Economists against Economics

By Richman, Sheldon | Freeman, December 2006 | Go to article overview

Economists against Economics


Richman, Sheldon, Freeman


Five economists who either won the Nobel Prize in economics or who served as president of the American Economic Association-and three who did both-recently joined over 600 other economists in urging the federal government to increase the minimum wage. The signatures were gathered by the union-backed Economic Policy Institute (EPI), which unsurprisingly supports substantial government intervention in the economy.

I guess this is supposed to make us think more of the minimum wage. Instead, it makes me think less of the Nobel Prize in economics and the American Economic Association.

The economists claim the minimum wage "is based on the principle of valuing work by establishing an hourly wage floor beneath which employers cannot pay their workers."

That's gibberish. Legislating a wage floor is not a principle of valuing work. We value work according to the utility it produces. No law can change that. All the minimum wage does is decree: If you are going to buy labor services (a big if), you can't pay less than the law mandates.

In a free market a wage is agreed on through bargaining between an employer, who wants to pay as little as he must to obtain the labor's expected value, and a potential employee, who wants to be paid as much as he can get for his services. What they are willing to offer and accept depends on their expectations and other options. An unskilled worker's options can be expanded through the acquisition of skills, but also through competition for his present services.

Ultimately, an employer's ability to pay the wage depends on consumers' willingness to buy the good that emerges from the production process at a price that covers the (opportunity) costs of making it. If the market price of the good doesn't cover all the costs, no wages will be paid for long.

A wage, then, is the result of a transaction. If competition is free of political impediments, wages tend to reveal the discounted marginal value of particular labor services in the market. Indeed, competitive bidding is the only way to discover that value, which has meaning only through the market process. There is no external standard against which a market-set wage can be judged. Moreover, if the parties are (politically) free-that is, the system is void of physical force-the outcome satisfies the criteria of justice and fairness.

True, we don't have a fully free market, but the proper response should be to repeal the subsidies, taxes, regulations, and other privileges that suppress competition, capital investment, and hence the demand for labor. Replacing the rotten school system with a competitive education market would also help. Tinkering with the minimum wage distracts us from the real task at hand.

The economists also say "the minimum wage helps to equalize the imbalance in bargaining power that low-wage workers face in the labor market."

But it doesn't do that for workers who are dismissed because their productivity is perceived to be below the mandated wage. For the same reason, the minimum wage cannot be, as the statement claims, "an important tool in fighting poverty." Economic theory demonstrates-and endless studies illustrate-that if you raise the price of something, other things equal, less of it will be bought.

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