Please Explain the Difference

by Don Boudreaux on February 3, 2014

in Reality Is Not Optional, Seen and Unseen, Work

Here’s a letter to Maryland Governor Martin O’Malley:

Hon. Martin O’Malley, Governor
State of Maryland
Annapolis, MD

Dear Gov. O’Malley:

Reasoning that “[o]ur economy does best when our middle class is actually growing and thriving,” you today told attendees at a rally that you support a 39-percent hike in Maryland’s minimum wage.  Contrary to the arguments of many economists who worry that raising the minimum wage prompts employers to hire fewer workers, you obviously believe that employers simply absorb higher mandated costs without changing their behavior.

So I’ve a question: If, as you believe, employers respond to higher mandated costs only by absorbing these costs rather than by changing their behavior to minimize their exposure to such costs, why are you confident that firms will pay the higher legislated minimum wage rather than pay the penalty specified for failure to do so?

You recognize that imposing costs – in the form of fines – on employers who disobey the legislation causes employers to adjust their behavior in order to minimize their exposure to the costs of fines.  As a result, no firms pay workers wages below the legislated minimum.  It’s odd, therefore, that you do not recognize that imposing costs – in the form of minimum wages - on employers causes employers to adjust their behavior in order to minimize their exposure to the costs of higher wages.  In reality, just as raising firms’ costs of violating government regulations causes firms to commit fewer such violations, raising firms’ costs of employing low-skilled workers causes firms to employ fewer such workers.

If you think it’s silly to suppose that higher costs of employing workers reduce employment, then you must also think it’s silly to suppose that higher penalties for breaking the law reduce the amount of law breaking – yet the latter proposition is one that you, as a government official, clearly do not think to be silly.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

See also on the question of the effects of minimum-wage legislation Bob Murphy’s new EconLib essay.

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