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Water Still Does Not Run Uphill

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Here’s another letter to BloombergView in response to Noah Smith’s latest:

Noah Smith writes that raising the minimum wage can strengthen the economy by prompting additional investments in labor-saving technology (“Want Innovation?  Try Raising Minimum Wages [2],” Nov. 23).  He’s right to argue that raising the minimum wage prompts such investments; he’s wrong to argue that such investments strengthen the economy.

Investment in labor-saving technology is like nearly everything else in life: there’s an optimal amount of it.  Too much is as harmful as is too little.  It makes no more sense to argue that government-prompted additional investments in labor-saving technology are beneficial than it does to argue that government-prompted additional investments in oil drilling or in big-box retailing are beneficial.  Because we have no good reason to suppose that market forces consistently result in too little investment in labor-saving technology, artificially prompting more of it will result in too much of it.

There’s an even worse downside of using minimum wages to artificially promote investments in labor-saving technology.  Labor-saving technology put in place in response to market forces reduces some industries’ use of labor as workers are bid away to work productively in other industries where those workers’ outputs have become more valuable.  In contrast, labor-saving technology put in place in response to higher minimum wages reduces some industries’ use of labor as workers are cast unproductively into the ranks of the unemployed because in no industries are those workers’ outputs valuable enough to justify paying those workers the minimum wage.

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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