Across North America, the “living wage” movement has recently gained momentum as San Francisco, Los Angeles, Seattle, and Alberta have either fixed their minimum wage at $15 per hour or announced plans to do so. Elsewhere, in locations such as Oregon, British Columbia, Chicago, and New York City, elected officials and activists are pushing for similar legislation. As anti-poverty groups and business lobbyists square off over such measures, an appreciation of the information that prices convey is invariably missing from the debate. Where do they come from, and what is their critical socio-economic role? To understand the price mechanism is to understand why tinkering with prices through government policy is dangerous, and why controls like the minimum wage are a bad idea.
The implicit assumption underlying the minimum wage is that since prices are already artificial creations, why not fix them by decree? It is true that prices are artificial in the trivial sense that they would not exist in the absence of human beings. Although they are the product of human activity, this does not make them the product of human design. Take, for example, a crowded classroom versus a crowded park: A teacher with 35 students is in that predicament because a school administrator decided that it would be so. If, however, there is no room to put down your basket at a picnic, it is not because a bureaucrat decided that thousands of people would flock to the same place at the same time. The crowded park is the result of many individual, uncoordinated decisions that happened to produce a result that no individual intended.
Prices are similar. When buying or selling something, we must decide the price that we would be willing to accept. If the buyer’s number converges with the seller’s, a transaction occurs. Over time, countless individual decisions by such producers and consumers generate the “market price” for a good or service. That dynamic is true for everything that we buy and sell, from cars to shoes to — yes — labor. Nurses, for example, earn far than most artists not because hospitals choose to be more generous than art patrons, but because the price at which supply and demand meet for nursing is much higher than for art.
It’s important to emphasize that if the hourly market wage is $50 for nurses and $5 for artists, the conclusion that follows is that consumers value the nurse’s labor more than the artist’s. It certainly does not follow that nurses have more inherent worth as people, or that artists are less valuable as human beings. Crucially, this disparity is also a signal to others who are pondering their career choices. The wage gap is a message from consumers to producers and potential producers: we want nursing more than we want art. In other words, prices allow producers and consumers to communicate their desires to each other.
The lower market wage for artists does not arise from someone’s arbitrary decision — or even someone’s informed decision — because no “decision” was involved. That wage instead results from an ongoing conversation between producers and consumers about how much art is for sale relative to how much art people will buy. That same conversation occurs for every good and service, and every offer to buy or to sell adds to the discussion. When the government fixes a minimum wage, however, it inserts itself in the discussion and tells the parties that the artist is not permitted to sell his labor at a price lower than some politically determined hourly rate. If no one is willing to pay him at least the minimum wage, whether to create art or to do so something else, then his hourly pay will be neither $15 nor $5, but instead $0 — unless he works illegally. In effect, each person’s skills and the demand for them mean that each of us has a “maximum wage,” the highest price that anyone is willing to pay for our labor. Anyone whose maximum wage falls below the legally mandated minimum wage is effectively locked out of the job market.
Prices are a way of carrying on the dialogue between producers and consumers, so price controls not only diminish economic freedom but also infringe on freedom of speech. They make certain lines of discussion illegal. For instance, a producer cannot convey his willingness to work for a wage lower than the legal minimum, any more than a consumer can convey her willingness to pay it. Granted, the penalties for speaking prohibited messages — i.e., paying less than the minimum wage — are far less draconian than those for criticizing a repressive government. But they remain penalties for exercising free speech nonetheless. And, like any restriction on free speech, the minimum wage is most harmful to the least politically powerful members of society. Such laws exclude unskilled workers from a conversation that allows them to discover which of their limited options is most in demand and most apt to lead to steady employment, the acquisition of more valuable skills, and a wage that will rise over time.
Good intentions are laudable, but policies should be judged on their results. Just as a mandated minimum price of $20 per screwdriver would harm your local hardware store, a minimum wage of $15 per hour will harm unskilled workers. Legislating away the bottom of the pay scale does not suddenly bump up an unskilled worker’s maximum wage. Instead, it further marginalizes him by excluding him from legal employment, thereby robbing him of the opportunity to learn on the job and develop new, more valuable skills. When minimum wage legislation restricts the freedom of producers and consumers to speak freely to one another, it is the least fortunate among us who suffer most.