Most countries have some kind of minimum wage laws. They are intended to protect unskilled or inexperienced workers against “exploitation” by employers who, in the absence of such laws, presumably would not pay wages their employees deserve and need to support themselves. Yet, I argue that minimum wage laws are unethical.

Minimum wage laws are unethical because they, like other employment legislation such as affirmative action, introduce government force into employment relationships which should be based on voluntary trade between employers and employees. Businesses should be free to hire whom they choose and negotiate pay based on the prospective employees’ value to the business. The employees are free to reject the offers and to seek work with other companies that value more highly what they have to offer. Or, if the employees do not have much to offer, they are free to upgrade their skills through further training.

Being able to follow what Ayn Rand termed the Trader Principle—to trade value for value for mutual benefit and by mutual consent—is in the interest of both companies and employees. By hiring and compensating employees based on their value, companies are able to be as productive as possible and maximize their long-term profitability. This is in the self-interest of companies, in other words, their owners. (The fact that some companies choose to hire employees based on irrational principles such as racial discrimination, does not diminish the value of the Trader Principle. Companies not hiring on the basis of competence and productivity will suffer the consequence of lower competitiveness and will be forced out of business.)

Being able to freely trade value for value is also in the interest of employees and prospective employees. Being able to negotiate wages without government-mandated minimums will make unskilled and inexperienced workers more attractive to employers. This would give job opportunities to young people in particular and to those with fewer skills in general. Young people are often both inexperienced and unskilled and cannot compete with older, more experienced and skilled workers when companies are forced to pay both the same minimum, despite the lower productivity of the less experienced and less skilled young workers. The youth unemployment rates (for 15 to 24-year olds) in the developed world—typically at least twice as high as the rates for the adult population—attest to that reality. (Although many in the youth age group go to school or work part-time, the twice-as-high unemployment rates cannot be attributed to that alone but reflect the barrier to youth employment created by the minimum wage laws.)

The second reason why the ability to negotiate wages freely without government interference is in the interest of employees and prospective employees is that it unleashes businesses to maximize their productivity. This translates into more wealth being created and invested into further production, which means more job opportunities, more demand for labor—and higher wages and higher standard for living. When businesses are free to create wealth, the economy prospers and the labor market is healthy. Should an employer decide to pay lower wages than employees deserve, based on their productivity, the employees can either negotiate for an increase in pay, or to find another job.

What about the argument that government-mandated minimum wages are necessary because otherwise workers would be paid less than they deserve and need to support themselves? Again, the principle is the immorality of government-initiated force. Why would government bureaucrats as opposed to individual employees or job seekers know better what an acceptable minimum wage is? If you decide that $7/hour is an acceptable wage for the opportunity to gain work experience, to develop your skills, and to increase your employment prospects, who is the government to tell you otherwise—and to leave you unemployed because a minimum wage higher than $7/hour makes you uncompetitive? Supporting yourself at $7/hour would be challenging and would require tight budgeting and discipline and perhaps even taking on another job—until you have developed your skills and increased your productivity to be able to negotiate higher pay. And if your employer will not pay what you deserve, you are free to find another company that will.

The government has no business in dictating voluntary trade between employers and employees. The minimum wage laws are immoral and should be abolished, leaving businesses and workers free to prosper.

3 COMMENTS

  1. Always excellent, Jaana. Thank you!

    As bad as things are, I feel so fortunate to live in a time when such ideas are gaining broad exposure. I’m deeply grateful to you (and so many others) for what you do.

  2. Forcing wages in either direction skews the market, which will eventually hurt poor people. Forcing them up eliminates services and jobs as work is done elsewhere.

    Some businesses even cause their own problems by thinking in terms of the minimum wage instead of the market. For example, a couple of decades ago McDonald’s restaurants had considerable difficulty hiring enough employees in Seattle and Tokyo because their bureaucracy wasn’t offering a competitive wage in those local markets.

    Similarly in Calgary a few decades ago offices downtown couldn’t hire enough clerical staff because they weren’t paying a wage high enough to afford to live anywhere near work. Around the same time publishers in Toronto couldn’t hire enough warehouse workers, for the same reason.

    In a free market with a justice system, such companies who don’t think smart from a life-sustaining values foundation will decline, smarter ones will emerge and prosper.

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