Raising the minimum wage while debasing the currency: an illogical economic policy?

The allure of minimum wage laws arises once more in both the UK and the US. While Chancellor Osborne has suggested raising the national minimum wage to £7.00, President Obama’s State of the Union speech called for raising the federal minimum wage to $10.10.

Although such actions are applauded by progressives as decisive steps government can take to help the working poor, boost consumerism, and improve economic conditions for all, these policies are bemoaned by many economists as counterproductive and unwelcome interventions of the state. Labour is subject to the laws of supply and demand just like any other product sold in the marketplace, they argue, and raising the price of labour will decrease the demand for it.

Moreover, raising the minimum wage is particularly pernicious as a means of alleviating poverty amongst those most in need, who suffer from lack of job opportunities or absence of marketable skills. Whereas businesses may be willing to employ these prospective workers at wages commensurate with their abilities and aptitudes at the point of hiring, these wages are almost certainly below the level the state has deemed as acceptable. Those most needing employment, and the requisite work skills, work habits, experience, and self-reliance they would acquire, continue in conditions of joblessness and dejection.

Yet the best-laid plans of social democrats are counterproductive not only in practice, but logically inconsistent, too – undermined by their constant interference in natural economic rhythms.

Writing in The New York Post, Seth Lipsky dissects Obama’s call for a minimum wage hike in light of the quantitative easing that has exploded in America as a response to the financial crisis. What use raising the former when the latter has undercut the value of the currency? ‘The minimum-wage crisis is a sign that fiat money is not working. It’s not, after all, that the nominal minimum wage has failed to go up,’ Lipsky writes.  ‘It’s that the value of the dollar has collapsed. For him, it makes absolutely no sense to increase the minimum wage when the coin of the realm is being inflated and debased:

‘How is a person to know what his or her wages will be worth if the dollar is always jumping around? Banks and businesses are beset with the same problem. Wouldn’t it be better to focus less on the minimum wage and more on stabilizing the dollar, just as Congress insisted on when it set up the Fed?’

Combating Lipsky’s conundrum was all in a day’s work for Frédéric Bastiat, who had a penchant for demolishing the economic fallacies of French monopolists and protectionists. He took them on in the pages of his Economic Sophisms—First Series, where he spoofed their ‘maxim of incomparable absurdity:  in political economy there is no inflexible rule, no absolute principle.’

Bastiat fought those who purchased for themselves the cheapest labour and products that the free market could provide, but advocated that their compatriots buy from protected markets. His nemeses were self-interested national producers and misguided legislators who saw in the Sisyphean fallacy of ‘more work, more wealth’ the route to national greatness. ‘It is quite necessary that you should have recourse to force, for you desire that men should be made to produce those things that they find it more advantageous to buy,’ Bastiat admonished; ‘you desire that they should renounce this advantage, and act upon a doctrine that implies a contradiction in terms.’

Hiking the minimum wage while inflating the currency is another contradiction in terms. But we know there are principles in political economy, and that the rules of economics do not admit of progressive fantasies. Better that sound currencies abound, and that interventions that add expensive barriers and burdens to voluntary exchange be ended, than that the government should take upon itself the presumption of economic calculation. Concurrent manipulation of wages and currency is political economy diametrically opposed to itself.

1 thought on “Raising the minimum wage while debasing the currency: an illogical economic policy?”

  1. Posted 27/02/2014 at 18:49 | Permalink

    The miinimum wage and the living wage are socialist banter equivalent to the expression what about the workers?. There is no logic to what is proposed and the effect is not to penalise the employer (although it does) but to penalise the worker who has a lower limit on his bargaining capacity.

    Politicians will forever create these rediculous schemes until they finally destroy the economy.

    They should remember that economic prosperity depends on competition, a free market and liquidation of poor investments. Simple

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