In January Vermont legislators, including at least one Republican, introduced a bill of “economic rights” which  includes provisions for raising the minimum wage to $15.00 per hour and compelling businesses to provide a minimum of 1 hour of paid personal time per 30 hours worked. The purported goal of the bill is to provide people with more money, thereby stimulating the economy and reducing inequality. Sadly, the supporters of such legislation tend to look only at the obvious and intended effects of the law while neglecting the unintended consequences or unseen effects.

The 19th century economist Bastiat explained this issue of the seen and the unseen effects in what is known today as the “broken window fallacy.” He did so by telling the story of a boy who breaks the window of a bakery. Because the baker must pay the glazier to replace the window which allows the glazier to buy a new pair of shoes, the shoemaker to buy a new suit of clothes and so on, the boy is praised by the public for stimulating the economy. The fallacy is that by looking only at the positive effects of the baker replacing his window one fails to see the fact that the baker is worse off than before, he has a window but less money, as well as ignoring the positive effects that would have come from other uses the baker could have used his money such as buying shoes or a suit for himself. In the end the economy as a whole in this example is worse off by at least the amount of value of the broken window.

As the public in the broken window fallacy, so those in favor of the government forcing a business to pay higher wages only look at the benefit to some workers, provided that those workers retain their jobs, but ignore what the business would have done with that money if left free. Now that their cost of labor is higher, a growing business is unable either to hire the additional employees they had planned on, or to buy new machinery which would have allowed them to operate more efficiently resulting in lower prices to consumers and higher profits to the business.  Perhaps the business owner(s) would have simply spent or invested the money elsewhere benefiting other businesses and their employees.  These “unseen” choices, which would almost certainly yield greater benefits, are now out of reach.

We must also consider the effect of the “unseen” on the potential employees who now will unable to find a job. Imagine a young person just out of high school who does not yet have a firm idea what he wants to do with his life and decides to work for a year or two while he decides. As he is inexperienced and his expenses are low he is willing to work for $10 per hour and is unconcerned about paid time off but with the proposed “economic rights,” given his lack of skills, he is now unable to find a job. The same would be true of someone who needs to enter, or re-enter, the workforce later in life with little or no job skills.

Obviously such so-called “economic rights” do not create new wealth, but merely inefficiently redistribute existing wealth. As such, the best that can be said for such programs is that they benefit some individuals or businesses at the expense of others. Even these “benefits” may be undercut or eliminated if the increased costs of labor results in a general increase in prices or if the (mis)allocation of capital to consumption rather than investment leads to slower overall economic growth.

In part 2: the fundamental issue with such laws and the root of why they ultimately fail.