A Market Process Perspective on Minimum Wage

Recently, there has been a lot of discussion about the issue of minimum wage due to the circulating proposals to raise it in the US and the new econometric studies purporting to demonstrate that raising the minimum wage slightly does not affect employment.

What got me thinking about this issue was the realization that the standard supply and demand for labor story in which workers are paid their marginal product does not quite survive realistic scrutiny. After all, if a company gets profit (sometimes fairly substantial like more than 25% for McDonald’s in 2013), it by definition means that at least some of the factors of production used by it are not paid their marginal product.

Substantial profits exist because the economy is never even close to an equilibrium. New products and ways of producing old ones are constantly being created some of which later turn out to be not worth the effort. These new products often do not just add themselves to the choice space of consumers, they often make other products obsolete or change the valuations of other products. At the same time, the reallocation of resources is not perfect and timeless. In such conditions it is not possible to talk about absolute efficiency of resource allocation, only about its efficiency with respect to the production opportunities known within a certain period. In other words, a resource will be used dynamically efficiently if at the moment there is no known way of reallocating it to a more productive venture.

This leads us to the issue of relative labor market monopsony, i.e. the ability of a firm to pay workers less than the contribution they make to the firm’s product. In an economy where firms receive profits this situation is probably not an exception but the rule. Does it, however mean that instituting a minimum wage in such an economy would be a good idea?

Let us assume that the government introducing a minimum wage is even capable of doing it in such a way that it does not make it unprofitable (not profitable enough) for certain firms to keep or hire some workers (i.e. a no direct increase in unemployment scenario) which is in itself a huge assumption to make. Still, I’d argue that such a policy would bring substantial economic damage because it would impede reallocation of labor to more productive uses.

Recall that in a dynamic market economy resource prices and profit rates tend to reflect the relative market values of goods that firms produce and the relative productivity of those resources. The change of wages in such an order usually happens if an entrepreneur sees correctly that it is possible to offer an employee a better wage (or a better combination of wage and working conditions) and achieve with it the same or higher profit rate and acts on this realization (or even lower profit rate even it is the best alternative the entrepreneur sees for using his money). But in order to be able to succeed in this activity, entrepreneurs need access to prices that reflect the current relative success of other entrepreneurs in satisfying consumer needs with the existing resources.

However, if the government forces entrepreneurs to pay some of their employees more than their relative entrepreneurial success warrants, it distorts the economic calculation based on arbitrage between resource and consumer good prices.

The affected entrepreneurs can respond to an increase in minimum wage in two main ways: they may just comply and get their profits reduce or they may adjust in one way or another, for instance by making the working conditions less attractive.

We have already assumed away the reduction in employment. Let us assume away also other forms of adjustment and assume that the affected entrepreneurs will just accept the reduction of their profit rates. The impact of this development will be twofold. First, the attention of other entrepreneurs will be relatively diverted away from the particular industry. They will not see that its profit rate without government distortion is actually higher and may warrant entry into it. This will probably hamper innovation in this industry and actually reduce competition in the correct, rivalrous sense of the word. Secondly, the wages of some employees will tend to be higher than is warranted by the current ability of entrepreneurs to create value with their help. It is not difficult to imagine that some innovations could be profitable if entrepreneurs could pay those workers a bit more than the non-distorted wage but less than the minimum wage.

So to sum up, a first approximation analysis based on market process logic seems to suggest that a minimum wage will hamper economic growth even if it does not result in decreases in employment. Of course, much more can be said if one goes deeper into various issues and interconnections.


Coercion and Deliberation: why murder and theft violate the NAP and satire and shaming don’t

Consider the following list of potential scenarios (A and B are human beings):

1) A murders B.

2) A rapes B.

3) A steals B’s car.

4) A sprays some gas with an unpleasant smell (like hydrogen sulphide) which reaches B’s nostrils.

5) A loudly plays a song by Justin Bieber which annoys his neighbor B who hates such music. 

6) A builds a house clearly in the shape of an erect penis which annoys B when she looks at it.

7) A publishes in his newspaper a cartoon of Prophet Mohammed which is seen by B who is a devout Muslim and B is offended.

8) A publicly shames B for being polyamorous.

The central question for the moral realist adherents of libertarian ethics here is which of those scenarios involve coercion, or initiation of physical force by one person against another without the latter’s consent.

Many people even in the libertarian ranks believe that this question does not have an adequately justified answer. They would say that the answer will always be to a certain extent arbitrary. They would say that cases 1-3 are relatively obvious examples but cases 4-8 are ambiguous. And a proponent of ethical absolutism will not be rescued by saying that for example case 8 does not involve any direct physical impact by A on B. The mechanism of B learning about A’s shaming her is still physical.

Although, at the first sight, this skeptical position seems to be correct, there is in fact a criterion which allows to differentiate between the cases involving and not involving coercion in the above list.

An issue which is often neglected in such discussions is the issue of the nature of the persons who are supposed to be protected against coercion. The defining nature of human beings is the ability to deliberate, or reason conceptually and form opinions and make choices as a result of this deliberative activity. This deliberative activity often also influences the psychological well-being of a person.

The intuition behind the notion of coercion is that certain kinds of actions override the ability of the person to determine the way she physically manifests her choices. Murder is the ultimate such action. Another good term for such actions is objectification. These actions physically affect a person as if she were an inanimate object thus frustrating some of her freely chosen goals. Their key feature is bypassing the mediation by a person’s mind.   

And this observation gives us the very criterion we need to at least in principle distinguish between cases involving and not involving coercion in the list with which I started this post. The criterion is the dependence of the presence of the action’s effect on the deliberative reasoning of the person.

Take case 8 from the list. The reason B gets frustrated by shaming is because she accepts in one way or another that what she does (in this case – polyamory) is shameful. Thus, the negative effect of A’s action can only materialize because of her reasoning in a certain way. On the other hand, the presence of the effect of a car theft clearly doesn’t depend on the thought process of the car’s owner. She either has control over the car or she doesn’t.

The only difficult case in the above list in this respect is (5). Our current knowledge of the brain and mind activity may not be sufficient to allow us to say definitely whether music may frustrate someone through mere physical mechanism. Nonetheless, at least the criterion to be established is still the same as in other cases, even if it is difficult to establish in practice.