Thursday, August 23, 2012

Problematicity of minimum wages

We can express a minimum wage as a price floor in each labor market.  Simple models indicate that minimum wages have no effect in high-wage markets and cause unemployment in low-wage markets; the overall effect on unemployment should be relatively low, since the median hourly wage is roughly $16.50.

I don't want to discuss the empirics of the minimum wage here; we'll save that for a future post.  Many arguments about the minimum wage focus on its reduction of quantity of labor demanded, or increase of quantity of labor supplied.  Some focus on unemployment.  Others focus on the infringement of contractual freedom (a perpetual, and to me perplexing, obsession of libertarians).

Rather than use those arguments, I'll argue from a moral perspective: Imposing a minimum wage marginalizes those whose labor is less valuable than the minimum wage indicates and robs them of autonomy and dignity.  This imposition disproportionately affects underprivileged groups, since their lack of privilege translates into labor of lower value.  If we wish to assist underprivileged and marginalized groups, we should find a way to do so that supports their autonomy and dignity, rather than effectively punishing them for having time worth less than the minimum wage.

Pecuniary value exists entirely in the eye of the beholder; an asset is only and precisely as valuable as what others are willing to exchange for it.  I shall refer to pecuniary value as "value."  Market process discovers the pecuniary value of assets and, over time, matches assets to those who place the highest value on them.

One important observation is that value can only be discovered.  It cannot be declared.  One cannot declare, "This home is worth $300,000!" and cause the home to be worth $300,000 --- the home's value can only be ascertained by the bids of those who are interested in purchasing.

We may regard time as an asset: one exchanges time (in the form of giving up alternative uses to perform certain obligations) for money.  The wage rate, reflects the value of one's time.  If people are willing to pay me $35 for an hour of instruction, then an hour of my time is worth at least $35.  (I paper over the distinction between marginal value and value.)

The labor market is an emergent social mechanism involving suppliers of labor and buyers of labor.  It acts to discover the value of each worker's time and match that worker to the employer who values her time most highly.  Each transaction is an approximate lower bound on the value of the time of the worker.

Imposing a floor on the price of labor declares that no employer may purchase time worth less than this bound.  Those whose time is worth less than the bound are shut out from participating in the labor market.  (In practice, they may participate, but will not be formally hired - hence the increase in unemployment.  Or they will participate in informal labor arrangements.)

The minimum wage declares: If your labor is worth less than this wage, you are excluded. You may not participate in this fundamental social institution.  Effectively, a minimum wage sets a minimum worthy value to time and outlaws the employment of people whose time is worth less than that minimum worthy value --- it marginalizes individuals with time less valuable than the wage.

This marginalization disproportionately impacts underprivileged groups, whose time is often worth less because of this underprivileging.  Because current employment -- by generating experience and connections, for example -- usually increases the future value of labor, effective minimum wages perpetuate the impoverishment and disenfranchisement of those groups.

In addition to blocking a mechanism that can act to correct social injustice, a minimum wage robs autonomy and dignity from those whose time is worth less than the minimum wage.  Instead of seeking the greatest value for their time, people with time worth less than the minimum wage are forced to either endure a perpetual, humiliating series of rejections, or to operate outside the law, or to simply withdraw from a fundamental social institution.  In our society, participation in the labor market confers a measure of dignity; to eject a person from the labor market, to bar him from participation, is to strip him of dignity.

Perhaps minimum wages are instituted as a mere signal of group affiliation, or in a misguided attempt to help underprivileged groups, rather than as a mechanism to perpetuate social inequity and drive underprivileged groups outside the confines of the law.  In any case, the moral impact of a minimum wage is to strip of dignity those it affects.  It serves to create outlaws and reinforces existing structures of oppression.

If we truly wish to help underprivileged groups whose labor is worth little, we should do so in a way that preserves their dignity and autonomy and does not drive them outside of the law in search of betterment.  We should do so in a way that respects basic, unquestionable human rights to shelter and sustenance without depriving already-impoverished people of more opportunities to participate in society and better themselves.

Edit 3:20 pm, 8/23:

A friend points out that in some cases --- where markets do not nearly approximate free --- there may be a power differential that acts in wage negotiations.  In this case, a minimum wage law not only shuts out those with labor worth the least, but those who have the least power.  Instead of permitting them to exercise what little power they can, it simply removes them from the process.  We create the illusion of empowerment, when in reality those who have the least power are simply barred from participation.

If we wish to empower the least privileged, most marginalized, we need a system of social insurance that actually empowers them, rather than shutting them out of a fundamentally dignifying social process.  A minimum wage removes options and strips dignity; a healthy social insurance system would give additional options, truly empowering the least privileged people in our society, giving them dignity and autonomy.

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