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Economic Reality Isn’t Optional

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Here’s a letter to a college student who writes to me regularly. He describes himself as a “kind critic” of mine.

Mr. L___:

Thanks for your e-mail in response to my criticism [2] of the City of Long Beach’s decision to order certain supermarkets to give their workers a “Hero” pay raise of $4 per hour.

You ask if I “worry if some supermarkets close down in Long Beach because of the higher minimum wage that the government would react by passing a law outlawing supermarkets from closing down for that kind of reason.”

I’m sure that a City Council so arrogant and economically ignorant as to raise the minimum wage might be sufficiently arrogant and ignorant also to enact legislation of the sort that you describe. But even if, contrary to fact, such ‘anti-closing’ legislation would confront no legal barriers, ultimately it would achieve an outcome quite the opposite of its ostensible goal of helping low-skilled workers.

Legislation that makes it more difficult for firms to exit a market makes it less attractive for firms to enter that market in the first place. To see why, consider your own reasoning when choosing which job to accept after you graduate. Suppose that you’re offered jobs by two firms, with the jobs being similar to each other except for one consideration: Unlike the job offered by firm A, if you accept the job offered by firm B you’ll won’t be allowed to quit until you’re 65.

What are the chances that you’ll accept firm-B’s job offer? Zero. The same logic holds true for businesses.

A second consideration applies: legislation of the sort that you mention cannot keep a firm operating if economic conditions make that firm unprofitable. A firm whose revenues consistently fall short of its costs is a firm that cannot fully pay its suppliers, including its workers. And so those suppliers and workers will quit doing business with the firm. Economic forces will shut the firm down despite the legal prohibition of its closing.

Were Long Beach to enact the kind of legislation that you mention, it would soon find itself with no businesses – and, hence, no jobs – whatsoever.

Sincerely,
Don

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