Do Employers Who Can’t Afford to Pay Workers a ‘Living Wage’ Have No Right to Exist?

by Don Boudreaux on June 18, 2017

in Myths and Fallacies, Seen and Unseen, Work

Cafe Hayek patron Craig Walenta sends the following e-mail:

Came across an argument from a colleague that I really didn’t know how to respond to. In some ways the argument has at least a superficial claim to equity so I wanted to inquire as to your thoughts.

Essentially the argument is if a busijess cannot afford to pay workers a living wage the business essentially has no right to exist.

How do I counter that?

Here’s my sightly edited reply:

I’ve heard that argument before. I think it’s silly. If people voluntarily contract with a business as customers, and voluntarily contract with it as suppliers (including as suppliers of labor), and if as a result the business earns sufficient profit to remain in operation, who is harmed? More to the point, whose rights are violated? The contracting is voluntary. I can find no one in this setting whose rights are violated.

Presumably – and it is a very strong presumption – both the consumers who purchase from the business and the workers and other suppliers who sell to the business find in their deals with the business the best options available to them. So the business, by existing, improves the well-being of those with whom it deals. The other alternatives open to its customers or workers might be relatively poor, but denying the business the right to operate does not improve those alternatives. It merely obliges the business’s customers and workers to settle for those even-worse alternatives.

More generally, your colleague’s argument, even if it were (contrary to fact) sound as a matter of ethics, does absolutely nothing to counter, or even to address, this economic prediction: shutting such presumably ‘unethical’ firms down will deny job opportunities to workers whose current levels of productivity are below what your colleague regards as minimally acceptable. Such a policy would oblige low-productivity workers to remain unemployed – and thereby denied not only current incomes but also the opportunities to gain on-the-job experience.

Also, ask you colleague the following. Suppose that 18-year-old Bobby earns money by mowing lawns in the neighborhood after school. Does your colleague think that Bobby should be prohibited from earning income in this way if the amount that he earns falls short of “a living wage”? Are we members of society – or Bobby’s customers – unethical if we permit Bobby to earn this low income in this way?

Now suppose that Bobby meets with some success in his little lawn-mowing business. His 18-year-old friend, Betty, then asks if she can help him mow the lawns he now has agreed to mow. Bobby and Betty agree that Betty will help Bobby mow lawns. Betty’s hourly pay turns out to be less than “a living wage,” yet she is happy enough with it to keep working for Bobby. Is Bobby unethical?

Here’s another point: the purpose of a business is not to pay workers; it’s to enable its owners to earn profits by supplying goods or services to consumers. Paying workers is simply one among the many necessities of running a successful business. Ask your colleague to consider these two different businesses:

Firm 1: a one-man operation that makes sufficient profit for its owner, but this firm employs no one at all;

Firm 2: a firm that makes sufficient profit for its owner and employs, in the process, one low-skilled worker at a wage below what your colleague regards as “living”.

Your colleague, apparently, believes that Firm 2 is unethical (and, presumably by implication, harmful on net to humanity). But it’s unclear if your colleague believes that Firm 1 is unethical. On one hand, Firm 1 isn’t employing anyone at a wage below “living,” so that fact might save Firm 1 from your colleague’s moral opprobrium. On the other hand, if Firm 1 can’t afford to hire anyone at a wage at least as high as “living,” your colleague might find Firm 1 to be morally objectionable despite the fact that Firm 1 actually employs no one at a low wage.

Let’s consider each option. The first is that your colleague has no moral objection to Firm 1. That’s a strange conclusion on your colleague’s part because Firm 1 does less to help poor workers than does Firm 2. Firm 2, at least, offers a job opportunity to a low-skilled worker while Firm 1 doesn’t.

The second option is that your colleague regards as unethical both Firm 1 and Firm 2. In this case, then, your colleague’s ethical logic – if followed consistently – should lead him or her to regard as unethical any economic activity that does not involve the hiring of at least one worker at a wage at or above “living.” Young Bobby’s one-man lawn-mowing operation is unethical if that operation doesn’t allow Bobby to be able to afford to hire at least one worker at a “living” wage. But also unethical is the selling of pencils on the street corner by a blind person, for that little enterprise clearly does not enable its proprietor to hire anyone at a “living” wage.

More can be said, but I’ve already written too much.  Let me leave you with this suggestion: Ask your colleague if he or she is unethical for failing to give away all of her wealth to others such that others’ incomes are raised to the level of “living.”  If he or she answers no, he or she hasn’t thought seriously or consistently about his or her ethical positions on this matter.

Don

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