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The Point Stands

Posted By Don Boudreaux On July 24, 2013 @ 6:49 am In Reality Is Not Optional,Work | Comments Disabled

(UPDATED: Typos corrected; thanks to David Henderson)

Commentor Steve Sisson, responding to this earlier post on the minimum wage and worker productivity [1], writes in full:

Absolutely true, in a full employment model.

Steve’s implication, it seems, is that in the absence of full employment the point of my post is wrong (or at least weaker).

I believe Steve is mistaken, at least insofar as he (or his point) is taken to suggest that, with high unemployment, a higher legislated minimum wage might be a good policy.

First the obvious: when unemployment is high, forcibly raising wage rates is counterproductive.  (I understand that Keynesian types will tell wealth-effect stories in which the negative substitution effects of higher wages are swamped by the – always allegedly – higher spending brought about by the higher minimum wage.  Such stories strike me as being especially spurious.)

Second and relatedly, for whatever reason during recessions that firms are not hiring enough workers, there’s every reason to believe that, from each employer’s perspective, the marginal value of an additional worker is less than the wages that would have to be paid to employ that worker.  Otherwise, that additional worker would be hired.  (Note that even Keynesians should agree with this statement.  In Keynesian theory employers hire too few workers because the demand for employers’ output is too low to justify the hiring of more workers.)  Nothing about unusually high unemployment suggests that firms refuse to hire workers up to the point where the value of each workers’ marginal product is equal to the amount that that worker is paid.

And nothing about high unemployment gives employers monopsony power over employees.  There are still many employers – too many to collude to suppress wage rates.  If some workers are being paid below their marginal products in a sluggish economy, other firms have an incentive to compete for those workers’ services (keeping in mind, of course, that the value of the marginal product of those workers services in a sluggish economy is lower than in a healthy economy).  A sluggish economy isn’t a dead economy.  Currently, remember, 92.4 percent of workers in the U.S. are employed – and $16 trillion of output continues to be produced annually.

Note also, by the way, that it is surely not the case that when unemployment rises the pattern of wage rates to worker productivity becomes random.  Higher-marginal-product workers still generally earn wages higher than middlin’-marginal-product workers who, in turn, earn wages higher than low-productivity workers.

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