The Minimum Wage: A Brief Study in Ideology

Joel C Knoll

Back in 1991, social and political philosopher Albert O Hirschman published a book

called “The Rhetoric of Reaction”. In it he identified three basic strategies used by

conservative thinkers in opposing progressive reforms of all kinds. These strategies

are best thought of as general templates for arguments. The first template Hirschman

calls “the futility thesis”: “Reform X will not work”. The second template is “the

perversity thesis”: “Reform Y will have the opposite of the effect intended by its

supporters.” The third and final template is called “the jeopardy thesis”: “Even if it

would have its intended effect, Reform Z would come at too great a cost to established

liberties.”

These templates have proven enormously useful to conservative economists,

politicians, and pundits in their ongoing quest to systematically and categorically

murder nearly every attempt to aid the “less fortunate” (meaning, frankly, those who

are not wealthy, including a growing percentage of the formerly middle class) and to

clean up the mess of the free market (of which there is a great deal). The templates

are versatile and just counter-intuitive enough to give laypersons an impression of

sophistication and expertise. Moreover, they are often grounded in a rather vast

apparatus of economic theory which -though most of it is either junk or worse - can be

made to look intimidating and authoritative by use of jargon, graphs, and equations.

Through the centuries, conservatives and wealthy interests have used this ideology-

dressed-as-science to combat such measures as progressive taxation, unemployment

insurance, aid to the indigent, environmental regulation, financial market regulation,

and the right of workers to organize. Indeed, conservatives have even used these

templates to argue against the abolition of slavery and for the wholesale privatization

of Social Security. If these templates – these patterns of argumentation – showed up

only now and then, they would appear fresh and insightful. However, overuse is

sapping them of credibility, leaving many people to wonder whether it is even possible

that every single attempt by the government to intervene on the behalf of the poor and

downtrodden is as misguided or perverse as conservatives say. Perhaps it is not.

Perhaps the stock arguments of conservatives are grounded less in reality than in the

desire of conservative thinkers – and those who pay them – to accumulate obscene

amounts of wealth without the government “interfering” (as they invariably call it) with

irritating tax-and-transfer programs. For the fact is that a conservative cannot just

come out and say, “I don‟t want to share my immense wealth with the poor, elderly,

and unemployed. I want another yacht!” That would be political suicide. There must

be another way. And so there is: simply devise a seemingly sophisticated and

scientific body of academic theory conveniently demonstrating that the best thing for

everybody is to leave the wealthy and their wealth alone! Thus, by a skillful sleight-of-

hand, conservatives have often been able to fleece the lower- and middle-classes by

posing as their guardians.

One of the conservative faction‟s pet topics is the minimum wage (or wage floor). To

oppose paying higher wages to lower- and middle-class workers, the business interests

use “the perversity thesis”, arguing that a minimum wage, intended to help the middle

class, will actually hurt it by increasing unemployment. The reasoning is simple and

solid. Wages are an input cost for businesses. According to the law of supply and

demand, as cost of a good rises, quantity demanded falls. Thus, to legislate a high

wage is to make labor so costly to businesses that they demand less of it –

unemployment. Although impressively counterintuitive, I will argue that this chain of

reasoning is incomplete, failing (like most other stock conservative arguments) to take

into account how economies actually work.

The first factor to consider is inflation. When the issue is raising the minimum wage

to keep pace with inflation (so that workers‟ real incomes will not fall), the argument

that a rise in the minimum wage will adversely affect business profits is simply false.

As long as the rise in the minimum wage does not exceed the rise in the general price

level, business profits will stay constant. Thus, ensuring that workers‟ real incomes

do not fall by tying them to the inflation rate – so that they rise and fall with it – comes

at zero cost to employers, while it allows wage workers to maintain their accustomed

standard of living. It is therefore the very least that could and should be done.

The second factor to consider is the fundamental difference between the “labor

market” and other goods markets. In a conventional market – say, the market for

oranges – as the price of the good drops, people will want to buy more of it. If I

relentlessly cut the price of oranges, eventually I will sell them all; a few sad souls will

have to go without. Now, if we put job-seekers in the place of oranges, it is obvious

what must be done for full employment: slash the price of labor! That is, slash wages

to make labor cheap enough that employers are willing to “rent” it all – full

employment.

The fallacy here should be easy to see, but sometimes it helps to follow a chain of

reasoning to its extreme. Let‟s reach full employment by paying every worker only a

penny an hour. “Wait a second,” conservatives will say. “We want wages low, but we

don‟t want them that low. That would be absurd!” Why would it be absurd? Here we

confront the key fact that workers, unlike oranges and other conventional

commodities, are also consumers who inject their earnings back into the economy.

Their various expenditures constitute income for various businesses. As Robert E

Prasch points out, people who oppose a rise in the minimum wage using the

“perversity thesis” wrongly assume that a change in wages will affect only a business‟s

costs.1 However, because workers are also consumers, a change in the wage rate will

also affect demand, which affects business volume, which affects business revenues,

which affects business profits, which affects employment. This is all the more clear

when it is remembered that low- and middle-income people – that is, the working class

in general – spends, rather than saves, a relatively high proportion of its income.

Along with increased demand often comes increased productivity. In these ways, a

wage floor can contribute to a dynamic, productive economy.

Of course, the opposite extreme is wages that are too high. According to mainstream

economists (the kind that typically wince at the idea of raising the minimum wage),

economic reality is all about equilibrium. (More accurately, since equilibrium rarely or

never happens in real life, economic reality is all about tendency toward equilibrium.)

So, while we do not want wages that are too low, for the reasons given above, we do

not want wages that are too high, either. The plain fact – with which many on the left

would do well to make friends – is that there is such a thing as a wage rate “higher

than the market can bear”, which would increase unemployment by making

employment too costly. This is what conservatives fear - or at least profess to fear –

when opposing wage floors. However, this fact does not negate the argument given

above that a wage floor – even one set relatively high – can contribute to a healthy and

efficient economy, as well as to enhancement of simple human dignity.

This leads to another important point about the minimum wage and the controversy

surrounding it. Conservative opponents of the minimum wage (and increases thereof)

give the impression that they know of no other means of cutting costs and increasing

efficiency than to slash wages or fire people. At the very least, they never mention any

other way. Now, cheapness and efficiency are certainly desirable goals. However,

cutting wages is not the only way of achieving them. Surely it is not the best way, and

it may even be the worst way. “Cutting costs and increasing efficiency” is just

longhand for increased productivity – more output per unit of input. Contrary to what

many mainstream economists seem to believe – with their “natural rate of

unemployment” – the real royal road to riches for any economy is productivity, not low

wages or high unemployment. According to economist SidneyWebb, these last two are

often just easy ways out for firms looking to pad the bottom line without having to

actually contribute something valuable to society. As Webb pointed out, a mandatory

minimum wage can compel employers to find ways of cutting costs and increasing

efficiency that may be hurtful to them in the short-run but will benefit everyone in the

long run:

Hence the mere existence of a Legal Minimum Wage, by debarring the hard-

pressed employer from the most obvious form of relief - which is of no advantage to

the community - positively drives him to other means of lowering the costs of

production, which almost inevitably take the form of increased productivity.

This rationale is more than familiar to us. It is very often in the best interest of society

to compel businesses – just as it is to compel individuals – to comply with standards of

process and behavior that may irk them. Webb pointed to environmental, safety, and

sanitation regulations as a few examples. The minimum wage falls squarely in this

venerable tradition.2

I have already discussed one difference between the “labor market” and the markets

for other kinds of goods. Another, even more fundamental, difference is that the labor

market, perhaps more than any other, is shaped by relations of power and authority.

Picking up on remarks by Keynes, James K Galbraith contends that there really is no

such thing as a “labor market”. The reason for this is that “there is no such thing as a

„supply curve for labor‟.” Unless we are to “make reality fit the model” rather than

“make the model fit reality” (which conservative economists and pundits like to do), we

must recognize that individual laborers – like individual consumers – are in no

position to pass up working for a wage. Even today, most people simply have no other

option in the way of a livelihood than to rent themselves out at an hourly rate. The

implications of this are enormous, for it means that in the so-called “labor market”,

trade is not voluntary in any meaningful sense. Again, consider the market for

oranges. If the price is too high, you can simply do without oranges, substituting

some other, cheaper fruit or go without fruit altogether for a while. Again, the “labor

market” is not like this. A person cannot just pass up a job and substitute for it some

other means of living. As Galbraith points out, this means that the employed are not

only at the mercy of macroeconomic conditions in general but at the mercy of

individual employers as well.3

In his paper, Prasch discusses all of this using the language of “unmet needs”.

According to him, a genuinely free and voluntary contract cannot be entered into by

parties, either of whose needs are not completely met. Where unmet needs do exist, a

contract is liable – if not certain - to become an instrument of extortion and

exploitation. This fact of “unmet needs” has been the source of labor unrest for

centuries, first in England, then in America, now all over the world. In fact, all

oppressors – from pimps to drug dealers to crime bosses to tyrants – operate by

keeping their victims‟ needs unmet, thereby nurturing a relationship of dependency.

Dependency of one party, of course, is bargaining leverage for the other.

Unsurprisingly, this dynamic is prominent in the related issue of unionization,

another pet object of conservative scorn. Conservative business interests pretend to

oppose unions on the grounds being discussed here, i.e. unions make employment

costly for employers. To whatever extent that is true, it is undeniably also true that

unionization gives workers leverage at the bargaining table: leverage for higher wages,

benefits, and standards of working conditions. Naturally, employers balk at this taste

of their own political medicine.

This issue of the minimum wage demonstrates splendidly what I argued at the outset

of this paper. Mainstream economics as an academic discipline and as a fount of

public policy is not now, and has never been, a science. Instead, it is an instrument of

psychological manipulation and political persuasion. That is, it is one of the most

powerful weapons in the arsenal of an ideologically motivated elite, used by it to

legitimate its abuses of power and to oppose any and all attempts at restriction of that

power.

Mainstream economists accomplish all this in two broad ways. First, they ignore

those aspects of economic reality that fail to square with the conclusions to which

their politics (not their science) compel them. Thus, as already discussed, economists

ignore the fundamental difference between the “market” for labor and markets for

conventional goods, which allows them to treat the “market” for labor as they treat

those other markets. Second, orthodox economists ignore those aspects of non-

economic reality – biological, psychological, social, historical, cultural, and political –

that influence specifically economic behavior in many complex ways and which are

often inconvenient to purveyors of ideology. In other words, these economists try to

bend reality (by constructing certain perceptions of it) to better fit their politically

motivated models, rather than adjusting scientifically regulated models to better fit

reality.

1. Prasch, Robert E. “In Defense of the Minimum Wage”. Journal of Economic Issues,

30:2. June, 1996.

2. Webb, Sidney. “The Economic Theory of a Legal Minimum Wage.” Journal of

Political Economy, 20:20. December, 1912.

3. Galbraith, James K. “The Predator State: How Conservatives Abandoned the Free

Market and Why Liberals Should Too”. Free Press (Simon and Schuster), 2008.