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Reich, the Mandatory Minimum Wage, and Wal-Mart’s Voluntary Wage Hike

Here’s a letter to another home-schooling parent.

Mr. Alex Palmer

Dear Mr. Palmer:

Thanks for your kind e-mail….

I disagree that Robert Reich “has a point” in his video when he argues that Wal-Mart’s voluntary action to raise the wages of its lowest-paid workers (as you put it) “is a sign that a higher minimum wage works.”

First, the fact that some firms profit by raising their workers’ wages in no way means that the same is true for other firms.  Not only do the fortunes of some industries and firms wane at the same time that those of other industries and firms wax, but even within the same industry different firms often operate with different production technologies.  For example, some successful firms use relatively large amounts of capital and small amounts of labor, while others use relatively smaller amounts of capital and larger amounts of labor.  (The capital-labor ratio of McDonald’s, for instance, is higher than that of an urban food truck.)  So labor policies that are today best for some industries and firms are not necessarily best for other industries and firms.  And because the economy is dynamic, even policies that work well today for some industries and firms might work poorly tomorrow for these same industries and firms.

Second, the very fact that Wal-Mart voluntarily raised its workers’ wages shows that government compulsion is unnecessary to ensure that workers’ wages rise whenever higher wages are justified economically.  Don’t buy Reich’s assertion that Wal-Mart hiked its wages in response to social pressure.  Social pressure does not increase a firm’s or its workers’ productivity.  Had Wal-Mart – which operates in the highly competitive retail sector – raised its workers’ wages for any reason other than the fact that doing so improves its productivity, it would soon start to hemorrhage financially.  My bet is that it will not so hemorrhage.

Finally and most importantly, there is zero equivalence between government raising the minimum wage and firms raising their workers’ wages voluntarily. Unlike when government hikes the minimum wage, when Wal-Mart voluntarily raises the wages it pays it does not deny to any worker the freedom to offer to work for a lower wage at Wal-Mart or at any other firm.  Put differently, while Wal-Mart’s choice to raise its workers’ wages does not constrict any worker’s freedom of contract, the very essence of government’s decision to raise the minimum wage is to artificially and arbitrarily restrict every worker’s freedom of contract.  That a government hike in the minimum wage strips a valuable bargaining chip from (especially) low-skilled workers is a huge and fundamental difference separating government-imposed minimum wages from firms’ voluntary actions to raise their workers’ wages.

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


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