Minimum wage and libertarianism

The labor market is one of those areas where pure libertarianism fails. The typical libertarian argument is seen in this anti-minimum wage post at the Mises Economics Blog.

The problem with the labor market is that employers and employees have unequal bargaining power. If unskilled laborers were all able to get together and form bargaining units equal in power to that of the employers, the free market wage in that case might very well be higher than the current minimum wage of $5.15/hour (which is such a pathetically low wage anyway that it’s hard to understand why anyone is complaining about it being too high).

Because, in the absence of any labor regulation, the lowest wages would be significantly lower than if they were fairly bargained for, an unregulated labor market unjustly enriches employers at the expense of employees and results in an inefficient allocation of resources because labor is undervalued.

Thus, by regulating the labor market, we actually increase economic efficiency. Society as a whole benefits, but fair labor market regulation is opposed by the wealthiest 1% who own the capital and become even wealthier if wages are kept low.

Comments

[Pete]

Your post is just a bunch of unfounded assertions. For one the comment that "the wealthiest 1%" own all the capital is sheer nonsense. Is the guy who owns the pizza joint down the street in the top 1%?

Further, it seems you view the government as a some sort of wealth creating magician. You would be well served to get acquainted with the most basic economic theory before you start blathering about economic subjects.

"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a 'dismal science.' But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance."

-- Murray Rothbard

[Pete]

Dear god, your old site informs me that you have a BS in Economics. That is comical, not to mention, a sad commentary on the state of undergrad education.

You sir, are too stupid for words.

[Scott S]

It is always dangerous isolating one part of human interaction, then arguing for various controls or complaining about lack of controls without referring to other parts that influence it. Meaning that government interference in our 'free' market is vast, encompassing every activity and making its effects felt at all times. Large corporations can play blackmail on a desperate State that relies on taxation to continue its bloated existence, threatening to move unless certain tributes are paid. Locally I saw this with the billion dollar IBM chip plant in Fishkill NY, partially funded with taxpayer money. I would be mistaken to isolate this action and demand greater government control of business - so this couldn't happen again - without acknowledging the ever-expanding State that makes such blackmail work. A government that did not extract so much from workers, and which didn't pay so much out to non-workers, would not be as affected by the free movement of business; would neither need nor have the power to attract or repel business. IBM would hold an empty threat.
Likewise with the perceived bargaining power between an employer and potential employee. An employer will try to maximize profits, and an employee will try to get as much money from his labor as possible. With no artificial barriers to starting a competing business, and no artificial rules regarding union power, the dynamic would look much differently than it does now, in our presumed to be free society.
I don't see your post as a hit against libertarianism, merely another example of why we need less government (a non-market, violent monopoly) interference in our lives.

[Half Sigma]

Pete: (1) The pizza joint is an atypical employer, the vast majority of workers work for much bigger employers; (2) Anyone who has ever worked at a job knows about the unequal power relationship between employer and employee; (3) Our economy is marketing oriented, unlike the commodity type economy envisioned by Adam Smith. A book like Competitive Strategy by Michael E. Porter does a better job of describing competition in our economy.

All of the above three points will one day be good starting points for additional posts.

[Michael A. Clem]

Government regulations, with some exceptions, tend to protect special interests, not society as a whole. The nature of political decision-making and all that stuff. In the case of the minimum wage, governments are protecting big businesses, which can afford the additional costs of the minimum wage, and skilled workers (and unions) which benefit from the unemployment of unskilled workers. The minimum wage laws increase unfair bargaining positions, not economic efficiency.
Perhaps what throws you off is that some workers are benefitting from the laws, and some businesses are hurt by the laws, but in no way does society as a whole benefit. It's the small businesses and the unskilled workers who lose out, as "common sense" should tell you.

[Pete]

"Anyone who has ever worked at a job knows about the unequal power relationship between employer and employee."

What does this claim even mean?

Power to what? The employer can't make me do anything. Both parties are faced with the exact same choice, to transact, or not to. You have equal right to refuse to work at a specific wage as your employer has to refuse to hire you at a specific wage.

Further, how do you get around the fact that the minimum wage is no different than any other price control? It doesn't magically improve wages, it simply restricts the legality of certain transactions. You have to take into account that if the minimum wage is going to "help" anyone, it must also prevent certain people from getting jobs. Take the case of two equally qualified workers. Their potential worker estimates that one worker will be worth $5.50 an hour and two workers will be worth $10 an hour combined. Absent a minimum wage, he will hire two workers and pay them each $5 an hour as they are equally capable. Put the minimum wage at $5.15, and he will only hire one. Placing the minimum wage at that number doesn't magically increase what the owner is willing to pay his employees. Instead, it gives a $0.15 raise to one guy, and puts another out of work.

[Half Sigma]

Pete, when a worker loses his job he loses 100% of his income, but when an employer loses a worker it loses only a tiny fraction of its total workforce. So the unequal power is obvious. Even before the worker is hired, the employer has an unfair advantage.

The rest of your comment, I think, makes some unwarranted assumptions about the elasticity of demand for unskilled labor.

[Scott S]

If worker A has a greater skill set than worker B, A has greater bargaining power - not just with the employer he has now, but with other potential employers. Should we then look at this obvious "unfair" advantage and demand government intervention - perhaps a quota system where a firm must hire a certain percentage of unqualified workers? Or a restriction on the number of times a worker may switch jobs for higher pay (or ask for a raise)?
I'm sure one can point to a specific job set at a specific time and show where employers hold most of the cards and can play the game at a great advantage. I can likewise think of cases where certain skill sets were in high demand, allowing employees to shop around for high salaries and putting the screws to the employers who wanted to keep them.
If I have no needed skills, or have minimal skills in a saturated field (whether this be in fast food services or lawyers), I will probably be at a disadvantage in finding work. I don't see how this translates to a requirement that government should force others to hire me at a salary they wouldn't otherwise be willing to pay in a field that perhaps doesn't need me.
Libertarianism is not Utopian; some people will not get everything they want, and some people will not have skills needed by others. It merely says that using force to modify free interactions among people is wrong.

Also, a point about this:

"Because, in the absence of any labor regulation, the lowest wages would be significantly lower than if they were fairly bargained for, an unregulated labor market unjustly enriches employers at the expense of employees and results in an inefficient allocation of resources because labor is undervalued."

If a company has to pay artificially higher salaries, this would seem to be reflected in higher product/service cost, passed onto the consumer. This would seem to lower the real buying power of consumers - who are also employees. Some will feel this more than others for sure, but messing with 'unfair' free market interactions seems to just transfer the unfairness to others - which is actually unfair.
Then you add the costs of maintaining a regulatory agency to oversee and enforce such government mandates, and it's easy to see how everyone loses.

[P.M.Lawrence]

Half Sigma, you may be interested in the following that I just posted at the mises blog:-

Sennholz is mistaken; his arguments are only valid for those methods that governments have been willing to try so far. There are other methods they could use that would actually work, e.g. Professor Kim Swales's method of Pigovian offsets to a broad based tax on producers. Of course, in the long term yet other non-governmental methods would be better, but it is about the best method available here and now (provided the right adjustments were made to prevent capital outflow, which would be institutionally difficult - but even without them it would provide minimum wages AND higher employment, although risking capital flight).

Perhaps I should add, distortions like regulated minimum wages only cause second order or worse declines, so if your personal utility function counts equity or whatever higher than job losses if only there is enough equity gain per job loss, then a sufficiently small distortion will suit you. This doesn't work if you don't value them that way, of course.