Minnesota’s Economic News – W/E 4/16/21
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It should not come as a surprise that a local St. Paul institution is citing the $15 minimum wage law as one of its reasons for going out of business. High operating costs are inevitable for businesses operating in areas with a high minimum wage. With that comes cutting hours, laying off people or going out of business. That reality has always been the same throughout history; controlling prices, wages included, leads to negative consequences.
As early as 4000 years ago, the Babylonians had the code of Hammurabi, which had stipulations of wage control and other price control measures. Among other laws, the code stated how much a worker was to be paid:
- If a man hire a field-laborer, he shall give him eight gur of corn per annum.
- If a man hire a herdsman, he shall give him six gur of corn per annum.
- If a man hire a pasturer for cattle and sheep, he shall give him eight gur of corn per annum.
- If a man has hired an ox for threshing, twenty qa of corn is its hire.
- If an ass has been hired for threshing, ten qa of corn is its hire.
- If a young animal has been hired for threshing, one qa of corn is its hire.
- If a man hire cattle, wagon, and driver, he shall give 180 qa of corn per diem.
- If a man has hired a wagon by itself, he shall give forty qa of corn per diem.
- If a man hire a workman, then from the beginning of the year until the fifth month he shall give six grains of silver per diem. From the sixth month until the end of the year he shall give five grains of silver per diem.
Such laws smothered the economic progress of the empire for many centuries; they led to a decline in trade and drove people out of the market. It was only after these laws were repealed that peoples’ fortunes changed for the better.
Similar laws (intended to control prices of goods and services) have been implemented throughout history, some more extreme than others. The Roman Empire, for instance, fixed the prices of goods by decree of Emperor Diocletian in 284 AD, enforceable through the penalty of death. All the law did was lead to shortages of goods, it was eventually set aside. The same happened with the French law of Maximum imposed to regulate the price of grain and other goods; it killed thousands of people (due to an extreme shortage of grain and other goods) and was thus repealed. George Washington’s army nearly starved after price controls imposed on goods used by the army created mass shortages. Anti-price control laws brought about an ample supply in a short period of time (June 1778 to Fall 1778).
Much more recent and close to home price controls include the gasoline price controls set by the Department of Energy in the 1970s which contributed to the energy crisis of that era, and New York’s rent control and, as of this year, its very controversial minimum wage laws.
In short, price control schemes are not new; they have been around for as long as people have exchanged goods. And if history has taught one thing, it is that price control schemes have never worked. They should not be expected to work now in St. Paul.
Theoretically, price controls are intended to hold the price at a certain level, but effectively they work to restrict either demand or supply while providing an excess of the other. Price ceilings (maximums) usually raise demand while restricting supply, leading to the shortage, while price floors (minimums) raise supply while restricting demand, leading to excess.
A minimum wage is the latter type of price control; it restricts labor demand while effectively increasing labor supply. Firms are less likely to hire workers if it is going to cost them more than they make. In that case, they are more likely to lay off employees, reduce hours or cut some other benefits to cut costs and maintain profitability. Minimum wage laws rarely make anyone better off, and usually negatively impact their intended beneficiaries, low-skilled workers. Target, for instance, raised its wages but cut down employee hours, putting employees at the same level of income as before, or lower.
Local business owners worry with good reason that they will not be able to afford the costs of running their businesses and will therefore have to shut down. O’Gara’s closing is a good local example of why price controls are never a good idea. If thousands of years of price control schemes have taught us anything, it is that moral arguments or good intentions do not matter in the market. Price controls never seem to protect the people they are intended to benefit, and actually make them worse off in some instances. St. Paul should not expect results different from that historical experience.