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Improving Lives by Lowering Mean and Median Wage Rates

Posted By Don Boudreaux On July 21, 2013 @ 1:57 pm In Seen and Unseen,Wal-Mart,Work | Comments Disabled

Here’s a mental experiment.

Suppose that only just yesterday did some clever entrepreneur – seeking only to increase his own material wealth – figure out a way to profitably employ workers each of whom contributes (say) $10.00 or less per hour to any employers’ revenues.  Until this entrepreneur – let’s call him Wally Marsh – devised this new business plan (or technological breakthrough), no employer in the United States has ever before found it profitable to employ any workers whose productivities are so low.

Profit-grabbing capitalist that he is, Wally implements his innovation and hires scores of low-skilled workers, paying each of these workers wages commensurate with their productivity, with none of these newly hired workers being paid more than $10 per hour.

What happens to the average and median wage rate in the U.S. as a result of Wally’s innovation?  (Answer: it falls.  Before Wally’s innovation, only workers who produced $10.01 per hour or more were employed; no worker, therefore, was paid an hourly wage less than $10.01.)

And what do you suppose would be the reaction of “Progressives,” such as Harold Meyerson [1] and Katrina vanden Heuvel [2], to this innovation?  My guess is that they would criticize Wally.  ”Before Wally Marsh entered the market, wages were higher.  The data prove this fact!  Therefore, Wally Marsh is pulling down the pay of ordinary workers.  Let’s mandate – as the City Fathers and Mothers in our nation’s capital would surely do [3] – that Wally Marsh pay all his workers wages of at least, say, $12.50 per hour.”

Now change the hypothetical just a bit from one in which Wally Marsh is the first business person to figure out how to profitably employ any workers whose marginal productivity is $10.00 or less per hour to one in which Wally Marsh ‘merely’ figures out a way to employ more such workers than in the past or than can be profitably employed by other, less-innovative firms.

My guess is that Wally Marsh would still, in this second hypothetical, be the target of unending criticism by the innumerate and the economically illiterate.  Rather than being praised for creating sustainable job opportunities for formally unemployable workers, Wally Marsh would be criticized for this achievement.  And to top off the inappropriateness of such criticism, almost none of the critics would be people who themselves employ anyone at any wage.

….

I realize, be assured, that the above hypotheticals are indeed just that: hypotheticals.  But I submit that they shed some light on reality.

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[1] Harold Meyerson: http://www.washingtonpost.com/opinions/harold-meyerson-dc-council-stands-for-fair-wages-and-against-wal-mart/2013/07/16/569eb418-ee48-11e2-9008-61e94a7ea20d_story.html

[2] Katrina vanden Heuvel: http://www.thenation.com/blog/171555/week-labor-v-walmart-plus-fracking-and-our-food#axzz2ZhhdMzKG

[3] as the City Fathers and Mothers in our nation’s capital would surely do: http://www.washingtontimes.com/news/2013/jul/10/dc-council-approves-bill-imposing-living-wage-requ/?page=all

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