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Milton Friedman explains who wins and who loses when government mandates higher labor costs

Business owners often have a choice of different inputs which they can use to make a given output. If one of these inputs rises in cost, they will be incentivized, where possible, to economize by shifting to the use of other, cheaper inputs.

This is partly what lies behind the increased use of self service kiosks in fast food places or self scanning machines in supermarkets. Technological improvements act to reduce the cost of capital inputs. If labor costs rise, possibly as a result of increased legal minimum wages, the business’s incentive to economize is increased.

This is an old story. As the economist Milton Friedman wrote in his Newsweek column in 1970,

Higher labor costs [due to government regulations],” says the story, “have prompted many growers … to switch to mechanized harvesting in recent years, lessening demand for migrant workers. That trend has intensified in the last two years, as government agencies have implemented stricter housing regulations for growers participating in their migrant-worker placement programs … “State and Federal officials estimate that mechanization could eliminate from 6,000 to 10,000 jobs in Michigan this summer that were previously done by migrants … License applications [for migrant camps] are down 11 per cent so far this summer …

Friedman goes on to explain who gains and who loses from government interventions like this.

Mechanization is a good thing if it is a response to a decline in the number of persons seeking jobs as migrant workers at low wages. That would mean that the former migrant workers have found better employment opportunities. Mechanization is a bad thing if it is a response to higher labor costs imposed arbitrarily from the outside. That simply wastes capital to replace people who are forced into unemployment or even less desirable jobs.

Migrant workers are clearly hurt. It is small comfort to an unemployed migrant worker to know that, if he could get a job, he would have better housing. True, the housing formerly available may have been most unsatisfactory by our standards. However, the migrant workers clearly regarded it, plus the accompanying jobs, as the best alternative available to them, else why did they flock to Michigan? It is certainly desirable that they have better alternatives available to them, but until they do, how are they helped by eliminating alternatives, however unsatisfactory, that are now available? That is simply biting off their noses to save our faces.

Farmers are clearly hurt. The cost of migrant labor has been raised. That is why they are mechanizing. The machines limit the rise in cost but do not eliminate it. Costs would be lower if farmers could hire migrant labor on terms that would be mutually satisfactory to them and the laborers. But they are not permitted to do so.

Consumers are clearly hurt. At the higher costs, less food will be harvested, so making food prices higher than they otherwise would be.

Producers of mechanized farm equipment are helped by having a larger market. But in the main, they simply produce harvesting equipment instead of other equipment.

The only other people who are helped are the do-gooders responsible for this type of legislation and for these effects. They have the high-minded satisfaction of promoting a noble cause. The good intention is emblazoned forth for all to see. The harm is far less visible, much more indirect, much harder to connect with the good-hearted action. Besides, the harm is mostly to someone else.

This case is not in any way unique, except that it happens to be more obvious than most. I know hardly any do-gooder legislation of this kind—whether it be minimum-wage laws or rent control or urban renewal or public housing or fair-employment legislation—which, on examination of its full consequences, does not do more harm than good—and more harm as judged by the intentions of the well-meaning people who sponsor such legislation.

Will the liberals ever learn this lesson of experience? So far, the clear failure of government program after government program to achieve its objective has simply led to a clamor for still larger, still more expensive, still more far-reaching programs—to do still more harm. It is about time that the liberals asked themselves whether the fault may not be in the system they favor— doing good at other people’s expense—rather than in the way the system is operated. It is about time that they appealed to their heads as well as their hearts.

John Phelan is an economist at the Center of the American Experiment. 

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