Laws Don’t Increase Wages

If I were asked to explain why I oppose legislative efforts to increase wages (President Obama’s new proposal in this case) to my grandmother, I would say the following. This is the most level-headed, even-keel, dispassionate, objective analysis that I can muster:

If wages rose as a result of government decree, then we could simply legislate our way to a wealthier society. However, that is not the case. Instead, wages only rise when a society becomes wealthier. That is to say that wages rise whenever we become more productive. The notion of marginal productivity means that we can achieve the same output with less work or more output with equal work. This happens when an entrepreneur innovates. For example, if a landscaping firm may hire one mower to cut the grass with a John Deer tractor rather than employing five workers to use reel mowers, then they may increase the wages of the aforementioned mower. The other four mowers’ labor will be reorganized towards more productive uses, the possibilities of which are endless.

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So, if we want entrepreneurs to innovate in order that workers’ wages may rise, then it is necessary to reflect on the incentives that increase the likelihood of innovation and entrepreneurship. Economic freedom is the policy set that best encourages innovation. It is simple to see that entrepreneurs prefer to work in an economy in which they are free to exchange and free to retain the fruits of their labor. That suggests that low taxes, spending, and regulations are the conditions that encourage innovation, thus increasing the productivity of each worker. Low inflation and secure property rights are two more critical measures of economic freedom, and it is by no accident that industrialized countries do relatively well in these two regards.

The rather clear implication from this is that President Obama’s forthcoming plan to raise the salary threshold at which employers must pay time-and-half for overtime hours will have no long term consequences for wages. Employers will merely adjust by cutting hours or cutting wages. The way to help workers realistically is to support policies that will encourage entrepreneurship and therefore support gains in marginal productivity. Economies do not grow just because a politician signs a new law. Economies grow, and wages rise, when we are free to create wealth.

Recommended Reading: F. A. Harper’s Why Wages Rise

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