Minimum Wages and the Political Process

The basic teaching of economies on minimum wage laws is well-known: this legislation is inefficient because it results in non optimal combinations and locations of resources and therefore in lower total output and employment. What is less easily understood is why this policy is enacted in spite of its inefficiency. The answer offered in this note is that in addition to being inefficient, minimum wage legislations operate transfers of wealth from unorganized losers to well-organized gainers. Because of this advantage in the political market, the latter are found to dominate the political process.

The victims of minimum wage laws belong to two broad categories of people. The direct and most immediate victims are the individuals who are disemployed as a result of the measure. These persons either become totally or partially unemployed or they choose to withdraw from the labour force in view of their deteriorated employment opportunities. In more concrete terms, the big losers are found in groups with lowest skills, namely 1. the young of both sexes 2. older workers deprived of an opportunity to make their contribution to family income 3. women of all ages and 4. low-wage workers in labour intensive industries located in declining regions. In a more general way, the society as a whole is made worse-off, because consumers have to pay higher prices for goods and services now produced in smaller quantities and taxpayers have to bear a heavier burden to finance unemployment and other social security measures.

Representative governments do not enact laws that make only losers. Four groups of persons come out gainers from the adoption of minimum wage laws. First and fore-most, union workers rely on this policy instrument to counter the competition from lower skill non-union workers. Second workers in high wage areas support the policy because it lessens the tendency for manufacturing investments to locate outside their region. Third firms in high wage areas also join the supporters of this legislation in order to protect the value of their assets from potential competitors in low wage areas. Finally low wage workers who are able to retain their jobs are clearly made better-off. From empirical results in the U.S., where minimum wages are lower than in Canada, it would seem that the young lose more in reduced employment than they gain in in-creased wage rates. The effect would be about neutral among male adults. Only adult women would be net gainers.

In the U.S., the position taken by the House Representatives on minimum wage rates was found to be consistent with theoretical predictions. Campaign contributions by unions, the level of wages in the district and the level of campaign contributions by small businesses were in that order the most important determinant of roll-call voting. Low-wage and teenage workers also influenced the voting pattern as expected.

That gainers prevail over losers should not be surprising. Generally they are members of well organized pressure groups, for which the cost of lobbying and other forms of political action is almost nil. Opponents on the other hand include mostly isolated, ill-informed and unorganized individuals. In raising minimum wages, the governing party gain more votes among the beneficiaries than it looses among the victims.