause of unemployment — of, indeed, permanent underclass unemployment — and who see this as a bad thing.

We who oppose the minimum wage do not do so because we “hate the poor.” We oppose it because we want to encourage human betterment specifically for the poor.

Paul Jacob, July 12, 2015

This column first appeared at

© 2017 Common Sense with Paul Jacob, All Rights Reserved. Back to top