Monday , June 21 2021
Home / David Henderson /Do Profit Maximizers Leave $4,000 on the Table?

Do Profit Maximizers Leave $4,000 on the Table?

Summary:
On Monday, I debated Professor Alan Manning of the London School of Economics on whether the federal minimum wage should be increased from .25 an hour to an hour. Guess which side I took. The audience was MBA students at Northwestern University’s Kellogg School of Management. The moderator was a Kellogg associate professor named Amanda Starc, whose area is health economics. She did a great job and, as I pointed out at the end, was more prepared as a moderator than I had seen in a long time. She even had her own slides as a basis for questioning both Alan and me. The discussion was quite civil. I asked them to record the debate and they did so; I think it will be available soon for people to watch. Alan Manning’s major claim was that even a substantial

Topics:
David Henderson considers the following as important: , , , , ,

This could be interesting, too:

SchiffGold writes Economics Always Wins: SchiffGold Friday Gold Wrap Podcast June 11

David Henderson writes Strawmen, Steelmen, and Bad Faith

Walter Block writes Do Labor Unions Really Raise Wages?

David Henderson writes Henderson versus Manning on the Minimum Wage

Do Profit Maximizers Leave $4,000 on the Table?

On Monday, I debated Professor Alan Manning of the London School of Economics on whether the federal minimum wage should be increased from $7.25 an hour to $15 an hour. Guess which side I took.

The audience was MBA students at Northwestern University’s Kellogg School of Management. The moderator was a Kellogg associate professor named Amanda Starc, whose area is health economics. She did a great job and, as I pointed out at the end, was more prepared as a moderator than I had seen in a long time. She even had her own slides as a basis for questioning both Alan and me. The discussion was quite civil.

I asked them to record the debate and they did so; I think it will be available soon for people to watch.

Alan Manning’s major claim was that even a substantial increase in the minimum wage will cause little or no job loss. In his argument, he gave the following hypothetical example. A low-skilled worker is producing something that nets the employer $12 an hour. Of course the employer isn’t going to pay $12 an hour because at that wage the employer would be indifferent between hiring or not hiring the worker.

So far, so good.

But then Professor Manning suggested that the employer would pay $8 an hour. So if the government then raises the minimum wage to $10 an hour, the employer will continue hiring the worker.

See the missing step? I did. So later, when I had a chance, I pointed it out. If the worker’s productivity is really worth $12 an hour, one would expect another employer to come along and offer $9. Then someone would offer $10. Then $11. I don’t know how close the wage would get to $12. But it’s highly implausible to think that it would stick at $8. If no one offered more than even $10, which already is $2 higher than in Alan’s hypothetical, then a potential employer is leaving $4,000 on the table annually.

Professor Starc suggested that I was proposing that the labor market is perfectly competitive. I responded that I wasn’t; I was making the much less ambitious claim that the labor market for relatively unskilled workers is competitive.

David Henderson
David R. Henderson (born November 21, 1950) is a Canadian-born American economist and author who moved to the United States in 1972 and became a U.S. citizen in 1986, serving on President Ronald Reagan's Council of Economic Advisers from 1982 to 1984.[1] A research fellow at Stanford University's Hoover Institution[2] since 1990, he took a teaching position with the Naval Postgraduate School in Monterey, California in 1984, and is now a full professor of economics.[3]

Leave a Reply

Your email address will not be published. Required fields are marked *