Minimum wages? Bullshit! (amv)

Minimum wages are popular. According to infratest dimap, almost 80% of the German vote-force would approve national minimum wages. As a second-best solution, all of them would accept minimum wages at least at the level of industry. Minimum wages are mostly communicated and thus widely perceived as a social question, hardly ever as an economic problem. It is claimed that one job has to pay a decent life. Even media hardly ever attempts to be scientific in this respect. It is also blinded out that the minimum wage, a lower bound for cost prices after all, is usually a protectionist measure, initiated by a loosing industry which approaches policy to escape its responsibility for and its commitment to the consumer. As I claimed elsewhere (here), the recent conflict between the Post AG and the Pin Group is a good case in point. Here, the company which is loosing its government privileges attempts to avoid the adjustments and entrepreneurial decisions which would be necessary on the unhampered market on which all producers depend on the valuations of the consumers. Thus, the Post AG and the social democrats (SPD) became allies: The SPD maximizes votes by keeping competition from the back of the former monopoly. The conservatives (CDU), though closely tied to the competitor of the Post AG (Pin Group is controlled by the Springer AG), can barely stop this process, since they also depend on votes. Thus, the CDU will trade this for something they can do for their vested interest. For the general public, this is a lose-lose-situation, since any meddling with prices causes waste and waste on the labour market means unemployment. If we want to pay higher wages, consumers have to be lured to pay for them! It is ultimately the consumer (together with the quantitative limitations of our means of production) who determines income! Thus wages must tend towards labour’s marginal contribution to general welfare (in value terms). Let's face it: Wages are prices and as such determined according to the same principles as every other price. Would anyone doubt that if we arbitrarily raise the price of copper or energy, the economy would struggle? Would anyone doubt that any arbitrary shift in rents would have to reduce demand and imply excess supply? The same is true for labour! Labour is priced according to its anticipated marginal value product. As a cost good (that is, as an input to production) its price at every moment in time reflects the utility foregone if the given supply of labour is reallocated. This is so, because economic activity attempts to allocate scarce means (including labour) to alternative uses. Opportunity costs simply allow for this kind of market coordination. If there is a significant expansion of one industry, resources do not fall from heaven but must be lured by higher bids from other uses. This higher bidding imply that the anticipated marginal value product of labour has increased and that therefore a fraction of the labour supply can be used in a new combination, better than before. If we introduce minimum wages the market cannot react differently as to dispose labour. Since the economic problem is a problem of allocating scarce means, any rise in the price of labour can only mean one thing: it signals to the market that the supply of labour has for any reason decreased, that labour has become more scarce and that therefore the economy should find a way to compensate and use less labour intensive processes. But since it is an administrative shift in prices and not accompanied by anything which is relevant to solve the economic problem, the market is betrayed: labour supply has not decreased but the market becomes nevertheless the signal to dispose with it! Unemployment in a world in which our wants outpace our means is an anomaly and due to lower bounds for wages (including the lower bound provided by the social security system). But is it not true that there is empirical evidence in favour of minimum wages? Is it not true that we can increase our wages without inducing unemployment? If this would be true however, why not asking for much higher minimum wages? If there is no negative economic consequence, why not doubling our wages? In fact, the empirical evidence is mixed. But in no case can empirical evidence settle this problem. The argument against minimum wages is based on the ceteris paribus clause. In reality, capital accumulation can compensate the loss in jobs which is due to the introduction of minimum wages. Those becoming unemployed because of minimum wages are in this case re-employed in new businesses. But that only means that minimum wages are at best neutral. And there is no guarantee for capital accumulation to be well-behaved, that is, to neutralize all government activity which hampers the market process. In general we must conclude with Sennholz:

"Good intentions, when guided by error and ignorance, may have undesirable consequences. There is no better example than minimum wage legislation. It means to raise the wages and improve the living conditions of poor workers but actually condemns many to chronic unemployment. It forcefully raises the costs of unskilled and inexperienced labor and thereby lifts it right out of the labor market. Yet, many politicians who neither own nor manage a business and do not employ such labor never tire of lamenting and deploring low wages and promising to raise the wage minimum by law and regulation. [...] To alleviate minimum-wage unemployment is to restore freedom in the labor market; it would permit the cost of labor to readjust to labor productivity and offer employment to every young man and woman willing and ready to work. A free labor market would welcome young people, which not only would exhort and restore the spirit of work but also improve labor skill and know-how."