Minimum Wage and the Myth of Capitalist Exploitation

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One of the changes initiated by the Czech government of Prime Minister Sobotka is an increase in the minimum wage level. Since January 1, 2016 the minimum wage has risen by CZK 700 to the level CZK 9,900 per month. Promoters of this labor market price regulation argue it is necessary to protect workers against greedy capitalist creatures. “We must prevent exploitation of workers,” they say. Well, this is a complete nonsense.

Capitalist exploitation is nothing but a fable that leftists, populists or inadequately educated individuals uses for haunting employees – just like parents use tales about bugaboos under bed to scare unruly children.

If you live in an economy where – despite administrative difficulties – you can establish any business and you can compete with existing businesses on the same market, it can never happen that the gap between entrepreneur’s wage (the “capitalist monster”) and her/his employee’s wage (“exploited one”) exceeds the market level and will remain like this forever.

Why? Show me a company where the employees work for a minimum wage and the owner drives Ferrari and singes Havana cigars with 500 bills… and I will establish own competitive business tomorrow. I will pay more to the employees, I will charge my customers less, I will compromise and rather drive a BMW limo and ignite Havana cigars with a gold lighter instead. This is how capitalism works. Competition is everywhere, which means the system is not remorseless to employees, but to entrepreneurs.

Wages paid to workers are essentially determined by three factors: the qualification necessary for producing and providing products or services, the demand for the products or services and the willingness of customers to pay for these products and services. They all then combine the demand for a labor factor and de facto create job market. Whether we like it or not, wages will always be determined by the market. Not by politicians.

This price regulation affects just a very small segment of the labor market. And, it will bring two results: some people working for a minimum wage will be better off, some people will be worse off. Nothing more. Increase in a gross minimum wage on the level CZK 9,900 per month causes an increase in total wage costs for employers to CZK 13,300 per month (social contributions included). Some entrepreneurs will be willing to bear this cost, some not. And they start to encourage employees to start working on other basis – especially informal one.

Liberalni Institute