Wednesday, September 16, 2015

Do Minimum Wage Laws Impact Employees Higher and Higher Up the Wage Ladder?

An email discussion between a student and Dr. Walter Block:

An edited version of the student's email appears below:
Dr. Block;
First, I would like to say thank you for everything you have done for the study of economics and the cause of freedom.  I would like to get my fan mail section out of the way and say that I have immense respect for you as an economist, but also as a person.  The way you present yourself professionally is exceptional....
In any case, I have been watching many of your debates (among others) on the minimum wage and a thought struck me in which I hope you might take an interest.  While I wholeheartedly agree with your analysis that the minimum wage is a compulsory ban on employment that disproportionately affects the poor, I would like to posit that it is affecting people higher and higher up the economic ladder at a rate higher than just MRP or productivity or even discrimination could account for.  I have noticed more and more posts on a very popular internet message board called "reddit" which are pictures of people in suits standing on busy street corners or outside cafes handing out resumes to anyone and everyone who will take one.  From what I can gather, these individuals have skills that are useful to jobs that are not typically minimum wage jobs such as tech/computer jobs, accounting jobs, etc.  They do seem to be college graduates rather than individuals with more experience, but they are not usually liberal arts majors or anything of the sort.  What I'm trying to say is that people in these fields aren't usually this desperate for employment...
...while people naturally might seek to improve their own productivity, some might do so only as a consequence of being "priced out" of their lower productivity...

Because of the minimum wage, some people who have been priced out of the market might seek to increase their productivity to find work.  As they do so, the labor market in other sectors is inundated with new workers and this effect works it's way up the ladder to affect people other than just marginal minimum wage earners.
Dr. Block's response:

Dear  XXXX: 
You make a not unreasonable point. The minimum wage leads to unemployment. This may encourage some people to improve their productivity, so as to get a job. But, then, they will compete with those with higher productivitity, reducing theirs, given diminishing marginal revenue product.  
My empirical judgement is that while this is a possibility, the effect will be small. For one thing, most unemployed people don’t go to school and improve their productivity. Instead, they turn to crime and end up in jail. Also, as a matter of prudential judgement, I don’t think that school increases productivity all that much; in some cases, given the political correctness legion there, it may even reduce productivity in the market. Third, even if, arguendo, those unemployed by min wages did go to school and increase their productivity, I don’t think this would much reduce the productivity of others at this higher echelon. So, I think you’ve latched on to a theoretical possibility with not much practical application. But, it shows great creativity on your part. I think that the reason college grads are also un and under employed may be better explained by govt regulations other than min wages: occupational licensure, what’s happening to Uber cabs, high taxes, punitive regulations for hiring full time workers (which is why so many are employed only part time). I’m going to possibly blog our conversation, but will keep your name anonymous. Best regards, Walter Walter E. Block, Ph.D.Harold E. Wirth Eminent Scholar Endowed Chair and Professor of EconomicsJoseph A. Butt, S.J. College of Business                   Loyola University New

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