How minimum wages encourage discrimination

An oft-overlooked effect of wage floors is that they permit and even encourage various forms of discrimination. Discrimination is an unfortunate yet persistent tendency that continues to exist in many societies. It may manifest itself as any number of prejudices that disadvantage some group of people on the basis of some characteristic other than their ability and work ethic.

The free market is a powerful tool that forces market participants to pay for their discriminatory tendencies. In a free market system, for example, if a discriminatory employer would like to hire a worker to do some task, and the employer is, say, disinclined to hire blue-eyed workers, he must be willing to pay for the extra cost of brown-eyed labour if he follows his discriminatory tendencies; blue-eyed labourers faced with such discrimination may compete on the basis of price and lower the wage they receive.

A wage floor, however, prohibits workers from competing amongst one another on the basis of price, and removes economics from the discriminatory employer’s decision-making process. The employer must pay potential labourers, whether blue-eyed or brown-eyed, the same wage, and because the equal wage ensures that this employer will pay no price to discriminate against the blue-eyed worker, he is free to make his hiring decision on some basis other than price and productivity, and will hire the brown-eyed worker.

This theoretical discussion is not without real-world evidence; there have been instances in societies with significant racial animosity of the use of wage floors as tools to deliberately diminish the labour participation of certain groups. In the early twentieth century southern United States, for example, racist activists trying to exclude black Americans from the workforce found minimum wages to be an effective tool to accomplish this insidious goal in a seemingly inoffensive way.

In 1909, the prejudiced Brotherhood of Locomotive Firemen demanded that the Georgia Railroad fire all Black workers. Economist Walter Williams observes that instead of such a transparent and overtly discriminatory measure, the exclusion was accomplished through the imposition of wage controls: ‘Instead of eliminating blacks … the arbitration board decided that black firemen, hostlers, and hostlers’ helpers should be paid wages equal to the wages of white men doing the same job.’1 The strategy satisfied white unionists, who knew that when forced to pay an equal wage to blacks and whites, discriminatory employers would no longer pay any cost for their discrimination and would hire white workers at the expense of blacks. The union stated: ‘If this course of action is followed by the company and the incentive for employing the Negro thus removed, the strike will not have been in vain.’

Similarly, white supremacist groups in South Africa under apartheid pushed for minimum wage laws as a way to reduce black participation in the labor force.  The overtly racist Mine Workers Union, for example, demanded a minimum wage to protect their dominance in the workplace and openly stated: ‘The real point on is that whites have been ousted by coloured labour. It is not because a man is white or coloured, but owing to the fact that the latter is cheap … when that [minimum wage] is introduced we believe that most of the difficulties in regard to the coloured question will automatically drop out.’ Similarly, the South African Wage Board, which set minimum wages in different sectors of that country’s economy beginning in 1925, ‘concentrated its wage determinations only on those areas of industry where nonwhites were in competition with whites, and made no wage determinations in areas where there was no such competition.’

Modern minimum wage laws are not imposed with such underhanded or targeted intentions.  Still, the use of minimum wages to achieve discriminatory ends is indicative of the ability of wage floors to erase the cost employers must pay to discriminate. Whether intentional or not, unemployment on the basis of racial or other discrimination increases to the extent that minimum wages rise above the market wage.

1 Walter Williams, South Africa’s War Against Capitalism (Westport, United States of America: Praeger Publishers, 1989).

6 thoughts on “How minimum wages encourage discrimination”

  1. Posted 01/08/2011 at 13:43 | Permalink

    Yes, and if I were a woman who had undergone a hysterectomy, I’d try and mention it in any job interview. But I’m not in favour of abolishing all maternity benefit or the UK minimum wage. Adults earning less than £6 an hour somehow doesn’t seem right.

  2. Posted 02/08/2011 at 01:08 | Permalink

    Jonathan: Yes, exactly. It’s far better for them to earn nothing than less than £6/hour…

  3. Posted 02/08/2011 at 09:19 | Permalink

    @ Johnathan

    Does the thought of adults being (persistently) unemployed and unemployable feel better?

  4. Posted 02/08/2011 at 15:14 | Permalink

    @ Jonathan – Earning less than £6 an hour might not seem right to you, but it should be up to the individual concerned whether he wishes to sell his labour at a particular rate. For example, he might wish to work for £2 an hour because he will learn skills that will earn him £20 an hour in ten years’ time. Minimum wages effectively prohibit people with low productivity from working and are thus fundamentally illiberal policies.

  5. Posted 04/08/2011 at 10:38 | Permalink

    But, going back to the hypothetical example, the question that strikes me is: why should blue-eyed workers be forced to work for less than brown-eyed workers just because certain employers have an irrational hatred of blue eyes? This is a moral question rather than an economic one; I’m sure that what you are arguing is correct. But I think that, rather than just accepting that blue-eyed workers “deserve” less money for their labour, we should be trying to tackle the problem at the source.

    Incidentally, it also assumes that the potential employees have a certain amount of information about their employer; ie. that he is a racist, and that they should therefore offer to work for him at a lower wage.

  6. Posted 04/08/2011 at 14:10 | Permalink

    Greg I think you have misunderstood the mechanics at play. No one is saying that the blue eyed workers “deserve” less or that blue eyed workers should be “forced” to work for less just because of an irrational hatred. What is being said is entirely different, that is, that IF an employer does have an irrational “hatred” of a certain irrelevant characteristic (ethnicity is almost always irrelevant as a point of distinction for most jobs), you do the group being discriminated against irrationally harm by forcing employers to pay people the same amount of money. The effect is simply that they will not be employed. If employees are free to bid down the cost of labour in order to overcome their prejudice then, assuming that the particular characteristic was not in actual fact a relevant proxy for inferior performance, the employers that will be hurt will be those that refuse to take advantage of the cheaper labour. You must consider all of the firms in the market place. If there are no minimum wage rates to distort things, and half of the firms are willing to select from the entire population regardless of eye colour and half will only hire brown eyed workers then the firms that do not discriminate will have access to a greater supply of labour and labour costs will be bid down. For each job they are willing to offer there are more people available who can do that job. The cost of this for the discriminatory firm will be reduced market share and possibly insolvency.

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