Jason Furman, Chairman
Council of Economic Advisors
In a recent interview with David Wessel  you used the “efficiency-wage” argument to justify raising the minimum wage. Specifically, you said that some of the evidence in support of raising the minimum wage “comes from the fact that a higher minimum wage means more people want to work and they’re more motivated to work and will do a better job, and that that can actually offset the cost of a higher minimum wage.”*
Can you explain why employers must be forced by the state to raise wages if raising wages inspires workers to exert so much more, and so much better, effort that the value to employers of the resulting decrease in employee turnover and increase in output covers the cost of the higher wages? And was Paul Krugman wrong to reason that “there is a fundamental flaw in the [efficiency-wage] argument: Surely the benefits of low turnover and high morale in your work force come not from paying a high wage, but from paying a high wage ‘compared with other companies’ – and that is precisely what mandating an increase in the minimum wage for all companies cannot accomplish”?**
Asked differently, why does not the quest for a competitive edge drive each employer on its own to raise wages whenever doing so increases worker productivity in such a cost-justified manner? Your theory must rest on the assumption that today’s business owners and managers are singularly incompetent, or at least less competent than are politicians to know how to maximize profits. Have you, then, an explanation for why the private sector is dominated by people who are so inept at business while those amongst us who do possess business acumen work largely as politicians, bureaucrats, and salaried advisors to the state?
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
* The relevant remarks start at around the 11-minute, 45-second mark.
** Paul Krugman, “The Living Wage ,” September 1998.
If this is the best justification that the chairman of Obama’s Council of Economic Advisors offers for the minimum wage, doesn’t this fact in and of itself expose all arguments for the minimum wage as specious?