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Minimum Wages Reduce the Bargaining Power of Low-Skilled Workers

In my latest column for AIER, I do my best to bust the myth that low-skilled workers have too little bargaining power in a free market – and also to show that this bargaining power is reduced by minimum-wage legislation. A slice:

More important than the fact that low-skilled workers have few specific job skills, the single greatest source of low-skilled workers’ bargaining power is price. If they can offer to work at whatever wages make them attractive to employers, low-skilled workers have adequate bargaining power – in fact, they have no less bargaining power than is had by the highest-skilled workers. The only workers in the modern American economy without adequate bargaining power are those whose freedom to offer better terms – for example, lower wages or fewer fringe benefits – to employers is taken away by government.

Consider a worker whose skills enable him to produce no more than $14.50 per hour. If the minimum wage is $15 per hour, this worker literally has no power to bargain on the wage margin. This worker is prevented by government from making the following offer to employers: “If you employ me, I’ll work for $14.50 per hour.” The absence of this bargaining power is caused directly by government regulation – and the fact that that regulation might today be well-intentioned does nothing to alter this awful reality for those workers who are prevented by the state from bargaining for employment by offering to work at hourly wages below the legislated minimum.

Now compare this worker’s unfortunate fate to that of a seller, such as McDonald’s, of fast food. We can reasonably call such a restaurant “low-skilled.” After all, what it offers for sale is more basic and less able to produce epicurean delights than are the offerings of Michelin-starred restaurants, or even of the items on the menus of restaurants such as Ruth’s Chris Steakhouse.

It’s accurate to describe McDonald’s offerings as being much less skilled at pleasing most people’s taste buds and dining wishes than are the offerings of higher-end restaurants. Yet no one alleges that McDonald’s therefore suffers from inadequate bargaining power in selling its hamburgers.

The reason McDonald’s and other fast-food eateries have bargaining power equal to that of the finest restaurants in Paris, New York, and New Orleans is that restaurants – including low-end ones such as McDonald’s – are free to price their menu items at levels that will attract willing buyers.

There is, though, one profoundly important difference between low-value foods such as fast-food hamburgers and low-skilled workers: Today’s low-value food is destined, by its nature, to remain low-value food. McDonald’s hamburgers will not be improved over time into haut cuisine for which diners will pay high prices. Fast-food burgers will never become ‘highly skilled,’ relative to fancy restaurant meals, at pleasing diners’ palates.

In contrast, today’s low-skilled workers are not destined by their nature to remain low-skilled workers. One – and perhaps the single most – important source of higher skills is job experience. Because minimum-wage legislation prevents many workers from acquiring more skills today – the reason being that such legislation prices these workers today out of the job market – this legislation prevents these workers from acquiring today the mix of higher skills and more experience that each could then use tomorrow to bargain for different, better-paying jobs.