Overcoming the Iron Law of Wages

EPI-low-wage-workers-reality-8-28-2013-2-54-01.pngOne of the arguments against raising the minimum wage is that employers won’t hire people if the wage is higher than the value of the employee’s work.

Obviously this principle is true.  In fact, an employer will not hire someone unless the wage is less than the value of the employee’s work to the employer.  Otherwise the employer would make no profit.

Under conditions of economic competition, there is pressure to keep wages as low as possible.  This is especially true for franchise and subcontract businesses, when the franchisers and the buyers have the economic power to squeeze their profit margins as low as possible.

Workers have no power, as separate individuals, to prevent wages from being forced down to subsistence level.   There’s a name for this process, the Iron Law of Wages, which was formulated by the economist David Ricardo 300 years ago.

The reason that, contrary to Ricardo, wages have risen over the century is that sometimes skilled workers are scarce and command a higher wage,  sometimes workers have been able to organize unions and bargain collectively, and sometimes governments have set minimum wages to limit how far wages can be pushed down.

Certain libertarians and free-market theorists oppose a role for government or even for labor unions.  They say wages should be negotiated between free individuals.  When an individual business owner is hiring an individual worker, that may make sense.

When a worker is up against a powerful collective organization, such as a corporation, then the worker needs something to equalize bargaining power.   And in the case of fast-food franchises, workers are not up against the individual business owners.  They are up against the corporations that set the terms for the franchisees.   A higher federal minimum wage would change the equation.


Click on Raising the federal minimum wage to $10.10 would give working families, and the overall economy, a boost for the full report from the Economic Policy Institute.

Click on David Ricardo for an Encyclopedia Britannica article on the author of the Iron Law of Wages.

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6 Responses to “Overcoming the Iron Law of Wages”

  1. Henshaw Says:

    Sadly this article does little to overcome a fundamental law of economics: the law of demand. It’s odd to watch seemingly intelligent people twist economic theory into pretzels trying to against principles you learn in Economics 101.

    BTW… the last time the United States raised the minimum wage teenage employment went down..


  2. jc777 Says:

    @ Henshaw: The last time we raised the federal minimum wage was in 2007, 2008, and 2009, in the midst of the Great Recession. Of /course/ teenage unemployment was going up then – it was the worst economic downturn since the 1930s. Unemployment rates for all ages and wage levels were increasing.

    Do you have any evidence whatsoever that increasing the minimum wage had anything at all to do with that?

    Labor economists – experts on wages and employment – haven’t found any clear relationship between minimum wage levels and unemployment rates. One famous paper even found that raising the minimum wage appeared to /decrease/ unemployment.

    Please don’t spread uninformed opinion as if it were fact.


  3. b-psycho Says:

    Perhaps if we called corporate boards “capital unions” it’d show the real position labor is up against.

    As for the minimum wage, if one is going to even bother trying to have a wage floor, it’d make more sense to explicitly index it to inflation, so as to not have that floor become quicksand. I see it as a kludge though overall, an intervention meant to counter previous intervention that people these days tend to not see. Widespread as the strikes have been, picture the impact in an environment that didn’t have bans on sympathy, secondary or “wildcat” strikes. I imagine wage growth would make a return pretty quick if maintaining the status quo meant industry-wide shutdowns…


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