The Fallacy of “Living Wage”

by | Jun 3, 2012

The fundamental issue is not wage rates, but productivity.

If the advocates of the “living wage” are truly convinced that arbitrary government dictates have no detrimental consequenceson jobs, why don’t they advocate a “prosperity wage”? Instead of legislating a wage that allows families to “get by,” why don’t they legislate a wage that allows families to prosper? In other words, instead of a “living wage” of $10 an hour (or whatever the figure may be), why don’t legislators force businesses to pay $100 an hour?

One would think that the answer is obvious, but apparently it isn’t. Few, if any, businesses could afford to pay $100 an hour. They would not create new jobs, and they would likely cut most of the jobs that they currently have. The results would be catastrophic.

The difference between a “living wage” and a “prosperity wage” is only one of degree. The principle is the same. A “prosperity wage” would be devastating to jobs. So is a “living wage,” a minimum wage, or any other government mandated wage. The only difference is the number of jobs and lives destroyed.

The real issue is not the nominal wage—what a worker is paid. The real issue is real wages—what that pay will purchase. If a worker’s pay increases 10% but prices increase 20%, he is not better off. His money does not purchase as much. However, if his wages decrease by 10% while prices fall 20%, he can purchase more even though he makes less money.

To most Americans, the idea of falling prices probably seems like a fantasy. Prices for energy, health care, and food seem to increase almost daily. But consider computers, cell phones, and flat screen televisions—their prices have fallen significantly. And in the late 19th century, wages fell while prices fell even more.

Between 1870 and 1889, wages for non-farm labor decreased from $1.57 per day to $1.39 per day, a decrease of 10.2 percent. During the same period, the Consumer Price Index decreased 28.9 percent. Even though wages for unskilled labor fell by more than ten percent over twenty years, prices fell by nearly three times as much, that is, a dollar bought a lot more. Further, there was much more available: Canned goods became widely available in the 1880s, which provided a much more varied diet, such as fruits and vegetables that were not in season; refrigerated railroad cars made it possible for urban residents to eat fresh meat, grapes, and strawberries more frequently; improvements in the sewing machine enabled manufacturers to mass produce clothing at low prices; department stores offered consumers wide selections in clothing, household goods, and more. In short, the unskilled worker’s life was immensely better in 1889 than it had been in 1870. In a free market, this will always be the case.

The items that are rapidly increasing in price today are, in general, heavily regulated industries. Government intervention stifles innovation and makes production more expensive. The items that are falling in price are in industries that are less regulated, which means more innovation and greater ease of producing those values.

The fundamental issue is not wage rates, but productivity. When production increases, prices fall. This was true of kerosene, which the price of kerosene steadily decreased from fifty-eight cents a gallon in 1865 to ten cents a gallon in 1874. It was true of the Model-T, which decreased from $850 in 1908 to $290 in 1924. When prices fall, a consumer can purchase more of the given item, even if his own wages decrease. But why would a worker’s wage decrease. Again, the issue is productivity.

If a worker desires a higher wage, he must produce more in a given period of time. A farmer who uses only manual labor can only grow, for example, 100 bushels of corn a year. A farmer who uses animal labor can grow 1,000 bushels of corn a year. A farmer who uses machinery can grow 100,000 bushels of corn a year. As the farmer produces more his income increases.

The focus on wages reverses cause and effect. The focus on wages is a focus on consumption—what a worker can buy from his wages. But an individual cannot consume until he produces, unless he wishes to live as a parasite. Government intervention impedes production. Government intervention prevents individuals from starting businesses, creating jobs, developing new products or processes. Government intervention prevents individuals from acting on their own judgment.

If someone wants to offer a job with a pay of $2 an hour, he should be free to do so. If he cannot attract enough workers at that wage, he will need to offer more or go out of business. If a worker is willing to work for $2 an hour, why should anyone prevent him from doing so? If the business owner judges that a job is only worth $2 an hour, he should be free to act on his own judgment. If a worker judges that a job paying $2 an hour is his best opportunity, he should be free to act on his own judgment. Government intervention in the employer/employee relationship prohibits each from acting as he thinks best for his own life.

Like all advocates of government intervention, the advocates of a “living wage” believe that they know what is best for other individuals. They are willing to use government coercion to dictate how others may live their lives. Ironically, and sadly, while advocating a “living wage” they simultaneously seek to prohibit others from actually living.

Brian Phillips is the founder of the Texas Institute for Property Rights. Brian has been defending property rights for nearly thirty years. He played a key role in defeating zoning in Houston, Texas, and in Hobbs, New Mexico. He is the author of three books: Individual Rights and Government Wrongs, The Innovator Versus the Collective, and Principles and Property Rights. Visit his website at

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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