Wednesday, September 9, 2020

 Week 15: Minimum Wage

 

A popular, evergreen topic to curry favor with some citizens and to secure their votes is that of the minimum wage. People in entry-level positions have a natural self-interest to increase their wages. Those about to enter the workforce have a natural self-interest to do so at the highest possible wage. Others may have a natural self-interest to feel good knowing that those in the former groups have a higher wage on which to live. And unlike many of the other topics we have discussed, which would disappear as election issues if they actually were fixed, there is no end to the political use of wage controls, as they can always go up.

 

In 1912, the State of Massachusetts passed the first minimum wage law in the United States, “An Act to establish the minimum wage commission and to provide for the determination of minimum wages for women and minors.” The act established a three-person commission to determine whether wages in various industries covered the “necessary cost of living and to maintain the worker in health.” The 1912 Massachusetts regulation was not an across-the-board approach. If an industry was of concern to the commission, it would establish a wage board to recommend a minimum wage for workers of average ability in that given industry. Exemptions could be made for workers of lesser ability, or “physically defective,” as the act characterized such human beings. The act applied oversight provisions, which included the publication of scofflaw employers in the newspaper. Any paper that refused to publish such lists or any other notices of the commission (which included provisions about the font size to be used by the paper) were subject to fines. So much for the First Amendment and freedom of the press. 

Contemporary economists, politicians and so-called social reformers were more transparent in terms of their singular goal in establishing a minimum wage: protectionism, specifically as it relates to job security for white men, even more specifically for unionized white men.

According to an April 5, 2016 op-ed in the “Los Angeles Times,” “Journalist and progressive social reformer Paul Kellogg in 1913 advocated a minimum wage of $3 per day for all immigrants, double the $1.50 per day ordinary laborers were then paid. Kellogg knew that no firm would hire an unskilled immigrant for $3 per day. That was the purpose of his high minimum wage, as he wrote, to exclude ‘Angelo Lucca and Alexis Spivak’ from American shores, thus protecting American jobs for ‘John Smith and Michael Murphy and Carl Sneider.’”

As Congress debated the Fair Labor Standards Act in the 1930s, Texas Democrat Martin Dies stated on the floor of the People’s House (i.e., the House of Representatives), “you cannot prescribe the same wages for the Black man as the White man.” At the time, Black people experienced higher employment rates than White people, due in great measure to the fact that Black workers, just a generation away from emancipation and post-Civil War reconstruction, were willing to work for lower rates. Politicians, primarily Southern Democrats, like Mr. Dies, sought the minimum wage in order to decimate the Black workers’ competitive advantage in terms of the wages they were willing to charge and, consequently, the employment they were able to obtain. Another Congressman, Miles Clayton Allgood, D-Alabama, stated that the minimum wage would eliminate “cheap colored labor in competition with white labor.”

Government intervention, via a minimum wage, eliminated the incentives of the free market. In the pre-minimum-wage market, a racist would incur a financial penalty for his or her bigotry. In many cases, the bigot would have to pay more for organized White labor. While some trade unions of this time had stated anti-racism platforms, they still tolerated and enforced segregation in practice. By establishing a minimum wage, the cost for racist hiring decisions was reduced to zero. The racist no longer had to pay more to hire a White worker and could no longer pay less for a non-White worker. The penalty for racism (and sexism for that matter, as early wage laws targeted women, too) was gone.

The shift in employment began, and Black Americans began to find themselves forced out of the labor market, that is until the present administration. Prior to the COVID-19 pandemic, employment statistics were at the most favorable levels since such statistics began being reported. 

That is the ethical argument to consider when contemplating government wage controls in a society that claims to be free.

What of the economic argument?

Let us, kind reader, consider a simple example: the loaf of bread. I purchased a loaf of bread today for $3.17, and I made a couple grilled cheese sandwiches to dip in some tomato soup. With a high of 57 degrees, it seemed like the perfect meal. What goes into the cost of that loaf of bread? Ingredients, such as flour, yeast and water (to name just a few) are obvious costs. The machinery to plant and to harvest the wheat, process the yeast, provide clean water, etc.; and the facilities and equipment to mill the wheat and to bake the bread are all “baked” into the cost of each loaf. Packaging, delivery and marketing expenses, as well as allowances for unsold loaves are factored into the cost. Each step described above are performed by someone, be it a person doing manual work or running a machine. The cost of labor is, by far the most expensive factor in the price of bread. There also must be allowance for profit, so that investments may be made in innovation, replacement of equipment, and the like, as well as returns to investors, be they day traders or investors like me – and perhaps like you – who invest through our retirement programs, like 401Ks.

Recognizing this fact, each increase in the minimum wage necessarily increases the price of goods and services you and I consume.

Proponents of the minimum wage refer increases in average household income associated with increases in the minimum wage. For a limited time, this is true, as it takes a short period of time for businesses to adjust prices to account for increased labor costs. There is some elasticity inherent in the cost structure. Eventually – and it doesn’t take too long – prices will rise, minimizing the short-term, favorable effect of increased wages. Soon follows the unfavorable effects of artificially increased wages. In real terms, people have less buying power than before the wage increase. Consequently, renewed calls for another increase in the minimum wage are heard in the halls of Congress and on the campaign trails. It becomes a never-ending, vicious cycle.

What of justice?

As discussed in Week 51 and Week 49, the educational system has been designed to repress the impoverished and those in certain minority groups. How does this relate to the discussion at hand? It’s simple. The government provides inadequate educational experiences for those most in need. With some notable exceptions, many people leave high school without the requisite knowledge, skills and abilities to enter college or the job market. In the past, prior to ever-increasing minimum wage requirements, people with lower knowledge, skills and abilities could find entry-level employment by demanding less from employers for their labor. In such positions, they could build their skills quickly, empowering them with enhanced capabilities to take on new, higher-level, better-paying jobs. With increases in the minimum wage, employers are inherently discouraged from hiring such individuals who, deprived of a solid educational experience by our government, have fewer skills. People who find themselves in this situation are, because of the minimum wage laws, prohibited from working for less in the near-term to build their skills in preparation for long-term financial security that comes from higher-level jobs.

Such a system reinforces cross-generational poverty and despair. It is a major cause for the growing chasm between the haves and the have-nots. And this poverty, this despair, this chasm, all of which separate one citizen – one human soul – from another, represent the nation’s very blood, which may be found on the hands of the political establishment.

As you consider the votes you will cast in November, reflect on who will perpetuate this system and it’s hidden and corrupt intentions and who will set the markets free to restore the equality that can only come from voluntary exchange, free markets and freedom itself.

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