Minimum Wages; H. Sennholz

The minimum wage movement came into existence, in concert with the union movement, as a conse quence of severe criticism of "sweat shops" in the homework system, which permitted employees to per form manufacturing services at home Dr. Sennholz heads the Department of Economics at Grove City College in Pennsylvania. He is a noted writer and lecturer on economic, political and mone taryaffairs. 270 rather than in a factory. The sys tem, which enabled women and chil dren to participate in simple produc tion, constituted a major threat to the union movement. To eradicate this threat and all other competition from low-cost labor, labor unions, since their very beginning, have called for government intervention. Minimum wage legislation origi nated in New Zealand in 1894 and came to England in 1909, when Par liament established trade boards with the power to fix minimum rates. In the United States, the movement at first was confined to state legis lation applicable to women and chil dren only. The federal government entered the field during the 1930s when it passed labor laws with lim ited application, such as the BaconMINIMUM WAGES 271 Davis Act of 1931, the Walsh-Healey Public Contracts Act of 1936, cer tain provisions of the U.S. Housing Act of 1937, the Sugar Act of 1937, and the Civil Aeronautics Act of 1938. In the same year, the Fair La bor Standards Act provided much broader coverage and established a minimum wage level of 25¢ per hour, covering employees of all businesses engaged in interstate commerce or in the production of goods for such commerce. Later amendments to the F.L.S.A. raised the minimum wage to the present level. 1 There is an infinity of political er rors which, once adopted and en acted, become principles of states manship. Labor legislation summarily disposed of the home work system and then set out to raise wage rates and improve working conditions by political force. To most political parties this is supreme statesmanship that takes prece dence over all other considerations.

But unfortunately, it is also the root cause ofm~.ss unemployment that is inflicting immeasurable harm on millions of innocent victims. An unhampered labor market of fers opportunities to anyone seeking employment. The pressures of com petition by both workers and em ployers establish a wage rate at which everyone eager to work can find a job, and every employer eager to hire more help can find more workers. But when government sets out forcibly to lift wage rates above those set by competition, chronic unemployment emerges. It causes countless economic distortions, re duces economic output, lowers per sonal incomes, and aggravates the plight of the poor. A wage rate set above a person's own productive contribution causes his unemployment, pricing him right out of the labor market. Surely, minimum wage legislation does not directly affect a worker whose train ing and skills earn him a wage in excess of the minimum. But it seri ously jeopardizes the employment of all those unskilled workers who produce and consequently earn less than the minimum. In the United States, minimum wage legislation does grievous harm to millions of unskilled laborers, especially among the racial and ethnic minorities Blacks, Puerto Ricans, Chicanos, Mexicans, and American Indians.

The Victims Most critics of mInImum wage legislation do not concern them selves with the propriety and moral ity of political intervention with the production process. They accept the rationale of political supremacy and government power, but lament the evil effects of unemployment on some highly visible groups of victims, such as young people, especially black teenagers. Therefore, they are de signing special programs for teen272 THE FREEMAN May agers and other groups, calling for massive government expenditures on their behalf. Unfortunately they are overlooking most of the affected population. Recent research confirms that only about one-third of low-wage earners are teenagers, almost one-half are twenty-five to sixty-four years of age. Two-thirds of the low-wage popula tion are believed to be female, and some ten per cent are individuals sixty-five years old or older. Alto gether they comprise some ten per cent of American labor. Other esti mates are even higher. Of course, these workers who are earning the minimum or near-minimum wages are the very workers who tend to be, or are in danger of being, displaced by wage legislation. 2 It is an unfortunate fact that many minority youngsters with lower lev els of education, training, and expe rience than white youngsters, are often less productive. In an unham pered labor market they would not be able to earn as high a wage as their more productive competitors, but would find employment at lower rates. When the minimum is raised above their productive ability, they are likely to be dismissed, or not to be hired. This explains why the un employment rate of black youth in recent years has ranged between 40 to 50 per cent, which is double the rate of white teenagers. If we add those individuals who in frustration and desperation have given up their search for employment, the unem ployment rate among black youth may, in our estimate, exceed 70 per cent.

Submarginal Workers Other workers with similar limi tations find it equally difficult to find employment at the minimum rate. Unskilled women, students seeking summer employment, and espe cially unskilled service workers in hotels, restaurants, hospitals, laun dries, automotive service stations, are living continuously with the dangers of unemployment due to minimum wage increases. It is true, not every minimum wage worker loses his employment when the min imum rate is raised. Employers may seek to offset the boost with econo mies in other labor expenses or through exaction of greater effort and performance by the covered work ers. Wherever such adjustments are impractical the submarginal work ers are laid off, that is, all those workers whose costs exceed the an ticipated price of the incremental goods produced or services rendered. Obviously unemployment is more severe in industries employing a great many unskilled workers than in other industries relying mainly on professional and highly skilled labor. And it is more keenly felt in cities with concentrations of un skilled labor than in prosperous 1983 MINIMUM WAGES 273 suburbs. For the South with its mil lions of unskilled black workers every minimum wage boost is a ca lamity. In Puerto Rico it is an un mitigated disaster.

But no matter how tragic the eco nomic effects may be on certain groups of victims, we must not over look the psychological harm and the moral wrong that are inflicted on them. Condemned to idleness and uselessness in a highly productive society and barred from making their own contributions, many in desper ation are turning to vice and crime. The inordinate national crime rate attests to a moral decay that is working evil in the centers of un employment and public assistance. And let us not forget the productive members of American society who not only must forgo the valuable services which the disemployed workers could render, but also are forced to support them through tax ation and other exactions. In return, they are compelled to live in con stant fear of crimes against their persons and property. Benefits for a Few It is true a few minimum-wage earners actually benefit from a mandated increase. The law that raises the minimum renders sub marginal all those workers who produce and earn less than the new minimum. It withdraws them from productive employment and deprives economic production of their services, which affects the labor market just like the conscription of millions of young men into military service. Their withdrawal from productive employment raises the marginal productivity of the re maining workers and, therefore, in creases their wages. It also lifts some submarginal labor above the threshhold of employability. If the minimum is raised from $5 to $5.50, the most productive among the ex cluded workers will be lifted to the new minimum in a declining order of productivity, that is, first workers who were earning $5.49, then others earning $5.48, $5.47, and so forth.

But consumer reluctance to bear the higher labor costs usually sets a narrow limit to the lifting process, which consigns most subminimum workers to the new army of the unemployed. Political force may disrupt eco nomic activity and forcibly benefit some workers at the expense of oth ers. It cannot stimulate production and promote universal well-being by withdrawing millions of able work ers from economic production. If by law or decree a government actually could raise the wages and improve the working conditions of all work ers, it would be cowardly and irre sponsible to be content with $2, or $3, or $4 minimums. Let us make it $10 per hour, or better yet, $100 an hour.

274 THE FREEMAN May If a minimum wage law actually could improve the working and liv ing conditions of all people, let us urge the governments of undevel oped countries to imitate our exam ple. Surely, it would alleviate the poverty and suffering of the masses of India, China, and many African and Latin American countries. Ac tually, it would create horrendous unemployment and jeopardize the very survival of the poor. Neither the U.S. government nor foreign gov ernments can improve general working conditions by law or decree; only rising production can bring it about. Fringe Benefits Nor can a government grant so cial benefits that do not reduce the workers' take-home pay. The inci dence of any and all benefits falls on the wage earner. For an employer the worker's take-home wage is just another component of the total price he must pay for the services of a worker. He would not be an em ployer for long if he were to ignore all other employment costs, such as retirement and pension costs, paid holidays and vacations, healthcare insurance, profit-sharing plans, wel fare funds, or any other fringe ben efits. And it does not matter to him whether he may deduct the fringe benefit costs from the worker's pay or must make direct payment to third parties. In both cases the burden falls on the employee. The employer is concerned only with the total price he must pay for the services of a worker.

The minimum wage as set by gov ernment must not be confused with the total employment costs of a worker, which in every case greatly exceed the former. Corporations that offer equal benefits to all their em ployees may grant fringe benefits that amount to 35 per cent of exec utive pay and to 100 per cent or more of a minimum-wage-earner's pay. But even without any such contrac tual privileges, the benefits man dated by government do add consid erably to total costs. There are Social Security exactions and heavy levies for unemployment and workmen's compensations. The .$3 minimum wage may actually amount to $5 minimum cost, and the $5 minimum wage to $10 minimum cost. It is, therefore, misleading to speak of a "small" boost of the minimum wage rate as if the mandated and contrac tual benefits would remain un changed. The small minimum boost may actually amount to a sizable in crease in total labor cost.

For an employer it is irrelevant whether he allocates 5 per cent of employee wages to fringe benefits or 95 per cent. His only concern is the total price he must pay to secure the services of a worker. If government forces him to pay more than the worker is expected to contribute to 1983 MINIMUM WAGES 275 production he can be expected to dis miss the worker. And again it does not matter whether government mandates an increase of take-home payor of fringe costs. A $1 boost in the rate of minimum wages has the same ill effect on employment as a $1 rise in the levies for Social Secu rity and workmen's compensation. Through their labor, workers pay for all of the fringe benefits they are recei ving. They also make good for their on-the-job training by receiv ing low wages that allow for the ex penses of their training. When the minimum wage is raised employers may react to the boost in labor cost by reducing their expenditures on benefits. In particular, they may re spond by reducing the amounts spent for on-the-job training.

The Opportunityto AcquireSkills and Knowledge For young people the most impor tant fringe benefit is the opportu nity to acquire new skills and knowledge, which enhances their productivity in the future. Most jobs offer an opportunity to learn through formal training programs or infor mal learning by experience. On-the job training not only imparts basic skills, but also stimulates motiva tion, nurtures a sense ofresponsibil ity, and generally prepares young people for rewarding roles in pro ductive society. If they fail to ac quire the experience, training, competencies and credentials in their formative years, they will have dif ficulty holding regular jobs in their adult years. Any barrier to on-the job training inflicts serious harm on them. Millions of young workers who are disemployed by the minimum wage may never acquire the general training and specific skills that make them useful members of society. They may never learn the basic discipline and ethos of labor that are so essen tial in our society. Instead, pro longed unemployment so early in life may prepare them for a precarious and bitter existence on public wel fare. More millions may remain em ployed at or near the minimum, but their on-the-job training may be re duced or eliminated as a result of mandated minimum increases, which may keep them marginally produc tive throughout life. And their more creative fellowmen not only must forgo their valuable cooperation, but may even be called upon to assist them and their dependents. 3 Extensionof Coverage Federal minimum wage legisla tion had its beginning more than forty-five years ago as part of the 1938 Fair Labor Standards Act. From its very inception it erected insur mountable barriers to the employ ment of unskilled workers, espe cially in the South and in Puerto Rico. Since then it has grown into 276 THE FREEMAN May the most calamitous instrument of government intervention that den ies productive employment to mil lions of willing and able Americans.

No other policy conducted by the U.S. government has more tragic effects on the daily lives of so many people than does this legislation. Several amendments to the Act not only pushed the rate to ever more restrictive levels, but also extended the coverage to include ever more employees. At the beginning the ba sic minimum as a percentage of av erage manufacturing wage was es timated at 41.7 per cent; for 1981 it amounted to 51.9 per cent. In 1938 the percentage of covered workers stood at 43.4 per cent; in 1981 it was estimated at 83.8 per cent. 4 If the coverage provided by various state laws is added to the federal cover age, the combined rate may exceed ninety per cent of all non-supervi sory workers. 5 It is rather natural for govern ment to expand its sphere of control and power. If it is called upon to se cure minimum wages for some workers it may want to extend the benefits to all workers. If govern ment can serve the public good by setting the wage rates for some workers it may serve it better yet by setting the wage rates for all work ers. The ninety-per cent coverage, therefore, can only be an interim step on the way to total coverage.

Unfortunately, this gradual extension of coverage tends to multi ply the unemployment effect until, with full coverage, it invokes the maximum rate of unemployment. As long as the minimum applies only to a small number of occupations, the workers displaced from covered jobs can seek employment in uncovered production. They shift to uncovered industries and employers, which tends to depress those wages through increased job competition. When the coverage is extended, the shift acce lerates from covered unemployment to uncovered jobs, which widens the wage differential in direct propor tion to the coverage. A small cover age generates a small difference in wage rates, a large coverage brings forth a large difference. Total cov erage obviously eliminates the dif ference, but creates maximum unemployment. Minimum wage legislation pro vides a beautiful example of the principle that government interven tion not only makes matters worse, but also tends to breed ever more intervention. The minimum wage covering a few workers causes wage rates to decline in uncovered em ployment, which invites the exten sion of coverage to more workers, which in turn brings forth ever wider wage differences calling for more coverage, until all workers are covered and the difference is eliminated. Unfortunately, total coverage guarantees maximum un1983 MINIMUM WAGES 277 employment, which brings forth the greatest conceivable income differ ence-between the workers still em ploye~ and the army of unemployed.

Indexing the Minimum Minimum wage legislation can be harmless if the rates are set below the unhampered market rates. But that, after all, is not the intent of its political sponsors who seek to inter fere with the market process. And yet, the ominous effects of minimum wages set above the rates estab lished by the market may be alle viated by two other factors: rising labor productivity which may lift more workers above the minimum barrier, and soaring inflation which lowers minimum wages in terms of purchasing power. The former may have lessened the impact of the le gal minimum during the 1960s when labor productivity managed to rise a little. But it began to aggravate the restricti ve effect of the legal mini mums during the 1970s when U.S. government deficits consumed pro ductive capital en masse and real la bor incomes began to decline. Throughout this period soaring inflation greatly lowered the real costs of labor, including the real minimums, which permitted the temporary employment of some workers who previously had been unemployable. The opposing effects of legislative mandates raising the minimum and the inflation depreciating it, is causing large swings in the effective minimum. According to Finis Welch, they ranged between 30 per cent of the manufacturing wage average in 1949 and 55 per cent in 1968.6 Observing the depreciation of their mandated minimums the sponsors deem it necessary frequently to readjust the minimum to soaring goods prices. From 1961, when infla tion began to accelerate in earnest, until 1981 Congress enacted eleven adjustments which raised the mini mum from $1 per hour to $3.35 an hour. To simplify the adjustment process and prevent the silent nul lification of Congressional efforts by inflation, some sponsors propose to index the federal minimum by tying it permanently to the average in dustrial wage. The 1977 amend ment, which established a Mini mum Wage Study Commission, therefore called for an investigation of minimum wage, indexation.

Indexing wages, rents, interest rates, and goods prices obviously means government control over wages, rents, interest rates, and prices. It aims at freezing present conditions, preventing all future changes and adjustments unless ap proved by political authority. Mini mum indexation would seek to pre serve the Congressional effort by freezing the real minimum at 55 per cent and thus eliminating the infla tion swings. This means, unfortu278 THE FREEMAN May nately, that unemployment would be stabilized at its highest possible rate determined by the minimum. It would permanently deny millions of unemployed workers a longed-for reprieve provided temporarily by inflation. Offsets In a sagacious monograph 7 Walter J. Wessels makes the cogent point that employers tend to react to min imum wage increases by seeking to offset the added expendi tures through reductions in other labor costs. They may cut year-end bo nuses, re-define the worker's share in profit sharing, and reduce com missions and work guarantees. They may moderate non-wage expendi tures, commonly called "fringe ben efits," such as paid vacations and sick leave, pensions and other retire ment benefits, life, accident and health insurance, or training pro grams and educational allowances.

They may even reduce expenditures on proper supervision and manage ment, which tends to impair and ag gravate working conditions. They may insist on more effort and appli cation. As fewer jobs are available, employers may exact greater pro duction from their minimum-wage workers. They may assign less de sirable working hours and condi tions for which they otherwise would pay higher rates. In short, they can be expected to react by making adjustments in order to offset the min imum-wage boost. But even if some employers should be able to offset the higher costs of a mandated minimum, Wessels ar gues, it nevertheless impairs the conditions of all covered workers. They may have preferred the fringe benefits over the pay boost, the paid vacations or the major medical in surance over the cash payment mandated by Congress. Where employers are unable to offset fully a minimum wage boost, which tends to lead to disemploy ment, the idled workers will seek jobs that are not covered by the mini mum wage. Or they may join the "underground economy" where la bor summarily ignores the law by working for wages below the mini mum. But their appearance on the uncovered labor market or the un derground market, which econo mists estimate to exceed 30 per cent of minimum wage labor,8 tends to reduce further those wages. All af fected labor, therefore, tends to be worse off than before.

Surely, employers do react to mandated minimum wage in creases. But we must not underesti mate the great difficulties they en counter in lowering other labor costs. Once benefits have been granted it is nearly impossible to rescind them. To reduce benefits is to invite uni versal resistance and hostility, which may impair labor productivity and 1983 MINIMUM WAGES 279 thus raise production costs. More over, it is virtually impossible in the allocation of fringe benefits to dis criminate against minimum wage labor. This is why most employers offer identical benefits to all their workers regardless of position and income. To ignore minimum wage labor, or even slash its given bene fits, is to invite resentment, conflict and strife. It is generally much eas ier and also more economical to dis miss the labor made submarginal by the mandated minimum boost than to seek adjustment through fringe cost economies.

InspiringPerformance For superior management it may be possible to lead and exhort labor to higher productivity. There is an untapped reservoir of productivity even in the best-run office and plant. Brilliant management seeks to tap this reservoir through guiding and teaching by example. It imparts the love of work and inspires enthusi asm for work well done. And, above all, it exemplifies that there is no work so base that man may not ex alt it, no work so dull that he may not enliven it. There is no minimum labor that may not lead to maxi mum position and income. Most business managers, unfor tunately, are incapable of exacting more effort and application from their employees, which is casting doubt on their ability to offset mandated wage boosts. But even if they were able to adjust, the number of affected work ers would be rather small. Offset ting adjustments cannot create jobs for those millions of unskilled work ers whose·usefulness and productiv ity lie below the legal minimum. The high school dropout from The Bronx who may contribute one dollar per hour of work remains unemployable at $3.35 per hour no matter how dil igently employers are readjusting their labor expenses.

Offsetting adjustments do not af fect the vast majority of American workers who are presently earning \more than the minimum. They may at best involve only a small number of people who are presently earning the legal minimum and are contrib uting an amount sufficient to cover this minimum and other employ ment-related costs. In many cases these other costs are also mandated, which clearly makes them unadjust able. In fact, they actually rise to gether with the minimum wage. Employer contributions to Social Security and Workmen's Compen sation do rise and further raise the costs of the minimum wage boost. They may also add to the adminis trative expenses of accounting, withholding, declaring and disburs ing the additional funds to the ap propriate government authority. While such costs may be negligible in a smoothly functioning account ing department, they are very bur280 THE FREEMAN May densome and highly disruptive for a small businessman considering the employment of a few minimum-wage laborers.

The offset possibilities must not be overstated. They are narrowly lim ited to contractual benefits that may be adjusted by agreement between the contract parties. But in some cases these benefits are negligible. They may be less valuable than a mandated wage boost together with the mandatory fringe adjustment, which precludes any offset. If they are equal to the ordered raise, all contract fringes would have to be eliminated in order to effect any off set. But such a withdrawal of all contract fringe benefits would be even more detrimental to amicable labor relations than their mere re duction. It surely would impede la bor productivity and raise produc tion costs. From the World of Politics Every well-known economist has voiced his concern about minimum wage legislation,9 and yet, it is sur viving sober reasoning and cogent arguments and living on in the sphere of political incentives. Few Americans actually believe that minimum wage legislation is truly in the workers' interest, that it in creases purchasing power and re duces poverty. And yet, many sup port it for political reasons. Labor unions and their members benefit significantly from a legal elevation of wages paid by competing indus tries using low-productivity, low wage workers. It hampers their competition with union labor and limits consumer preference for goods produced and services rendered by low-wage labor. Similarly, capital intensive industries using relatively skilled labor may want to redirect consumer choices by raising the costs of low-wage industries.

Most of the support for minimum wage legislation comes from groups that are fully aware of its unem ployment effects. Many Americans in the industrial states of the North and Northeast use it knowingly as a barrier to the industrial migration from their states to the South. Since World War II many companies have left the North to take advantage of lower labor costs and other advan tages in the South. To prevent this industrial migration and to stifle emerging Southern competition the Northern politicians usually favor high minimum wages. Other supporters who are aware of the harm done to unskilled work ers are convinced that the beneficial effects, as they see them, tend to outweigh the ill effects. Their blind faith in political action leads them to believe that the ill effects can be alleviated by new governmental ef forts, such as neighborhood youth corps, job corps, public works pro grams, and the like.

1983 MINIMUM WAGES 281 But the most vociferous support of minimum wage legislation comes from the professional spokesmen of the poor. Some may actually wel come unemployment among minor ities because it breeds other political and economic effects and, above all, creates a political power base for the minority champions. When jobs are scarce they are likely to be rationed and allocated according to govern ment plans and programs. Ration ing bestows benefits to political con stituents and thus confers prestige and power to the program propo nents. 1O Some are also aware that unemployment tends to give rise to new demands for radical govern ment intervention, for central con trol and planning, which may pave the way for an all-round political command system, called socialism. Mass unemployment, they are hop ing, will lead voters to support their ultimate objective. i -FOOTNOTES1For a detailed chronology of minimum wage legislation from thirteenth century France to the 1930s in the U.S., cf E. R. Nichols and J. H. Baccus, Minimum Wages and Maximum Hours, H. W. Wilson Co., New York, 1936, p. 41 et seq; for an American history, cf. U.S. Dept.

of Labor, The Development of Minimum Wage Laws in the United States, 1912 to 1927, Wash ington, 1928. 2Cf. Finis Welch, Minimum Wages, American Enterprise Institute, Washington, D.C., 1981, p. 13; also Edward M. Gramlich, "Impact of Minimum Wages on Other Wages, Employment and Family Incomes," Brookings Papers on Economic Activity, 2, 1976, pp. 409-451. 3Cf. Masanori Hashimoto, Minimum Wages and On-the-Job Training, AEI, Washington, 1981. 4Cf. Finis Welch, ibid., p. 3. 5Most states have complex minimum wage legislation of their own, with rates typically be low the federal rate. In a few states-Alaska, California, the District of Columbia, and New York-the rates usually exceed the federal minimum. In other states the differential has been shrinking in recent years. 6Ibid., p. 6. 7Walter J. Wessels, Minimum Wages, Fringe Benefits, and Working Conditions, American Enterprise Institute for Public Policy Research, Washington, 1980.

80rley Ashenfelter and Robert S. Smith, "Compliance with the Minimum Wage Law," Journal of Political Economy, April 1979, pp. 333-350. 9Ludwig von Mises, Human Action (1949), 3rd ed., Henry Regnery Co., 1966, pp. 769-777; Arthur Burns, The Business Cycle in a Chang ing World, National Bureau of Economic Re search, New York, 1969, pp. 216-219; Martin Feldstein, "The Economics of the New Unem ployed," Public Interest, Fall 1973, pp. 14-16; Milton Friedman, Capitalism and Freedom, University of Chicago Press, 1962, pp. 180, 181; George J. Stigler, "The Economics of Minimum Wage Legislation," American Economic Re view, June 1946, pp. 358-365; Walter Wil liams, Youth and Minority Unemployment, Re port for the Joint Economic Committee, July 6, 1977; even Paul Samuelson must admit that minimum wage rates "often hurt those they are designed to help." Cf. Economics, Eleventh Edi tion, McGraw-Hill Book Co., New York, 1979, p.369.

lOKeith B. Leffler, "The Unanswered Ques tion: Why are Minimum Wages Popular with the Poor?" in The Economics ofLegal Minimum Wages, AEI, Washington, 1981, pp. 531-534.