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Arguments that Water Might Run Uphill Are Endless

Here’s a letter to BloombergView:

Noah Smith speculates that raising the minimum wage might be good for low-skilled workers over time because a higher minimum wage prompts firms to invest in technologies that increase worker productivity (“Want Innovation? Try Raising Minimum Wages,” Nov. 23).  Key to his case is his observation that “[i]n the past, when companies implemented labor-saving technology – whether assembly lines or computers – their workers didn’t simply go on the unemployment rolls.  They became more productive than before and commanded higher wages.”  While this observation is largely accurate, by using it to justify minimum wages Mr. Smith confuses cause and effect.

Higher wages do not cause higher worker productivity; instead, higher worker productivity causes higher wages.  When industry X is expanding and its workers are becoming more productive, companies in X bid for more workers by raising the wages paid in X.  Higher wages in industry X attract workers from industry Y, thus prompting companies in industry Y to implement labor-saving technology.  The implementation of labor-saving technology in industry Y causes no unemployment because it is industry Y’s response to industry’s X’s increased demand for workers – an increased demand for workers that, again, is the result of a rise in worker productivity in X.

In contrast, if wages are forced up by diktat rather than competed up in response to rising worker productivity, wages for some workers will exceed the value of their productivity.  These workers will become unemployed.  And in addition to losing current income, these workers will be denied on-the-job experience – a denial that thwarts improvements in their productivity (that is, in their “human capital”). The economy and workers as a group will over time become less, not more, productive.

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

Several other problems, in addition to the one highlighted above, infect Smith’s argument.  One such other problem is Smith’s failure to distinguish between a change in the marginal productivity of a worker who is part of a given number of workers and a change in the marginal productivity of workers resulting from a change in the number of workers employed.

The distinction to which I refer here is that between a shift of the schedule of worker productivity and a movement along a given schedule of worker productivity.  If, for example, the demand for steel increases, the value of the marginal product of steel workers will rise – these workers will become more productive – with no change in the number of people employed as steel workers.*  In contrast, if the number of people employed as steel workers is reduced because, say, government implements an effective minimum wage for steel workers, the resulting higher marginal productivity of steel workers is caused not by any improvement in the productivity of a given number of steel workers but, instead, simply by the fact that, with fewer people employed as steel workers, the value of the marginal product of each of those fewer workers will be higher than it was before the higher minimum wage prompted steel producers to further economize on labor.  The higher wage for steel workers in the latter case should not be read in the same happy way as is the higher wage for steel workers in the former case.


* This increase in the productivity of steel workers will, of course, likely cause steel producers to hire more workers.

(I thank Quinn Connelly for the pointer to Noah Smith’s essay.)