3. Minimum Wage Rates
The very essence of the interventionist politician's wisdom is to raise the price of labor either
by government decree or by violent action on the part of labor unions. To raise wage
rates above the height at which the unhampered market would determine them is considered
apostolate of the eternal laws of morality as well as indispensable from the economic
Point of View.
Whoever dares to challenge this ethical and economic dogma is scorned both as depraved
and ignorant.
Many of our contemporaries look upon people who are foolhardy enough to cross a picket
line as primitive tribesmen looked upon those who violated the precepts of taboo conceptions.
Millions are jubilant if such scabs receive their well-deserved punishment from the hands
The Market Wage Rate tends toward a height at which all those eager to earn wages get jobs, and all those eager to employ workers can hire as many as they want.
It tends toward the establishment of what is nowadays called full employment.
Where there is neither government nor union interference with the labor market, there
is only voluntary or catallactic unemployment.
But as soon as external pressure and compulsion, be it on the part of the government or on
the part of the unions, tries to fix wage rates at a higher point, institutional unemployment
emerges.
While there prevails on the unhampered labor market a tendency for catallactic unemployment
to Disappear.
Institutional unemployment cannot disappear as long as the government or the unions are
successful in the enforcement of their fiat.
If the minimum wage rate refers only to a part of the various occupations while other
sectors of the labor market are left free, those losing their jobs on its account enter
are the free branches of business and increase the supply of labor in them.
When unionism was restricted to skilled labor mainly, the wage rise achieved by the unions
did not lead to institutional unemployment.
It merely lowered the height of wage rates in those branches in which there were no efficient
unions or no unions at all.
The corollary of the rise in wages for organized workers was a drop in wages for unorganized workers.
But with the spread of government interference with wages and with government support of unionism,
conditions have changed.
Institutional unemployment has become a chronic or permanent mass phenomenon.
Writing in 1930, Lord Beveridge, now an enthusiastic advocate of government and union meddling
with the Labor Market, pointed out that the potential effect of a high wages policy in
causing unemployment is not denied by any competent authority.
In fact, to deny this effect is tantamount to a complete disavowal of any regularity
in the sequence and interconnectedness of market phenomena.
Those earlier economists who sympathized with the unions were fully aware of the fact that
Unionization can achieve its ends only when restricted to a minority of workers.
They approved of unionism as a device beneficial to the group interests of a privileged labor
aristocracy and did not concern themselves about its consequences for the rest of the
wage earners.
No one has ever succeeded in the effort to demonstrate that unionism could improve the
It is important to remember also that Karl Marx did not contend that unions could raise
the average standard of wages.
As he saw it, the general tendency of capitalistic production is not to raise but to sink the
average standard of wages.
Such being the tendency of things, all that unionism can achieve with regard to wages is
making the best of the occasional chances for their temporary improvement.
The unions counted for Marx only as far as they attacked the very system of wage slavery
and present-day methods of production.
They should understand that instead of the conservative motto, a fair day's wages for
for a Fair Day's Work, they ought to inscribe on their banner the revolutionary watchword,
abolition of the wages system. Consistent Marxians always opposed attempts to impose
minimum wage rates as detrimental to the interests of the whole labor class. From the beginning
of the modern labor movement, there was always an antagonism between the unions and the revolutionary
Socialists. The older British and American unions were exclusively dedicated to the enforcement
of higher wage rates. They looked askance upon socialism, utopian as well as scientific.
In Germany, there was a rivalry between the adepts of the Marxian creed and the union
leaders. Finally, in the last decades preceding the outbreak of the First World War, the unions
triumphed. They virtually converted the Social Democratic Party to the principles of interventionism
and unionism. In France, Georges Sorrel aimed at imbuing the unions with that spirit of
ruthless aggression and revolutionary bellicosity which Marx wanted to impart to them. There
is today in every non-socialist country a manifest conflict between two irreconcilable factions
The problems of labor unionism have been obfuscated and utterly confused by pseudo-humanitarian
and Blather.
The advocates of minimum wage rates, whether decreed and enforced by the government or
by violent union action, contend that they are fighting for the improvement of the conditions
of the working masses.
They do not permit anyone to question their dogma that minimum wage rates are the only
appropriate means of raising wage rates permanently and for all those eager to earn wages.
They pride themselves on being the only true friends of labor, of the common man, of progress,
and of the eternal principles of social justice.
However, the problem is precisely whether there is any means for raising the standard
of living of all those eager to work, other than raising the marginal productivity of
labor by accelerating the increase of capital as compared with population.
The union doctrinaires are intent upon obscuring this primary issue.
They never refer to the only point that matters, namely the relation between the number of
workers and the quantity of capital goods available.
But certain policies of the unions involve a tacit acknowledgement of the correctness
of the catallactic theorems concerning the determination of wage rates.
Policies are anxious to cut down the supply of labor by anti-immigration laws and by preventing
outsiders and newcomers from competing in the unionized sectors of the labor market.
They are opposed to the export of capital.
These policies would be nonsensical if it were true that the per capita quota of capital
available is of no importance for determination of wage rates.
The essence of the Union Doctrine is implied in the slogan Exploitation.
According to the Union variety of the Exploitation Doctrine, which differs in some points from
the Marxian creed, labor is the only source of wealth, and expenditure of labor the only
real costs.
By rights, all proceeds from the sale of products should belong to the workers.
The worker has a fair claim to the whole produce of labor.
The wrong that the capitalistic mode of production does to the worker consists in the fact that
it permits landowners, capitalists and entrepreneurs to withhold a part of the worker's portion.
The share which goes to these parasites is unearned income.
It is manifestly a predatory revenue, a theft.
The workers are right in their endeavors to raise wage rates, step by step, to such a
height that finally nothing will be left for the support of a class of idle and socially
useless exploiters.
In aiming at this end, they continue the battle which earlier generations fought for the emancipation
of slaves and serfs, and for the abolition of the imposts, tributes, tithes and unpaid
Statute Labor with which the peasantry was burdened for the benefit of aristocratic landlords.
The labor movement is a struggle for freedom and equality and for the vindication of the
inalienable rights of man.
Its ultimate victory is beyond doubt, for it is the inevitable trend of historical evolution
to wipe out all class privileges and to establish firmly the realm of freedom and equality.
The attempts of reactionary employers to halt progress are doomed.
Such are the tenets of present-day social doctrine.
It is true that some people, although in perfect agreement with its philosophical ideas, support
the practical conclusions derived by the radicals only with certain reservations and qualifications.
These moderates do not propose to abolish management's share altogether.
They would be satisfied with cutting it down to a fair amount.
As the opinions concerning the fairness of the revenues of the entrepreneurs and capitalists
vary widely, the difference between the point of view of the radicals and that of the moderates
is of little moment.
The moderates also endorse the principle that real wage rates should always rise and never
drop.
In both world wars, few voices in the United States disputed the claim of the unions that
the wage earners' take-home pay, even in a national emergency, should go up faster than
the cost of living.
All these sentimental disquisitions leave out of consideration the problems that matter,
namely the economic aspects of the issue.
They take no notice of institutional unemployment, the inescapable result of raising wage rates
above the height determined by the unhampered market.
As the union doctrine sees it, there is no harm in confiscating the specific revenue
of the capitalists and entrepreneurs, partially or altogether.
In dealing with this issue, they speak of profits in the sense in which the classical
economists applied this term.
They do not distinguish between entrepreneurial profit, interest on the capital employed and
compensation for the technical services rendered by the entrepreneur.
We will deal later with the consequences resulting from the confiscation of interest and profits
and with the syndicalist elements involved in the ability to pay principle and in profit
sharing schemes.
We have examined the purchasing power argument as advanced in favor of a policy of raising
wage rates above the potential market rates. What remains is to scrutinize the purport
of the alleged Ricardo effect.
Ricardo is the author of the proposition that a rise in wages will encourage capitalists
to substitute machinery for labor and vice versa. Hence, conclude the union apologists,
A policy of raising wage rates, irrespective of what they would have been on the unhampered
labor market, is always beneficial. It generates technological improvement and raises the productivity
of labor. Higher wage rates always pay for themselves. Enforcing the reluctant employers
to raise wage rates, the unions become the pioneers of progress and prosperity.
Many economists approve of the Ricardian proposition, although few of them are consistent enough
to endorse the inference the union apologists draw from it.
The Ricardo effect is, by and large, a stock in trade of popular economics.
Nonetheless, the theorem involved is one of the worst economic fallacies.
The confusion starts with the misinterpretation of the statement that machinery is substituted
for Labor.
What happens is that labor is rendered more efficient by the aid of machinery.
The same input of labor leads to a greater quantity or a better quality of products.
The employment of machinery itself does not directly result in a reduction of the number
of hands employed in the production of the Article A concerned.
What brings about this secondary effect is the fact that, other things being equal, an
increase in the available supply of A lowers the marginal utility of a unit of A as against
that of the units of other articles and that therefore labor is withdrawn from the production
of A and employed in the turning out of other articles.
The technological improvement in the production of A makes it possible to realize certain
and projects which could not be executed before, because the workers required were employed
for the production of A, for which consumer's demand was more urgent. The reduction of the
number of workers in the A industry is caused by the increased demand of these other branches
to which the opportunity to expand is offered. Incidentally, this insight explodes all talk
Talk About Technological Unemployment
Tools and machinery are primarily not labor-saving devices, but means to increase output per
unit of input. They appear as labor-saving devices if looked upon exclusively from the
point of view of the individual branch of business concerned. Seen from the point of
view of the consumers and the whole of society, they appear as instruments that raise the
The Productivity of Human Effort
They increase supply and make it possible to consume more material goods and to enjoy
more leisure.
Which goods will be consumed in greater quantity and to what extent people will prefer to enjoy
more leisure depends on people's value judgments.
The employment of more and better tools is feasible only to the extent that the capital
All required is available.
Saving, that is, a surplus of production over consumption, is the indispensable condition
of every further step toward technological improvement.
Mere technological knowledge is of no use if the capital needed is lacking.
Chinese businessmen are familiar with American ways of production.
What prevents them from adopting the American methods is not the lowness of Chinese wages,
but lack of capital.
On the other hand, capitalist saving necessarily causes employment of additional tools and
machinery.
The role that plain saving, that is, the piling up of stocks of consumers' goods as a reserve
for rainy days, plays in the market economy, is negligible.
For capitalism, saving is as a rule capitalist saving.
The excess of production over consumption is invested either directly in the saver's
own business or farm, or indirectly in other people's enterprises through the instrumentality
of savings deposits, common and preferred stock, bonds, debentures and mortgages.
As we are dealing here with the conditions of the unhampered market economy, we may
They disregard the capital-consuming effects of government borrowing.
To the extent to which people keep their consumption below their net income, additional capital
is created, and at the same time employed for the expansion of the capital equipment
of the apparatus of production.
As has been pointed out, this outcome cannot be affected by any synchronous tendency toward
and an increase in cash holdings.
On one hand, what is unconditionally needed for the employment of more and better tools
is additional accumulation of capital.
On the other hand, there is no employment available for additional capital other than
that provided by the application of more and better tools.
Plato's proposition and the union doctrine derived from it turn things upside down.
A tendency toward higher wage rates is not the cause, but the effect of technological
improvement.
Profit-seeking business is compelled to employ the most efficient methods of production.
What checks a businessman's endeavors to improve the equipment of his firm is only
lack of capital.
If the capital required is not available, no meddling with wage rates can provide it.
All that minimum wage rates can accomplish with regard to the employment of machinery
is to shift additional investment from one branch into another.
Let us assume that in an economically backward country, Ruritania, the Stevedores Union succeeds
is enforcing the entrepreneurs to pay wage rates which are comparatively much higher
than those paid in the rest of the country's industries.
Then it may result that the most profitable employment for additional capital is to utilize
mechanical devices in the loading and unloading of ships.
But the capital thus employed is withheld from other branches of ruritania's business,
in which, in the absence of the Union's policy, it would have been employed in a more profitable
way.
The effect of the high wages of the stevedores is not an increase, but a drop in Ruritania's
total production.
The example is merely hypothetical.
Such a powerful Union would probably prohibit the employment of mechanical devices in the
The Loading and Unloading of Ships in Order to Create More Jobs
Real wage rates can rise only to the extent that, other things being equal, capital becomes
more plentiful.
If the government or the unions succeed in enforcing wage rates which are higher than
those the unhampered labor market would have determined, the supply of labor exceeds the
The Demand for Labor, Institutional Unemployment Emerges
Firmly committed to the principles of interventionism, governments try to check this undesired result
of their interference by resorting to those measures which are nowadays called full employment
policy, unemployment doles, arbitration of labor disputes, public works by means of lavish
Fresh Public Spending, Inflation and Credit Expansion. All these remedies are worse than
the evil they are designed to remove. Assistance granted to the unemployed does not dispose
of unemployment. It makes it easier for the unemployed to remain idle. The nearer the
allowance comes to the height at which the unhampered market would have fixed the wage
Wage Rate, the less incentive it offers to the beneficiary to look for a new job.
It is a means of making unemployment last, rather than of making it disappear.
The disastrous financial implications of unemployment benefits are manifest.
Arbitration is not an appropriate method for the settlement of disputes concerning the
height of wage rates.
If the arbitrator's award fixes wage rates exactly at the potential market rate or below
that rate, it is supererogatory.
If it fixes wage rates above the potential market rate, the consequences are the same
that any other mode of fixing minimum wage rates above the market height brings about,
namely institutional unemployment.
It does not matter to what pretext the arbitrator resorts in order to justify his decision.
What matters is not whether wages are fair or unfair by some arbitrary standard, but
whether they do or do not bring about an excess of supply of labor over demand for labor.
It may seem fair to some people to fix wage rates at such a height that a great part of
The potential labor force is doomed to lasting unemployment, but nobody can assert that it
is expedient and beneficial to society.
If government spending is financed by taxing the citizens or borrowing from them, the citizens'
power to spend and invest is curtailed to the same extent as that of the public treasury
expands.
No additional jobs are created.
But if the government finances its spending program by inflation, by an increase in the
quantity of money and by credit expansion, it causes a general cash-induced rise in the
prices of all commodities and services.
If in the course of such an inflation the rise in wage rates sufficiently lags behind
the rise in the prices of commodities, institutional unemployment may shrink or disappear altogether.
But what makes it shrink or disappear is precisely the fact that such an outcome is tantamount to a drop in real wage rates.
Lord Keynes considered credit expansion an efficient method for the abolition of unemployment.
He believed that gradual and automatic lowering of real wages as a result of rising prices
would not be so strongly resisted by labor as any attempt to lower money wage rates.
However, the success of such a cunning plan would require an unlikely degree of ignorance and stupidity on the part of the wage earners.
As long as workers believe that minimum wage rates benefit them, they will not let themselves be cheated by such clever tricks.
In practice, all these devices of an alleged full-employment policy finally lead to the establishment of socialism of the German pattern.
As the members of an arbitration court whom the employers have appointed, and those whom the unions have appointed, never agree with regard to the fairness of a definite rate,
The decision virtually devolves upon the members appointed by the government.
The power to determine the height of wage rates is thus vested in the government.
The more public works expand and the more the government undertakes
in order to fill the gap left by private enterprises' inability to provide jobs for all,
the more the realm of private enterprise shrinks.
Thus, we are again faced with the alternative of capitalism or socialism.
There cannot be any question of a lasting policy of minimum wage rates.
The Catalactic Aspects of Labor Unionism The only catalactic problem with regard to
labor unions is the question of whether or not it is possible to raise by pressure and
and Compulsion, the wage rates of all those eager to earn wages above the height the unhampered
market would have determined.
In all countries, the labor unions have actually acquired the privilege of violent action.
The governments have abandoned in their favor the essential attribute of government, the
exclusive power and right to resort to violent coercion and compulsion.
Of course, the laws which make it a criminal offense for any citizen to resort, except
in case of self-defense, to violent action, have not been formally repealed or amended.
However, actually labor union violence is tolerated within broad limits.
The labor unions are practically free to prevent by force anybody from defying their orders
concerning wage rates and other labor conditions.
They are free to inflict with impunity bodily evils upon strikebreakers and upon entrepreneurs
and mandatories of entrepreneurs who employ strikebreakers.
They are free to destroy property of such employers and even to injure customers patronizing
their shops.
The authorities, with the approval of public opinion, condone such acts.
The police do not stop such offenders.
The state attorneys do not arraign them, and no opportunity is offered to the penal courts
to pass judgment on their actions.
In excessive cases, if the deeds of violence go too far, some lame and timid attempts at
repression and prevention are ventured.
But as a rule, they fail.
Their failure is sometimes due to bureaucratic inefficiency or to the insufficiency of the
and the means at the disposal of the authorities, but more often to the unwillingness of the
whole governmental apparatus to interfere successfully.
Such has been the state of affairs for a long time in all non-socialist countries.
The economist, in establishing these facts, neither blames nor accuses.
He merely explains what conditions have given to the unions the power to enforce their minimum
from Wage Rates and What the Real Meaning of the Term Collective Bargaining is.
As union advocates explain the term collective bargaining, it merely means the substitution
of a union's bargaining for the individual bargaining of the individual workers.
In the fully developed market economy, bargaining concerning those commodities and services
of which homogeneous items are frequently bought and sold in great quantities, is not affected
by the manner in which non-fungible commodities and services are traded.
The buyer or seller of fungible consumer goods or of fungible services fixes a price tentatively
and adjusts it later according to the response his offer meets from those interested, until
While he is in a position to buy or to sell as much as he plans, technically no other
procedure is feasible.
The department store cannot haggle with its patrons.
It fixes the price of an article and waits.
If the public does not buy sufficient quantities, it lowers the price.
A factory that needs 500 welders fixes a wage rate which, as it expects, will enable it
to hire 500 men. If only a minor number turns up, it is forced to allow a higher rate.
Every employer must raise the wages he offers up to the point at which no competitor lures
the workers away by overbidding. What makes the enforcement of minimum wage rates futile
is precisely the fact that with wages raised above this point, competitors do not turn
end up with a demand for labor big enough to absorb the whole supply.
If the unions were really bargaining agencies, their collective bargaining could not raise
the height of wage rates above the point of the unhampered market.
As long as there still are unemployed workers available, there is no reason for an employer
to raise his offer.
Individual collective bargaining would not differ catallactically from individual bargaining.
It would, like individual bargaining, give a virtual voice to those job seekers who have
not yet found the jobs they are looking for.
However, what is euphemistically called collective bargaining by union leaders and pro-labor
legislation is of a quite different character.
It is bargaining at the point of a gun.
It is bargaining between an armed party ready to use its weapons and an unarmed party under duress.
It is not a market transaction.
It is a dictate forced upon the employer, and its effects do not differ from those of
a government decree for the enforcement of which the police power and the penal courts
are used.
It produces institutional unemployment.
The treatment of the problems involved by public opinion and the vast number of pseudo-economic
writings is utterly misleading.
The issue is not the right to form associations.
It is whether or not any association of private citizens should be granted the privilege of
resorting with impunity to violent action.
It is the same problem that relates to the activities of the Ku Klux Klan.
Neither is it correct to look upon the matter from the point of view of a right to strike.
The problem is not the right to strike, but the right by intimidation or violence to force
other people to strike, and the further right to prevent anybody from working in a shop
in which a union has called a strike.
When the unions invoke the right to strike in justification of such intimidation and
and the Deeds of Violence, they are on no better ground than a religious group would be in invoking the right of freedom of conscience as a justification of persecuting dissenters.
When in the past the laws of some countries denied to employees the right to form unions, they were guided by the idea that such unions have no objective other than to resort to violent action and intimidation.
When the authorities in the past sometimes directed their armed forces to protect the employers, their mandataries and their property against the onslaught of strikers, they were not guilty of acts hostile to labor. They simply did what every government considers its main duty. They tried to preserve their exclusive right to resort to violent action.
There is no need for economics to enter into an examination of the problems of jurisdictional strikes and of various laws, especially of the American New Deal, which were admittedly loaded against the employers and which assigned a privileged position to the unions.
There is only one point that matters. If a government decree or labor union pressure and compulsion fix wage rates above the height of the potential market rates, institutional unemployment results.