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The Case for Local Price Controls Is Weak

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In comments on earlier posts [2] Daniel Kuehn claims that his support for allowing local jurisdictions to experiment with minimum-wage regulations [3] means that he is more humble in his knowledge of what policy should be than are Truong Bui, myself, and the many other economists who object to all minimum-wage dictates.

There’s much to say in response to Daniel’s claim.  (Some commenters have already said some of what should be said.)  I wish that I had time this morning to say more than I will say here, but, time being scarce, I don’t.  So I limit myself now to only three points.  (Perhaps my local government, attentive to my and my customers’ full range of preferences and constraints – or, at least, more attentive than is Uncle Sam – should compel me to spend more time blogging this morning on this issue, threatening to cage me if I don’t act in ways that these local solons determine are proper.  What could be the harm in that?)

First, Daniel (like most people who find potential merit in real-world minimum-wage regulations) ignores public-choice [4] considerations.  (In fairness, Daniel admitted in another comment thread that he’s largely unfamiliar with public-choice scholarship.  Such ignorance of the economic analysis of policy-making, however, should cause one to be even more reluctant to counsel the unleashing of government power to interfere in private contracting among adults.)  The implicit assumption is that politicians, at least at sub-national levels, are to be trusted (1) to judge when labor-market conditions are such that a well-crafted minimum wage will likely yield welfare improvements; (2) to actually craft, implement, and enforce such regulations apolitically – that is, ignoring the (a) whooping of the economically uninformed voters who demand a minimum wage because these voters simply never bother to consider potential unintended consequences, and (b) the lobbying of labor unions and other rent-seekers who stand to gain materially by a policy that prices low-skilled competitor-workers out of the labor market; and (3) monitor the effects with some modicum of objectivity and, if they find they erred, to admit their error and either eliminate or reduce the minimum wage.

None of these three conditions is likely in reality.

Second, Daniel’s position begs the question of what are the relevant jurisdictions.  We know from his responses in the comments that the relevant jurisdiction is never an individual firm or worker.  That’s too local.  The jurisdiction must be something larger.  But what?  A neighborhood block?  Two blocks?  Ten square block?  Ten square miles?  No attention is paid to this important question.  Daniel just takes for granted that the current pattern of political jurisdictions (for example, the boundaries of Fairfax County) adequately enough define the relevant economic markets over which experiments with minimum-wage legislation can be usefully conducted.  This implicit assumption, however, is unjustified – or, rather, it must be explicitly justified before we can even start to accept the claim that local (or sub-national) governments are to be trusted with the power to prohibit adults from striking contractual agreements on terms that the officials in these governments find objectionable.

While a plausible case can be made for supplying local roads and city policing through the institutional device of a local government, the case for allowing local governments to experiment with a policy of caging adults who insist on voluntarily contracting with each other on terms that politicians disapprove of cannot be justified by the same line of reasoning (used to justify government provision of the likes of local roads).  There is no obvious public-good aspect to minimum-wage rates.  If there are no legal barriers to entry into, or exit barriers out of, business in a locale, then the presence of underpaid workers there today is a profit opportunity that can be acted upon privately by an entrepreneur or entrepreneurs.  No collective-action or free-rider problem prevents an entrepreneur from seizing upon the opportunity to hire away into her firm workers who are currently underpaid by these workers’ current employers.  Likewise, no collective-action or free-rider problem prevents an underpaid worker from quitting his current job, if he believes that he is underpaid, in order to search for a better job – a better job either in the same locale or outside of it.

Indeed, the smaller the jurisdiction, the less likely it is that the lone economically sensible theoretical justification for minimum-wage regulations will exist in reality.  This lone economically sensible theoretical justification is, of course, the presence of monopsony power among employers of low-skilled workers.  Imagine, for example, an extreme situation – one as favorable as possible to the case for a legislated local minimum wage: the government of the State of Indiana enacts legislation giving employers in the town of Eagleton, Indiana, (and only in Eagleton) monopsony power over low-skilled workers in Eagleton.  This enactment will not long result in any significant exploitation of low-skilled workers, as most low-skilled workers in Eagleton will find it easy to quit and take jobs in the adjoining town of Pawnee.  Over time, economic activity (not just workers) will shift from Eagleton to Pawnee.  Eagleton will wilt; Pawnee will thrive.  This example is not meant to say that such legislated local monopsony restrictions don’t do damage; they most surely do.  But the more localized is monopsony power, the less is the damage that it inflicts.

More generally, as reflection on the Eagleton-Pawnee example above should reveal, the getting and the exercising of monopoly or monopsony power generally becomes more and more unlikely the smaller and smaller become the geographic areas under consideration.  We can grant that there might be a period of time that, even without special legislation, employers of low-skilled workers in Eagleton, IN, have temporary monopsony power.  But if such power exists, then not only is it relatively easy for workers in Eagleton to search for and find jobs in Pawnee and other nearby towns, it is also relatively easy for new employers to move into Eagleton to exploit the pool of underpaid workers there – and, thus, in the process destroy any monopsony power that employers in Eagleton once enjoyed.

In short, not only are existing local political jurisdictions unlikely to correspond to relevant market areas over which workers and firms operate, but the more local becomes the jurisdiction under consideration, the less likely will that jurisdiction suffer the one economic market malady (genuine monopsony power) that justifies minimum-wage legislation.

Third, Daniel’s argument illegitimately and cavalierly assumes that there is something special about minimum-wage regulations that carve it out as an exception to the rule that markets work best when governments do not control prices.  While for obvious reasons it’s true that bad policies enacted locally are not as destructive as are the same bad policies enacted nationally, it does not follow that sound reasons offered for why certain policies are bad at the national level do not apply to those same policies enacted at the local level.

As I read Daniel, his argument in favor of a live-and-let-live stance toward local governments that wish to experiment with minimum wages obliges him to have also a live-and-let-live stance toward local governments that wish to experiment with price ceilings on gasoline, rent control, price floors on apples (or price ceilings on apples), prohibitions on usury (or interest-rate floors) – indeed, any and all interferences by political authorities into the voluntary contracting of adults.

Now I’m pretty sure that Daniel does indeed favor such a live-and-let-live stance toward such aggressive economic interference by local governments.  But readers should therefore recognize that (1) there is nothing about his argument that uniquely justifies local minimum-wage dictates; and (2) Daniel rejects, or does not understand, a key part of the foundational case for free markets – namely, that (at least in situations involving no public goods) prices set on markets – prices set and constantly adjusted by the competition of producers against producers, of consumers against consumers, and by the legally unrestricted bargaining among adults each seeking his or her own best terms as he or she judges best – embody and transmit otherwise unobtainable information about market conditions and expectations, as well as simultaneously supply nuanced incentives, to which each person is free respond as he or she individually judges best for himself or herself, for market participants to coordinate their actions with each other.  This argument against any and all price controls is not that unrestricted markets are perfect; it is that they always work better in practice than they do when government artificially restricts the range of bargaining options open to adults.  And this argument against any and all price controls loses none of its significance or power when price controls are set locally as opposed to nationally.

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