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Quotation of the Day…

… is from pages 64-65 of the late Robert Tollison’s 1991 paper “Regulation and Interest Groups,” which is Chapter 2 of Regulation: Economic Theory and History, Jack High, Ed. (1991):

The basic idea is straightforward. Firms in an industry are heterogeneous with respect to costs; the industry supply curve is upward sloping. This opens the door to possible regulations that improve relatively greater costs on higher-cost, marginal firms, causing some of them to leave the industry. All firms face higher costs as a result of direct regulation, but the exit of higher-cost firms raises market prices in the industry. Depending upon relevant elasticities, the increase in price can outweigh the increase in costs for lower-cost producers. If so, the regulation increases their wealth at the expense of both consumers and the higher-cost firms that had to leave the industry.

DBx: Although on some occasions it’s acceptable to talk or write about “the steel industry” or “the manufacturing sector” or even “the American economy,” we should be alert to the confusions that such lumpy language can create. Such language too easily – and, thus, too often – misleads. Industries and economic sectors consist of several different firms, both existing and potential. Almost all of these firms differ in some economically relevant ways from other firms that are classified in the same industry or sector. The existence of such differences implies that not all firms will be equally affected by changes in market conditions or in regulatory or tax obligations.

To adequately understand the political economy of regulation requires awareness of the reality that it’s very often the case that not all firms in a particular industry or sector share the same interest in some market condition or regulatory intervention. Most obviously, a regulatory requirement that imposes the same absolute cost on small firms as on large firms will impose relatively larger costs on the smaller firms than on their larger rivals, thus giving an artificial advantage to larger rivals. This same heterogeneity also often is relevant down to the level of individual employees and investors.

For example, suppose the federal minimum wage in the U.S. were to be doubled, from $7.25 per hour to $14.50 per hour. For workers currently earning an hourly wage of $9.00, their employers must – because of this minimum-wage hike – raise their hourly wage by 61 percent. For workers currently earning, say, $12.00 per hour, their employers must raise their hourly wage by only 21 percent. For workers currently earning and hourly wage of $14.50 or more, their employers are not required by the hike in the minimum wage to increase their pay at all.

Clearly, the damage inflicted on workers by minimum-wage hikes is greater the lower-paid are the workers.

But the analysis doesn’t end there. Because higher-skilled (and, hence, higher-paid) workers are often substitutes for lower-skilled (and, hence, lower-paid workers), a hike in the minimum wage, can increase the wages of higher-skilled workers at the expense of their lower-skilled rivals. Here’s how:

To perform some task or to produce some output requires fewer hours of higher-skilled labor than of lower-skilled labor. Absent a minimum wage (or minimum-wage hike), the lower-cost method of producing some output might be to employ, say, 1,000 hours of lower-skilled labor rather than 800 hours of higher-skilled (and more costly) labor. In many cases employers will find that the lowest-cost means is to hire 1,000 hours of low-skilled workers rather than 800 hours of the higher-cost higher-skilled workers. But raising the minimum wage – because it raises the cost of employing lower-skilled labor relative to the cost of employing higher-skilled labor – can result in the lower-cost means of producing this output switching from using 1,000 hours of low-skilled labor to 800 hours of higher-skilled labor. And the resulting increase in the demand for higher-skilled labor – an increase in demand for such labor caused by the minimum wage effectively pricing low-skilled workers out of the job market – will raise the wages of the higher-skilled labor as it reduces the employment options of the lower-skilled workers.

If you doubt that the above abstract analysis applies in reality, ask yourself how you think brewers of craft beers would feel about legislation that imposed a minimum price of beer. A minimum price of beer would cause the price of Budweiser to rise relative to the price of, say, Sierra Nevada. As a result, consumer demand for Sierra Nevada would increase, raising the price of this already-pricier brew and causing fewer units of Budweiser to be purchased.


In light of these realities, it’s simply mistaken for proponents of minimum wages to fancy themselves as champions of the downtrodden. Knowingly or not, proponents of legislated minimum wages are enemies of the downtrodden and friends of those persons with greater advantages.