Response to Rick Gibbons on CFRA regarding minimum wage and other interventions in the economy

Rick, I was the caller who seemed "way out there" on this subject. I realize my statements seemed radical - and they are - because they represent a thoroughly principled stand in favour of individual rights. Unfortunately, Canada and most of the western world has been moving toward increasing controls, regulations and interventions in the economy for many decades now. This is because few people understand the nature and source of individual rights and have little or no economic education. Probably the greatest economist of all time, Ludwig Von Mises, thoroughly described socialism and capitalism about a century ago and has been proven correct a million times over ever since.

The value of any product or service can only be properly determined through free exchange. When one or both parties is subject to coercion, the price system cannot work properly and a ripple of distortions runs through the market. It is important to note that no one has a right to force another person into an agreement - it is thus not an agreement at all. If my work is only worth $7 on the market (determined by the amount a freely acting employer is willing to pay for a task) because I have little skill and experience, then making it illegal to hire anyone for less than $11 will not make my work more valuable, it simply encourages employers to seek productivity gains through means OTHER than hiring more people. Making it illegal for a low-skilled worker to find employment cannot help low skilled workers get experience and earn their way up the value chain. In fact, the most vulnerable people whose work has low value are the most harmed by using government force in the market for wages.

In a free society no one can ever be forced to accept a job for any price, such as $7. The existence of competition between both similar employers and all other potential employers drives market prices for all labour and all inputs into production. If I believe my work is worth $11 I am free to seek an employer who agrees and to sign a contract. If no one agrees, then that is a fact of reality I must deal with and it is morally wrong of me to recruit politicians to force an employer to pay me more than they are freely willing to. You see, employers must always pay a high enough wage to attract the employees they wish to keep, to keep their business operating efficiently. If other employers pay more for the same work, people recognize this market signal and change employers. It is the economic power of a free and uncoerced marketplace that keep an economy operating to maximize production, value, employment and wealth creation.

The side effects of government intervention in the economy are too numerous to cover here, but consider a few. Government has arrogated the control of the money supply, and since the 1930's has been inflating money, thus destroying the value of existing money. This harms the weakest in society most and causes consumer price inflation. It also serves as a wealth transfer from the general public to the beneficiaries of government spending, including corporations and selected politically powerful pressure groups. These receive newly printed money and the inflationary effect spreads through the whole economy, benefiting the first recipients the most. Often, at the end of the chain reaction are the most vulnerable, who do not understand economics and wealth creation - those on a fixed income, those who who not own equity, those who are unable to mount their own pressure group to feed at the government trough. The inflationary effect causes the entire price system to be distorted and less predictable, leading to abnormal production of some goods, hiring of some people, and lower overall economic output. The wealth of society is reduced and progress is slowed.

Some people then lobby government for a favour by asking for a minimum wage law - they ask for force to be applied against workers and employers who would otherwise agree on a wage as some level below the arbitrarily set "minimum". The minimum wage then raises the cost of production, leading to a further inflation of all prices in the economy, so everyone is paying more than before, including the minimum wage recipients. When the cost of living rises, the pressure groups go back to government and say the last minimum wage intervention is not working and it needs to be higher still. And so the cycle of disruption continues, while the pressure groups and the government ignore the fact they are causing inflation and harming those most vulnerable - again and again they persist, failing to make a permanent impact every time. They are ignoring the key economic facts of reality in pursuit of their belief that wishing to improve the financial status of an individual can make it so and ignoring the truth - that only by making my work more valuable and finding an employer who agrees can true value be created and actual improvement be accomplished.

There is another very different aspect of the poverty question that is almost always ignored - the study of what actually happens to the people who have a low income.

A November 2012 study titled “Measuring Income Mobility in Canada” by Charles Lammam, Amela Karabegovi, and Niels Veldhuis confirms what has been known for many years and what a reasoning  person should quickly realize: the portion of people who spend a long time in poverty is far smaller than many groups would have us believe.

Most studies of income differences are cross-sectional, that is they take a sample at a moment in time and analyze the data, dividing the population into income quintiles (five equal groups).  Such studies always show a certain fraction of the population is at the lower end (someone has to be) and a certain population living below what is called “the poverty line”. The data does not change much over the years, so people who view society in collectivist terms call for higher taxes on the productive members of society, more income and asset redistribution by the government powers and lifestyle support programs to help these supposedly poor people.

What these studies fail to do is track information longitudinally over time to see what actually happens to the individuals who are initially at varying levels of income.  Viewed this way, the problem of poverty is far lower than imagined since the large majority of those who are “poor” at a particular time do not stay poor. The table below is extracted from the study and demonstrates that in a short five years half of the lowest income people had moved to a higher income group.

As the time horizon was lengthened the results were even better, with 83% of the lowest earners moving up in a ten year period.  The greatest income gains were made by those who started out at the lowest levels.  This should not be surprising since many of those people are at the start of their earnings life and have less training, experience and value to employers than those with more experience.  It is entirely natural that their incomes would rise over time and that most of them would succeed.

Finally, the study looked more closely at how far the different groups moved.  Most notably, the lowest initial income quintile saw 26% move up by one group, 25% moved up two groups, 20% moved up to the top 40% and 12% moved up to the top 20% of all income earners.  This is certainly not a story of long term poverty and certainly is not a justification for the massive income redistribution called for and which often make it harder for the poor to rise while certainly punishing the more productive for being productive. That is a path to slower economic progress.

After just 10 years, only 17% of those who were in the bottom quintile were still in that group.  That’s about one sixth of the size of the problem often quoted.  We should celebrate the fact that despite the many government controls and redistribution plans  created over the decades, that we still have a free enough society to see 83% of the poorest people rise from poverty in a relatively short time. The study also looked at 19-year mobility and of course found it was even better than for 10 years, but by ten years there were only a few people left in the lowest income level so naturally there was little room for improvement.

This data is very similar to that published in a 1999 book by W. Michael Cox and Richard Alm titled “Myths of Rich and Poor”.  They used U.S. data from 1975-1991 and published tables much like the ones in the current research paper. I am glad and not surprised to see that Canadian data is very similar to the U.S.

It turns out that much of the effort directed at poverty reduction is not productive.  The truth is that individuals are properly responsible for their own lives and most of them work their way to a better standard of living through their own efforts.  Unfortunately there is always a small number people who are unable to help themselves.  In a free society there is a good chance there will be many benevolent groups willing to help them without any government intervention.

You asked the broader question "would society be better off if government did not regulate the economy?"  The answer, in the area of wages, and the same principles apply across all aspects of the economy, is an unequivocal yes, but it is very difficult for people to see unless they have a good grounding in economic science and reasoning.

I'd be happy to continue this discussion with you in any way you choose - email, on-air or in person.  There is great good that can come from applying the principles on which our country was founded - principles derived from Magna Carta, later the Bill of Rights (Great Britain), to the Canadian Constitution to the Canadian Bill of Rights. These principles prove that the best form of society is one where individual rights are paramount (a free, capitalist society) and government's role is to protect them, not violate them by dictating economic outcomes in defiance of reality.

David McGruer
2013 Candidate, Ottawa South
Freedom Party of Ontario