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Quotation of the Day…

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… is from page 133 of my teacher Leland Yeager’s, and of his co-author David Tuerck’s, still-vital 1966 volume, Trade Policy and the Price System [2] (original emphasis):

Common sense and economics emphasize, instead, that real wages and living standards depend on how much goods and services workers produce, and not to any important extent on wishes or union demands or minimum-wage laws.

Indeed.

The only circumstances under which the above would not be true in reality is if (1) employers had monopsony power in the labor market (a theoretical possibility that no one with sound judgment thinks exists in American labor markets [3]), or (2) nearly all employers refuse to fully exploit labor.

You read that correctly: apart from the existence of monopsony power in labor markets, the only way that non-market forces such as government-enforced labor-union demands or minimum-wage statutes could significantly and generally raise real wages is if the economy were filled almost exclusively with employers who refuse to exploit workers to the fullest.

To raise workers’ real wages by diktat without causing greater joblessness and in a way that lifts ordinary people’s living standards would require that nearly all workers are currently being paid wages below the values of these workers’ productivities.  Each employer is exploiting its workers by paying its workers too little.  A large chunk of the value of each worker’s output is being withheld from that worker and kept by his or her employer.  Each worker’s loss is employers’ gain.

Greedy, greedy employers.  Shame on them for being so obsessively focused on maximizing their profits that they underpay their workers!

In such a circumstance, government-dictated wage hikes can indeed generally raise real wages without causing any unemployment and that improves the living standards of workers (in this case by reducing the living standards of employers).  This situation, however, is not plausible; it is not, as economists say, an equilibrium.  This situation is one that prompts a process of self-interested actions by employers and by workers – actions that push workers’ pay up to the values of their productivities.

Were the disequilibrium situation described above to persist in reality (that is, were it to be an equilibrium), employers would have to consistently refuse to take advantage of the widespread opportunities to profit by bidding underpaid workers away from other employers.  In other words, the same employers who are so greedy for profits that they underpay their current workers would simultaneously have to be so uninterested in reaping further profits that they don’t attempt to add to their workforces the additional workers who they can hire at wages below the value of these additional-workers’ marginal productivities.

Such a situation is possible, but it’s too implausible to take seriously as a description of reality.*  Again, such a situation implausibly requires that employers simultaneously be greedy enough for profit that they underpay – we might say, “exploit” – their current workers but so indifferent to additional profits that they do not pursue – we might say, “refuse to exploit” – other underpaid workers.  This description of economic reality simply doesn’t make good sense.  It raises too many questions – most notably, “Why do greedy employers consistently fail to seize available opportunities to increase their profits?” and “Why do underpaid workers not quit their current jobs, and seek other jobs, in ways that cause greedy employers to raise workers’ wages in order to ensure that these employers continue to reap at least some excess profit off of workers?”

…….

* The range of what is possible is vast, yet nearly everything that is possible will never occur.  The range of what is plausible is far narrower than is the range of what is possible.  And the range of what is probable is even narrower than the range of what is plausible.  One benefit of learning the economic way of thinking [4] – and of learning also history – is to gain and sharpen the good judgment necessary to distinguish the probable from the plausible, and to distinguish both of these from the merely ‘possible.’

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