You probably saw the recent headlines. Senator Bernie Sanders proposed a new bill that he claims will reduce weekly working hours from 40 to 32. This would move workers from needing to work five 8-hour days to only four.
But you haven’t heard the best part. You’d get paid exactly the same amount as before! Don’t believe me? Just look at what the journalists say:
• Business Insider: “Bernie Sanders wants to bring in a 4-day workweek, which would see workers paid the same for 8 hours less work every week”
• NBC News: “Bernie Sanders pushes bill for four-day workweek without loss of pay”
• New York Post: “Bernie Sanders champions bill to create 32-hour workweek without pay loss”
• Boston.com: “Sanders pushes for 32-hour workweek without loss of pay”
Wait just a moment. How do journalists know you’ll get paid the same amount? Well, that’s what Sanders’s legislation claims! There’s just one problem. Real wages aren’t determined by legal decree, and there is no way for the government to claim credibly that they won’t go down. To see why, let’s take a look at how wages are determined.
The Market Wage
Who determines how much workers are paid? You might be tempted to say that companies set wages, but does that make sense? Imagine you’re a business owner trying to make the most profit possible. What wage would make business owners the most money? Well, a business owner would love it if all their workers did their jobs for free. Even better, businesses would be happy to pay a negative wage. Wouldn’t it be nice for business owners if their workers paid them for the privilege of working there?
If greedy business owners alone determined wages, then surely workers wouldn’t be paid. So why do workers get paid? Well, as any business owner will tell you, valuable workers have alternative options. If you underpay good employees, they’ll find something else to do. Maybe they’ll find a new boss, or maybe they’ll start their own business.
Either way, business owners aren’t sovereigns in control of market wages. Wages arise in response to factors not totally in the control of workers or businesses.
Let’s consider a quilt-making business. Imagine customers are willing to pay $100 for a quilt. Deb is a fast quilter. She can make three quilts a day. Let’s say there are two quilting companies in town: Old Town Quilts and Krazy Kwilts. Deb applies to both companies and proves to both that she can make three quilts a day. What pay will she be offered?
Well, both companies would like to pay her $0, but if they try that, the other company will outbid them. Deb makes $300 (3 x $100) worth of quilts every day. That means if Old Town Quilts offers her $100 per day, the owner could make $200 ($300-$100) worth of profit each day.
Notice a problem? If Krazy Kwilts offers Deb $150, they still make a profit off of her labor. So it makes sense even for greedy business owners to offer to pay workers more. In fact, it will be profitable to pay Deb up to $299. If Old Town Quilts offers her $299, the company owners still come away one dollar richer than if they don’t employ her.
Notice what determines wages here. There are two major factors. First, the extra quilt production she brings to the table matters. Economists call this extra quilt production her marginal product. Deb has a marginal product of three quilts a day. The other aspect that determines her wage is the most important—the price of quilts. Customer valuations are what determine the price of quilts. If nobody wanted to pay for quilts and the price dropped to $0, Deb’s ability to produce three quilts a day would be worth $0. Wages aren’t determined by labor productivity in the sense of just producing any physical stuff; they are determined by the laborer’s ability to produce in accordance with the customer’s subjective values.
Bernie’s Wishful Thinking
So what happens if the government tries to determine wages without regard to market forces? Let’s consider Deb. We already know that Old Town Quilts will pay her around $300 per day. So, over the course of a five-day workweek, she’ll be paid $1,500 (5 x $300). Now Senator Sanders decides Deb works too hard. He wants her to have a break. He passes a law that allows her to work only 4 days a week, but the employer legally must keep her pay at $1,500 per week.
What happens?
Well, Deb creates three quilts a day for four days for a total of 12 quilts per week. That brings the company $1,200 per week. That means every week Deb remains employed, Old Town Quilts loses $300 by keeping her on. So what will the company do? Well, one option is that they could slash all the nice benefits Deb enjoys. If part of her compensation had come in the form of healthcare plans, those might be scaled back, or perhaps they’ll get rid of retirement matches. Alternatively, they can give Deb an ultimatum: start making more quilts in a day, or you’re out. Maybe Deb will start skipping her lunch breaks and bathroom breaks to make it work.
Ultimately the result is simple—the company will either need to recoup the $300 loss from Deb somehow, or they’ll have to fire her. Businesses do not just take an obvious loss on a worker if they can avoid it. Several things could happen if she gets fired, none of them particularly good for Deb.
One possibility is that she could apply for a job at Krazy Kwilts. However, now that she only produces $1,200 worth of quilts per week, they can only offer her a weekly pay of $1,200. So she’s now $300 poorer than she was with a five-day workweek.
In this scenario Sanders’s plan has clearly failed. He promised less work for the same pay. The result is less work and less pay.
At this point, defenders of Sanders’s plan might propose an alternative. Krazy Kwilts doesn’t get to offer her $1,200. They have to maintain her old wage of $1,500. This doesn’t work either. Krazy Kwilts wouldn’t hire Deb at this wage because it would cause the company to lose $300 a week.
Like all laws aimed at keeping wages higher than their market rate, the result of this law carried to its logical conclusion would be unemployment.
But supporters of such a policy could go further. Let’s just force Krazy Kwilts to hire Deb at that wage, they might say. Alternatively, we could just make it illegal for Old Town Quilts to fire Deb.
Let’s think about this carefully. What would happen to a company that is required to keep workers employed at wages that cause it to make a loss? Well, a company making continual losses would eventually go out of business. Owners of the company would take their capital out before it lost all value.
If the employer goes out of business, Deb’s wage falls to zero. Notice that Sanders’s policy fails again. Less pay is the result.
An extremist might take the policy even further. What if the government just forces the business to stay open? Well, eventually a business making constant losses will run out of money. At this point, the government could inject more money. Notice what this means, though. If the government is the one providing all the money for the business, setting wages, and forcing the company to hire some number of workers, then politicians and bureaucrats have effectively taken ownership of the business.
We have a word for when the government seizes businesses and the means of production: socialism.
In short, Sanders’s policy cannot work on its own. In order to make it work, the government would need to take successively larger interventions until the economy itself is owned by central planners. This logic is exactly the logic pointed out by Ludwig von Mises in an address titled “Middle-of-the-Road Policy Leads to Socialism.”
Mises’s point is that when the government imposes certain controls on the market, the market reacts in a way that undermines the goal of the controls. In order to fix this, the government must take even more control of the market again and again until eventually there is no market left.
It’s also important to highlight what Mises is not saying. Mises is not saying that every government that intervenes in the economy will become socialist. He is saying that if they want to succeed at their stated ends then they will need to take over increasingly large parts of the economy.
A similar logic applies here. I don’t think Bernie’s proposal will pass at all, but, even if it does, it won’t lead to socialism (despite Bernie’s desires). Instead, I think a more likely alternative is that the government will stop at one of the stages in the process above.
For example, employers may simply cut non-wage benefits for workers to make up for being required to pay them a higher wage. There’s realistically no way for the government to know all the ways companies could cut these benefits, so this is one likely endpoint. (Note that even this would be bad for workers, as it would restrict their ability to negotiate for better compensation arrangements). Alternatively, I also think it’s unlikely the government would be able to mandate that new employers pay workers the same wage as before. In this case, workers will just lose their jobs and be hired at a lower wage. Realistically, there’s no way for the government to assume wages between different employers should be the same given that firms are unique.
Socialism Wouldn’t Work Either
You probably noticed the irony here. If Sanders’s proposal was taken to its logical conclusion, we’d end up replacing capitalism with socialism. That sounds like a win for Sanders and his supporters.
But it would be a loss for human flourishing—the ostensible goal of socialism.
The same economist who pointed out how middle-of-the-road policies lead to socialism was also the first to articulate the single biggest problem with socialism.
You’ve likely heard people say before that socialism “looks great on paper but doesn’t work in practice.” It’s true that socialism doesn’t work in practice, but Mises highlighted how it doesn’t work in theory either.
In 1920, Mises published his now-famous essay Economic Calculation in the Socialist Commonwealth. The piece is long, but its underlying argument is basic. In market economies, consumer desires determine where productive resources go. Those desires are communicated to entrepreneurs and capitalists in the form of profits and losses.
However, Mises points out that there is a problem here for socialist economies. His argument is well summarized by Peter Boettke:
Without private ownership in the means of production, Mises reasoned, there would be no market for the means of production, and therefore no money prices for the means of production. And without money prices reflecting the relative scarcities of the means of production, economic planners would be unable to rationally calculate the alternative use of the means of production.
This inability to rationally calculate which usage is best for each means of production means that socialist systems will produce next to no wealth. In fact, in order to continue, its calculation failures will lead to wealth consumption.
So even if Sanders’s plan led to the government seizing the means of quilt production, it would be unable to keep Deb’s real wage at its previous level for long. The money would simply run out.
There is one way, however, for workers to be able to reduce their hours while keeping wages at the same level, and that is by going in the opposite direction from Bernie and leaning into the free-enterprise system. Indeed, the prosperity created by capitalism has lowered working hours around the world.
At the same time, average incomes have increased around the world.
We cannot shorten the workweek and keep wages the same by legislative fiat. If we could, why not make a law that gives us a one-hour workweek for the same pay?
In reality, the only system that will actually accomplish the end of a lighter workload is the system that has been making steady progress on this front over the last century—the free market.
Originally published by the Foundation for Economic Education. Republished with permission under a Creative Commons Attribution 4.0 International License.
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