Thursday, June 2, 2016

On Further Handicapping the Least Productive

By Don Boudreaux

 [This} is from page 193 of UCLA economist William Allen’s 1989 collection of the transcripts of his excellent radio addresses, The Midnight Economist; specifically, it’s from Allen’s September 1987 radio address entitled “Poverty and the Minimum Wage”:
To handicap further by political decree those already most handicapped in the labor market because of little training and experience is to evince appalling poverty of the poverty program.  If that is the best politicians can do, they should – in sense and in compassion – do nothing.
Consider this hypothetical (which, given the poor quality of today’s punditry and publicly discussed economics, is not as far-fetched as it might at first seem): Ostensibly to help raise the incomes of hard-working vintners of low-quality wines – vintners many of whom have children to feed and sick parents to care for, and many of whom also are stuck in their jobs as owners of low-quality vineyards – Congress passes minimum-wine-price legislation: no wine may sell for any price less than $1.00 per fluid ounce.  Roughly, that means that the minimum price of a standard-sized – 750ml – bottle of wine becomes $25.00. Armed officers of the state will use deadly force against anyone and everyone who insists on disobeying this diktat.
If proponents of the minimum wage are correct in their economics, then the only effect of this minimum-wine-price diktat will be distributional.  Consumers – including retailers and restaurants buying from wholesalers – will continue to buy as much wine, and the same qualities of wine, that they bought before the diktat took effect.  The only difference is that, with the diktat in place, owners of low-quality vineyards earn higher incomes, all of which are paid for by consumers who dip further into their own incomes and wealth to fund this transfer.  Easy-peasy!  Problem solved!
But who in their right mind would suppose that a minimum-wine-price diktat would play out in the manner described above?  Who would not see that a wine buyer, obliged to pay at least $25 for a standard-size bottle of wine, will buy only higher-quality wines – wines that before the diktat took effect were fetching at least $25 per bottle (or some price close to that)?  Many wine buyers who before the diktat were confronted with the choice of paying either $8.99 for a bottle of indifferent but drinkable chardonnay and $25.00 for a bottle of much more elegant and enjoyable chardonnay opted for the less-pricey bottles.  They did so not because they prefer to drink chardonnay that is indifferent to chardonnay that is elegant – they in fact do not have this preference.  Rather, they did so because the greater elegance of the pricer chardonnay was not to them worth its higher price.  So the low-quality chardonnay found many willing buyers.
With the minimum-wine-price legislation in place, however, everyone who still chooses to buy wine will buy only the more elegant wines – the better wines, the more aged wines.  The lower-quality wines will find no buyers.  Because the minimum-wine-price diktat effectively eliminates low-quality wines from competing with higher-quality wines for consumers’ dollars, vintners who produce higher-quality wines will applaud the diktat.
Most people will see the basic economic problem with minimum-price diktats in this example involving wine.  Yet change “wine” to “workers,” and many people – including many economists – somehow fabricate in their minds fanciful stories or accounts of how a legislatively imposed minimum price of labor will result simply in higher pay for all low-skilled workers.
In vino veritas.

The above originally appeared at Cafe Hayek.

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