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What ARE They Thinking?

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My close friend Lyle Albaugh sent to me this article on Oakland, CA’s, minimum wage [2].

Take a look at the photograph at the top of this article.  It’s of apparently earnest young people demanding that all workers be paid at least $15 per hour (“and full-time”!).  My first thought upon seeing this photo was to wonder why these protesters’ demands are so meager.  While protesting for miracles to occur, why not also demand an immediate cure for cancer as well as free, flying ponies for all of the world’s children?  Why settle for such a paltry miracle as an hourly wage of at least $15 per hour along with guaranteed full-time employment?

Seriously, when I see photos such as this one I ask myself “What are these people thinking?”  I ask myself this question quite sincerely.  I try to get into their minds in order to understand their world view.

Obviously, none of these protesters realizes that he or she is demanding that a miracle occur.  Each protestor mistakenly believes himself or herself to be demanding an outcome that is not only possible but feasible.  So what must be the operative presumptions and assumptions that swirl in their minds to create such a mistaken belief?

I doubt seriously that as many as 1 in 10,000 of them are thinking that the market for low-skilled workers in America is suffused with monopsony power.  My guess is that these protestors think (without much actual thinking about the matter) one of two things (or, for some of them, possibly both things): (1) employers are “rich” and hence not only can “afford” to be more generous to people poorer than they are (such as their workers) but also are morally obliged to share their greater wealth with people poorer than they are, or (2) it’s simply in the nature of the employment relationship for most workers (and especially low-skilled workers) to be paid much less than they are worth to their employers.

Yet if I really believed that (1) is the case, I wouldn’t demand a higher minimum wage, for that helps only those poor(er) people who happen to be currently employed (and who happen to be currently employed in the jurisdiction in which the higher minimum wage would take effect).  No.  I’d demand that shareholders and other business owners give away most of their wealth to all poor people, whether these poor people be workers or not and regardless of the jurisdiction in which they live.

The response by pro-minimum-wage protestors to the question ‘Why limit your demand for wealth sharing to people who happen currently to be workers?’ is ‘Well, employers get something from their workers.’  (I know that this answer is prevalent because it’s the one I get whenever I pose such a question to a certain kind of minimum-wage proponent.)  Yet, of course, workers also get something – namely, income and work experience – from their employers.  This fact only makes more pressing the questions: “Why not demand that any further ‘redistribution’ of employers’ wealth be done to benefit those poor people who haven’t yet gotten anything from employers?  Why should people who happen to be currently employed be allowed to hog all the extra wealth that will be ‘redistributed’ by employers to poor(er) people?”

Asking such questions elicits answers that reveal that most minimum-wage protestors think (again, without much actual thinking) that employers owe a special debt to their workers – a thought that, if valid, implies that employers are indeed profiting unfairly off of their workers.  But if employers really are making excess profits off of their low-skilled workers, why do not other greedy capitalist exploiters swoop in to bid such bargain-rate workers away from these workers’ current employers?  Why do these excess profits continue to exist?  And – very importantly – why do not these protestors invest heavily in shares of Wal-Mart, KFC, and other corporations that allegedly are making excess profits off of their workers?

A correct answer to this latter question is: because the share prices of these firms have already been bid up to reflect these monopoly profits.  But that answer implies a correct understanding of competition – an understanding that, if such a protestor possessed it, would lead that protestor also to understand that the wages of low-skilled workers are bid up to reflect the value of their marginal productivity to their employers.  Put differently, if a protestor honestly believes that low-skilled workers are consistently underpaid, that protestor should put his money where his mouth is and invest in employers of low-skilled workers.  But if that protestor understands that any excess profits that employers make off of exploited workers come soon to be reflected in (higher) share prices of those employers, then that protestor must explain why competition works in one arena (equity markets) but not in another (labor markets).

Again, these protestors don’t think in this way because these protestors don’t think.  They mistake their self-felt concern for others for analysis of reality.  They “feel” – they emote – they grandstand.  They do not analyze.  They do not reason.  They do not think.

….

The explanation for why economists who support the minimum wage consistently insist that monopsony is prevalent in the labor market is because they (kind of*) understand all of the above.  So these economists need a way to avoid the inconsistency.  The only even remotely economically plausible way to avoid the inconsistency is to suppose that employers have monopsony power over low-skilled workers.  Such monopsony power is a necessary – although not a sufficient – condition to make an economically coherent argument that minimum-wage legislation will not shrink the employment options available to low-skilled workers [3].  The fact that the existence of monopsony power in reality in modern America’s low-skilled-labor market is too fanciful to take seriously is another matter altogether.

* I say “kind of” because these economists, as far as I can tell, do not understand that even if there incontestably is incontestable monopsony power in the market for low-skilled labor, for a minimum wage to not reduce the employment options of low-skilled workers it must also be true that there is monopoly power in output markets.  The reason is that only if there also is monopoly power in output markets will the prices of outputs remain above costs so as to ensure that the costs to employers of a higher minimum wage are paid out of these excess profits.  Put differently, in order for a minimum wage not to shrink low-skilled workers’ employment options, employers must consistently reap excess profits – which will be reaped from monopsony power over labor inputs only if those employers also can avoid competing the prices of their outputs down to their costs.

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