Inefficiency Is Not a Benefit

by Don Boudreaux on January 22, 2015

in Competition, Hubris and humility, Myths and Fallacies, Work

In writing my response yesterday to Chris Oliver, I got distracted from making the point that I originally meant to make.  I’ll try here not to get distracted again.

Mr. Oliver objects to a particular part of my explanation that minimum-wage legislation reduces the employment opportunities of low-skilled workers.  The part he objects to – a part that he describes as being “flat-out untrue” – is my claim that “[e]mployers, therefore, can afford to raise their workers’ pay only if their workers become more productive.”  The basis for Mr. Oliver’s objection is his belief that my claim

assumes that each and every business is running either right at absolute peak efficiency, or at the brink of inviability. Employers don’t pay employees what they can afford to pay, they pay what they can get away with paying.

In other words, Mr. Oliver seems to argue – especially with his “right at absolute peak efficiency” remark – that because most businesses are not as efficient as they could be, raising the minimum wage isn’t likely to cause some low-skilled workers to lose their jobs.  (Or, raising the minimum wage is less likely than I suppose to cause some low-skilled workers to lose their jobs.)

This argument is, as I described it yesterday, very odd.  It says that the more inefficient are businesses, the better able they are to absorb arbitrary hikes in their costs – hikes in their costs that are unaccompanied by any improvement in their productivity.  Why would being inefficient increase a firm’s efficiency at absorbing an arbitrarily imposed cost increase, such as a hike in the minimum wage?  Cost increases unaccompanied by (or, more generally, in excess of) revenue increases are more likely to force inefficiently run firms to dramatically scale back their operations, or to go bankrupt, than they are to make efficiently run firms scale back or shut down.

So, read literally, Mr. Oliver’s contention makes no economic sense.  Inefficiency for a firm is a burden, not a blessing.  Efficiency, in happy contrast to inefficiency, supplies a buffer against the worst consequences of cost increases.

What Mr. Oliver likely has in mind, therefore, isn’t that most firms are generally inefficient but, rather, that most firms enjoy some monopoly power or monopsony power (or both).  But this contention of monopoly or monopsony power is empirically untenable in modern-day America.  Given that in the U.S. there are no, or only low, legal barriers to entry into most businesses that employ lots of low-skilled workers – businesses such as grocery, clothing, and other retailing, the restaurant and food-preparation business, the lawn-care business, the maid-service business, and the residential and commercial moving business – I repeat again that anyone who asserts that monopoly or monopsony power in these industries is sufficiently widespread across space and time to justify minimum-wage legislation ought to be ignored unless and until they themselves try in some way to take advantage of the corresponding profit opportunities to enter these industries.

Unless and until they take such actions – directly, or indirectly by trying to persuade other people who are more practical and business-savvy than they are to enter these industries – any diagnoses that they offer, either explicitly or implicitly, that existing firms are generally far away from “inviability” because of the alleged existence of monopoly or monopsony power deserve zero respect.  The consistent and personal refusal of the people who make such claims to act in any stake-holding way in conformity with their claims is itself powerful empirical evidence against the validity of those very claims.  And the excuses that such people unfailingly offer for why they don’t personally act in any stake-holding ways on their claims are only additional empirical evidence that these people, when making such claims, ought to be treated as if they are utterly ignorant of the relevant details of economic reality about which they pretend to know so much.


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