The study of economics has a tendency to assume consumers, producers, workers, and/or any other agent, has a mechanical nature about them. With regard to the issue of minimum wage, such an ideological distortion is definitely problematic. Why is it problematic? The answer is simple. Firms always look for, or are at least open to, ways to lower costs. One of those ways is to lower variable costs, which means slashing the compensation of the workers. There is obviously a flip side to this. No worker actually wants to receive lower wages because most if not all workers see themselves as worth more than they really are per hour. However, economics assumes that people will adapt to these market-driven changes in wages or pursue other value producing opportunities. That is clearly unrealistic, and hence, the existence of labor unions.
It should come as no surprise that consumers (at least rational ones) almost never pay for the toil and trouble that constitutes the engineering of a product or service. They just pay for the product or service, all the while disregarding the worker. This naturally affects a firm’s decision making process with regard to the employment of the needed factors of production. If price is a consumer’s major concern, and in a relatively competitive free market economy, it almost always is, this will affect the wages of a firm’s workers. If an economy really were this simple, it would be cruel and unfair to firms to mandate minimum wages. However, it is not that simple.
Competitive free market economies do not exist, just free market economies. One does not have to look too far to realize there are problems of asymmetric information, oligopolies, monopolies, etc. that prevent economies from being truly competitive. Naturally, this translates into drastically unequal revenue schedules and profit margins for businesses. For instance, it is unfair to compare the income of a large multinational corporation, such as McDonald’s, to a mom and pop burger joint. Technically, they are competitors, but comparing the two firms is ridiculous. So, is it also unfair that both these firms pay minimum wage to their unskilled labor force given the gap in revenue streams and profit margins? One of these businesses benefits from economies of scale, and the other is just being pushed around by public economic policy.
Donald J. Boudreaux, chairman of the economics department at George Mason University, and author of the blog Café Hayek, provided an example of the consequences of forcing firms to comply with minimum wage law. On Café Hayek Professor Boudreaux had posted a letter sent to him by a small business entrepreneur, who in short, had to lay-off many of his low-skilled workers as well as cut hours of those still employed. The reason was because this entrepreneur was forced to pay his entire staff of workers at least minimum wage, and the collective cost of all these minimum wage salaries was too costly. His proposed alternative was simply cutting wages below the legal minimum while keeping the jobs intact, but as he explained, this was illegal.
The letter raises an excellent point: Should small and medium-sized businesses have to follow the same wage laws as the McDonald’s-like-megacorporations of the world? The answer is no, and the laws must be changed. Firms that can be easily determined by way of appropriate metrics, to have relatively large steady flows economic profit, must bear the burden of minimum wages. The rationale is that such an imposition is not actually a “burden,” but rather a trimming of economic profit.
Obviously, this is not a proposal for a specific change in legislation. After all, firms hire lawyers specifically to get around legislation. The request is a change in mindset about how wage laws affect a firm’s cost of conducting business and the low-skilled workers that actually receive minimum wages. Only this will allow the letter of the law to be shadowed by the spirit behind it.
Boudreaux, Donald J. “An Entrepreneur and the Minimum-Wage.” Web log post. Cafe Hayek. 29 Apr. 2010. Web. 28 July 2010. http://cafehayek.com/2010/04/an-entrepreneur-and-the-minimum-wage.html
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