More On the Economically Flawed Argument for Tolerance of Minimum Wages Set Locally

by Don Boudreaux on May 24, 2015

in Hubris and humility, Man of System, Myths and Fallacies, Reality Is Not Optional, Seen and Unseen, Work

Let’s continue to explore the argument that counsels humility when criticizing locally set (as opposed to nationally set) minimum-wage rates.  This argument (if I understand it correctly) is premised on the notion that, while national-government officials might well be too unlikely to know enough about the details of all the markets throughout the nation in order to be trusted to wisely set minimum wage rates nationally, local-government officials can plausibly know enough about the details of each of their jurisdictions in order to be trusted to set minimum-wage rates locally.  Therefore, say proponents of this argument, it is arrogant for anyone – for example, me (Don Boudreaux) – to issue a blanket condemnation of all minimum-wage legislation.  How do I, in insisting that all minimum-wage legislation is likely to do damage, justify my stance of second-guessing local officials who are actually on the ground, each closer than I am to each different local market, when these local-government officials decide to enact minimum-wage regulations in their localities?

The question is fair.  It’s also easy to answer.

In earlier posts (for example, here) I offered parts of my answer.  Now I offer more.

As suggested in this other earlier post, to point out correctly that person A has more knowledge about M than does person B is not to offer evidence (and certainly not proof) that person A therefore likely has sufficient knowledge about M to fiddle with M in ways that generally yield better outcomes than would be yielded if person B fiddled with M – and, certainly, than if M weren’t fiddled with at all.  To make a logically respectable case for person A fiddling with M requires more.  Such a case requires a logical argument and plausible evidence that person A in fact is likely not only to be able to know enough to fiddle productively (rather than destructively) with M, but also that person A’s incentives are such that he or she will fiddle with M only when doing so is justified and only in ways intended to yield the generally desired results.

A genuine understanding of the foundational economic case against minimum-wage regulation reveals that government officials, no matter how local, can neither ever know enough to enable them to set minimum wages productively nor to be trusted to set such wages productively even if they, by some miracle, could be adequately enough informed.

As long as there are no significant barriers to entry or exit into most industries in a locale – especially barriers in those industries that employ disproportionately large numbers of low-skilled workers – the market will always discover and know more than that town’s politicians, ‘activists,’ and academics.  Suppose the officials of Eagleton, Indiana, conclude that there is sufficient monopsony power in Eagleton to justify enactment in that town of a minimum wage.  Germane questions to ask these officials include:

– “How do you know such a thing?”

– “Because there’s freedom of entry and exit into the Eagleton restaurant market, the lawn-care market, the maid-service market, and other markets in which lots of low-skilled workers are employed, are you telling me that you – politicians – have outguessed business people about current economic conditions in your town?  Why are no skilled, experienced, and greedy-for-profit business people swooping into Eagleton to take advantage of the under-paid labor that you – you politicians – claim to have discovered to exist in your town in large enough numbers as to justify your enactment of a policy of caging people who contract to employ and to supply hours of labor at wage rates that you – you politicians – have determined are too low?”

– “If you politicians – along with your academic advisors from the local university – genuinely believe that, although there are no legal barriers to entry and exit into business in your town, monopsony power is nonetheless now generated in Eagleton’s low-skilled labor market by ‘frictions,’ why don’t you take off your ‘I Like to Boss People Around At the Point of a Gun’ hats and put on your ‘I’m an Entrepreneur Who Profits By Improving On the Current Performance of Markets’ hats and start your own firms to hire, and make your own profits from, these under-paid workers – a act that will also cause these workers’ wages to rise?”

– “Can you tell me why, if you’re unwilling to put your money where your mouths are – and if the actions of all skilled and experienced business people and investors reveal that not even one of them, in that capacity, accepts your assessment of the Eagleton labor market – I should nevertheless trust that, because you’re a local politician, you should be trusted to know enough to interfere in the private affairs of your citizens?”

In short, the notion that even the best-intentioned and most intelligent local-government officials can be trusted to know enough to out-guess the market on whether or not genuine monopsony power exists in their local markets is too fanciful to take seriously.


Even if we now grant, however and for the sake of argument, that local-government officials can indeed be trusted to know when employers in their jurisdictions possess monopsony power and know, in addition, just how much monopsony power is possessed by each employer in each industry (for, certainly, the amount of monopsony power possessed today by employers in industry X will not be the same as the amount possessed today in industry Y, and is also likely to differ even across employers in the same industry), this knowledge does not give these government officials the additional, different knowledge of how employers in their locales will react to a minimum wage.  While the imposition of, or a hike in, a minimum wage might, as the monopsony theory predicts, prompt employers with monopsony power in the low-skilled labor market to hire more hours of low-skilled labor, it need not have this effect.  Employers with monopsony power in the labor market might instead respond to a minimum-wage hike in any number of other ways, such as

– by working their current employers harder.  And local-government officials have no reliable way to know if the higher pay compensates, or fails to compensate, low-skilled workers for the disutility of the additional effort these workers are now obliged, as a condition of keeping their jobs, to exert while working.  Indeed, the strong presumption is that these workers on the whole are made worse off, despite their higher monetary take-home pay.

– by lowering the value of low-skilled workers’ fringe benefits.  And local-government officials have no reliable way to know if the higher hourly pay compensates, or fails to compensate, low-skilled workers for the loss or reduction in the value of their fringe benefits.  Indeed, the strong presumption is that these workers on the whole are made worse off, despite their higher hourly take-home pay.

– by firing all or some of their current low-skilled employees and replacing them with ‘better’ employees, such as the housewives who enter, and the retirees who re-enter, the labor force to fill such jobs now that the wage paid to such workers is higher.

– by firing all or some of their current low-skilled employees and replacing them with machines that substitute for low-skilled labor.

– by launching plans to eventually, perhaps soon, reduce or eliminate operations in that local jurisdiction.  It’s possible that the ‘extra” profits taken in by some of the locale’s employers from the exercise of their monopsony power worked in fact to supply the premium that was necessary to prompt those employers to set up shop in that locale in the first place.  With that premium now eliminated or reduced by local minimum-wage legislation, these employers will eventually scale back their operations there, even if in the short run they hire more low-skilled workers just as the textbook monopsony model predicts.  (Deep reflection on this last possibility should serve to drive home the point that any claim that locales throughout the U.S. are in fact infused with genuine monopsony power is quite unbelievable.)



I plan one more post on this question of the alleged acceptability and ‘reasonablness’ of minimum-wage regulations imposed locally.  That final post will explain why I believe that, contrary to Daniel Kuehn’s claim, it is indeed appropriate for those of us who question the case for all, including local, minimum-wage regulation to ask him (and those who share his view) why the argument for tolerance of local-government restrictions on the freedom of adults to strike their own labor-market bargains does not also justify tolerance of local-government restrictions on other freedoms – such as the freedom of speech, freedom of religion, freedom of the press, and freedom of adults to have consensual homosexual relations with each other.


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