Quotation of the Day…

by Don Boudreaux on June 25, 2022

in Economics, Work

… is from page 50 of the first edition of University of Washington economist Eugene Silberberg’s excellent 1995 textbook, Principles of Microeconomics (original emphasis):

The law of demand is the central behavioral proposition in economics. Its veracity is not really open to debate; to deny this proposition is to deny economics. The phrase economic explanation to a large extent means an explanation based on the law of demand. In Chapter 1 we outlined the idea that people respond so as to reduce the impact of changes in constraints. This proposition is given operational significance, that is, an interpretation in terms of the observable phenomena of prices and quantities, in the form of the law of demand. Consuming less of a good after its price has risen is one way in which we mitigate the deleterious effects of an increasingly severe constraint.

DBx: Indeed so.

And yet much public policy is built on the presumption that the law of demand does not apply universally. Perhaps the best example of such denial is the widespread support for minimum-wage legislation. The belief of many minimum-wage proponents is that raising the minimum wage will simply cause employers to pay workers higher wages, without any further adjustments. Employers’ incomes (profits) will fall while workers’ incomes will rise.

Disappointingly, it’s easy today to find professional economists who twist themselves into intellectual knots to lend apparent justification to this popular, fallacious belief. Yet the only theoretically possible scenario in which a rise in minimum wages will not reduce or worsen at least some low-skilled workers’ employment opportunities requires employers to possess both monopsony power in labor markets and monopoly power in output markets. (And the combination of such powers is a necessary, but not sufficient, condition for the minimum wage to work. Another necessary condition is that the legislated minimum wage not be set too high.) Of course, the likelihood in reality that there will prevail in a market-oriented economy this combination of monopsony and monopoly is so minuscule as to be ignorable.

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