Thursday, August 4, 2016

The Inconsistency of People Who Support Higher Tariffs and Who Also Support Higher Minimum Wages

By Don Boudreaux

Here’s a letter to a rising high-school senior whose up-coming economics teacher is fostering his interest in economics even over the summer months:
Mr. Rory Diggs
Dear Mr. Diggs:
Thanks for your e-mail.  Please pass along to Ms. Barney my thanks for her sharing with you some of my blog posts.
You ask about a post from June 1st.  There I highlight the inconsistency of people who support higher tariffs and who also support higher minimum wages.  Think of it this way.  Tariff supporters correctly recognize that imports have substitutes – namely, domestically made goods – and that using tariffs to artificially raise the prices of imports prompts buyers to buy fewer imports and, hence, to buy more domestically made goods.  The very point of protective tariffs is to cause buyers to substitute away from purchasing imports whose prices are artificially raised and toward purchasing domestically made goods whose prices are not artificially raised.  No one – not Clinton, not Trump, not Sanders, not Obama, not Gary Johnson, not me – doubts that tariffs have this substitution effect.
The same fundamental economic principle operates in labor markets.  Minimum wages artificially raise the price of low-skilled workers.  Yet low-skilled workers, just like imports, have substitutes.  These substitutes include machines (such as self-serve cash registers) and higher-skilled workers (such as furniture-delivery teams made up of two bigger, stronger, and more-experienced men rather than of three smaller, less-strong, and less-experienced men).  And just like when tariffs cause consumers to buy fewer imports and to buy instead more domestically made goods, minimum wages cause employers to employ fewer hours of work from low-skilled workers (whose wages are forced up by minimum wages) and to employ instead more hours of work from machines and higher-skilled workers (whose prices and wages are not directly forced up by minimum wages).
The bottom line is that it is deeply inconsistent for people to say, with one breath, that prices forced higher by tariffs cause a substitution away from imports, but then to say with the next breath that wages forced higher by minimum wages do not cause a substitution away from minimum-wage workers (that is, low-skilled workers).
Good luck to you in your senior year!  Please feel free to write to me again if you’ve more economics questions.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercator Center
George Mason University
Fairfax, VA  22030
The above originally appeared at Cafe Hayek

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