The minimum wage's 1938 birth and the workers it was meant to shut out

A price floor is a simple thing. The law says that no one may sell a certain item below a certain price. For an item like milk, nobody is shocked to learn that a floor above the market price leaves some of the milk unsold. For an item like labour, we are told, the same arithmetic stops applying, because the item is a human being and the floor is an act of kindness. The history of the minimum wage is the history of what happens when you test that claim, and it begins with a handful of reformers who did not believe it themselves.

Today I want to tell the story of how the minimum wage came to American law. It is not the story most of us were taught, and it is not a comfortable one. Some of the early advocates were candid about who they expected to lose their jobs. They considered that a good thing. The law that finally passed in 1938 did not share that purpose, but it carried the same arithmetic, and the people it shut out were the ones who had the least to offer an employer at the new price. I will tell the story in order, give the supporters of the minimum wage their best case, and then say what I think follows for the debate today.

What a wage floor does, in a paragraph

A minimum wage is a legal floor under the hourly pay an employer may offer. Productivity is the value of what a worker produces in an hour. An employer will hire a worker only if the worker's output is worth at least what the worker costs. So if the floor is set above the value a particular worker can produce, then hiring that worker loses money, and the employer will, if the law lets him, either not hire him, reduce his hours, or replace him with a machine or a more skilled person. The floor does not make the worker more productive. It raises the price of employing him. That is the whole argument, and you do not need a doctorate to follow it. The dispute is about how large the effect is, for whom, and at what level.

The Progressive Era ideas

The movement for minimum wages in America grew out of the Progressive Era, in the early twentieth century, when reformers were worried about sweated trades, long hours and the poverty of working women and children. The first American laws were state laws. Massachusetts passed one in 1912, covering women and minors and relying largely on publicity rather than penalties. Other states followed, and by the 1910s and early 1920s a good many had laws of their own, mostly for women and children, and the Supreme Court was asked to say whether they were constitutional.

The arguments made for them were not all of one kind. Some reformers made a plain humanitarian case: no one should have to work full-time and still be unable to live. But historians of economic thought report that some economists and reformers of the era made another argument, and it is the one that modern defenders of the minimum wage tend to leave out. On their account, these writers believed that a wage floor would push the least productive workers out of the labour force, and some of them thought that was a benefit to society, a view mixed up with the eugenic ideas that were fashionable among some progressive intellectuals. I will not put words in anyone's mouth, and I have not reproduced any quotation here; I would urge the reader to look up the original papers and the scholarship on Progressive-era economics and judge the wording for himself. The point is that the claim that a minimum wage works partly by excluding some workers is not simply a critic's slander. According to those historians, it appeared in some of the movement's own literature.

Let me say how I think about this. I do not claim that every supporter of the minimum wage, then or now, shared that purpose. Most did not. Most were moved by sympathy for the working poor. What I claim is narrower: some of the people who wrote about the policy at the time, as the historians report, understood its effect on the least productive workers and were not troubled by it. The modern debate, in which a reduction in jobs is treated as a baseless scare, would have struck them as strange.

The courts: Adkins and West Coast Hotel

In the early 1920s the Supreme Court was asked about a minimum-wage law for women in the District of Columbia. In Adkins v. Children's Hospital (1923), the Court struck it down. The majority, in an opinion by Justice Sutherland, held that the law interfered with the freedom of contract protected by the Due Process Clause of the Fifth Amendment. The case is a good example of how the argument looked from the Court's side: a worker and an employer had agreed on a price for labour, and the legislature wanted to forbid them from making the bargain.

Fourteen years later, the Court changed its mind. In West Coast Hotel Co. v. Parrish (1937), it upheld a Washington State minimum-wage law for women and overruled Adkins, by a vote of five to four. The decision came in the middle of the fight over President Franklin Roosevelt's plan to enlarge the Supreme Court, and many commentators described the Court's shift as "the switch in time that saved nine." Historians dispute how much the court-packing threat caused the change, and I will leave that fight to them. What is certain is that the decision marked the end of the era in which the Court enforced a robust freedom of contract against economic regulation, and it cleared the way for a federal law.

A conservative can disagree with that turn without being a defender of sweatshops. The argument of the Adkins majority was that liberty includes the right to make your own bargain, and that when the state sets a floor it takes away the one right the least skilled worker has, which is the right to offer his labour for less than the floor in order to get his foot on the ladder. That is not a frivolous argument. It is the argument of the economic liberty tradition, and it is the one that was set aside in 1937. For other examples of how courts have treated economic liberty, see North Carolina's dental board, teeth whitening and the Supreme Court.

The Fair Labor Standards Act of 1938

With West Coast Hotel on the books, Congress moved. President Roosevelt signed the Fair Labor Standards Act on June 25, 1938. It set the first federal minimum wage at 25 cents an hour, with a scheduled rise to 40 cents over seven years. It set a maximum workweek, with overtime above the limit at time and a half, and it restricted child labour. It took effect in October 1938. The Supreme Court upheld it in United States v. Darby (1941), on the ground that Congress's power over interstate commerce reached the labour conditions of goods produced for that commerce. The reasoning stretched the Commerce Clause well beyond what the Founders likely had in mind, and that is a story for another post.

The law did not cover everyone. By the Labor Department's own history, the industries it reached employed only about one-fifth of the labour force, and Southern protests helped push the first-year rate down to 25 cents from the 40 cents in earlier drafts. Who was left outside the law, and whether that was a deliberate choice or a political price paid to win Southern votes, is a question that scholars debate, and I do not need to resolve it here. What matters for the argument is the other side of the exemption: the workers who were covered faced the new cost.

The South and Puerto Rico

The effect of a single national floor was uneven because wages across the country were uneven. In the 1930s, wages in the South were well below those in the North, because productivity, living costs and the mix of industries all differed. A floor that was a modest nuisance in a Northern factory was a heavy cost in a Southern textile town or a Puerto Rican needlework shop. Some Southern employers told the Labor Department they could not survive a 25-cent floor, and Southern congressmen argued that Northern interests were using labour standards to hurt Southern industry.

Puerto Rico is a case the reader should look up. The island's wages and productivity were far below those of the mainland, and its industries, including needlework, sugar and tobacco, employed many workers at low pay. I have not confirmed the details of how the 1938 law was applied there, so I will not state them, and I would urge the reader to consult the economic histories of the island. The general lesson is the one the early advocates had understood: a floor above what a worker can produce does not raise him up. It removes the rung.

The best case for the minimum wage

I promised a fair hearing, so here it is. The strongest argument for the minimum wage runs like this. Employers sometimes have market power in local labour markets. In a town where one employer dominates, the wage can be pushed below what a competitive market would pay, and a floor can raise pay without destroying jobs. This is the monopsony argument, and it is a real one in economic theory. Moreover, a floor protects workers who cannot easily bargain, spreads the benefit of growth to the bottom of the wage scale, and expresses a social judgment that a full-time job should not leave a person in poverty. And the history that I have just recited, the defenders say, is about the motives of some reformers a century ago. Motives are not effects, and today's defenders have different aims.

Each of those points has force, and each has an answer.

1. Monopsony is a case for specific circumstances, not a universal floor. If an employer has local market power, a floor set at the right level can help. But a floor set at the wrong level, or applied to a labour market that is competitive, costs jobs. The 1938 law set a single national rate for the whole country, which is not a tool designed for local monopsony.
2. A wage floor is a blunt way to fight poverty. Many minimum-wage workers are not in poor households. Meanwhile, many poor households have no worker at all, and no wage law reaches them. Tools aimed at the household, such as the earned income credit discussed in The EITC began as a conservative idea and now pays out billions in error, reach the poor without making it more expensive to hire the least skilled.
3. Motives do not change arithmetic. I agree that a modern supporter should not be tarred with a century-old remark. The history matters for a different reason: it shows that the people who first designed the policy saw the exclusion effect clearly. If it was clear to them, it is not an invention of the modern opponents.
4. The people shut out are the ones the law is meant to help. The worker whose output is worth less than the floor is not helped by being told that his labour is illegal at the price he can get. He is helped by getting the job, learning the skills, and moving up. That is the argument of the Adkins majority, and it is also the argument of common sense.

What the history means for today's debate

Three lessons. First, do not accept the claim that a minimum wage is a free gift to workers. Every legal floor has a price, and someone pays it: a worker with fewer hours, a customer with a higher price, a business with lower profits, or a young person who never gets the first job. The honest question is how large the price is and who bears it. For one of the best-known modern tests of that question, see seattle raised its minimum wage, and a city-funded study counted the hours.

Second, notice who benefits from a uniform national floor. It is the high-productivity firm and the high-wage region, which are not troubled by it, at the expense of the low-productivity firm and the low-wage region. A conservative who believes in federalism should ask why a single number set in Washington should apply to Manhattan and a small town in Mississippi alike. The Founders' answer was that such questions belong closest to the people affected, and the Tenth Amendment says that the powers not delegated to the United States are reserved to the states or to the people. You can read the text at the Constitution page.

Third, remember the people who are not in the room. The unemployed teenager, the immigrant with limited English, the worker with a gap in his résumé, the person coming out of prison or addiction: they are the ones whose labour is worth least to an employer on day one. They are also the ones who need the first job the most, because that job is the beginning of everything else. A policy that makes the first rung unavailable has done them no kindness, whatever its authors intended.

The case in brief

1. The wage floor works by raising the price of employing the least productive workers, and some early advocates, including economists of the Progressive Era, said openly that excluding such workers was a benefit.
2. Adkins v. Children's Hospital (1923) struck down a minimum-wage law on freedom-of-contract grounds, and West Coast Hotel v. Parrish (1937) overruled it, clearing the way for federal action.
3. The Fair Labor Standards Act of 1938 set a federal minimum of 25 cents an hour, left most of the workforce uncovered, and weighed heaviest on low-wage regions such as the South.
4. The strongest defenses, monopsony and anti-poverty aims, justify targeted tools more than a single national floor.
5. The cost of any floor falls on those with the least to offer, which is why the history matters to every proposal to raise it.

What you can do: look up your state's minimum wage and its youth or training exceptions on the state labour department's website, and ask your legislator who would be hurt first if the number doubled.