The (Minimum) Wages of Economic Illiteracy

by Don Boudreaux on January 16, 2015

in Reality Is Not Optional, Seen and Unseen, Work

Here’s a letter to a gentleman who this morning wrote to inform me that he is “furious” that someone as ethically challenged – and as ignorant of economics and of reality – as I am regularly teaches college students.

Mr. Felix Goldbaum

Dear Mr. Goldbaum:

You misunderstand my point in the “Notable & Quotable” column of today’s Wall Street Journal.  I did not say – and I do not believe – that low-skilled workers are “lesser forms of humanity” than are high-skilled workers.  I said only that the market value of the hourly output of low-skilled workers is lower than that of high-skilled workers and, thus, employers cannot afford to pay to lower-skilled workers wages as high as those paid to higher-skilled workers.

My teenage son cannot now produce for any employer hourly output worth as much as that produced by my lawyer neighbor and my physician friend, yet surely you do not think that I, in articulating this truth, believe my son to be a ‘lesser form of humanity’ than my neighbor and my friend.

There’s another problem with your attempted justification of minimum-wage legislation.  You claim, first, that “businesses have to pay the higher minimum wage [because] they need workers to do certain jobs…. [F]irms must fill these jobs.”  Then, second, you claim that employers of low-skilled workers possess “vast monopsony power.”  While it’s probably theoretically possible to square your second claim with your first, in practice these two claims are at odds with each other (in addition to each being at odds with reality).

Economists’ textbook demonstration that monopsony power can create conditions under which a minimum wage improves the well-being of low-skilled workers without harming any of them presumes that employers of low-skilled workers profitably vary the amounts of labor they hire as conditions in the labor market change.  Indeed, according to this model, monopsony power itself causes employers to hire fewer workers.  The monopsony model, therefore – and like any good economist – rejects the notion that there is a fixed number of low-skilled jobs that employers “must fill.”

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

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