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Minimum wage laws have been thought of as a leveraging tool for employees to ensure that employers are paying them fair wages. But with the passing of the first minimum wage law, something that was once between the employer and the employee became something between the employer, employee and the government.
Minimum wage laws are a product of Socialism. So if Socialism is so great, why don’t minimum wage policies actually work?
The fact remains that government intervention has never been, nor will ever be, the answer to creating a prosperous economy.
In order to understand the pitfall of minimum wage policies, an understanding of supply and demand is necessary.
The Law of Supply and Demand says that when supply and demand for a good are equal, a fair market price can be set. In a traditional Laissez-Faire, free market economy, wages are also determined by the same token. If there’s an increased demand for red sneakers, then the company making these shoes will need to hire more workers to make more sneakers. Workers then bargain for a wage that reflects the demand for their labor.
However, in a socialist or communist economy, government intervention corrupts the forces of supply and demand. In these economies, supply and demand can’t balance because the government artificially sets supply quotas that don’t match demand. As a result, supply increases and yet no one is buying the item, costing companies to waste a ton of money and resources producing a good that no one is buying.
In the same vein, artificially raising the minimum wage increases the supply of workers who are now willing to work for higher pay. Employers, who now have to cover the additional cost of the artificial wage increase, have to choose between firing an employee or raising the price of the goods sold.
So, if we understand the economic principles underlying a successful free market, why do we have a minimum wage?
Following the Great Depression, workers were desperate for work and wages. When FDR came into office, he wanted to create a minimum wage to protect workers who didn’t have bargaining power. In 1938, the Fair Labor Standards Act (FLSA) was passed and with it came the first national minimum wage law. The goal was to stabilize the economy and protect workers from being scammed out of fair pay, as employers knew full well that people were desperate for work and would take any job they could get.
However, it’s been long thought that the power of government to regulate prices is inconsistent with constitutional liberty. So why are federal minimum wage laws constitutional?
Up until 1937, precedent held that minimum wage laws were unconstitutional. The Fifth Amendment says no person shall be “deprived of life, liberty or property, without due process of law.” Throughout the 1800’s, it was understood that “liberty” inferred the “liberty of contract” clause, which basically says that businesses had the right to conduct their business as they please without government telling them how.
In 1886, Pennsylvania Supreme Court Case Godcharles v. Wigeman held that a law which mandated monthly wage payments was unconstitutional because the state couldn’t tell businesses how to contract with their employees. Ten years prior the Supreme Court of the United States heard the case of Munn v. Illinois. The issue at hand was whether the state had the authority to mandate that grain warehouses fix minimum rates for storage. While the law was upheld on the basis that this specific business had public use and was subject to government interjection, the majority did acknowledge that in other instances with other businesses, the law was invalid since it infringed on the liberty of contract. Last, in 1923 SCOTUS ruled that minimum wage laws outright violated the Liberty of Contract clause of the Fifth Amendment. The fact remains that free markets provide economic opportunity and a better standard of living than any government-controlled market. In a free, Laissez-Faire type market, basic laws of supply and demand will allow prices and wages to adjust accordingly, and the Supreme Court knew that.
When people say that Capitalism has failed us and that’s why we need to raise the minimum wage, just remember, in a true capitalist economy, the free market does all the work, not the government. The issue of a low minimum wage isn’t a consequence of Capitalism, but rather a consequence of Socialism. The government has no business interjecting in a free market with heavy regulations and mandates. However, if we let socialist candidates win, that is exactly what will continue to happen.