More Reflections on the Economics of the Minimum-Wage
19th February 2013
Don Boudreaux, a Real Economist, points and laughs.
No one questions that higher taxes on, say, cigarettes discourage the purchase of cigarettes in the ‘white’ market (that is, outside of the black or gray market in which the taxes are avoided). Anyone who said “Hmmm….. You say that higher cigarette taxes will discourage their purchase in the white market. But a real scientist would test that proposition before accepting it.” would be regarded as daft. Questioning the magnitude of the effect is perfectly legitimate; questioning the effect’s existence and direction is not.
Indeed, quite often the rationale for ‘sin taxes’, especially taxes on booze and tobacco, is precisely because they are an attempt to discourage people from buying booze and tobacco. If raising the price of alcohol and tobacco products is considered effective in reducing sales of alcohol and tobacco, how is raising the price of labor not considered effective in reducing employment?
If you went to the people who make Jack Daniels and said ‘We want to make sure you guys get an adequate return for all your hard work, so we’re going to pass a law saying that everybody has to pay at least $50 a bottle for Jack Daniels’, the response on the part of the makers of Jack Daniels would be a shriek of horror. Unlike legislators, the makers of Jack Daniels know that if you raise the price of something fewer people buy it, a concept that economists know as ‘elasticity of demand’ and politicians know as ‘Huh?’.
And so empirical studies are done to test the law of demand as it applies to human labor and, lo and behold, some studies find that it does not apply while other studies find that it does. So we are to conclude from this fact that employers of workers whose pay is in the range of the legislated minimum-wage might well not seek to economize on their production costs, in the face of higher mandated wages, by reducing the quantities of labor they hire, by working their laborers harder, or by lowering on other dimensions (say, fewer fringes) their hourly costs of employing labor.
Although this is perfectly in line with the general conviction on the part of those who pass laws that people do not change their behavior when they are socked with new laws but just keep on what they’re doing, dum dee dum dee dum, like sheep standing around waiting to be turned into sweaters and lamp chops.
Of course, seeing that Obama is in his second term, they might actually have a case with respect to a large part of the population. And that would be sad.