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Gerard
Jackson
It is a
fundamental economic law that pricing the services of any product above its
market clearing price will create a surplus for that product. It should
therefore be a self-evident truth that this economic law applies to labour
with equal force. Regardless of what a many people think, labour is not
special nor is it bought and sold. What employers actually do is pay rent to
labour for the use of its services. How much rent must be paid for those
services depends on the supply of labour and the value of its marginal
product. The lower the supply (given an unchanged demand) the higher will be
the wage, and vice versa.
The
demand curve for labour consists of a descending array of marginal
productivities. The point at which the wage rate is determined is where we
find marginal workers, those it only just pays to hire. It is at this point
that minimum wage laws*
do their damage. These workers are the first to go when the effective minimum
is raised. It follows that what really matters is not the minimum wage per se
but the effective minimum rate, the rate that exceeds the market clearing
price of labour. Hence it is this rate that causes unemployment.
It
should therefore be clear that if the minimum wage is fixed at or below the
market rate no unemployment will appear. When this happens the public can
usually be persuaded that raising the minimum wage will raise the standard of
living for these workers without creating unemployment. That the general
public can be conned into buying this snake-oil is, unfortunately, to be
expected. Equally unfortunate is the fact that there are ideologically
motivated ‘economists’ who enthusiastically promote this dishonest and
destructive policy.
Laura
Dresser, a University of Wisconsin
professor of labour economics and associate director of the Center on
Wisconsin Strategy (COWS), a leftwing front, is one such ‘economist’. The
argument goes that when the lucky beneficiaries of Dresser’s generosity spend
their additional incomes this will generate a “boost in economic activity”.
This extra spending will then create more jobs. (Nancy Pelosi said the same
asinine thing about dole payments). Naturally, her comrades in the
‘Democratic’ Party were jubilant at the good news. Once these self-appointed
tribunes of the downtrodden had wiped away their tears of joy one of their
spokesmen, State Senator Bob Wirch, then self-righteously denounced those
heartless Republicans, i.e., people who think it’s immoral to deliberately
price people out work, as “a bunch of extremists”.
Let us
examine in detail the thinking behind Laura Dresser’s phony economics. This
leftwing activist is politicising and rationalising vulgar Keynesian
reasoning. She emphatically asserted that raising the state’s minimum wage
would increase aggregate spending, which implies that it would also raise
government revenue. What a trifecta! Raising the effective minimum would
increase tax revenue, raise the demand for labour and promote economic
growth. (I have it on good authority that Dresser also writes fairy tales
under the pseudonym Easter Bunny).
The
ridiculous implication of Dresser’s argument is that those who hire marginal
workers are selfishly accumulating ever-mounting piles of cash. Hence,
transferring these idle cash balances to minimum-wage workers would increase
total spending which would generate more jobs. Utter nonsense, employers have
to spend just as their employees have to spend. The difference being that a
great amount of an employer’s revenue is spent on inputs, particularly wages.
Moreover,
the idea that transferring income from one group to another boosts aggregate
spending should be self-evidently absurd. Taking money from A and giving it
to B cannot raise total spending: it merely reduces A’s income by the same
amount that it raise B’s income. John Stuart Mill expressed the classical
view perfectly on this matter more than 170 years ago when he wrote:
It is
no longer supposed that you benefit the producer by taking his money,
provided you give it to him again in exchange for his goods…. that the man
who steals money out of a shop, provided he expends it all again at the same
shop, is a benefactor to the tradesman whom he robs, and that the same
operation, repeated sufficiently often, would make the tradesman’s fortune1.
Of
course, Dresser could use the old Keynesian standby that as these employers
save part of their incomes while marginal workers save nothing, then boosting
the minimum wage will raise spending by reducing savings. No it won’t. This
fallacy contains even more fallacies. To begin with it assumes that to save
is not to spend. But saving is spending by another name and is the means by
which spending is directed from the purchase of present goods to the purchase
of future goods. (I should add that Keynesians are forever confusing cash
balances with savings).
Entrepreneurship
drives economies and savings fuel them. Without savings there can be no
investment (the purchase of future goods) and that means no growth and
therefore no increase in the standard of living. Even competent Keynesians
admit that growth is forgone consumption, meaning that current consumption is
sacrificed in favour of greater future consumption. Therefore consumption
comes out of production.
If
Dresser and her fellow travellers are right then why stop with a ‘modest’
increase. Why not make it $25 an hour or even $100 an hour. According to her
logic (I would never dream of calling it economics) this would boost consumer
spending by a huge amount and send the state’s growth rate into orbit, not to
mention the demand for labour. With one stroke of the pen Wisconsin could
lead the United States if not the world in economic growth. The calculating
Dresser knows full well that a $25 wage hike would be catastrophic for
employment, even though it is the logical outcome of her own argument. This
is why she tried to forestall criticism by disingenuously stating that
I don’t
want to create the impression that you would get this consensus on any
increase of the minimum wage…. The simple truth is that nobody is raising the
wage to $25 or $100 an hour.
So how
does she know her proposal will have only beneficial effects? Because a study
that she and her pals conjured up said so. This is like buying a judge and
still rigging the jury. If this so-called economist is correct in that her
minimum wage would not destroy jobs then economic theory tells us that there
must be a labour shortage among Wisconsin’s young adults, which means that
employers would be bidding up wage rates. But the state’s high rate of youth
unemployment tells us that the reverse is true. So how does she explain this
situation? She doesn’t and Wisconsin’s phony media is not going to demand
that she do so.
Laura
Dresser’s minimum wage proposal is at heart a redistributive policy. What she
and her lefty chums refuse to publicly admit is that it would effectively
redistribute income from those whose jobs the new effective minimum wage
destroyed to those who get to keep their jobs. But playing roulette with the
lives and well-being of people is something leftists live for.
When it
comes to leftists I have learned to never attribute stupidity to their
actions when those actions can be just as easily explained by malice.
*The
real minimum wage is not the statutory rate but that rate combined with
mandatory costs of hiring labour. For example, if a government mandates
healthcare costs that add 10 per cent to the cost of hiring minimum wage
workers then the minimum rate the employer must pay has been effectively
increased by 10 per cent.
1John
Stuart Mill, Essays on Economics and
Society, University of Toronto Press, 1967, p. 262.
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