Saying No to a Minimum Wage Hike
There are three groups of people who want a higher minimum wage: those who earn minimum wage, those who advocate for progressive issues, and those who think it sounds good but have not researched the issue. The first group seeks a political win while the second group seeks a personal win. Only the third group has the objectivity necessary to understand how an increase in the minimum wage hurts the economy as a whole and low-wage earners in particular.
Although early 19th-century economist David Ricardo was influential during his own day, his works are now overlooked. He was a capitalist and viewed as an intellectual successor to Adam Smith, and he spent much of his effort laying out the basics in his greatest work, On the Principles of Political Economy and Taxation.
Wages were fundamental to his theory of economics, and he begins, “Labour, like all other things which are purchased and sold, and which may be increased or diminished in quantity, has its natural and its market price. The natural price of labour is that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution.”
The “natural” value of labor is measured by what we call the “standard of living.” It is a cost that can go up or go down based on how prices fluctuate: “The natural price of labour, therefore, depends on the price of the food, necessaries, and conveniences required for the support of the labourer and his family. With a rise in the price of food and necessaries, the natural price of labour will rise; with the fall in their price, the natural price of labour will fall.”
The actual value of a wage is more important than the numerical wage. As Mark Twain described almost a century later (as discussed in one of our first articles in this series), someone who spends 10% of his wage on basic necessities makes more than someone who spends 30% regardless of the number attached to his wage. The natural value of labor, therefore, normally rises and lowers in relation to the cost of goods and the relative value of the wage.
Ricardo continues by explaining that the natural costs will increase due to items becoming "dearer," but they will still fall due to improvements in production and new markets. Advances in technology and skill increase the output of individual laborers, which allows for more goods to be sold and more profit to be made by all involved without the need to raise the price of goods.
Although the market price of labor often matches the natural value of the labor, there are some situations in which it does not: “It is when the market price of labour exceeds its natural price, that the condition of the labourer is flourishing and happy, that he has it in his power to command a greater proportion of the necessaries and enjoyments of life, and therefore to rear a healthy and numerous family. When, however, by the encouragement which high wages give to the increase of population, the number of labourers is increased, wages again fall to their natural price, and indeed from a re-action sometimes fall below it.”
Like Thomas Malthus, Ricardo believed that more wealth will lead to more children as a whole, but also to more costs and more competition that will eventually drive down wealth. Either people will stop having children because they cannot afford large families, or laborers will leave the specific labor market because the wage can no longer pay for their family.
When laborers are no longer part of the market, the wages will once again rise: “When the market price of labour is below its natural price, the condition of the labourers is most wretched: then poverty deprives them of those comforts which custom renders absolute necessaries. It is only after their privations have reduced their number, or the demand for labour has increased, that the market price of labour will rise to its natural price, and that the labourer will have the moderate comforts which the natural rate of wages will afford.”
Although Malthus limited his theory to the bust and boom of family growth, Ricardo believed that the labor pool was not the only factor. Instead, technological advancements would allow for new industries to constantly appear, which would create new labor pools to draw from: “Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse, which an increased capital gives to a new demand for labour be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labour may give a continued stimulus to an increase of people.”
We can see this in our own day with the tech boom. Jobs in the tech industry have an extremely high average salary, which has led many tech moguls to push for a massive increase in immigration to increase the labor pool and push down wages. Although the profits and costs do not require them to drive down the high wages, they seek to rely on immigration anyway to maximize their own personal wealth.
The amount of labor necessary to create a product is also affected by technology, and automation can drive down the cost of goods by removing the cost of labor: “Or capital may increase without its value increasing, and even while its value is actually diminishing; not only may an addition be made to the food and clothing of a country, but the addition may be made by the aid of machinery, without any increase, and even with an absolute diminution in the proportional quantity of labour required to produce them. The quantity of capital may increase, while neither the whole together, nor any part of it singly, will have a greater value than before, but may actually have a less.”
When wages rise at the same rate of costs rising, “The situation of the labourer will be improved, but not much improved; for the increased price of food and necessaries will absorb a large portion of his increased wages; consequently a small supply of labour, or a trifling increase in the population, will soon reduce the market price to the then increased natural price of labour.”
Ultimately, the only way to truly create a rise in the value of wages is to create an increase in goods: “In different stages of society, the accumulation of capital, or of the means of employing labour, is more or less rapid, and must in all cases depend on the productive powers of labour. The productive powers of labour are generally greatest when there is an abundance of fertile land: at such periods accumulation is often so rapid, that labourers cannot be supplied with the same rapidity as capital.”
Ricardo then explains that the natural production of the land, especially food, would necessitate a balance in the population. The more people who exist in a nation, the less likely the nation is capable of feeding them. There is no benefit for a nation to constantly increase its population, either through the encouragement of large families or through policies that increase immigration. A closed society with a constant rate of people is one that can maximize its labor rate, driving the costs of food and goods down for the benefit of all.
Those who push for more immigration are those who are pushing for a diminished value in labor. Ricardo condemns this approach: “The friends of humanity cannot but wish that in all countries the labouring classes should have a taste for comforts and enjoyments, and that they should be stimulated by all legal means in their exertions to procure them. There cannot be a better security against a superabundant population.”
If populations steadily increase, then the cost of labor naturally declines, “In the natural advance of society, the wages of labour will have a tendency to fall, as far as they are regulated by supply and demand; for the supply of labourers will continue to increase at the same rate, whilst the demand for them will increase at a slower rate.”
This would then push against the lower class the hardest: “As population increases, these necessaries will be constantly rising in price, because more labour will be necessary to produce them. If, then, the money wages of labour should fall, whilst every commodity on which the wages of labour were expended rose, the labourer would be doubly affected, and would be soon totally deprived of subsistence. Instead, therefore, of the money wages of labour falling, they would rise; but they would not rise sufficiently to enable the labourer to purchase as many comforts and necessaries as he did before the rise in the price of those commodities.”
When government tries to interfere, it only makes the problem worse: “The clear and direct tendency of the poor laws, is in direct opposition to these obvious principles: it is not, as the legislature benevolently intended, to amend the condition of the poor, but to deteriorate the condition of both poor and rich; instead of making the poor rich, they are calculated to make the rich poor; and whilst the present laws are in force, it is quite in the natural order of things that the fund for the maintenance of the poor should progressively increase, till it has absorbed all the net revenue of the country, or at least so much of it as the state shall leave to us, after satisfying its own never failing demands for the public expenditure.”
Every increase in the minimum wage either decreases the labor pool by forcing employers to cut back on employees or increases the cost of goods. The economy does not end up with more wealth as a result. If, instead of increasing wages, the government subsidizes the poor directly, then the price of goods still increases as taxation drains businesses of their profits.
Under Ricardo's theory, there are only two ways to increase the actual value of wages. The first is to promote technological advances that allow a laborer to produce more product than his current rate. The second is to stop flooding the market with cheap labor from other nations that lowers wages while increasing the price of goods.
Therefore, helping the poor requires a decrease in regulations and in immigration. The political advocates for an increase minimum wage also champion an increase in regulations and in immigration, and they are actively destroying the wealth of the lower class. They use an increase of minimum wage as a cover for their disastrous policies, pretending that they are really there to help. Instead, the only benefit they offer is fool's gold.
Jeffrey Peters is an Annapolis, Md.-based writer and political consultant.