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What’s So Special About an Hour?

Posted By Don Boudreaux On October 20, 2013 @ 8:57 am In Seen and Unseen,Work | Comments Disabled

If the goal of those who support minimum-wage legislation is to raise the incomes of low-skilled workers, why focus only the hourly wage?  Why not a minimum daily wage or a minimum annual wage?

You might think that the only difference here lies in the unit of time in which the minimum-pay mandate is expressed – a purely nominal difference.  $7.25 x 40 x 52 = $15,080 (and $7.25 x 8 = $58).  But if so, then I ask my question again: Why do Congress and the president (or the governments of other countries with minimum-wage legislation) focus only on – and, more importantly, legislate only – the wage rate per hour?

I have an hypothesis.  If the discussion were not of a minimum hourly wage but, instead, say, of a minimum daily wage (for example, $58 per day), it’s too easy to see that employers, in response to this minimum-pay mandate, could and would readily adjust their low-skilled employees’ work arrangements so that the bulk of these employees would not be helped by the legislated minimum mandated pay.

If government were to order employers to pay each of their workers at least $58 per day, employers could (and many surely would) simply increase the number of hours each employee must work each day (say, from 8 to 10 hours per day).  Even people normally blind to all but the most superficial economic phenomena are likely to see this reality.  Even these economically benighted people would see, for example, that such a mandate would mean the end to almost all part-time employment.

Stipulating a minimum daily wage gives employers and employees more lee-way to work around the negative effects of a minimum-pay mandate than does such a mandate stipulated on a per-hour basis.  Likewise, a minimum weekly wage would give employers and employees more lee-way to work around the negative consequences of a minimum-pay mandate stipulated on a per-day basis.

While the shorter the time unit used to stipulate minimum pay the more difficult it is for employers and employees to arrange work-arounds, this fact does not mean that such work-arounds aren’t available and used in response to minimum-hourly-pay mandates.  Most obviously, of course, employers can reduce the number of hours of low-skilled work they hire.  In addition – or instead – employers can work their low-skilled employees harder per hour.  In addition – or instead – non-wage employers can reduce non-wage compensation, such as paid vacation time.

When government commands workers to remain unemployed unless these workers can persuade employers to pay them at least the amount of money divined by government to be minimally acceptable, employers and employees do not simply follow the command.  They adjust.  And if there are no monopoly or monopsony conditions that consistently prevent one group from exploiting the other, these adjustments to a mandated minimum-pay requirement will worsen the well-being of both employers and employees generally.  The reason, of course, is that the minimum-pay mandate blocks off contractual possibilities that are mutually advantageous to large numbers of employers and employees.

The bottom line is that any efforts by government to mandate minimum pay in time-units larger than hours would likely be seen even by the economically benighted to unleash harmful counter-ajustments – unintended ill-consequences.  So the question is: why do so many people who would recognize that unintended ill-consequences are likely to emerge when minimum-pay requirements are issued in relative large time units such as days or weeks not see that unintended ill-consequencs also are unleashed when the minimum-pay requirement is expressed in the time unit that we call “hour”?

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