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Doing Bad By Pretending to Do Good

Summary:
Earlier today I heard this story on NPR about an event of 50 years ago that was inspired by Martin Luther King, Jr., just before his assassination. The point of this event was to highlight poverty in the American south. As I listened to the story I wondered how much, if any, of the south’s economic backwardness in 1968 can be explained by the imposition 30 years earlier of a nationwide minimum wage. After all, the original purpose of the national minimum wage was to impose an artificial disadvantage on some southern factories in order to give artificial advantages to factories up north. It is reasonable to suppose that the economic development of the south 50 years ago would have been further along without this legislation and others like it. Also earlier today I read this blog post

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Earlier today I heard this story on NPR about an event of 50 years ago that was inspired by Martin Luther King, Jr., just before his assassination. The point of this event was to highlight poverty in the American south. As I listened to the story I wondered how much, if any, of the south’s economic backwardness in 1968 can be explained by the imposition 30 years earlier of a nationwide minimum wage. After all, the original purpose of the national minimum wage was to impose an artificial disadvantage on some southern factories in order to give artificial advantages to factories up north. It is reasonable to suppose that the economic development of the south 50 years ago would have been further along without this legislation and others like it.

Also earlier today I read this blog post by David Henderson on an old state statute in Oregon that imposed minimum wages for women. My public-choice instincts, along with my knowledge that history is filled with examples of government using seemingly well-meaning pieces of legislation for cronyist-protectionist purposes, prompt me to suspect that this Oregon legislation was ultimately motivated not by any admirable intention to help women but, instead, to protect politically powerful producers from the competition either of women workers directly or from that of firms that disproportionately employed women who were under the statute’s jurisdiction.

I haven’t read the paper that David links to, and being very busy with other work, I’ll not do so any time soon. But I would be very surprised if careful research of the history of this Oregon statute did not reveal a producer group – or producer groups – who benefitted materially from the minimum-wage-induced stifling of competition.

The logic of such rent-creating legislation is plain: producer group A competes for many of the same customers against producer group B. Producer group A, however, uses for its production a mix of inputs (most importantly, capital and labor) that differs from the mix used by producer group B. Also, producer group B might compete most effectively against producer group A not by producing outputs as nearly identical as possible to that of A but, instead, by producing ‘substitute’ goods or services that sell at prices lower than those charged by producer group A.

For example, producer group A might consist of locally owned restaurants with tablecloths and serving food freshly prepared by skilled chefs, while producer group B consists of chain restaurants serving food less exquisite but priced much lower. Members of producer group A are upset that producer group B is competing successfully for some diners who would likely otherwise eat more frequently at the restaurants of producer group A. What are the members of producer group A to do?

They could accept the fact that competition is not tortious – indeed, that economic competition is healthy for the economy at large – and do nothing other than compete harder to win more consumer patronage. That’d be the honest and honorable path to take. But government is in the picture, standing ready to escort those with little interest in honesty and honor down the rent-seeking path.

“So just pass legislation outlawing chain restaurants in our state,” suggests the leader of producer group A.

“Wish I could,” responds Sen. Slimey, “but that’s too blatant. Plus, it might not pass muster with the courts. But I’ve got an alternative plan that’s just as good.”

Do tell!” exclaims the leader of producer group A.

“Well, I understand,” replies Sen. Slimey, “that the restaurants run by producer group B use many more low-skilled workers in their kitchens than your restaurants use.”

That’s correct. We serve only fine food, so we hire experienced, high-skilled chefs, whose market wages are high.”

“So,” observes Sen. Slimey,” let’s enact a statute that raises the minimum wage above the average wage now paid to the average worker in producer group B’s restaurants, but lower than the average wage paid to workers in your – producer group A’s – restaurants.”

Brilliant!” declares the leader of producer group A, who sees immediately that, while the minimum-wage legislation will on its face – de jure – apply to all restaurants, it will in fact have a differentially harsh effect on the restaurants in producer group B. The minimum wage will artificially raise producer group B’s costs of operation, causing them to reduce their outputs. One consequence of producer group B’s reduced outputs will be artificially increased demand for meals served at producer group A’s restaurants.

Sen. Slimey smiles, knowing that the news media, as well as most of the intellectuals in town, will applaud him for his apparent humanity and “Progressive” values. It’s a win-win for Sen. Slimey and for members of producer group A. And too few people will pay close-enough attention to the members, workers, and customers of producer group B to suspect that Sen. Slimey is anything other than a socially conscious public servant.

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Don Boudreaux
He is a professor of economics at George Mason University in Fairfax, Virginia. Previously, he was president of the Foundation for Economic Education.

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