Why a Minimum Wage is Misguided

During the Great Depression, Herbert Hoover coerced captains of industry into “voluntarily” propping up wages. President Hoover is quoted in Murray Rothbard’s America’s Great Depression (available for free here): “[Wage rates] were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.”

Rothbard continues: “But was there any causal link between this fact and the highest unemployment rate in American history? This question Hoover ignored.”

George Reisman is an economist of the Austrian School who studied directly under Ludwig Von Mises at New York University. My Austrian Economics Professor calls Reisman his favorite living Austrian Economist. In this essay, Reisman disposes of both the popular and scholarly Keynesian theories that wages must remain high for the common good.

“The popular version of the Keynesian doctrine, which is championed above all by the labor unions, is simply that a fall in wage rates, in reducing the incomes of wage earners, causes a fall in consumer spending, which allegedly serves to worsen the problem of unemployment. This doctrine can be disposed of fairly simply. . .

First of all, it overlooks the fact that at lower wage rates more workers will be employed. The effect of this is to enable total wage payments and consumer spending in the economic system to remain the same or even increase while the wages of the individual worker decline. For example, 10 workers each employed at 90 percent of the wages earn the same total wages and can spend just as much in buying consumers’ goods as could 9 workers each earning the original wage. (It’s as simple as the fact that 10 times .9 equals 9 times 1.) And, of course, more than 10 workers employed at 90 percent of the wage per worker would earn more collectively and spend more for consumers’ goods collectively than was possible before.

The popular version of the Keynesian doctrine also overlooks the fact that even if total wage payments and consumer spending did decline, business sales revenues would not decline insofar as reduced wage payments made possible increased expenditures for capital goods. Indeed, to the extent that additional spending for capital goods took the place of wage payments and the consumer spending supported by wage payments, not only would sales revenues in the economic system remain the same, but, what is particularly important for the process of economic recovery, the amount of profit earned on those same total sales revenues would actually increase.” (Read more from mises.org)

See Also Milton Friedman’s commentary:

The minimum wage, like almost all government regulation, has the effect of reducing competition and impoverishing our country.