Classical liberal economists oppose minimum wage laws because they restrict mutually beneficial labor market trades.
This is the basic economic case for complete freedom of contract. Wage floors mean potential employees who would otherwise be willing to sell their labor at a lower price are unable to. Employers are banned from employing more people or giving workers longer hours at a lower wage too.
It is in this spirit that Colorado State Rep. Dave Williams has proposed an amendment to the state’s minimum wage law. Williams’ legislation would allow an opt-out in cases where applicants for jobs or employees and employers mutually agreed to a wage below the state minimum. Paying less than the minimum wage would essentially be legal again in cases where the employee or applicant had agreed to waive their minimum wage “right” (though the employer would still be bound by the federal minimum).
This has potential benefits similar to lowering or abolishing the state minimum wage. On the margin, it would help workers with low productivity levels looking for entry-level jobs. It would also reduce the risk of hiring for employers in cases where potential employees had little work experience. While there would of course be a not insignificant risk that employees might later claim the agreement was not truly “voluntary,” such a waiver would overall shift Colorado labor market law closer to the freedom of contract that libertarians prize.
For that reason, it will of course be opposed by most minimum wage proponents. Traditionally, minimum wage advocates have recognized that such laws outlaw exchanges. But they believe this is a good thing, asserting that market-based wage setting is unfair or exploitative, or appealing to older theories such as monopsony, which says that employers in certain industries have significant market power and are able to hold wages below productivity levels absent regulation. In such a scenario, minimum wages can even raise employment levels.
Almost all minimum wage studies these days are empirical in nature, testing whether minimum wages or increases have the classical or monopsonistic effect. Though the degree of the effect differs, the overwhelming majority find negative employment or job growth consequences from minimum wage increases. From an employment perspective then, any reform in the direction of Williams’ should be welcome.
But another benefit of a debate around this law could be educational. It is difficult to make the case for complete abolition of minimum wage laws, in part because opponents lament that some workers would see pay cuts. No doubt there would be some companies that sought to move to a model with lower pay, with attempts to get employees to sign forms waiving the wage. This is the “seen” effect. But what is not seen is that there are people out there willing to work in Colorado between the federal and state minimum wages, who are currently unable to do so.
Williams’ legislation highlights that minimum wage laws are coercive, ceasing to give us control over our own labor. Indeed, under Williams’ legislation, employers would have to post notices to inform applicants and employees that they have the right to negotiate wages. Well, above the federal minimum at least!
There is therefore a principle and a consequence at stake. The principle is freedom to contract your labor. The consequence is that minimum wage laws tend to cause “unemployment”. While complete abolition of minimum wages would be preferable, Williams’ legislation helps highlight the principle and ameliorate the consequence.