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Classic Special-Interest-Group Effect

Here’s a letter to a correspondent who identifies himself as “a recent economics graduate in private practice now”:

Mr. Jason Rowe

Dear Mr. Rowe:

You agree with me that U.S labor markets are not monopsonistic and that there’s no sense to the argument that minimum wages are justified because they improve employee morale and reduce employee turnover.  Yet you allege that my opposition to minimum-wage legislation “smacks of inconsistency” given that I also endorse free trade.  You argue that “the minimum wage is the same as free trade because they both enrich many persons while making a small number poorer.”  With respect, I believe you to be mistaken on several fronts.  Time permits me now to address only one of these.

Being an economist, you know that the amount of wealth transferred by a protective tariff to domestic producers is less than the sum of the resulting losses to domestic consumers.

The economic consequences of the minimum wage are similar.  The minimum wage, by dampening and distorting competition in the labor market, raises the wages of some workers only by imposing a sum of larger costs on others – namely, on consumers in the form of higher prices and, especially, on other low-skilled workers in the form of worse working conditions or unemployment.  The total gains to the ‘winners’ from the competition-stifling minimum wage are less than the total losses to the losers.

In short, the minimum wage is akin, not to free trade, but to protectionism.  The inconsistent economists, therefore, are those who support free trade while endorsing the minimum wage.

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