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Price Controls Make People Work Harder

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In my most-recent column for AIER – titled “Exploring Deeply the Economics of Price Controls” – I elaborate on an important yet subtle point that I first encountered in F.A. Hayek’s The Road to Serfdom [2]. A slice:

Just as well-meaning supporters of price ceilings are blind to the heavy costs of this policy, well-meaning supporters of minimum-wage legislation are also blind. They mistakenly suppose that the only consequence of such legislation on affected workers is that these workers’ monetary incomes rise.

When low-skilled workers are prevented by government from competing for jobs by agreeing to work at wages below the government-set minimum, some would-be workers are simply rendered unable to find employment. These unfortunate persons thus earn no income to be spent on bread, beef, beer, or any other goods and services. They must either produce directly for themselves or live off of incomes earned by others.

But the ill-effects of minimum wages don’t play out exclusively in job losses [3]. Because even entry-level jobs have many dimensions, employers who are obliged by minimum-wage legislation to pay their workers higher monetary wages can alter these jobs in ways that make them worthwhile to maintain. Employers can demand that workers work faster. They can more strictly monitor and limit workers’ break times. Personal texting and telephoning while on the job can be reduced or eliminated.

Even low-skilled workers who remain employed with a minimum wage in place are thus constrained by this legislation to work in ways that are less desirable than they’d be absent the minimum wage. While these workers’ monetary incomes might be made higher by the minimum wage, most such workers would prefer less-onerous job requirements to the additional income. If this latter fact weren’t so, employers would not have to be prompted by minimum-wage legislation to pay the higher wages in exchange for greater work effort from their workers. Employers would do so on their own in response to the demands of current and potential workers.

Minimum-wage legislation, in other words, is a means by which government forces some low-skilled workers into the ranks of the unemployed while forcing other such workers to ‘purchase’ increases in their monetary incomes with extra work effort that these workers would prefer not to exert. These workers continue to work only because an even worse option for them than working harder at the minimum wage is not working at all.

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