# It Usually Starts With Five Cents An Hour **URL:** **By** Walter Block **Published:** January 1, 1972 --- “The minimum wage law is, on the face of it, not an employment law, but an unemployment law.” Down with the minimum wage law? But then the fat capitalist employers would lower wages to whatever they wanted to pay. They would probably like to pay, if they were in a generous mood, maybe 5 cents per hour. At best, we would be pushed back to the days of the sweat shops at worst, to the days of the industrial revolution and before, when mankind waged an often losing battle with starvation.... Or so goes the conventional wisdom on the subject. If we are able to shed any light on this morass of error, fabrication, and misunderstanding, we will have to make use of several basic economic concepts used in all introductory economics courses. The minimum wage law is, on the face of it, not an employment law, but an unemployment law. It does not force an employer to hire an employee at the minimum wage level, or at any other wage level. It compels the employer not to hire the employee at certain wage levels (those below the minimum set by law). It also compels the _worker_, no matter how anxious for a job even at a wage level below the minimum, not to accept the job. It compels the worker with a choice between a low-wage job and unemployment, to accept the unemployment, no matter how much he would prefer the low-wage job. Moreover, it does not even state that any wage presently below the minimum shall be raised to (or above) the minimum; it only provides that no wage below the minimum shall be paid. How would wages be determined in the absence of minimum wage legislation? The wage rate will tend to be set in accordance with what the economist calls the marginal productivity of labor. The marginal productivity of a laborer is the extra amount of receipts an employer will have if he employs this particular worker, over and above the receipts he would have if he did not employ this worker. Why will the wage rate tend to equal the marginal productivity of the worker, especially in view of the fact that the employer would like nothing better than to pay the worker virtually nothing, no matter what his productivity? Assume that the worker’s marginal productivity is equal to $1.00 per hour. (This means that any employer will be better off by $1.00 per hour if he hires him). Assume that the wage offered him is 5 cents per hour. The reason this wage offer cannot be the wage rate at which the worker will be finally hired is because at 5 cents per hour the employer would make 95 cents per hour pure profit for every such worker he could hire. Other employers, jealous and greedy, would move in to take advantage of the situation, offering 6 cents, 7 cents and horrors! even 8 cents per hour (workers begin to get uppity at such high wage rates). But even at the astronomically high 8 cents per hour, employers can still make 92 cents pure profit per hour, thus leading to another round of jealousy, greed and higher wage bids. Where will it all end? Clearly, at the wage level of $1.00 per hour, for at any wage level below this, there will still be incentives to bid workers away from their employers. (Do not waste any sympathy on the employers and wonder where their profits will come from if they are forced to pay $1.00 per hour for productivity of $1.00 per hour. The profits come from the intramarginal workers. Due to the famous law of diminishing returns, the first in a series of equally-productive workers will have a higher productivity than the marginal worker whose productivity we have been assuming to be $1.00 per hour. In much the same way, a housewife who buys only 10 oranges because, to her, the eleventh is not worth the price, obtains consumers’ surplus or consumers’ profit from the first 10 which, to her, are worth more than the price). But suppose the employers “get together” and agree not to hire workers at more than 5 cents per hour? The only time a scheme like this succeeded was in the middle ages when a cartel of employers got together with _the aid of the_ state and passed a maximum wage law which prohibited wage levels above a certain maximum. And it’s not just an historical accident that no such schemes have succeeded without state aid. There are very good theoretical reasons why this should be so. The reason (in a free market, without a cartel) why the employer does not hire any more workers than he does is because he thinks that the next worker’s marginal product will be so reduced by diminishing returns that it will be below the wage rate he must pay. To continue our analogy, if an employer has hired only 10 workers, it is because he thinks the productivity of the eleventh will be less than the wage he must pay all the workers. If a cartel succeeds in lowering the wage of the workers with a marginal productivity of $1.00 to five cents per hour, each employer will want to hire many more workers. This is part and parcel of the law of downward sloping demand: the lower the price, the more the buyers will want to purchase. The worker whose productivity was, in the eyes of the employer, just below $1.00 and therefore not hired at $1.00 per hour, will be eagerly sought at 5 cents per hour. This is the first flaw in the cartel: each employer who is a party to the cartel will have a great financial incentive to cheat. Each employer will try to bid workers away from the others. And the only way he can do this will be by offering higher wages. Wages higher than 5 cents per hour. How much higher? All the way up to $1.00 as we have seen before, and for the same reason. The second flaw is that everyone who is not party to the cartel arrangement want to hire these workers at 5 cents per hour. This will also tend to drive up the wage from 5 cents to $1.00 per hour. Examples of people who are not part of the cartel agreement but who would want to hire more workers if it were in effect would be employers in other geographical areas, self-employed artisans who could afford employees, employers who had only hired part time workers. But suppose the workers are ignorant of wage levels paid elsewhere in the city, and/or are located in the boondocks where there is no alternative employment? What forces will then ensure that workers are paid at their marginal productivity level? It is often mistakenly assumed that knowledge on both sides of the trade is necessary for the trade to take place; that cases in which such full and perfect knowledge is lacking are cases of “imperfect competition,” where economic postulates somehow do not apply. Knowledge on both sides of the trade, however, is not necessary. Certainly, knowledge of the labor market on the part of workers, especially immigrant workers, is faulty. But the employer’s knowledge about the job market is usually conceded to be adequate, indeed, exceedingly so, by typical questioners of marginal productivity theory. And this is all that is necessary. While the worker does not know too well of alternative job opportunities, he knows well enough to take the highest paying job, and all that is necessary is that the employer present himself to the downtrodden employee earning less than his marginal productivity with a higher wage offer. The self interest of employers will lead them “as if by an invisible hand” to ferret out such downtrodden workers, offer them higher wages, and spirit them away. The whole process will tend to raise wages to the level of marginal productivity. The same analysis applies to workers out in the boondocks who are ignorant of alternative job opportunities and have no money to travel to them even if they were aware of them. Although, here the differential between the wage level and the productivity of the “boonie” worker will have to be high enough to compensate the employer for the costs of coming to him, telling him of the alternatives, and paying the costs of sending him there. But this is just what the employer will do. The Mexican “wetbacks” are a case in point. Few groups have less knowledge of the U.S. labor market, and less money for traveling to lucrative jobs. Not only, however, do employers from southern California travel hundreds of miles to search them out, they furnish trucks or travel money to transport them northward. Employers from as far away as Wisconsin travel to Mexico for “cheap labor” (workers getting less than their marginal product) in eloquent testimony to the workings of an obscure economic law they never even heard of. (There are complaints of the poor working conditions these migrant workers undergo. These are mainly from unions of U.S. farm workers who are not in sympathy with minority group members receiving wages commensurate with their productivity. The Mexican workers view the package of wages and working conditions favorably compared with alternatives at home. This is seen in their willingness, year after year, to come to the U.S. during the picking season). What will be the reaction of the typical worker earning $1.00 per hour to a legislated increase in wages from $1.00 to $2.00 per hour? If he is already fully employed he will probably want to work even more hours (although there are special conditions under which he will want to work fewer hours). If he is only partially employed or unemployed, it is virtully certain that he will want to work more. On the other hand, the typical employer will react in the opposite way: he will want to have fewer of such workers. He might not be able to do anything about this immediately, but as time goes on he will replace his suddenly more expensive unskilled workers with skilled workers and more sophisticated machinery of an equivalent productivity. Students of introductory economics courses know that when a price level above equilibrium is set, it causes a surplus. When a minimum wage level above our $1.00 per hour is set, it causes a surplus of labor—otherwise called unemployment. The minimum wage law causes unemployment! Iconoclastic as it may sound, it is true. At the higher wage level more people are willing to work and there are fewer jobs available. Unemployment. The only debatable question is how much unemployment? This depends on how quickly the unskilled workers will be able to be replaced by equivalently productive skilled workers in conjunction with machines. When the minimum wage law increased from 40 cents to 75 cents per hour, elevator operators were replaced. It has taken a while, but virtually all elevators are now automatic. Ditto for unskilled dishwashers and automatic dishwashing machinery operated and repaired by semiskilled and skilled workers. As the minimum wage law becomes applied to wider and wider segments of the unskilled population and as its level rises, more and more unskilled people will become unemployed. A minimum wage law only affects directly those earning less than the minimum wage level. What effect can a law requiring that everyone be paid at least $2.00 (or not at all) have on someone already earning $10.00 per hour? None. He is already being paid in accordance with the law. In order to convince yourself that a minimum wage law of $2.00 does affect those earning less than $2.00 per hour, consider the effects of a $100.00 per hour minimum wage law. A law requiring that at least $100.00 per hour be paid (or nothing at all). How many of us has such a great marginal product that an employer would willingly shell out $100.00 for an hour of our services? Who is hurt by the minimum wage law? The unskilled whose productivity level is below the wage level required to be paid. The unemployment rate of black male teenagers is usually (under)estimated at 30%. Twice the unemployment level of the 1933 depression! And this does not take into account the great numbers who have given up searching for a job in the face of this unemployment rate. The lost income that this represents is only the tip of the iceberg. More important is all the on-the-job training these young men are not getting. Were they working at $1.00 (or even less) instead of being unemployed at $2.00 per hour, they would be learning skills that would enable them to raise their productivity and wage rates above $2.00 in the years to follow. A paradox is that many black teenagers are worth more than the minimum wage but are unemployed because of it anyway. For in order to be employed with a $2.00 minimum wage law, it is not enough just to be worth $2.00 per hour. You have to be _thought_ to be worth $2.00 per hour by an employer who stands to lose money if he guesses wrong and who stands to go broke if he guesses wrong too often. In the ordinary course of business, the hero, when confronted with a situation like this, would stride manfully up to the employer, look him squarely in the eye, and offer to work for him for a token salary like 5 cents per hour, or even nothing, for a term of two weeks. During this time our hero would prove to the employer that his productivity deserved a higher wage rate. More important, he would bear with the employer part of the risk of hiring an unproductive worker. The employer might go along with the deal since he would be risking little. But the minimum wage law would make all this illegal. One less chance for the black teenager to prove his worth in an honest way. The minimum wage law also hurts the black ghetto merchant and industrialist. But for this law, he would have an advantage over his white counterpart in access to the cheap pool of black teen-aged labor. Not only does the young black worker tend to live in the ghetto and therefore have less distance to travel to reach a job in the ghetto; he can also be expected to have less resentment toward, and work more smoothly with, the black entrepreneur than the white. As this is a component of productivity, this can be expected to raise the wages of black workers working for black employers rather than whites. This also impinges on the problem of getting the first job, where all employers seemingly demand experience (if they are forced to pay for experienced workers, is it any wonder that they demand experienced workers?): black employers might well be more willing to take a chance on a young black worker than white employers. With this kind of mutual self-support between the ghetto businessman and worker replacing the present vicious cycle of unemployment and despair, one is forced to wonder whether repeal of this one law might mean more for the economic well being of the ghetto than all the fanfare of Nixon’s “black capitalism.” Unfortunate as the effects on young black workers are, the real tragedy of the minimum wage law is not found here. The real tragedy concerns the handicapped worker: the lame, the blind, the deaf, the amputee, the mentally handicapped, the paralyzed. It is here that the real tragedy lies. Imagine this predicament coupled with a law which makes it illegal for a profit-seeking employer to hire a handicapped person! All hopes of even a modicum of self-reliance are dashed. The only choice is enforced idleness or governmentally supported make-work schemes—from a government that had made an honest job an impossibility in the first place. It is not the fault of profit-seeking. It is the fault of a law that completely perverts Adam Smith’s hand by making it in the self-interest of profit seekers not to do the humane thing and hire the handicapped. As if to add insult to injury, there has been an exception made to the minimum wage law for certain classes of handicapped people; for people that have been defined as only “slightly handicapped.” So it is now in the interest of employers to hire the slightly handicapped. They now have jobs. But if it has been realized that the minimum wage law hurts the employment chances of covered groups, why have not _all_ groups been exempted? Especially the seriously handicapped. Why has not the minimum wage law itself been repealed? And if it has not been realized that the minumum wage law hurts the employment chances of covered groups, why have the slightly handicapped been stripped of its “protection?” Why, if the minimum wage law has all the deleterious effects specified, did the all-loving government pass such a law? Among the most vociferous proponents of minimum wage legislation is organized labor. Now surely this must give pause for thought. For the typical union member makes quite a bit more than the minimum wage level or $2.00 per hour. If he is already making $10.00 per hour, as we have seen, his wage level will not be directly affected, for it is already in accordance with the law. How then to explain his fanatical adherence to the concept? It is hardly his concern with the downtrodden worker, his black and Puerto-Rican and Mexican-American and American-Indian brethren. His union is typically 99.44% lily-white. More than anything else, it is an attempt to resist the inroads of these minority groups into the unions. Just as the law of downward sloping demand caused the employer to substitute skilled labor for unskilled labor when the minimum wage law forced up the wage of unskilled labor, so does the law of downward sloping demand cause the employer to substitute unskilled labor for skilled labor whenever a labor union (composed mainly of skilled laborers) obtains a wage increase. In other words, skilled labor is in competition with unskilled labor! This competition arises because skilled and unskilled laborers are substitutable for each other, within certain bounds. It might well be that it is 10 or 20 unskilled workers who are in competition with only 2 or 3 skilled workers (plus a more sophisticated machine). But the competition is there nonetheless. What better way to get rid of your competition than to force it to price itself out of the market? What better way for a union to insure that the next wage hike will not tempt employers to hire unskilled, non-union scabs (read minority group members)? (According to the logic of this argument, a powerful way for minority groups to get back at unions would be to somehow to get a law passed requiring that all union wages rise to no less than ten times their present amount. Although this would cause unheard of cataclysms, and is only meant for purposes of illustration, union membership would decline precipitously. Employers would fire all unionists or go bankrupt. The shoe would truly be on the other foot.) Do the unions purposefully and knowingly advocate such a harmful law? I do not know unionists well enough to answer. And I really do not care. It is not motives that we are concerned with here. It is only with facts. And their effects. The effects of the law are a disaster. They play havoc with the poor, unskilled and minority group member, just the people they were supposedly designed to help. What kinds of jobs would open up were the minimum wage law to be repealed? Although it is oft times mere idle speculation to try and anticipate the market, in this case there are several effects immediately apparent, which can aid groups oppressed by the minimum wage law.\* Take ecology, for instance. Container manufacturers have of late been switching to non-recyclable non-deposit bottles and cans. They are doing this because (for among other reasons) it is prohibitive to undergo the costs of checking up on the deposits and paying the premium. At lower wage rates, however, it would become more feasible. Since there will almost always be some companies just on the verge of switching from deposit to non-deposit bottles, allowing people to take jobs below the present minimums should discourage at least some companies from taking this step. It is also presently too expensive to sort out refuse and garbage, saving newsprint, glass, several metals and other materials that could be reused instead of tapping virgin sources. If people were not barred from accepting jobs at a low but mutually agreed upon wage, some could be employed to save resources in this manner. It is just the liberal type who is most vociferous on the topic of ecology who is likely to oppose repeal of wage minima the most. (The day care movement is another case in point. Traditionally, baby sitting has been exempt from mal effects of a wage minimum, if only _de facto_.) But only informal, non-“commercial” babysitting. The type of babysitting, for instance, done by a fourteen year old girl in the child’s parents’ home. Thus day care has not been allowed to develope on the free market. For day care companies, engaged in formal, commercial, efficient large scale baby watching most certainly are subject to the limitations of the minimum wage law. It is as if the State had in effect said: “We shall encourage babysitting in the home on a one-to-one basis by allowing those who do so to work for less than $2.00 per hour; we shall discourage commercial babysitting on a large scale (day care centers run for profit) by requiring such entrepreneurs to pay at least $2.00 per hour.” So the State first gives fourteen year old girls an unfair commercial advantage denied to their competitors; day care centers, forced to operate at a disadvantage, never really get started at all; interventionists and large segments of the women’s liberation movement complain that capitalism is sexist; and that the State is “forced” to step in to rectify this latest “market imperfection.” If, however, the state did not interfere with the market in the first place, many “unemployables” might have found employment in day care, thus solving their own unemployment problems, helping mothers with children to fing gainful employment, and obviating the “need” for Big Brother to become a Big Babysitter. I have not discussed so-called improvements or alternatives to the minimum wage law such as welfare, job training, guaranteed annual income schemes. I believe these programs are all disasterous stop-gap measures engendered by the failure of the minimum wage law, which will inexorably give rise to stop-gap measures when their own failures become apparent. I have tried to restrict myself to an examination of the minimum wage law itself, which is usually defended as a seperate issue. _\*Groups oppressed not by the unemployment effects of minimum wage laws, but by not being able to hire those who are not allowed to work._