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Gifts Do Not Cause Wages to Rise

Posted By Don Boudreaux On February 27, 2012 @ 8:25 am In Economics,Prices,Work | Comments Disabled

So here’s why – referring to my earlier post [1] – success by the University of Virginia’s hunger-striking students to pressure that institution to arbitrarily raise the wages that it pays to its janitors would not put upward pressure on wage rates for non-UVA-employed janitors and other low-wage workers: any such increase in wages would do nothing to increase the demand for janitors and other low-skilled workers.  It’s that simple.

If UVA grants the hunger-striking students’ demands, the increase in wages would be a form of philanthropy – charity – extended by the university to its janitors.  (Never mind here that this charity would be extended mostly with other people’s – taxpayers’ – money.)  Such higher wages would not reflect demand by UVA to hire more low-skilled workers.  So even though low-skilled workers employed elsewhere might have a stronger desire (as a result of these higher wages paid by UVA) to work for UVA, UVA will not hire more workers as a result of its arbitrary hike in the wages that it pays to such workers.  Being no more able today than they were yesterday to get a job at UVA, low-skilled workers employed elsewhere will find their current employers no more willing today than they were yesterday to raise these workers’ wages.

UVA’s janitors would unquestionably benefit if the hunger-striking students succeed (at least insofar as such higher wages do not over time put pressure on the university to substitute capital for low-wage labor used on campus).  But charity given to Miller does not increase the demand for Johnson’s labor, even if Johnson is a very close substitute for Miller.

If UVA were obliged by market forces to raise the wages it pays to its janitors, then such wage increases would indeed be part of the market process that puts upward pressure on the wages of low-skilled workers who do not work at UVA.  Higher wages under these circumstances would reflect increased demand (relative to supply) for low-skilled workers’ services, obliging employers other than UVA to raise the wages they pay in order to hire and retain low-skilled workers.

But simply giving a worker a gift in the form of wages higher than market – higher than the wage necessary for the employer to hire and retain all the employees of a certain type that it wishes to employ – does nothing to increase the demand for such labor.  (If anything, over time such arbitrarily higher wages seem more likely to reduce the demand for such labor.)

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