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Distortion Due to Minimum Wage Law

Summary:
In an attempt to raise wages, the government imposes a minimum wage by law. Socialists imagine that this increases wages paid. But the fact is that it increases, not the wage paid to a given worker, but the threshold. That is, it raises the bar on what employment is legally permissible. This is well understood (at least by those who don’t substitute their notion of morality for economics).Today I write about a different problem: what happens when there is a layoff.In a free market, a layoff causes a downtick in the bid for labor. Recall that the bid is set by the competition among sellers. Most of the newly-unemployed workers who are seeking a job will take the bid price on their labor. So the bid is depressed a bit. That is, they choose to take a lower wage rather than no wage. In a

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In an attempt to raise wages, the government imposes a minimum wage by law. Socialists imagine that this increases wages paid. But the fact is that it increases, not the wage paid to a given worker, but the threshold. That is, it raises the bar on what employment is legally permissible. This is well understood (at least by those who don’t substitute their notion of morality for economics).
Today I write about a different problem: what happens when there is a layoff.
In a free market, a layoff causes a downtick in the bid for labor. Recall that the bid is set by the competition among sellers. Most of the newly-unemployed workers who are seeking a job will take the bid price on their labor. So the bid is depressed a bit. That is, they choose to take a lower wage rather than no wage. In a free market, there is no such thing as structural unemployment.
As an aside, if this seems bad, you may be substituting moral notions for economics. Economics works the way it works, and doesn’t work the way it doesn’t work (e.g. the way socialists feel it should work).
Anyways, each laid-off worker finds a job. His new employer is able to employ him, because the worker accepted the employer’s bid. Over time, the employer may increase its efficiency or the value of its product, and be able to pay more. This employer would not have had the opportunity, if it had to match the wage of the established company.
And this leads us to the problem with minimum wage law which I want to focus on today. Prices move in a free market. Each and every move is for a reason, even if the observer—or central planner—does not know what that reason is. If allowed to move—i.e. not fixated by a central planner—the new price is a signal. If the bid is pressed down, it tells buyers to increase their volume. If the offer is lifted, it tells sellers to bring more goods to market.
Of course, the very response of buyers stepping up will tend to push the price up, and sellers bringing goods will tend to push the price down!
To the untrained eye, it may seem like the price is stable. Or stable with a bit of noise in the signal. This seeming-stability is the effect caused by the actions of the buyers and sellers. And their inactions, as in the case of the layoff, when they stop buying or selling.
A price fixing scheme like minimum wage is based on the idea that stasis is a goal. That there is a magically right wage—nowadays called “living” in an attempt to mobilize those moral notions. And the government, of course, has the job to ensure it is paid. Of course, the government cannot guarantee any such thing. What it does is deliver the stasis that people imagine is the ideal condition.
However, it is a stasis of price only. Not of outcomes achieved by participants in the market. On one side, there are people who go without work. They suffer the hardships of poverty (not counting that the government may dole out free goodies to them, like pouring food onto a wound). On the other side, there are entrepreneurs who go without workers. They suffer hardships too, including they may be out of business entirely.
By fixing price, they think to fix the economic outcomes. But the reality is the opposite. The claim to to good to the workers. But they actually inflict harm on them. And the employer. And everyone else, who does not have the goods and services that the would-be workers are not producing for the companies who are not allowed to hire them.
And (I discuss this in much greater length in my dissertation), notice how government intrusion into the market causes discoordination. There are people who lack for work, and at the same time companies who lack for workers. This is an extraordinary thing, for all that we take it for granted and accept it as if it were normal.
That downtick is necessary. It is moving off a local maxima to get to a higher point. A free market delivers generally-rising wages, but not monotonically rising.

Distortion Due to Minimum Wage Law

Keith Weiner
Keith Weiner is CEO of Monetary Metals, a precious metals fund company in Scottsdale, Arizona. He is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. He is founder of DiamondWare, a software company sold to Nortel in 2008, and he currently serves as president of the Gold Standard Institute USA. Weiner attended university at Rensselaer Polytechnic Institute, and earned his PhD at the New Austrian School of Economics.

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