Maximum-Wage Legislation

by Don Boudreaux on February 15, 2016

in Science, Scientism, Work

Why is it that purported market imperfections are almost always the sort that allegedly justify government intervention against the perceived interests of employers or sellers?  If markets are imperfect, those imperfections should not be overwhelmingly biased against employees or consumers.  Sometimes – often, indeed – the imperfections should work in favor of employees and consumers.

Consider, for example, allegations of asymmetric information or other ‘imperfections’ that are said to create monopsony power in labor market.  These ‘imperfections’ are used by some economists to justify minimum-wage legislation, on the grounds that these ‘imperfections’ cause market-determined wages to be too low (that is, below the value of workers’ marginal products).

But if market imperfections exist with such regularity and certainty to justify government intervention, why  are these imperfections presumed always to work against workers?  Why don’t imperfections often lead to wages that are too high (that is, above the value of workers’ marginal products)?  I can think of no reasons why market imperfections are always or even usually biased against workers rather than in workers’ favor – especially today when unemployed workers are entitled to government handouts while most bankrupted employers (say, the restaurants that went belly-up because they paid their waiters and dishwashers too much) get no government relief.  And why presume that employers of low-skilled workers can monitor with sufficient clarity the performance of workers to ensure that workers are not shirking so chronically that employers are not overpaying their workers?  Perhaps – because of ‘asymmetric information’ – many employers can’t monitor workers so clearly.  Or perhaps employers are more poorly informed than are workers about pay and employment conditions elsewhere, thereby giving workers a bargaining advantage over employers.

Why, in short, does no one advocate a maximum wage for low-skilled workers?  I see no one arguing for such legislative intervention as a potential antidote for this possible market imperfection.  But surely science – objective, unbiased science that is “data-driven” – does not rule out the possible social benefits of a maximum wage.

Here’s a further question along these lines.  Suppose that legislation is enacted that commands all employers to reduce by ten percent the hourly wages paid to all workers currently earning less than, say, $20 per hour.  Further suppose – as is not at all far-fetched – that empirical measurements of the effect of this maximum wage on employment levels finds no statistically significant change.  Would such an empirical finding justify maximum-wage legislation?  Such a finding would, after all, be consistent with a (just-so) story of workers exploiting their hapless employers until these hapless employers were saved by the wise, apolitical, and data-driven intervention of kindly legislators.

Why oh why do the objective scientists who are so darned proud of their apolitical approach to the minimum-wage question never raise the possibility of a maximum wage?  Could it be that such Scientists are not so objective as they fancy themselves?


See also this post from several years ago.


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