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Economics Circa 1820

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Here’s a letter to the New York Times:

Editor:

MIT economist David Autor argues that government welfare programs result in taxpayers subsidizing employers of low-wage workers by “paying for the things their low-wage workers can’t afford” and, thus, artificially lowering the wages employers pay to these workers (“Good News: There’s a Labor Shortage [2],” Sept. 4). This argument is mistaken.

At the core of Autor’s argument is a theory of wage determination that was commonly accepted by classical economists but which was exposed 150 years ago as fallacious. With the “marginal revolution [3]” of 1871, economists came to understand that hourly wages of each kind of worker are determined by the amount of revenue that an additional – a “marginal” – hour of labor enables employers to earn. Thus was debunked the belief of many classical economists that a major source of wage determination is workers’ cost of living.

If Autor’s classical theory of wage determination were correct, we’d see wage patterns that we simply don’t see. We’d see, for example, Tampa Bay Buccaneer star quarterback Tom Brady, because his supermodel wife of 12 years Gisele Bündchen earns a much higher annual income than do other NFL wives, being among the lowest paid players in the NFL. But we don’t. We’d see little difference separating the incomes of households in which both spouses work from the incomes of households in which only one spouse works. But we don’t. We’d see adult children from wealthy families generally earning incomes lower than those that are earned by similarly skilled workers from less-affluent families. But we don’t. What we see instead is workers’ wages determined largely by worker productivity [4] – just as predicted by nearly all economists since 1871.

It’s disappointing that an economist in 2021 falls for a pre-1871 fallacy.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030