Freedom-Fighters Forum

The Constitutional Broadside
V1 N5 A PUBLICATION OF THE TWENTY FIRST CENTURY COUNCIL

CAN A LAW WHICH SETS A MINIMUM WAGE BE CONSTITUTIONAL?

 
CONSTITUTIONAL ANSWER

1. MINIMUM WAGE LAWS CONTROL PEOPLE AND PROPERTY

The best we can expect from our elected representatives is a partial adherence to the constitution. Hon. Robert Price (Rep. Tex._ says,”…Those who receive wage protection by the Federal Government are the marginal, least productive workers. They are usually the young, the inexperienced person, the unskilled, the functionally illiterate, the disadvantaged. Often they work in highly competitive, low-profit industries with high rates of turnover and instability. Employers in those lines can pay only what the worker is worth, not what may be socially desirable, and the worker typically is worth little because of his inadequate equipment and because the price structure for goods and services in these industries typically is low.”

UNEMPLOYMENT CAUSED BY SETTING OR RAISING MINIMUM WAGE

“Where the minimum wage is raised, the employers of marginal workers have few options immediately open to them. They may either go out of business, law off least productive workers or cut back on their hours of work, or substitute capital equipment for human labor. All of these alternatives cause unemployment. The highly competitive nature of most affected businesses prevents the employer from absorbing the increased payroll out of his profits or raising his prices..raising the minimum wage simply does not automatically guarantee higher wages..If by raising the minimum wages we merely succeed in driving up prices, we have really accomplished nothing at all. The way to raise living standards of our workers is to promote job training and education so that persons who have ambition to seek a better life for themselves and their families shall have the opportunity to acquire the skills necessary to achieve that goal.: (Congressional Record-May 16, 1972-page E5255)

Editor’s note: Taxes should not be collected for the purpose of “job training and education.” Instead money should be left in the hands of employers so they can offer such programs on a voluntary basis.

2. LAWS WHICH CAST GOVERNMENT IN THE ROLE OF MASTER ARE UNCONSTITUTIONAL

President George Washington said, “Government is force. It is a faithful servant, but a fearful master.”

The United States Constitution cast the government in the role of “servant.” Such laws as minimum wage laws cast the government in the role of “master.” They are, therefore, unconstitutional. Such laws permit government officials to force a citizen owner to run his business their way. Thus he loses control of the business and becomes a slave of the state.

UNCONSTITUTIONAL ANSWER

1. JOHN W. SCHMITT SAYS MINIMUM WAGE PROTECTS WORKER

John W. Schmitt, President of the Wisconsin AFL-CIO says in the Milwaukee Journal, “One of the ridiculous and in-humane arguments being advanced by the Nixon administration and some newspaper editorials these days is that an increase in the federal minimum wage requirement would create more inflation and unemployment. These arguments have been popping up as a result of the bill currently before Congress to modernize the Fair Labor Standards Act by raising the minimum wage from the 1966 level of $1.60 an hour to $2.00 and extending coverage of the minimum to some 17 million workers who still lack even this protection.

Editor’s note: WHO PROTECTS THE EMPLOYERS?

“You don’t have to be a learned economist to know that there is certainly no inflationary threat in assuring the lowest paid workers in the nation a bare, subsistence wage. That is all that the proposed $2.00 an hour could possibly provide in today’s high cost of living economy. At the $2.00 rate, a full-time, year round worker would earn approximately $4,000.00 this isn’t much above the government defined poverty level of $3,900.00 for a family of four on the basis of 1970 living costs, and living costs have continued to skyrocket in the year and a half since then… “Rather than being a cause of inflation, the proposed minimum wage increase is absolutely essential to restoring the purchasing power of those workers at the very bottom of our national economic ladder. For the population generally, an up-to-date and realistic minimum wage is also the best solution available for reducing the growing welfare burden..”(Congressional Record – May 11, 1972-page E5131-placed by Hon. Clement Zablocki (D. Wis.)

REGARDING THE MINIMUM WAGE

1. GOVERNMENT REGULATION OF WAGES IS OLD PRACTICE

“Government regulation of wages is, of course, an old practice. In Western Europe there existed a wide range of wage regulations prior to the rise of classical liberalism in the nineteenth century. The North American continents was largely free from government manipulation of wages during the period which saw wages here become the highest in the world; however, from 1912 to 1923 a mis-guided humanitarian concern for the poor resulted in the establishment of minimum wage laws in fifteen states, Washington, D.C., and Puerto Rico. These laws, when tested in the courts, were declared unconstitutional as violations of the Fourteenth Amendment.

2. FAIR LABOR STANDARDS ACT OF 1938

“The idea of a minimum wage law was revived with the Fair Labor Standard Act of 1938, based in the Federal government’s power to regulate interstate commerce. The legal minimum wage was set at 25 cents an hour in October 1938.” Since then the minimum has been raised until in 1963 it stood at $1.25 an hour.

3. CLASSICAL THEORY OF ECONOMICS REGARDING MINIMUM WAGE

“Before presenting the results of empirical studies made on the effect of minimum wage laws, it is desirable to review the results predicted by the classical theory of economics, to know what to look for in the mass of data published by the Department of Labor’s Bureau of Labor statistics. Let me hasten to assure the reader at this point that it is scientifically sound to use theory as a guide in the interpretation of data. Indeed, I hope to show that failure to consider data deemed important by theory has led many people to overlook some of the harmful consequences of our present minimum wage law.

a. EMPLOYERS FORCED TO PAY HIGHER WAGES WILL EMPLOY FEWER WORKERS

“Simple application of the law of supply and demand suggests that employers forced to pay higher wages will employ fewer workers. This indicates that the industries affected will respond to minimum wage increases by either laying off existing help, or hiring fewer new workers than they otherwise would have done.

“As a consequence of reduced employment opportunity in industries “protected” by the minimum wage coverage, one would expect an influx of workers who would “normally” have been employed in the protected industries. Thus, theory predicts that unprotected industries should show increases in employment or unemployment or both depending on the particular industry’s ability to absorb the new workers as the minimum wage is raised. As a result of the increased competition for jobs one would also expect that wages in the nonprotected industries would either fall, or else rise more slowly than normal, when the Federal minimum wage is increased.

“As the legal minimum is extended to more workers, or is raised higher above the market value of the worker as determined by his productivity, the nonprotected industries will be less able to absorb the workers precluded from employment in the protected industries. Hence, one would expect (all else being constant)an increase in the number of persons structurally unemployed. This should be greatest among persons with little skill, or those who are for one reason or another likely to seek employment in the low-pay jobs most affected by the law.

“In the normal operation of the market economy, if unemployment develops in a given location (due, for example, to decreases in the demand for a product produced in that area), wages paid in that region tend to be reduced. Theo lower wages serve as an inducement for the industry to move into the area, particularly industry such as textile and light manufacturing plants which do not require highly specialized skills in their workers. Insofar as minimum wage laws ten to reduce the wage differential between “depressed areas” and areas of normal employment, they would be expected to retard the movement of industry into depressed areas.

b. EMPLOYERS FORCED TO PAY HIGHER WAGES WILL REPLACE LABOR WITH MACHINES

“Another consequence of minimum wage laws is the “Ricardo effect,” i.e., a high minimum wage causes employers to substitute machinery for labor because of the increased cost of labor. It has been suggested by some that Ricardo effect is desirable because it promotes automation. But this neglects the fact that it is usually laco of capital which checks a businessman’s endeavor to improve the equipment of his firm. Since the minimum wage law does not create additional capital, the forcing of more capital expenditures in one industry leaves less for other industries where it would have been employed more efficiently, i.e., would have yielded a higher return on investment. Thus, the economy as a whole does not benefit from the Ricardo effect. And while the worker in the protected industry who has higher pay benefits from the law, the worker who is lad off or replaced by a machine may see things in a different light.

c. SUMMARY OF THE CONSEQUENCES OF INTERVENTION

“To summarize, classical economics predicts reduced employment opportunity in protected industries, lower wages and unemployment in both types of industries than would have otherwise been the case. In addition, a shift of capital expenditures from the rest of the economy into some protected industries would be expected. If the unprotected industries could not absorb the influx of workers precluded from the protected industries, the decreased employment opportunity in the latter would cause an increase in the structural unemployment contributing to the development of “depressed areas.” The classical theory does not claim that no worker will benefit, or even that wages in the protected industries cannot be raised for those workers fortunate enough to remain employed.

“Proponents of minimum wage laws, or at least all of them that I have read, base their support on the assumption that the classical theory is invalid (if indeed they indicate having thought about it all) and that employment opportunity will not be affected. In addition, they like to stress the humanitarian purpose of the law. On this point I offer two observations: (1) Since a law is not animate, we should rather talk about the purpose of the legislators who supported it. But this is impossible to determine without telepathy or a truth serum. Perhaps a congressman voted for it because he thought it would help the poor, or because it would aid in his re-election, or because he wants to reduce the likelihood of industry moving into this state or district. (2) The “purpose” is not relevant to the actual effect.

4. STUDIES PROVE CLASSICAL THEORY TO BE ACCURATE

“When the Federal minimum wage law was passed in 1938, there were no data available, from this country at least, on the effects of such a law. One could claim that he “knew in his heart” the classical theory is wrong. Now, however there are both theory and data.

“It is sometimes suggested in jest (and even in earnest) that since average wages in this country have increased, and the legal minimum wage rate has increased, the latter caused the former. This argument does not even qualify, since the increases in the legal minimum in each case followed the average wage increase. I, for one, find it difficult to believe that the national average wage rose past the 75 cents per hour mark in the 1970’s due to the minimum wage boost to 75 cents per hour in January of 1950. Studies on minimum wage law impact have to done a bit more carefully than this.

For one thing, since most workers are not directly affected by any boost in the legal minimum, either because they already earn more than that level or because they are excluded from coverage, the effect can be seen only by studying those industries or geographic areas where a relatively large portion of workers receive low wages. An intelligent study must consider employment as well as wages, and must study the effect on industries excluded from coverage of the law as well as those included.

a. SUPPORT FOR THE LAW COMES FROM GOVERNMENT STATISTICS?

“Support for the law comes from studies printed in the Department of Labor’s Bureau of Labor Statistics’ publication, MONTHLY LABOR REVIEW, so let us consider these carefully. The May, 1960, MONTHLY LABOR REVIEW (v. 83, NO. 5 PP. 472-830) contains the most recent such study entitled “Effects of the $1.00 Minimum Wage in Six Areas 1956-59.” The six areas were selected in low-wage regions of the South where the law has a measurable effect. The survey reports average hourly wages in the areas before and after the legal minimum was raised to $1.00 on March 1, 1956, and shows that in the industries covered by the law, average hourly wages jumped by around 10 per cent in most of the six regions. But no data are given on employment and unemployment figures in these regions at this time, and nothing is said about possible reductions in the work force. Indeed the average wage in an industry can be raised by simply firing the lowest-paid employees. Hence, this Bureau of labor Statistics’ study is almost completely useless as an attempt to test the predictions of classical economic theory.

“The study does contain some interesting figures, however. Wages in the industries in these six areas which were not covered by the minimum wage law showed an average reduction in one of the areas and they either stayed the same or increased by only a per cent or two in the other five areas. This was during an upswing in the economy as a whole, when wages would normally be expected to rise. Thus, the theoretical prediction that wages in unprotected industries will either fall or rise more slowly than usual appears to be supported. It should also be noted that this study shows that in all six areas wages in covered industries were already higher than in uncovered industries before the $1.00 legal minimum went into effect. Thus the law produced an even greater difference in wages between the “high” and “low” pay jobs.

b. EFFECT OF RAISES IN THE LEGAL MINIMUM ON EMPLOMENT SUMMARIZED

“The effect of raises in the legal minimum on employment in various low-wage industries covered by the law is summarized in MANPOWER, PRODUCTIVITY, AND COSTS by Professor Yale Brozen of the University of Chicago. In the two years following the establishment of the 25 cents per hour minimum wage rate in October, 1938, 14 per cent of the workers in seamless hosiery plants lost their jobs. Likewise, when the rate was raised to 75 cents an hour employment in southern pine saw mills dropped by 17 per cent. Similar employment drops occurred in the cigar, fertilizer, shirt, footwear, and canning industries. The Bureau of Labor Statistics found an 8 percent decline in total employment during the year following the increase to $1.00 in the five low-wage industries it chose for detailed examination. The application of the $1.00 minimum wage in 1961 to a certain sector of retail trade, brought an 11 percent decline in employment to that part of retail trade, while retail trade employment in the other sectors and in the nation rose. In each of these cases cited above, while employment in the protected low-wage industries dropped, sales, production, and employment were rising in the United States as a whole, because these figures were compiled during a cyclical upswing.

c. STUDY SHOWS INCREASE IN MINIMUM WAGE CAUSES LOSS OF JOBS AMONG NEGROES, FEMALES, YOUTH AND RURAL FARM WORKERS

“Another study of the economics of the minimum wage law is the Ph.D. thesis of David E. Kaun, Stanford University (1964), WHICH IS SUMMARIZED IN DISSERTATION Abstracts, 25, no. 2, p. 881. Kaun studied fourteen low-wage industries, with large segments located in the south (where the direct effects of the minimum wage are greatest). He considered the behavior of wage distributions, employment, and labor force composition, among other things. His list of findings includes “relative adverse employment effects occurring where the impact of the minimum wage is greatest” and “increases in the minimum wage appear to have adversely affected employment opportunities for certain classes of labor, namely, Negroes, females, younger workers, and workers living in rural farm areas.” He concludes that his analysis “results in conclusions generally in agreement with the implications derived from the competitive hypothesis, ” i.e., classical theory.

d. CORNELL UNIVERSITY STUDY SHOWS RESULTS ON NEW YORK RETAIL TRADE

“A Cornell University study of the $1.00 minimum wage law on New York retail trade, some of the results of which are given in Monthly Labor Review, March, 1960, pp.238042, found that the law resulted in

1. Lower profits to stores
2. Reduced hours for part-time help
3. The laying off of workers, especially “inefficient” ones, which, the study explains, means elderly, handicapped, and part-time help
4.Reduced store hours, and
5. “More careful recruitment of employees, which is explained to mean exclusion of the elderly, Negroes, and other “less acceptable” employees.

e. PH.D. THESIS SHOWS EMPLOYMENT DECLINE DUE TO MINIMUM WAGE

“The Ph.D. thesis of M.A. Malik, University of Michigan (1963), summarized in Dissertation Abstracts, 25, no. 3, p. 1616, reports that of twelve low-wage industries studied in the United States, eleven experienced employment declines in the immediate period of two or three months after the establishment of the $1.00 minimum (remember this was during a general economic upswing). Of these, ten continued to show employment declines a year later. Since there are many other constantly changing factors which influence the employment situation in any given industry, Malik tried to find alternate explanations for the employment reductions in these industries. But in at least five of the industries he could find no other reasonable explanation—the employment decline must be due to the minimum wage law. As expected, the industries where the law had the greatest impact registered the largest declines in employment.

f. STUDY SHOWS WORKERS DRIVEN FROM COVERED INDUSTRIES SEEK WORK IN NONCOVERED INDUSTRIES

“The final study I shall cite is the effect of minimum wage law increases on a noncovered industry, household workers, by Yale Brozen in the Journal of Law and Economics, 5, pp. 103-109, October, 1962. Studying the period from 1950 to 1962, Professor Brozen’s figures, from the Department of Labor and Bureau of the Census, show that in each instance when the minimum wage rate rose, the number of persons employed as household workers rose. The rise was not the result of unemployed household workers finding jobs, since there was also a rise in the percentage of household workers unemployed in each instance (except 1961-62k when the decline in unemployment percentage accounts for only 15 per cent of the rise.) This increase in both employment and unemployment in the noncovered industry with raises in the legal minimum wage is exactly as predicted by classical economics, and indicates that workers driven or precluded from jobs in covered industries by the law must seek work in noncovered industries (like household work.) Figures given on wage rates in household employment indicate that the wages are lower than they would have been without the Fair Labor Standards Act.

g. GOVERNMENT OFFERS INVALID REASONS FOR MINIMUM WAGE LAW

“As evidence of curtailment of employment in low wage industries resulting from the minimum wage law has mounted, some proponents of the law have adopted a new rational for their position; they say the law is good because it helps to eliminate “sweatshops.” Since some industries are covered and some are exempt from coverage by the Fair Labor Standards Act, if some “sweatshops” have been eliminated, it has caused people employed in them to find jobs in others, generally at even lower wages. If the law covered EVERYONE in the economy, (including babysitters and the like) those who were saved from sweatshops would have nowhere to go to find jobs. It is all very well for the “liberal” theorist to claim that a man is better off unemployed than working in a “sweatshop,” but shouldn’t the decision rest with the man in question?

h. LOW PAYING JOB MAY GIVE EMPLOYEE CHANCE TO LEARN BUSINESS

“One additional observation on this point: often a low-paying job gives a person the chance to learn the business or demonstrate his ability, and can lead to a higher-paying position. Consider the number of company presidents and high officials who started their careers in low-paying jobs, and imagine where they might be today if they had been “protected” against being offered their first job by a minimum wage law.

i. SUMMARY

“Thus, we see that the minimum wage law can raise “average” wages in an industry by reducing the employment of low-wage help. In some respects the effects are like that of a tariff—it is easy to recognize those who benefit from the law, but harder to determine those who suffer from it. We can see the worker who is given a raise because of the increased minimum, but the worker who is laid off when he otherwise would not have been, and the man who is not hired who otherwise would have been, are harder to identify. But while the harmful effects of the tariff are spread over the whole economy, those harmed by the minimum wage law are mostly the poor, the unemployed, the elderly, and the unskilled.” (adapted from the article “Regarding the Minimum Wage,” the FREEMAN, July 1965, pp. 13-21, by Dr. James E. Blair)

THE REAL PRICE WARS

by Leonard E. Reed,

President of The Foundation for Economic Education

EVERYBODY FAVORS FREEDOM, BUT…!

“Everybody favors freedom, but…! Countless minds are filled with “buts” of every description and variety. So numerous are freedom’s “shortcomings” that in most company it hasn’t a leg to stand on. State interventionism, socialism, thus engulfs those who favor freedom, but…!

“For instance, over and over again we hear, “I believe in freedom but in a free and unrestricted market we have price wars; the big fellows cut prices below cost to run the little fellows out of business after which monopoly prices may be charged.”

“Such so-called price wars are the minor competitive pricing flurries between bakers, filling station operators, and the like. Recently, consumers in the New York area enjoyed a “coffee war” But these bids for more business are nonviolent and, thus, are not wars at all. They are nothing more than intensified, competitive pricing offers to serve mass markets.

2. COMPETITIVE PRICING IS A DEVICE FOR COOPERATING

“Actually, competitive pricing is a device for cooperating. As consumers, we look not only at quality but at price to determine with which supplier we shall cooperate in trade. How else are we to decide what bread to buy, with which baker we shall cooperate? Many men may cooperate to produce an item, but their customers are cooperators of the business, too.

“True, some businesses fall by the wayside as have some 1,600 different automobile manufacturers in the history of that industry in the United States. Intensive competitive pricing only steps up the rate of dropouts; it does not alter the final decision. It simply let’s all producers know sooner than otherwise how they rate in the struggles to serve self and others. And this is the way it should be. The alternative would be for consumers to subsidize every incompetent person or group in every enterprise ventured. Unthinkable!

These so-called price wars and the monetary benefits they confer on consumers are not a social problem and do not merit special attention by the student of political economy. They are mere ripples in the mainstream of open competition.

3. WILL THE REAL PRICE WARS PLEASE STAND UP?

“There are, however, mighty, economy-wrecking price wars- real ones- that are rarely thought of as such and seldom diagnosed with accuracy. As a consequence, remedial efforts often tend to aggravate the conflicts and to make peaceful cooperation and trade more difficult.

“We should bear in mind that violence is the distinguishing feature of war. We can infer from this that ANY PRICING THAT RESTS ON THE USE OR THE THREAT OF FORCE—VIOLENCE –MUST BE DEFINED AS A PRICE WAR.

“What then, are the real price wars? Rent control qualifies, for it rests on coercive pricing. So does the minimum wage law; if anyone doubts it, let him absolutely disobey and observe the consequences. The prices of wheat, cotton peanuts, tobacco, and so on are fixed by force. Every form of price control forces either buyer or seller, or both, to deal at prices not mutually acceptable.

“The strike is the perfect example of a real price war. Why? The strike is a method of pricing; strikes rest on violence or the threat thereof; thus, ALL STRIKES ARE PRICE WARS.

“The strike is the markup device used by trade unions, organizations of otherwise independent sellers of labor having among their purposes the coercive manipulation of market price to their own advantage.

“The striker is not content just to withhold his own services from the market; he is determined that no one else shall enter the market he has closed. Any trading must be at his price or not at all; and his picket line. Governments often sanction, encourage, and uphold such violence- in effect, forcing taxpayers to subsidize (employ) the strikers.

4. VIOLENCE AS A METHOD OF PRICING IS INTIMIDATION NOT COOPERATION

“Violence as a method of pricing is intimidation, no cooperation. Violence or its threat at best results in unwilling a distinguished from willing exchange. For varying periods the consequence is no exchange at all, and often exchange between combatants is brought to a permanent standstill. Strikes are price wars; indeed, THEY ARE NO LESS THAN CIVIL WARS. The object in war is not to serve the opponent but to injure him- to gain at his expense. The grave risk is that both sides may lose.

“To observe which side comes out on top in warfare is not to be sure of a winner. The side on top may be as permanently fastened in that position as is the side being held down. Both sides lose in these unfree positions. Contrast this with the mutual gain derived from the peaceful voluntary exchange of goods and services.

5. VIOLENCE DESTROYS WEALTH AND DOWNGRADES MAN

“We should assess all violence as it affects the quality of the ideas men hold. Evaluated in this manner, it is easy to see that violence not only destroys material wealth but also downgrades may intellectually, morally, spiritually, and ideologically. Reflect on the prospects for cooperation; for instance, when one slaps a spouse is the face! Each shot fired at a human being and each threat on violence whether in shooting or price wars, is a step away from the ideal, a blow to the creative process.

6. THE CURE FOR WARS

“The cure for wars- including price wars- is an intelligent interpretation of self-interest. How can I realize my creative potentialities except as I be free? And I cannot be free if I am holding you down. Or vice versa! My freedom depends on yours and yours on mine. This is so simple and self-evident that one wonders why it is ever questioned.

“As to the price of labor- yours or mine- simply free the market by removing every trace of violence or the threats thereof. Let competition be open and unlimited. Maximize, rather than minimize, the prospects for mutual gain through a cooperation. And be not misled by the claims that trade unions or governments raise the wage level.

“In any event, let us confine the term “price wars” to those pricing activities resting on force, coercion, violence” (The FREEMAN March 1968, pp. 144-146).