Minimum Wage – An Historical View, Part 2

New York City 1920sIn part 1 of this series I introduced the Supreme Court decision from the 1923 Adkins v Children’s Hospital to illustrate the opinion of minimum wage laws that was still common prior to the Great Depression. This decision struck down a minimum wage law in the District of Columbia as an unconstitutional infringement of the individual’s right to freely enter into contracts regarding their own labor. It was this emphasis on the individual which was the focus of the first part of this series. The individual was seen as having the right and ability to decide for themselves what wage they were willing to accept for their labor without interference from a government body. The decision argued that it is impossible for a government body to determine what an appropriate “living” wage would be as this decision depends on the set of circumstances that are unique to each individual.

Today, and likely not before the Great Depression either, no one makes the argument, at least not publicly, that individuals are not capable of making such a decision for themselves. Instead, they argue that businesses, especially large businesses such as Wal-Mart, have so much power that the worker is at a disadvantage in negotiating for her wages. They claim that this results in businesses paying such low wages that workers having to rely on government assistance to get by. This view was summarized by Senator Bernie Sanders in 2014, “Walmart pays its employees so little that many of the low-wage workers must rely on food stamps to feed their families and Medicaid to pay doctors when their children get sick.”

Was this view accepted prior to the Great Depression? As this quote from the Adkins v Children’s Hospital decision shows, it did not.

The feature of this statute which, perhaps more than any other, puts upon it the stamp of invalidity is that it exacts from the employer an arbitrary payment for a purpose and upon a basis having no causal connection with his business, or the contract or the work the employee engages to do. The declared basis, as already pointed out, is not the value of the service rendered, but the extraneous circumstance that the employee needs to get a prescribed sum of money to insure her subsistence, health and morals. The ethical right of every worker, man or woman, to a living wage may be conceded. One of the declared and important purposes of trade organizations is to secure it. And with that principle, and with every legitimate effort to realize it in fact, no one can quarrel; but the fallacy of the proposed method of attaining it is that it assumes that every employer is bound at all events to furnish it. The moral requirement implicit in every contract of employment, viz., that the amount to be paid and the service to be rendered shall bear to each other some relation of just equivalence, is completely ignored. The necessities of the employee are alone considered, and these arise outside of the employment, are the same when there is no employment, and as great in one occupation as in another. Certainly the employer, by paying a fair equivalent for the service rendered, though not sufficient to support the employee, has neither caused nor contributed to her poverty. On the contrary, to the extent of what he pays, he has relieved it. [emphasis added]

This is still true today. While Bernie may claim that Wal-Mart’s “low wages” cost the tax payers $6.2 billion in food stamps and other government benefits, I am assuming here that this value is accurate, he does not stop and consider how much it would cost if these workers didn’t have these jobs. How much higher would the bill be for government support be then? (I should state here that I do not believe it is the government’s job to provide this support, no matter how great or small the “need” is.)

[Minimum wage law] compels him to pay at least the sum fixed in any event, because the employee needs it, but requires no service of equivalent value from the employee.

In a free market, wages are largely determined by a complex interplay between the employer and the worker.  How much value can the job produce when expertly filled? How do the skills of the worker match up to the requirements of the job? What other expenses are incurred to produce the value created by the job, i.e. how much can the employer actually afford to pay? How much does the employee need in order to live? All of these questions and many more get factored in to the decision of how much a given worker will be paid. All of these factors except one are largely ignored by minimum wage laws, past and present. Turning again to the decision:

The law takes account of the necessities of only one party to the contract. It ignores the necessities of the employer by compelling him to pay not less than a certain sum not only whether the employee is capable of earning it, but irrespective of the ability of his business to sustain the burden, generously leaving him, of course, the privilege of abandoning his business as an alternative for going on at a loss. Within the limits of the minimum sum, he is precluded, under penalty of fine and imprisonment, from adjusting compensation to the differing merits of his employees. It compels him to pay at least the sum fixed in any event, because the employee needs it, but requires no service of equivalent value from the employee. It therefore undertakes to solve but one-half of the problem. The other half is the establishment of a corresponding standard of efficiency, and this forms no part of the policy of the legislation, although in practice the former half without the latter must lead to ultimate failure, in accordance with the inexorable law that no one can continue indefinitely to take out more than he puts in without ultimately exhausting the supply. The law is not confined to the great and powerful employers, but embraces those whose bargaining power may be as weak as that of the employee. It takes no account of periods of stress and business depression, of crippling losses, which may leave the employer himself without adequate means of livelihood. To the extent that the sum fixed exceeds the fair value of the services rendered, it amounts to a compulsory exaction from the employer for the support of a partially indigent person, for whose condition there rests upon him no peculiar responsibility, and therefore, in effect, arbitrarily shifts to his shoulders a burden which, if it belongs to anybody, belongs to society as a whole. [emphasis added]

So we see that, just as with its view of the individual in regards to minimum wage laws, prior to the Great Depression, but not now, it was largely understood that businesses have the right to bargain freely with employees as to their wages. Just as the unique circumstances of the employee must be taken into account in any such bargain, so to must those of the employer. When a minimum wage law compels a business to pay wages higher than they might otherwise, this right is violated. Violated ulitmately to the detriment of both employer and employee.

If it was understood in 1923 that both the individual and the business have the right to freely negotiate the terms by which the individual could sell his labor to the business, why are we in the state we are today? Why do so few people recognize this right today and instead accept that it is proper, even good, for the government to force arbitrary terms on them? We’ll take a look at that in part 3.

4 thoughts on “Minimum Wage – An Historical View, Part 2

  1. Pingback: Minimum Wage: An Historical Viewpoint, Part 1 - Order From Chaos

  2. Jim BoardmanJim Boardman

    I find irony in Bernie or any other politician complaining about how Walmart pays their employees so little they have to rely on food stamps. When I was in the military, most of the enlisted members with families relied on food stamps and donations to survive too. Just think how many people could be fed on what Bernie makes a year.

    1. Jim BoardmanJim Boardman

      I don’t get what people see. Or the short sightedness of a $15hr minimum wage. It may be Econ 101, degree in business or just years working for a big company and every time expenses increase (or profits decrease) cut backs start. The easy stuff is first and eventually layoffs and price increases and inflation. A business that doesn’t make a profit can’t stay in business.

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