Introduction to Economic Reasoning - Chapter 7: Minimum Wages and Wage Controls

Minimum wages and wage control are no different from the discussion about price control. Still they are very important topics associated with the notion of equality.

Many people express concerns over the presence of income gaps. It is often taken for granted that the more equality there is in income, the better.

Advocates of equality often demonstrate its inherent goodness by asking whether it is fair that a millionaire should pass by a homeless person without sharing any of his income. Gordon, acknowledging the anecdote might say something about helping the destitute, disagrees that it makes a persuasive case for equality. Gordon doubts whether an equality advocate would say it is unfair that a billionaire pass by a millionaire without sharing his wealth as well. If not, then what does then what is the status of equality?

Wages, like prices, are set by demand and supply. A wage earner is free to accept or not accept a wage offered him. Demand and supply are brought into balance. Should the government impose higher wages, more people will want to work for that wage, but at the same time fewer suppliers of labor will be able or willing to supply it at that price. Demand and supply are thrown out of balance which creates unemployment.

Like price controls, wage controls may or may not affect unemployment. If the minimum wage is set below the market wage, or the market wage is expected to climb above the minimum wage, the wage control will have no effect on unemployment. Wage controls either cause unemployment or do not affect employment.

It does not follow that the minimum wage is bad because it causes unemployment. As with price controls, one may argue that there are other benefits the minimum wage provides that are more important than resulting unemployment. The problem, however, is that many who advocate the minimum wage do not acknowledge that it causes unemployment, and do not cite any benefits that outweigh this cost.

Some economists argue that there is a zone of indeterminancy around a given market wage. Wages are not exact, but can be set within a narrow zone without affecting unemployment. The problem with this theory is that there is no proof that a zone of inderterminancy actually exists. No argument is made that such a zone exists for the prices of material goods. Why should it exist only for labor and not other goods? Furthermore, even if the zone does exist, why assume most wages will end up at the bottom of the zone, and not the top? Also, if wages end up at the bottom of the zone, should one accept the government must intervene to correct this?

It is not just the minimum wage that causes problems. Income includes not just wages but benefits. The government mandates that employers offer certain benefits and pay certain taxes and fees to support social programs like social security. Like the minimum wage these also increase employment costs and cause unemployment.

Labor unions also cause unemployment by forcing employers to raise wages. In a free market unions cannot ask for more than the market price. With the protections given to unions by the federal government, however, they can coerce employees to raise their wages. This also contributes to unemployment.