Quotation of the Day…

by Don Boudreaux on February 17, 2018

in Myths and Fallacies, Reality Is Not Optional, Seen and Unseen, Work

… is from page 413 of the late University of Washington economist Paul Heyne‘s insightful 2000 paper “The Morality of Labor Unions,” as this paper is reprinted in the 2008 collection of Heyne’s writings, “Are Economists Basically Immoral?” and Other Essays on Economics, Ethics, and Religion (Geoffrey Brennan and A.M.C. Waterman, eds.) (original emphasis):

The implications of the economist’s perspective become clearer when we ask what this perspective denies or rules out.  To begin with, it denies that employers will want to hire a specific number of employees, the number they “need” to run the operation, regardless of what they must pay to obtain them.  It suggests, on the contrary, that the size and nature of the operation will itself depend in part on the cost of obtaining workers.  Thus, fast-food outlets, for example, do not require any specific number of employees.  If a very high wage must be paid to obtain competent personnel, fast-food outlets will be open only at the busiest hours, customers will wait longer for service, and there will be fewer outlets in operation.

DBx: This quotation is vintage Paul Heyne: a great deal of economic insight, clearly expressed, packed into a small space.  Among the most relevant implications of the above is a warning about empirical tests of minimum-wage hikes.  Tests done today – 80 years since the enactment in the United States of the Fair Labor Standards Act – on the reaction of employers today to hikes in the minimum wage will fail to pick up major impacts of the minimum wage on employment.  The very existence of minimum-wage legislation, along with the expectation that its real value will be raised from time to time, affects what Paul above calls “the size and nature” of firms that hire low-skilled workers.

Compared to a world without a minimum wage (and one with no expectation of a minimum wage being imposed), the number, size, and nature of such firms will already have largely adjusted to the existence of minimum wages.  Fewer employers of low-skilled workers will exist.  Firms that would otherwise have employed lots of low-skilled workers will instead be designed to operate with fewer such workers and with more capital – that is, with machines and other techniques of production that substitute for low-skilled workers.  Also, terms of employment – both formal and informal – will have adjusted over time to account for the existence of minimum wages.

A word on this latter point about terms of employment adjusting to minimum wages.  It’s often noted by good economists and other sensible people that among the ways that employers of low-skilled workers can adjust to a hike in the minimum wage is to reduce the fringe benefits, formal and informal, they pay to low-skilled employees.  (To the extent that this adjustment takes place, the loss of jobs – or of work hours – is reduced.)  I myself often make this point about fringe benefits.  But minimum-wage fans frequently retort by saying something like “But low-skilled workers don’t get many fringe benefits!”

One valid reply to this retort is to note that fringe benefits come in many forms.  Employer leniency with workers making personal phone calls while on the job is just one among innumerable possible sorts of fringe benefits.  But another reply is to explain that whatever the amount and type of fringe benefits paid today to low-skilled workers, that amount and type have long-ago been modified by the existence of minimum wages.  An observation, for example, that very few low-skilled workers today receive employer contributions to pension plans is an observation of a fact that is explained, at least in part – and perhaps in large part – by the existence of minimum wages.  Already required to a pay to some workers hourly wages made artificially high by government diktat – and reasonably expecting that another diktat will soon be issued that raises the minimum wage – employers who might otherwise have competed for low-skilled workers by offering contributions to workers’ pensions instead offer fewer or even no such contributions.

The following is, in one sense, an empirical question: Compared to the percentage paid now, what percentage of compensation for workers who currently earn hourly wages of (say) $12 per hour or less would have been paid in the form of formal fringe benefits had there never been a minimum wage?  I’m confident that the answer is “more than is currently paid in this form.”  But it is impossible to discover an empirically valid specific number such “17 percent more.”


(Perhaps the absence of a minimum wage might have resulted in the empty lot pictured above not being empty.  We can see the empty lot.  It’s much more difficult to ‘see’ what might have been, but which in reality certainly is not, there.)


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