Conversations with Murray Rothbard: Can a law require wages to be higher?

The minimum wage has a political force that is hard to dispute. If a worker earns little, it seems reasonable to establish by law that they should be paid more. Those who defend it see it as protection against excessively low wages; those who question it warn about its effects on employment. But behind that discussion arises a less obvious question: can a law increase the economic value of a job simply by ordering that more be paid for it?

This was the topic I “discussed” again with Murray Rothbard, because he dedicated part of “Man, Economy, and State with Power and Market” to analyzing what happens when the State sets wages above those that would arise voluntarily between workers and employers.

—Professor Rothbard, what is wrong with establishing by law that no one should earn less than a certain amount?

—The intention and the result are different issues. A government can set the minimum wage it desires, but it cannot force an employer to hire a person whose work they value below that cost.

—But the worker who keeps their job earns more.

—Of course. And that is the visible part. The problem arises with those who are no longer hired. In “Man, Economy, and State with Power and Market” I explained that when the minimum wage is set above the market value of a certain job, the amount of labor offered exceeds the amount demanded. That surplus manifests as unemployment.

—So you would say that the minimum wage harms precisely some workers.

—Those whose productivity does not yet justify the imposed wage. The law does not manage to raise their productivity by decree. It simply makes it illegal to hire them below a certain remuneration.

—Your critics might respond that, without that protection, employers would pay miserable wages.

—But wages do not depend exclusively on the employer's will. Employers also compete for workers. In a market economy, remuneration is related to the value that work adds to production. If we want higher wages sustainably, we must look at what increases worker productivity.

—And what increases it?

—Fundamentally, having more and better capital goods. A worker with better tools, machinery, and technology can produce more. The sustainable increase in wages comes from that increase in productivity, not from changing the number written in a contract through a law.

—But suppose the minimum wage only affects the lowest-paying jobs. Wouldn't that be an acceptable cost?

—Precisely there lies one of the biggest problems. It is the least productive or least experienced workers who have the most difficulty overcoming that threshold. Legislation can improve the salary of those who remain employed while simultaneously closing the door to those trying to enter the labor market.

—In a word, can the law raise the price of labor but not its value?

—Exactly. And confusing the two generates consequences. In “Man, Economy, and State with Power and Market” I argued that maintaining wages above their market level produces unemployment.

—So, what would be the correct question when faced with a wage we consider too low?

—I would not first ask how much the government should order to be paid. I would ask what makes a person's work worth more and what conditions allow their productivity to increase.

—Thank you very much, professor. We'll continue next week.