Most modern countries have laws governing employee minimum wage. And though the majority of people support such legislation there are always those who oppose. Dissidents lean toward the ideals of total free market economics, where wages are left only to the market. Advocates, like labour leaders, say minimum wage is essential for protecting the working poor. Who’s right?
Let’s start by looking at early economic thinking and why this legislation was introduced in the first place. Then we’ll decide.
Adam Smith
In his book, The Wealth of Nations, published in 1776, Adam Smith presents his theory of natural versus market price. He says the natural price of labour is the cost for a family to provide for itself. And the price of labour can never go below this level because if a family cannot adequately support itself by working, capitalism doesn’t function. There’d be no end of revolutions. Then he crudely defined what adequate subsistence was. At the time, only half of all children survived into adulthood so a family required food and shelter for six (plus maybe a grandparent or two since, back then, children were your retirement plan).
Market price is what employers are willing to pay for labour, today. It’s the result of supply and demand. His theory says that, over time, market price will gravitate towards natural price. So even if the market is currently paying higher, the pull is always back to subsistence wages.
Objective
Early economists were pessimistic about the fate of labour. They couldn’t see how wages would ever get beyond mere subsistence levels. Couple this with the theory that business naturally wishes to maximize profits and you see why the push for minimum wage. It was designed to combat the natural lows of the market by ensuring the price of labour never went below its natural price. And that’s what it still is today.
So is it a sin to regulate such a thing when Adam Smith says the market will, over time, naturally correct itself? And what else are these free marketers trying to say?
Milton Friedman
Milton Friedman, famed economist from the University of Chicago, argues that minimum wage causes unemployment. He says that if minimum wage is set at $8.00 per hour, and a worker is only worth $5.00, you’re denying employment because no one will hire that person for $8.00. And if the market was left to its own devices, he or she would have a job being paid exactly what they’re worth.
Now we have someone saying minimum wage isn’t helping—it’s hurting. But Milton has obviously never run a business. In the real world, if someone isn’t worth barely a living wage, they should be fired. You can’t have that type of person influencing the rest of your staff, not to mention causing quality issues. Every person doesn’t belong in every occupation so part of the market system is for workers to find where they do best.
History
New Zealand was the first to enact a minimum wage in 1894, followed soon after by Australia. Britain brought in similar legislation in 1909 when Winston Churchill said, “It is a serious evil that any class of His Majesty’s subjects should receive less than a living wage in return for their utmost exertions. It was formerly supposed that the working of the laws of supply and demand would naturally regulate or eliminate that evil.”
Minimum wage was introduced in the US, in 1938, by Franklin Roosevelt. He introduced the .25 cents an hour legislation by saying, “No business which depends for its existence on paying less than a living wage to its workers has any right to continue in this country.” In Canada, the Canadian Constitution assigns the responsibility for labour laws, including minimum wage, to the provinces and territories.
Summary
Because of its duty to maximize profits, business is often handcuffed from doing what it ethically desires. That’s why, in many industries, one company can’t pay much better than another. But when government forces all to honour a minimum wage, it levels the playing field.
Friedman’s theory only holds water if minimum wage is set too high. And the practice of telling someone to move on “if he or she isn’t doing well in this industry” is part of the market system. If you can’t find a better fit, you may belong on social assistance. (Note: government programs already exist to address such situations.)
The general sentiment is that people deserve to make at least a living wage, so these laws are here to stay. But there will always be debate over who minimum wage is for, how much we pay young people, and what we deem to be a living wage.