The two recent, but not new, political solutions for income inequality (aka income redistribution), are extending unemployment benefits, and raising the minimum wage. In this post we will look at the consequences of the political solution, “raising the minimum wage”, but first lets start with an understanding of the nature of exchanges.
TYPES OF EXCHANGES
The free market is nothing more than individuals making voluntary exchanges. What is produced and consumed in the free market is the result of these individual decisions. All actions by individuals are exchanges, whether it’s an isolated exchange or an exchange involving other people.
An example of an isolated exchange would be you deciding to run on your treadmill. You are exchanging the time on the treadmill for other activities that could have been done with that time and at that time. This exchange reveals your value preference no matter what you might have said about that preference before your choice. Value is revealed in action and not one second before the action takes place.
Examples of exchanges between individuals, or interpersonal exchanges, would be you exchanging your labor for money, you exchanging that money for a treadmill, a steak dinner, a ticket to a baseball game, or having your roof repaired. These voluntary interpersonal exchanges increase the value for both parties involved, or they wouldn’t have taken place. Put another way, each person values what they are receiving in the exchange more than what they are giving up.
Are there involuntary interpersonal exchanges, or exchanges an individual wouldn’t choose unless he was forced or defrauded? Yes: examples of these involuntary interpersonal exchanges would be a robber taking your wallet at gun point or under the threat of physical harm, a slave owner taking the labor of the slave under the threat of violence, or a counterfeiter stealing what you’ve produced in a fraudulent exchange of something for nothing. So, in review there are two types of exchanges, isolated and interpersonal, and there are two types of interpersonal exchanges, voluntary and involuntary. Now lets look at raising the minimum wage and extending unemployment benefits through this lens.
THE REALITY ABOUT LABOR AND WAGES
When Government officials make a law raising the minimum wage, it voids the wage contract voluntarily agreed on by the employer and the employee. Each person in this exchange decided that the terms of employment were beneficial, or their wouldn’t have been an exchange of the labor for money. The Government is a third-party to the exchange between the employer and the employee. It forces an agreement on both parties that one, or both, would have never decided to make under a voluntary situation. It forces an involuntary exchange to be made.When Government officials mandate a higher wage, the employee would obviously like this exchange of his labor for more money, but the employer wouldn’t voluntarily make this exchange. What if Government officials mandated all wages be lowered? The employers would like these new terms, but the employees wouldn’t voluntarily make this exchange. Labor is ruled by the same economic laws as every other good or service supplied in the market, in spite of the Marxist brainwashing about the specialness of labor, that has taken place over the last seventy plus years.
We know from the law of supply and demand that more is demanded at a lower price than a higher price, and more is supplied at a higher price than a lower price. We have this concept of supply and demand bass ackwards when it comes to labor because we think the supplier is the employer and the demander is the employee. In reality the demander of labor is the employer and the supplier of labor is the employee. The employee is demanding money, not a job, and the employer is supplying money, not a job. When a wage is high, workers will supply more labor at this higher price than they would supply if the wage is lower. When the wage is high the employer will demand less labor than he would demand if the wage was lower. This applies to labor in general, but labor is more complex than this.
Labor is not homogeneous it is specific. Labor can be broken down into specific general categories like construction, healthcare, food services etc; and each general category can be broken down into specific jobs with specific skills like welder, plumber, doctor, nurse, cook, server etc. Each specific skills value is determined by the demand for that skill, balanced by the supply of that skill. If there is a high demand for a skill that’s rare, the price for that skill will be high. If there is a low demand for a common skill the wage will be low. The combinations of how much demand there is for a skill, and how rare or common it is, determines how much money that skill can demand, and how much money the employer will supply.
The demand for NFL quarterbacks is limited to the number of teams in the NFL, 32, and there is no real demand for this skill outside of the NFL. There are roughly 64 quarterbacks in the NFL, counting starters and backups, and these 64 are demanded differently. The demand for the skill level of Tom Brady or Payton Manning is greater than the demand for the skill level of Ryan Mallet or Josh Johnson, and this difference in skill level determines how much money each can demand.
Millions of people have the ability to dig with a shovel, making it a common skill, and if you add to it the fact that we use machines to dig, we get a situation where there is a large supply of potential labor for the low demand job of digging with a shovel. The result is a low wage for that particular skill. The varying combinations of the supply for specific labor, and the demand for that specific labor is why wages differ. If you factor in the reality that these combinations are constantly changing, because technology and innovation are constantly changing the supply and demand for labor, you have a situation where no one politician or bureaucrat, or group of politicians or bureaucrats, could possibly have enough knowledge to arbitrarily set wages. Although they certainly have enough arrogance and ignorance to try.
GOVERNMENT MANDATES VS. INDIVIDUAL CHOICES
There is one factor these moral crusaders fail to think about when they make these third-party mandates. Individuals may not comply. In an involuntary interpersonal exchange, like robbery at gun point or forced slave labor, the person being robbed or enslaved can simply not comply and accept being beaten or killed, or he may fight back if he thinks he has a chance of prevailing over his aggressors. In the case of the minimum wage being artificially raised above what labor produces, the employer has options besides complying with the law. The employer can 1)use capital in place of labor, 2) get rid of, or not hire low skilled labor and spread the work among his higher skilled employees, or 3) a combination of the two.
CONCLUSION
The reality is, when the price of labor is artificially set above the cost of labor, there will be less labor. Raising the minimum wage increases unemployment. Politicians really don’t care about the reality that their minimum wage mandate will hurt the people they say they are trying to help. Politicians are only interested in how morally righteous they look in the fight against income inequality. Low skilled workers are being sacrificed on the altar of politics, because political reality is the only reality that interests politicians.
Related Article – Minimum Wage Laws Create Unemployment, by austrianaddict.com.
Related Article – Politics And Minimum Wage, by Walter E. Williams, at jewishworldreview.com.
AUSTRIAN ECONOMICS ADDICT 