Here’s yet another letter to BloombergView in response to Noah Smith’s recent case for a higher minimum wage:
In “Want Innovation? Try Raising Minimum Wages ” (Nov. 23) Noah Smith implicitly plays the game ‘I Can Imagine That….’ Specifically, he can imagine that raising the minimum wage will spur enough additional investment in labor-saving technology that over time the economy will grow so much faster that everyone will benefit. As Mr. Smith puts it: “I am not sure that workers should be so afraid of being replaced by this kind of technological improvements. Ultimately, it may make them more productive, and actually help them earn more.”
The problem with this game is that the moves its players can make are far too numerous and unconstrained. For example, I Can Imagine That imposing a price ceiling on low-skilled labor – say, by prohibiting anyone from earning wages within the range of $2.50 per hour to $25.00 per hour – will encourage so many low-skilled people who otherwise would not go to college to go to college, with the result being that over time all of these workers, and the nation as a whole, will be made economically better off. That is, many workers who today choose to work at hourly wages such as $7.25 or $12.00 would, if available jobs paid a maximum of $2.50 per hour, instead flock to college where they would invest heavily in their human capital.
At the opposite end of the spectrum, I Can Imagine That if government prevented all women and minorities from attending school beyond the 12th grade that the resulting fall in the supply of high-skilled labor would prompt employers to invest more in technology to perform many of the tasks that would otherwise be performed by such labor – investment that, over time, would so enlarge the economic pie that everyone would be made economically better off.
Indeed, I can imagine almost anything – and so can everyone else, which makes such a game analytically pointless and politically dangerous.
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