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Friday, September 22, 2017

The ‘Fight For 15’ Is Another Tool For Big Businesses To Kill Competition

But by making both production more expensive for everyone, you undermine what would have been a shift in patronage.

Supporters of the “fight for 15” and other campaigns to raise the minimum wage go to great lengths – including commissioning “research” designed to contradict studies that find their effects injurious – to insist that such a hike will have little or no adverse effects on employment for low-skill workers. However, such claims fly in the face of the economic truism that “there are substitutes for everything.” Additionally, the supplementary policies they also support would impose still greater government coercion, showing that they know how misleading their claims are.

Advocates insist that they want higher minimum wages, not just for local workers, but across the country. And they don’t just push for it nationwide they want our trade agreements to mandate higher wages in other countries. Their claimed rationale is that a higher minimum wage would improve the lot of low-skill workers everywhere, not just themselves – thus making this fight a part of a broader anti-poverty campaign. However, they ignore evidence and logic that contradicts their stated purpose.

One excellent source of evidence comes from apartheid-era South Africa. White labor unions backed “equal pay” laws in the guise of helping black workers. But it dramatically raised the price of hiring blacks, in comparison to the price of hiring whites. Blacks in South Africa had less education and fewer skills on average, in addition to being discriminated against regularly. Whites gained, but black unemployment jumped as a result of that “compassion” on their behalf.

An Ice Cream Analogy

As to the logic involved, consider an analogy. Suppose the price of ice cream was pushed up by law in one location. Because of that, ice cream sellers will no longer sell the same amount of product because at a higher price point customers will make different choices. Since frozen yogurt’s price will be lower relative to ice cream, consumers will shift towards it, decreasing the quantity of ice cream sold. Such a law would also lead consumers to shift ice cream purchases from other places that don’t have an ice cream price regulation.

Making your production more expensive by law benefits all other rival producers.

Both forms of substitution will reduce ice cream sales in the regulated area. If the law had imposed higher wages for local ice cream workers rather than for ice cream, there would also be shifts away from local labor as producers substituted capital equipment and technology for labor, as well as shifting to employing labor elsewhere. Such forms of substitution are the mechanism by which the law of demand operates in this case. Only if they did not exist would the law of demand fail to operate.

What if those substitutions could be substantially paralyzed, however? What if frozen yogurt prices (or the wages of frozen yogurt workers) were also forced up proportionately? Their relative prices would no longer fall, eliminating substitution effects in their direction. What if ice cream prices elsewhere (or the wages of those ice cream workers elsewhere) could also be forced up proportionately? Again, it would eliminate substitutions that would otherwise occur.

Those added mandates would certainly benefit the original ice cream makers and potentially even allow them to claim that the law of demand didn’t exist in their “special” case when it is, in fact, government restrictions masking the effects of what would otherwise happen. But how would they affect the others allegedly helped by extending the policy elsewhere?

Unions benefit from raising everyone’s minimum wage because low-skilled labor is a substitute for union labor. Mandating a higher price of ice cream in the first location alone will clearly benefit both frozen yogurt producers and ice cream producers (and their workers) elsewhere. That is, making your production more expensive by law benefits all other rival producers. So if you really wanted to help them, imposing higher minimum wages on yourself would do so.

But by making both your production and their production more expensive, you undermine what would have been a shift in patronage. Using artificial restrictions to raise others’ wages does benefit you, but can easily hurt them. And that doesn’t exactly match the rhetoric of caring just as much about others as yourself.

The Real Beneficiaries

In the case of low-skill wages, the above analysis means that unions benefit from raising everyone’s minimum wage because low-skilled labor is a substitute for union labor. For instance, if the minimum wage was $8 and the union wage was $40, employers give up 5 hours of low-skilled work for every union worker-hour utilized. But if the minimum hourly wage were increased to $10, employers would only be foregoing 4 hours of low-skilled work for every union worker-hour employed. Consequently, it is no wonder unions, whose self-interests are advanced whether or not low-skill workers benefit, are the primary backers of minimum wage campaigns.

Such self-interest explains a great deal about minimum wage positions. Non-union workers and employers in high cost-of-living areas, where virtually everyone earns above the federal minimum wage, back the federal standard. Why? It raises the cost of production imposed on rival firms where wages are lower.

Wal-Mart, who already pays more than the federal minimum, backs a higher wage because it raises competitors’ costs, but not theirs. This is why many in high-wage areas favor higher federal minimum wages, while those in low-wage states – the alleged beneficiaries – often oppose them. Workers and producers, where state minimum wages exceed the federal minimum, also gain from raising the federal level. Higher minimum wages raise the cost of production, relative to where they are located. Even Wal-Mart, who already pays more than the federal minimum, has backed higher federal minimum-wage because it raises local competitors’ costs, but not theirs – this also explains why Wal-Mart opposes raising state minimum wages where that would directly affect it.

Unions and others say that their support for higher minimum wages is not about themselves, but about benefiting others. And yet, they continually advance their own interests at the expense of those they care so much for. You can be sure that this is about them.

  • Gary M. Galles is a Professor of Economics at Pepperdine University and a member of the Foundation for Economic Education faculty network.

    In addition to his new book, Pathways to Policy Failures (2020), his books include Lines of Liberty (2016), Faulty Premises, Faulty Policies (2014), and Apostle of Peace (2013).