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What About a Maximum Wage?

Here’s a letter to someone who represents businesses that, allegedly out of their self-trumpeted sense of “fairness,” seek a higher legislated minimum wage.

Mr. Bob Keener

Dear Mr. Keener:

In your e-mail today you “applaud” Pres. Obama’s call to raise the minimum wage.  In that e-mail you include a list of papers purporting to show that higher minimum wages cause no job losses.

Your case for a higher minimum wage is unpersuasive.

First, the argument against the minimum wage doesn’t strictly predict that such legislation causes a measurable rise in the rate of unemployment.  Rather, the case is that the higher is the minimum wage the worse are low-skilled worker’s job opportunities.  These worse opportunities likely (but not necessarily) do include fewer jobs for such workers, but they include also deterioration on other fronts of low-skilled workers’ job fortunes.  For example, as a result of a higher minimum wage low-skilled workers who remain employed might enjoy fewer opportunities for overtime work or suffer greater pressures to work faster and with fewer breaks.  The ways that employers adjust to offset the higher costs imposed by a minimum wage are numerous.  All such ways reduce low-skilled-workers’ well-being.

Second, just as you supply a list of papers showing no negative effect of the minimum wage on rates of employment, I can supply a list of papers showing the opposite.  (And I dare say that my list will be longer than yours.)  So how do we decide which of these lists to believe?  I propose a mental experiment.

Suppose that government mandates for all teenagers and high-school dropouts, not a minimum wage, but a maximum wage (of, say, $4.00 per hour).  Do you think that teenagers and high-school dropouts will simply absorb this forced wage cut without responding in ways to offset its reduction in their monetary well-being?  Do you deny that these workers will, because of this legislation, perhaps reduce the number of hours they are willing to work, or reduce the diligence and energy with which they work?

If you understand that workers will adjust to a legislated maximum wage in ways that cut their losses, why do you continue to insist that businesses will not adjust to a legislated minimum wage in ways that cut their losses?  Are business people more malleable, more public spirited, or less greedy than are workers?  Are business executives less crafty and less able than are low-skilled workers to adjust in cost-saving ways to government-imposed regulatory burdens?

Unless you answer ‘yes’ to these questions, you should – if you truly aim to help low-skilled workers – rethink your support for legislation that raises businesses’s costs of employing such workers.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030