Minimum Wage Laws Violate the "Invisible Hand" and the U.S. Constitution

Dr. Judd W. Patton
Associate Professor of Economics, Bellevue University
 The Bottom Line / Fall, 1996 issue

      A fundamental proposition of economic science is that good intentions are not the essential pre-requisite to sound public policy. A corollary proposition is that compassionate policy requires dispassionate analysis. Of a truth only policies rooted in principle will succeed. Policies in defiance of principle, even though advocated with the best of intentions and compassion, will fail.

      The U.S. minimum wage law, recently increased from $4.25/hr. to $5.15/hr. (in two steps), is instructive and a case in point. The intentions are clearly noble: to raise the income of the bottom end of the wage scale and help some to escape welfare. President Clinton, praising the increase, said, “There's no reason that minimum wage workers should have to wait any longer for their raise.” And Labor Secretary Robert Reich even proclaimed the increase “a matter of morality.” Careful analysis, however, reveals their rationale and praise are misplaced.

      A form of price control, minimum wage laws strike at the very heart of the free enterprise system. Adam Smith, the father of economics, explained in his masterpiece, The Wealth of Nations, that the price system is the communication mechanism that coordinates, motivates, and harmonizes the actions of consumers and entrepreneurs. His now famous metaphor of the “Invisible Hand” captured the idea that free-market pricing molds individual self-interest into general economic betterment for society. No production Czar, as in Socialist economies, is needed to “regulate” the economy. Free market economies rely on the “Invisible Hand” to continually provide the supply and demand data to consumers, investors, savers, employees, employers, and entrepreneurs to make informed and efficient decisions.

      It follows that any shackling of prices or costs distorts the communication mechanism of capitalism, providing “bad” information to market participants. Minimum wage laws coercively falsify the market worth of the very people the laws were supposed to help! All those laborers, mostly young, unskilled entry-level job seekers, whose market worth is less than $5.15/hr. will be legally priced out of a job. Unemployment and disemployment result. The higher the minimum wage, the greater the unemployment.

      Contrary to Mr. Reich, the recent minimum wage increase is not a matter of morality, but one of immorality. Minimum wage laws distort the cost-productivity relationships that are essential for employment, thereby bearing false witness. Thus minimum wage laws violate a fundamental Judeo-Christian moral precept.

      Dispassionate analysis, then, reveals that minimum wage laws violate: (1) the principle of employment (that wages and salaries of employees must correspond to the market value of their services); (2) the “Invisible Hand” principle (that the free-market price system is absolutely essential to coordinate economic activity, thereby making full production and full employment achievable); and (3) a moral principle (that false witness is wrong). Is it any wonder that empirical studies almost universally confirm the counterproductive consequences of minimum wage legislation?* Is it even necessary to inquire about such studies when one understands economic and moral principles?

      The laissez-faire ideas of Adam Smith were adopted by America's Founders and were written into the U.S. Constitution. Minimum wage laws violate the original intent of a number of clauses in the Constitution designed to guarantee freedom of exchange and freedom of contract. Article 1, Section 10 requires that, “No State shall...pass any Law impairing the Obligation of Contracts.” Since the Constitution does not delegate any power to the Federal government to interfere in contractual relations, it too cannot violate the sanctity of market-derived contracts between employers and employees. Furthermore, the Commerce clause in Article 1, Section 8 was intended to give the Federal government power to ensure the “free flow” of trade, not to restrict it, as would be the case with minimum wage laws and other price controls.

      There is only one policy to higher wages and incomes in America. And that policy is to raise wage rates the “old-fashioned” way: by increasing people's productivity, specifically through saving and capital formation, improved technology, better education and skills, and more entrepreneurial competition for labor services. This policy is right in principle; it will work. And it is the only truly compassionate policy at that.

      *See Doug Bandow’s article, “Minimum Wage Plus” in the August, 1996 issue of The Freeman for a discussion of recent empirical studies.