December 01, 2003

Nit Picking the Angry Economist

In general, I like The Angry Economist. I do have to take issue with one detail of his characterization of the minimum wage. Minimum wage economics is not so simple or straightforward a science as he makes out. If it were, it wouldn't be so politically potent a vote getter.

Employers are given two choices when confronted by labor that does not meet a legal minimum wage. They can either forgo the labor and not pay anything or they can pay for the next best substitute.

What the employer does depends on the cost and benefit of the next best substitute. In the case where the next best substitute has a large fall in cost/benefit, increasing the pay of the worker actually would make sense and would happen. This is the heart of the positive case for minimum wage laws. When we ignore that this case can exist anti-minimum wage law campaigners leave a logical weakness in their arguments that really doesn't need to be there.

First of all, the existance of such a large gap between alternatives would not be the normal state of things but something of a rarity. In essence you'd have that "I've got my boss over a barrel" feeling at a very low wage rate. This is not normal.

Secondly, bosses don't like feeling like they're over a barrel. They would have an unmet need, a low gap alternative to substitute for the unjustified wages they are paying to low productivity workers. Since bosses in general have high amounts of available capital, entrepreneurs would spot any actual occurance of such an unusual low wage/high gap situation as an opportunity to provide a lower gap substitute and capture business.

Thus we have a situation where the low wage voters are captivated by the chimera of having their bosses over a barrel and extracting surplus wages but the actual occurance of this is such a rarity that it's all just a cruel hoax.

But a cruel hoax is not the same as a nonexistant or illogical phenomena. The angry economist would have better served his readership if he'd been a bit less angry this time.

Posted by TMLutas at December 1, 2003 02:21 PM