Minimum Wage

The best reason to oppose minimum wage laws is philosophical: governments don't set wages, the market does. But there are a bevy (how many quarts in a bevy?) of practical reasons that support the premise.

Disturbing supply and demand will result in fewer jobs, unless the mandated wage is so low that it will have no effect. Thomas Sowell makes a great case that the law is racist, because it does not allow a minority group the opportunity to undercut other workers to get their shot. He offers the reductio ad absurdum that if the minimum wage were $100,000, racists could hire whatever workers were wanted for any job. Whereas, the marketplace would kill a company that tried that with no minimum wage.

Professor Bainbridge discusses California’s proposed hike in minimum wage and comes up with yet another reason why it's bad. It will encourage students to drop out, when we need more educated workers to compete.

If you stay in school, you sacrifice current wages for higher future income. If you drop out, you likely will have a lower lifetime income, but start making money immediately.

Although you likely wouldn't articulate the problem in these terms, you're faced with a capital budgeting problem. Should you invest in your human capital by staying in school or should you drop out and go to work full time?

Although there are several ways for a business to make capital budgeting decisions, the simplest and most relevant to our hypothetical teenager is net present value. You therefore should discount to present value the net stream of income that would be generated by each of your choices.

The problem is that research in behavioral economics suggests that young people tend systematically to err in assigning discount rates; specifically, because they tend to be systematically biased in favor of current consumption, they tend to use too high a discount rate in making such calculations. As a result, the prospect of an immediate income will be given too much weight in their calculus and the prospect of higher lifetime earnings in the future too little weight and, when deciding between work and a present paycheck versus staying in school and deferral of income, they will tend to err towards the former.

I'll give the Golden State credit -- they have the world's most resilient golden goose. The poor fowl is under constant attack from Rob Reiner and his ideological brethren, yet it limps along. Imagine the economic dynamo if that state's Hank Reardon's were let loose!

Economics and Markets Posted by John Kranz at April 20, 2006 12:21 PM