Power and Market: Government and the Economy

Compulsory unemployment is achieved indirectly through minimum wage laws. On the free market, everyone’s wage tends to be set at his discounted marginal value productivity. A minimum wage law means that those whose DMVP is below the legal minimum are prevented from working. The worker was willing to take the job, and the employer to hire him. But the decree of the State prevents this hiring from taking place. Compulsory unemployment thus removes the competition of marginal workers and raises the wage rates of the other workers remaining. Thus, while the announced aim of a minimum wage law is to improve the incomes of the marginal workers, the actual effect is precisely the reverse—it is to render them unemployable at legal wage rates. The higher the minimum wage rate relative to free-market rates, the greater the resulting unemployment.39

Unions aim for restrictionist wage rates, which on a partial scale cause distortions in production, lower wage rates for non-members, and pockets of unemployment, and on a general scale lead to greater distortions and permanent mass unemployment. By enforcing restrictive production rules, rather than allowing individual workers voluntarily to accept work rules laid down by the enterpriser in the use of his property, unions reduce general productivity and hence the living standards of the economy. Any governmental encouragement of unions, therefore, such as is imposed under the Wagner-Taft-Hartley Act, leads to a regime of restrictive wage rates, injury to production, and general unemployment. The indirect effect on employment is similar to that of a minimum wage law, except that fewer workers are affected, and it is then the union-enforced minimum wage that is being imposed.

• 39On minimum wage laws, see Yale Brozen and Milton Friedman, The Minimum Wage: Who Pays? (Washington, D.C.: The Free Society Association, 1966). See also John M. Peterson and Charles T. Stewart, Jr., Employment Effects of Minimum Wage Rates (Washington, D.C.: American Enterprise Institute, August, 1969).39