Economic Principles Do Not Disappear As Economic Complexities Arise

by Don Boudreaux on January 15, 2017

in Economics, Myths and Fallacies, Seen and Unseen, Work

Here’s a letter to The Atlantic:

Law professor James Kwak’s core case for minimum wages runs like this: Econ 101 clearly predicts that minimum wages reduce the number of jobs available for low-skilled workers; alas, Econ 101 is introductory material that abstracts from many real-world complexities; therefore, Econ 101’s predictions shouldn’t block our embrace of minimum wages for a real world that features complexities not accounted for by Econ 101 (“The Curse of Econ 101,” Jan. 14).*  At least two flaws infect Prof. Kwak’s reasoning.

First, while indeed introductory, Econ 101 is also foundational.  It teaches essential, bedrock truths about economic reality.  Contrary to Prof. Kwak’s implication, these truths do not disappear or even become less central when account is taken of real-world complexities.  Thus, any accounts of such complexities that run counter to Econ 101 – accounts that cannot be squared with the foundations of economics – are not, as Prof. Kwak supposes, simply more realistic or reliable.  Instead, such accounts are just as dubious as would be accounts of cosmological complexities that run counter to Physics 101.

Second, of the many real-world complexities that Prof. Kwak identifies as allegedly nullifying Econ 101’s prediction that minimum wages shrink job opportunities for low-skilled workers, only one is recognized even by PhD-level economics as theoretically defensible.  All the others – for example, Prof. Kwak’s assertion that minimum wages pay for themselves by increasing the spending of low-skilled workers – are rejected not only by Econ 101, but also by Econ 999.

The lone economically coherent theoretical possibility under which minimum wages might not shrink low-skilled-workers’ job opportunities requires that in reality employers have monopsony power over low-skilled workers.  Yet a real-world complexity overlooked by Prof. Kwak is that for minimum wages not to shrink employment options, employers must also possess monopoly power in the markets in which they sell their outputs.  Only if both of these conditions hold – and then, only if minimum wages aren’t raised too high – is it even possible for minimum wages not to shrink low-skilled workers’ job opportunities.

I leave to the reader to judge the realism of the claim that the typical low-skilled-worker’s real-world employer – for example, a retailer, a restaurant, or a lawn-care provider – is both a monopsonist in the hiring of labor and a monopolist in the sale if its outputs.

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

* Note that in any decently taught Econ 101 course, many real-world complexities are indeed acknowledged, and even addressed.  But let’s here put this reality to the side.

Also on Kwak’s mistake-stuffed essay are Mark Perry, and Tim Worstall.


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