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Minimum Wisdom

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Suppose several top economists were asked the following question:

If government imposes a price-ceiling on gasoline at the pump – specifically, forcing the current per-gallon price of gasoline at the pump down from $3.78 to $2.87 (a decrease of 24 percent) – motorists’ difficulty in finding gasoline to buy will noticeably increase.  Do you agree?

Would only 1/3rd of these economists agree (and none strongly agree)?  My guess is many more than 1/3rd would agree, and that many would strongly agree.  Indeed, I suspect that a significant majority of economists would agree.  Sadly, alas, this ChicagoBooth survey [2] (HT Tyler Cowen) causes me to question the accuracy of the pulse I take of my fellow economists.

But if my pulse is correct about what economists would say about a proposed 24 percent forced reduction in the price of gasoline, what explains the results of this poll that asks economists about a 24 percent forced increase in the legislated minimum wage?

One possibility is that many or even most of the 66 percent of economists who do not agree that this proposed hike in the minimum wage will make it more difficult for low-skilled workers to find jobs are presuming that most such workers already earn hourly wages significantly higher than $7.25 (and perhaps even higher than $9.00) – in which case, empirically, a 24-percent hike in the legislated minimum wage might well, in fact, have little effect on the prospects of the typical low-skilled worker finding a job.  So I wonder what the answers of these economists would have been had the question asked instead

If government mandated that all hourly wages currently $8.99 or lower be raised by 24 percent, that policy would make it noticeably harder for low-skilled workers to find employment.  Do you agree?

I fear that most of these economists would still disagree.  I fear that many economists have convinced themselves that esoteric theoretical curiosities that reveal the textbook possibility that a modestly higher legislated minimum wage will not reduce the employment options of low-skilled workers are, in fact, compelling and empirically relevant reasons for doubting that a higher minimum wage will shrink low-skilled-workers’ employment options.

If my fear is correct, then the question is begged: why do economists not attach the same significance also to the very same sort of esoteric theoretical curiosities that reveal the textbook possibility that government-imposed price ceilings can increase the quantities supplied of goods such as gasoline or beef or bell-bottom-jeans?

Every gasoline retailer faces a downward-sloping demand curve.  As every intermediate-microeconomics student knows, this fact means that every such retailer’s marginal-revenue curve slopes downward more steeply than does its demand curve [3].  Every gasoline retailer, therefore, sells too little and prices each unit too high [4].  Consult almost any microeconomics textbook.

A wisely imposed and modest price ceiling, therefore, will not only not reduce the availability of gasoline at the pump, it will increase that availability!  (I know that I’m here repeating myself, from an earlier post [5].  But it’s my and Russ’s blog.)  Yet I do not believe that most, or even many, economists regard this textbook demonstration to be such a powerful picture of reality that it calls into question the deeper proposition that forcing down the price of good will almost surely prompt suppliers of to bring fewer units of to market.  More generally, consumers’ consumption options will be reduced, rather than improved, by a price ceiling – or so I suspect most economists still would agree.

Put differently, the theoretical curiosity of the textbook model that shows downward-sloping demand curves of the sort that each real-world gasoline retailer (and each butcher, brewer, baker, and candlestick-maker) confronts in reality – or confronts with no less likelihood that employers of low-skilled workers confront upward-sloping supply curves of hirable hours of low-skilled work – is not interpreted by economists to mean that the question of whether or not price ceilings on gasoline will help or hurt consumers is an empirical one about which we can say nothing until and unless we’ve gathered lots of data on the matter.  Yet this wisdom now seems to vanish for many economists when the product in question is low-skilled human labor.  Bizarre.

Bottom Line: If the results of the survey (mentioned above) of economists regarding the minimum wage reflect, as I fear they do, a growing faith among economists that the price of low-skilled human labor is somehow exempt from the basic principles of supply and demand, then I am unimpressed with the wisdom of today’s typical economist.