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Comparing the Unemployment Caused by Minimum Wages to the Unemployment “Caused” by Free Trade

Commenting on a recent EconLog post by David Henderson, ThomasH accuses David of “ironically” failing to see the equivalence between the unemployment that follows in the wake of a minimum-wage hike and the unemployment that follows in the wake of increased trade with foreigners.  David responded with this comment (the italicized part of the comment is David’s direct quotation of ThomasH’s comment; links added):

Ironically, Henderson advances the same argument for the effects of freer trade on low income workers (with no more support than Kleinman gives for his position) as that of supporters of minimum wages: some few may become unemployed, but the vast majority will see higher real incomes.
Our senses of irony must be different. Trade, as Kleiman admits, produces benefits in excess of costs. An increase in the minimum wage produces costs in excess of benefits.

David correctly and germanely notes that freer trade makes society wealthier while the minimum wage (absent the practically irrelevant theoretical curiosity of monopsony power) makes society poorer.  (I’ve made this point myself here at Cafe Hayek, also in response to ThomasH.)  I added the (slightly edited) following as a comment at EconLog in response to ThomasH’s argument:

David Henderson’s response to ThomasH is correct and germane. But at least three additional points deserve to be mentioned (in no particular order):

(1) The unemployment caused by a minimum wage is permanent, in the sense that even in theory it will always exist. Unlike the unemployment that arises when trade becomes freer, the unemployment that is caused by minimum-wage legislation is not the result of transaction costs and other frictions that prevent workers who lose their jobs from finding alternative employment immediately. Put differently, in principle if not in practice, no workers need be rendered even temporarily unemployed by freer trade. In contrast, the minimum wage necessarily (in the absence of genuine monopsony power) causes some workers to lose their jobs and causes these destroyed jobs to remain destroyed for as long as the minimum wage remains in place.

Put in yet another different way, unlike with free trade, the creation of unemployment is not a temporary or incidental consequence of minimum-wage legislation. Lasting job destruction is part of the essential logic of the minimum wage. While in principle, and over time also in practice, free trade does not lead to permanent job losses, job losses caused by the minimum wage, in addition to springing from the very logic of the minimum wage, are indeed permanent.

Second, unemployment caused by free trade is, in reality, simply a particular instance of unemployment caused by changes in the pattern of economic activities. In both principle and practice this unemployment differs not a whit from the unemployment caused by, say, consumers coming to prefer more chicken to beef, more outdoor recreation to indoor entertainment, more wine to whiskey, or living in Arizona to living in Michigan. That is, the unemployment caused by freer trade is inseparable from the very logic of a market economy driven by consumer sovereignty and competition. Far from free trade being an exception to the rules of a market economy, it is protectionism that is an exception. The minimum wage, in contrast to free trade, is emphatically not part of the logic of a market economy; like protectionism, the minimum wage is a suspension of, or an interference with, the logic and principles of a market economy and of consumer and worker freedom. If this fact means nothing else, it means that free trade (like any competition-driven change in the pattern of consumer spending) enjoys a presumption of legitimacy while the minimum wage, which is a restraint on the operation of the market and on voluntary contracting, operates under a presumption of illegitimacy.

Third, economic theory and empirical evidence strongly suggest that the ill consequences of the minimum wage are not randomly distributed. These ill consequences are suffered only by low-skilled workers and, even among low-skilled workers, disproportionately by those who are the least advantaged (for example, by inner-city blacks rather than by suburban whites). The downsides of free trade, in contrast – and in addition to being only temporary and part of the larger logic of the real-world market – are much more random. These ill consequences are not more likely to fall only on low-skilled workers, or on blacks rather than whites.


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