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> this abuse of the system should be prevented via a minimum wage law. That would cut into the employers profits, but there's nothing wrong with that. Hazlitt

by dpatru 15y ago

> this abuse of the system should be prevented via a minimum wage law. That would cut into the employers profits, but there's nothing wrong with that. Hazlitt uses the whole book to drive home the most important lesson about economics, and that is: One must consider not just what is seen, but also unseen. Let's apply this to the case for minimum wage for hotel workers. Sure, the minimum wage helps hotel workers. Sure, hotels will still pay for cleaning services. That is all seen. That is the naive analysis. What is unseen? What is the unseen result of a higher-than-market hotel-cleaning wage? Workers who would best be employed in other tasks will now be employed cleaning hotels. Other goods and services that are more valued won't be produced because the people who would produce them are busy cleaning hotels. In general, the low-productivity employment sector will be made less efficient, because of lack of price information. For example, suppose the minimum wage is $7/hr, and the market wage for hotel cleaning is $5/hr while the market wage for cooking is $6/hr. A worker who could do either should, in a free market, choose cooking, because it is more valued (hence the higher wage). But a minimum wage hides this information. So if the worker chooses cleaning, the economy will be $1/hour poorer than it would otherwise have been. Also, the sector of the economy that employs large number of low-wage workers will become comparatively less efficient because of the high-than-market wage costs. This will encourage capital to flow out of this sector and into other sectors. The unseen effect of the minimum wage is a missing low-wage industry. This was made very obvious when the US Congress raised the minimum wage on the small pacific island of American Samoa. The result was that major employer on the island left the island and instead built a more mechanized plant in the state of Georgia. A lot of low-tech, low-wage jobs in American Samoa disappeared and were replaced by a lot fewer, higher-wage jobs in Georgia. This was the direct and visible effect, but over time, the unseen effect is the same: industries and jobs that won't exist because the minimum wage makes them illegal.

nhaehnle 15y ago
In general, the low-productivity employment sector will be made less efficient, because of lack of price information. For example, suppose the minimum wage is $7/hr, and the market wage for hotel cleaning is $5/hr while the market wage for cooking is $6/hr. A worker who could do either should, in a free market, choose cooking, because it is more valued (hence the higher wage). But a minimum wage hides this information. So if the worker choose cleaning, the economy will be $1/hour poorer than it would otherwise have been. In this particular scenario, do you believe that a person chooses between cleaning (an unskilled job) to cooking (a skilled job) based on the wage that is paid? Either the person is unskilled; then they have no choice. Or they have the skill to be a cook; then they presumably have the skill because they like being a cook, and will certainly prefer to do that over cleaning even if both are paid the same (in fact, they will probably prefer cooking even if it were slightly higher paid; wages only start coming into consideration when the difference is larger). Now you might argue that people will be deterred from even learning to become a cook in the situation you have outlined. That is doubtful, because again, price plays a much smaller role than you might think. But even if it were the case, the wages of cooks would eventually rise above the minimum wage if demand for cooks is high enough. It is a mistake to assume that there is always a God-given market price that is the "right" price for goods to have. The development of prices is always a negotiation within society. In the case of the minimum wage, society says that labour should have at least a certain price, because that is the morally right thing (and also avoids certain externalities that opponents of the minimum wage like to ignore). If society agrees on that, then minimum wage is efficient by definition.
- dpatru 15y ago
  > wages only start coming into consideration when the difference is larger I would think that wage differences would be most important when wages are small. The difference between $5/hr and $6/hr is a lot more important than the difference between $50/hr and $51/hr. > It is a mistake to assume that there is always a God-given market price that is the "right" price for goods to have. . . . In the case of the minimum wage, society says that labour should have at least a certain price, because that is the morally right thing . . . I'm not sure what you're trying to say in your last paragraph. There is no such thing as a "morally right" wage. Wages are just prices set by the market unless they are interfered with. For example, unless you're being paid a government-mandated minimum wage, your wage is set by a mutual agreement between you and your employer. At the time of the agreement, you thought the proposed wage was the best of your options and so did your employer. Had your employer offered you less, then presumably you would have had a better option and would have chosen a different employer. Had you demanded more, presumably your employer would have had a better option and would have chosen a different employee. This is a market wage. The market, all the people together each choosing as they see best among their various options, this is what generally determines all prices including wages. The market is efficient because each actor chooses what is best for them given the choices of the other actors. Whenever the market is intervened with by government-imposed price controls, like minimum wage, the result is inefficiency (waste): the market acts differently than it would if each actor were free to choose.
  - calibraxis 15y ago
    One thing conventional economists (not just the hypercapitalist Austrians) ignore is bargaining power. It's fashionable to speak of employers and employees as if both were spheres with equal power. In reality of course, people rent themselves into something which is accurately called wage slavery, where they spend their time under someone's command, watching their tongues. The hotel owner is far more powerful than the room cleaner, and it's very common for bosses to steal wages. (After all, which one can dish out the humiliation while the other takes it?) Another fallacy of mainstream economics is that markets exist without government. In reality, it is government which creates markets. And yet another fallacy is that markets do not have morality associated with them. Yet markets are intertwined with moral taboos about debt, even in cases where the powerless owe debts to the powerful. (Like with rotten healthcare systems.) David Graeber discusses the history interestingly in _Debt: The First 5000 Years_. Since the linked article is right-wing, here's a left-wing one which discusses some of these fallacies. (http://www.zcommunications.org/debt-slavery-and-our-idea-of-freedom-part-1-by-david-graeber http://www.zcommunications.org/debt-slavery-and-our-idea-of-...) BTW, if I had to choose between being a well-paid coal miner and a significantly lesser-paid doctor, I'd choose the lower pay.

by dpatru 15y ago

nhaehnle 15y ago

In general, the low-productivity employment sector will be made less efficient, because of lack of price information. For example, suppose the minimum wage is $7/hr, and the market wage for hotel cleaning is $5/hr while the market wage for cooking is $6/hr. A worker who could do either should, in a free market, choose cooking, because it is more valued (hence the higher wage). But a minimum wage hides this information. So if the worker choose cleaning, the economy will be $1/hour poorer than it would otherwise have been. In this particular scenario, do you believe that a person chooses between cleaning (an unskilled job) to cooking (a skilled job) based on the wage that is paid? Either the person is unskilled; then they have no choice. Or they have the skill to be a cook; then they presumably have the skill because they like being a cook, and will certainly prefer to do that over cleaning even if both are paid the same (in fact, they will probably prefer cooking even if it were slightly higher paid; wages only start coming into consideration when the difference is larger). Now you might argue that people will be deterred from even learning to become a cook in the situation you have outlined. That is doubtful, because again, price plays a much smaller role than you might think. But even if it were the case, the wages of cooks would eventually rise above the minimum wage if demand for cooks is high enough. It is a mistake to assume that there is always a God-given market price that is the "right" price for goods to have. The development of prices is always a negotiation within society. In the case of the minimum wage, society says that labour should have at least a certain price, because that is the morally right thing (and also avoids certain externalities that opponents of the minimum wage like to ignore). If society agrees on that, then minimum wage is efficient by definition.

dpatru 15y ago
> wages only start coming into consideration when the difference is larger I would think that wage differences would be most important when wages are small. The difference between $5/hr and $6/hr is a lot more important than the difference between $50/hr and $51/hr. > It is a mistake to assume that there is always a God-given market price that is the "right" price for goods to have. . . . In the case of the minimum wage, society says that labour should have at least a certain price, because that is the morally right thing . . . I'm not sure what you're trying to say in your last paragraph. There is no such thing as a "morally right" wage. Wages are just prices set by the market unless they are interfered with. For example, unless you're being paid a government-mandated minimum wage, your wage is set by a mutual agreement between you and your employer. At the time of the agreement, you thought the proposed wage was the best of your options and so did your employer. Had your employer offered you less, then presumably you would have had a better option and would have chosen a different employer. Had you demanded more, presumably your employer would have had a better option and would have chosen a different employee. This is a market wage. The market, all the people together each choosing as they see best among their various options, this is what generally determines all prices including wages. The market is efficient because each actor chooses what is best for them given the choices of the other actors. Whenever the market is intervened with by government-imposed price controls, like minimum wage, the result is inefficiency (waste): the market acts differently than it would if each actor were free to choose.
- calibraxis 15y ago
  One thing conventional economists (not just the hypercapitalist Austrians) ignore is bargaining power. It's fashionable to speak of employers and employees as if both were spheres with equal power. In reality of course, people rent themselves into something which is accurately called wage slavery, where they spend their time under someone's command, watching their tongues. The hotel owner is far more powerful than the room cleaner, and it's very common for bosses to steal wages. (After all, which one can dish out the humiliation while the other takes it?) Another fallacy of mainstream economics is that markets exist without government. In reality, it is government which creates markets. And yet another fallacy is that markets do not have morality associated with them. Yet markets are intertwined with moral taboos about debt, even in cases where the powerless owe debts to the powerful. (Like with rotten healthcare systems.) David Graeber discusses the history interestingly in _Debt: The First 5000 Years_. Since the linked article is right-wing, here's a left-wing one which discusses some of these fallacies. (http://www.zcommunications.org/debt-slavery-and-our-idea-of-freedom-part-1-by-david-graeber http://www.zcommunications.org/debt-slavery-and-our-idea-of-...) BTW, if I had to choose between being a well-paid coal miner and a significantly lesser-paid doctor, I'd choose the lower pay.