Here’s a new paper on the minimum wage by David Lee and Emmanual Saez. I learned of this paper from David Henderson (who, I believe, learned of it from Greg Mankiw). I agree with all that David and Prof. Mankiw say about this paper.
I add here only that when I teach principles of microeconomics (ECON 103 at GMU) I do every semester what Lee and Saez do in this paper. I do it less formally than they do it; but do it I certainly do. Specifically, I identify the minimum conditions that must hold in reality for minimum wages and other price controls to have even a prayer of making society better off if markets are reasonably competitive.
Tellingly, the exercise that Lee and Saez do with minimum-wage legislation can be done with any government-imposed price control, floor or ceiling – indeed, almost any government policy whatsoever. Consider, for example, price ceilings on gasoline.
Of course it’s possible that, say, those people who manage to get gasoline when its price is capped by government – and, hence, when gasoline supplies are short – are those particular people who, by some calculus, are most ‘in need’ of gasoline but least able to pay money for it. Put differently: of course it’s possible that the people who are least able to pay money for gasoline, but who also are most in genuine need of it, happen also to be the people in society who are best able to afford the non-monetary expenses of acquiring gasoline – non-monetary expenses that inevitably rise because of the shortages caused by price ceilings. (Typically, but not always, these non-monetary expenses are in the form of time spent waiting in queues to buy the good.)
In addition, of course it’s possible that the full costs of acquiring gasoline (monetary together with non-monetary) to those who manage to get gasoline are lower than would be the full costs to these people of acquiring gasoline if its price were not capped and these people had to pay more money, but less non-money expenses, to acquire gasoline.
In further addition, of course it’s possible that the other distortions in the market caused by the price ceiling on gasoline – say, an artificial reduction in investments devoted to oil exploration – will either be so minimal that these distortions can safely be ignored or be such as to fall overwhelmingly on those people (“the rich,” it is usually supposed) who can best afford to bear the costs of these distortions. Of course it’s possible that these distortions do nothing down the road to make life worse even for those people who today do manage to buy all the gasoline they want at the artificially low ceilinged price.
In yet further addition, of course it’s possible that the utility losses to those people unable to buy as much gasoline as they would if there were no price ceilings are less than the utility gains to those people who do manage to get gasoline when its price is capped. And it is also possible to construct some sort of social-welfare function that, anthropomorphizing society, reveals that the utility gains to the ‘gasoline-getters’ sufficiently outweigh the utility losses to the ‘gasoline-non-getters’ to make that policy worthwhile.
Enumerating such possibilities is child’s play. It can be gussied-up to look like serious scholarship that tells us something about reality that we don’t already know, but, in fact, it’s too-often child’s play at bottom. (It’s possible, indeed, that full central planning of an entire economy will make us all much wealthier than we are today: grant me sufficient lee-way to make assumptions, such as about the knowledge that government officials have access to, and I’ll prove that almost anything is possible.)
The range of the possible is far, far larger than is the range of the plausible – which itself is far larger than is the range of the probable, which, in turn, is larger than the range of what will actually happen.
….
If analyses such as that of Lee and Saez in that paper were sensible research pursuits for professional economists, then economics would be a very different ‘science’ than it is today. Applications of such economic analyses would extend well beyond minimum-wage legislation and other price controls. Such an economics would be employed to answer questions such as: Should short people be allowed to vote? Should women be permitted to work outside of the household? Should government prohibit formal schooling beyond the age of eight? Should government ban the Internet? Should Uncle Sam prohibit interstate migration? The field for our study would be enormous!
