A major function of unions, perhaps the major function of unions, is to see that a given firm pays its employees more than their market wage. Governments perform the same role when they impose minimum wages. In this chapter we demonstrate how our Profit Table can be used to evaluate union and government efforts to coerce firms to pay higher wages.

Many people who earn the minimum wage work in the fast food business. Accordingly, let's consider the case of a fast food restaurant trying to decide whether to employ a machine or a person for a particular job task. To avoid any legal problems, let's call our imaginary firm McBurger King. McBurger King is thinking of expanding its business by staying open later. One consequence of being open later is that there will be more trays to wash. McBurger King could hire a local teenager to wash those trays. Or it could employ a mechanical dishwasher. The human dishwasher has a market wage of $9,000 a year, while the mechanical dishwasher rents for $10,000 a year. The fast food restaurant expects to generate about $12,000 in Revenue by staying open later. (To simplify our analysis, we assume that the services of either a human or mechanical dishwasher are identical, and that this is the only extra cost of staying open later.) We can represent McBurger King's choice between a human dishwasher and a mechanical dishwasher in the Profit Tables below.

Clearly, McBurger King will hire a person to wash dishes rather than rent a machine. And this is exactly what we want. If the restaurant employs the human dishwasher, that is one less person on the job market, one person who will not be producing $9,000 of happiness in an alternative use. If the restaurant employs a mechanical dishwasher, then there is one less machine available to generate $10,000 of happiness in its alternative use.

Now say the government decides to impose a minimum wage, raising the worker's wages to $10,400. The firm's profit tables now look like this:

After the minimum wage, McBurger King still decides to expand its hours, but now it employs a machine to wash trays instead of a human. And that is a shame. Why? Because the higher price of the machine tells us that the machine would produce more happiness elsewhere in the economy than the teenager. It is the more valuable input. As a result, society would prefer that McBurger King leave that resource alone, and instead employ the less valuable input. Hiring the machine to wash trays instead of the teenager is like hiring a Ph.D. in electrical engineering to sweep floors rather a high school dropout (remember that one?).

Not only will the artificially high wages caused by unions or minimum wages induce firms to hire the wrong inputs, it will also affect the quantity of goods available for consumption. For example, by changing a few numbers in the table (try changing Revenue to $9,500), you can see that the minimum wage may actually stop McBurger King from staying open later and offering more of its product to the public. And that is (another) shame. The fact that transferring resources to later hours was profitable before the minimum wage tells us that society wanted the restaurant to stay open later.

Lastly, on top of all these other problems, note that we are left with some unemployed workers. If the best use of a worker can only produce $9,000 of Revenue per year, while his mandated wage is $10,400 per year, you can probably guess that this worker will find himself unemployed for quite some time. And that is a (third) shame.

Aren't there any winners from minimum wages? Yes there are. While some workers will lose their jobs, others will be able to keep their jobs at the higher (minimum) wage. The workers who keep their jobs are clearly better off. In fact, the benefits from union wage raising or government minimum wages are clearly evident to those who benefit. It's not hard for them to see that the efforts of their union officials or elected politicians have directly helped them. As a result they can be expected to support those leaders who advocate raising wages artificially.

On the other hand, the workers who lose their jobs, or who find it difficult to get employed, may not see that their misfortune is due to distortionary wage policies. They are more likely to blame the greediness of insensitive, self-seeking employers. They are not likely to see the irony that the efforts of the very people who are trying to "help" them are precisely what is keeping them from finding a job. Accordingly, union officials and elected politicians may find relatively little political resistance to plans for artificially raising workers' wages.

The bottom line is that artificially setting wages above their market level is going to cause distortions in the allocation of resources in society. By affecting the way that firms employ inputs and produce outputs, artificially high wages result in lower overall happiness for society. Still unconvinced? Alright, then, we give up. Let's raise the minimum wage. But let's not be cheap about it. If raising the wage from $4.25 per hour to $5.00 an hour is a good idea, then raising it to $5.50 or $6.00 an hour is even a better idea. Even at $6.00 an hour, a worker who puts in a 40 hour work week and works 50 weeks a year will earn only $12,000. Hardly enough money to raise a family. So let's make the minimum wage $10 an hour. No, $50 an hour...$100 an hour!

Why doesn't anybody advocate a minimum wage of $100 an hour? Because everyone knows that the end result would be an economy with a couple of $100-an-hour workers, surrounded by a great ocean of unemployed. But if raising the minimum wage from $4.25 to $100 an hour is a bad idea, why then is it a good idea when it only gets raised to $5.00 an hour? As always, the secret in economics is to keep one's eye on the ball. As a nation, we make ourselves wealthy by allocating resources to their highest valued use. This is the only real way to raise our "national wage."

In a free market/capitalistic economy, the individual efforts of society's members to make themselves richer serves to enrich all of society. This is the essence of Adam Smith's "invisible hand" insight. But there is a public sector analog to the "invisible hand." We like to call it the "invisible foot." By attempting to use laws or coercion to artificially make ourselves richer, the individual efforts of society's members can backfire, producing precisely the opposite effect from that which was intended. That is, the very efforts intended to provide prosperity can cause the economy to stumble, to trip up, just as if it was being impeded by a great "invisible foot:" making ourselves poorer by trying to make ourselves richer.