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Sunday, 16 November 2014

The Iron Law of Minimum Wage Laws

You know that I am not a professional economist. Even if I were, that would not make me right. Professional economists are very various and within the profession there are diametrically opposed opinions and analyses. We can assume that if the Marxists are right, Free Marketeers are necessarily wrong – and vice versa. Physicists have disagreements too but they share a larger chunk of their discipline than economists do. However, I think I am right in saying that there is one economic ‘fact’ that is pretty well universally accepted: The Iron Law.

This can be stated in more than one way.

·         If something is relatively plentiful, it will be relatively cheap. The extreme case is air: there is no shortage and that is why the price is zero.

·         If something is relatively scarce, it will be relatively expensive. After a bad wheat harvest bread will be more expensive than after a good harvest.

·         If the price of a good is low, people will buy more of it. When petrol prices are low, people use their cars more. If it costs nothing to graze your sheep, you have an incentive to have more sheep. If everybody does the same, then the meadows will be over-grazed. This is known as the Tragedy of the Commons.

·         If the price is high, people will buy less.

·         If many people want something, the price will be relatively high. We can see this illustrated in bids at an auction.

·         If few people want something, the price will be relatively low.

These six sets of sentences say essentially the same thing in different ways. All other things being equal, these statements are unfalsifiable. That does not make them unscientific – economics is not that kind of science.

But Life is complicated – by governments! A classic example was the slaughter and burning of millions of pigs during the Depression. Prices were maintained by the destruction of wealth. Was that a smart policy when there were many hungry people in the US? The question answers itself.

Another example is that of minimum wage laws. Governments pass legislation which (in effect) threatens to put employers in prison if they pay less than an arbitrary minimum wage. Workers are prevented from selling their labour for less. So, employers buy less labour. Is this good for people who have only one thing to sell, their labour? If Mike’s labour is worth less to an employer than the minimum wage, the employer will decline to hire Mike. The less skilled Mike is, the fewer employers will want him. Upgrading his skills can only be done by working. Mike is out of luck – thanks to the government. Is that a smart policy? The question answers itself.

Of course, most people who are employed earn more than the minimum wage because their labour and skills are worth more to the employer than the minimum wage, by definition. Mike is unimpressed. The higher the minimum wage, the fewer workers will be employed. The attrition starts with the least skilled, the most vulnerable.

Economics is important. Most economic policy consists of ‘fixes’ for problems caused by earlier policies, whereas simply repealing the earlier policies would be a better way forward.

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