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Minimum-Wage Reality

Posted By Don Boudreaux On November 25, 2012 @ 11:41 am In Crony Capitalism,Reality Is Not Optional,Seen and Unseen,Work | Comments Disabled

My new e-mail friend, Democracy’s Herald, is quick to respond by e-mail to today’s Quotation of the Day [1].  In particular, Mr. Herald dismisses my mention of minimum-wage legislation as an example of how governments impertinently and oppressively shield politically influential producers from the competition and free choices of politically weak producers and consumers.  Quoting now Mr. Herald (original emphasis):

You’re in the echo chamber too much. Minimum wage laws are designed to protect workers FROM oppression. These laws RAISE worker’s pay.

I’ll point out here only in passing that the history of the national minimum-wage in the United States supports my contention: that legislation was meant to protect northeastern U.S. textile producers from their southern U.S. rivals.  Burt Folsom explains here [2].  (David Henderson, in his superb 2002 volume, The Joy of Freedom [3], has more on this history.  David also updates that history – revealingly – through John F. Kennedy’s time in the U.S. Senate.  [I'd give page numbers, and perhaps even a quotation, from David's book were my copy not at my office while I'm now at home.]  Oh, and my GMU Econ colleague Walter Williams explains the unsavory origins of South Africa’s minimum-wage [4].)

But let me content myself with relating here a hypothetical that I give to my principles students each semester.  I ask my students:

Suppose that I – an ordinary and none-too-accomplished professor of economics at George Mason University – open the morning Washington Post to read the headline: Congress Enacts Minimum-Wage Legislation for Economists.  I then excitedly read the accompanying report.  The minimum-wage, to be binding on all employers of economists in the U.S., will ensure that every economist employed full-time and paid this mandated minimum wage will earn at least $500,000 annually.

Why [I ask my students] am I excited by this story?  Does my excitement spring from joy or from grief?  [I assure my students that I would very much love to earn $500,000 annually - which is a sum multiple times my current annual earnings.]

Several students blurt out that I’m joyous to read such a headline.

They’re wrong.  I’d be devastated.  The reason is that I know that I’d lose my job as an economist.  My options aren’t these: work full-time as an economist at my current annual salary or work full-time as an economist for a salary of $500,000 annually.  The world doesn’t work that way, despite legislators and many of their constituents believing the contrary.  Because my labor is not worth, to any employer, $500,000 annually – and because no alteration in my work patterns or duties can make me worth such a sum – no employer will pay me $500,000 annually to work as an economist.  That democratically elected government officials enact legislation as if this reality were optional does nothing to change this reality.

Then I share with my students the following:

While my two Nobel laureate colleagues  - Jim Buchanan [5] and Vernon Smith [6] – are now both retired from GMU, suppose that they are still on the active faculty.  Each of their annual salaries would likely be somewhat lower than $500,000.  How would Buchanan and Smith react to news of Congress’s new minimum-wage for economists?  From a purely self-interested perspective, each of my Nobel-winning colleagues would rejoice at this news.  They would be the last to lose their jobs because of forced wage hikes.  With the number of economists employable at Uncle Sam’s new minimum-wage now made artificially lower than it would otherwise be, the demand for the services of unusually highly productive scholars, such as Jim and Vernon, would be made artificially higher than it would otherwise be.  Jim and Vernon would almost surely continue to be employed full-time as economists and at the higher minimum-wage.  [Likely the same is true also for my still-active colleagues Tyler Cowen [7] and Walter Williams [8].]  Extraordinarily highly productive economists would benefit from Congress’s enactment while most of my other colleagues and I – like most other economists elsewhere – would find ourselves unemployed, and unemployable, as economists.  We would suffer.  (And, by the way, we would not take kindly to pseudo-scientific assertions that the gains to economists such as Jim and Vernon plausibly outweigh the losses to us.)

I very much wish to have a higher annual income, but I’m under no delusions that ceremonies and formulaic compositions and signatures by duly elected government officials can make my wish come true – at least not without doing unjustified damage to countless innocent people.

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URL to article: http://cafehayek.com/2012/11/minimum-wage-reality.html

URLs in this post:

[1] today’s Quotation of the Day: http://cafehayek.com/2012/11/quotation-of-the-day-471.html

[2] here: http://www.mackinac.org/356

[3] The Joy of Freedom: http://www.amazon.com/Joy-Freedom-Economists-Odyssey/dp/0130621129/ref=la_B001IZ1HAS_1_3?ie=UTF8&qid=1353851273&sr=1-3

[4] Walter Williams explains the unsavory origins of South Africa’s minimum-wage: http://townhall.com/columnists/walterewilliams/2006/04/26/minimum_wage,_maximum_folly/page/full/

[5] Jim Buchanan: http://www.econlib.org/library/Enc/bios/Buchanan.html

[6] Vernon Smith: http://www.econlib.org/library/Enc/bios/SmithV.html

[7] Tyler Cowen: http://www.businessweek.com/magazine/content/11_23/b4231066695798.htm

[8] Walter Williams: http://econfaculty.gmu.edu/wew/

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