One of the ideas that economists are most sure of is that when the price of something rises, other than due to something that shifts the whole demand curve, the quantity demanded falls. Conversely, when the price of something falls, the quantity demanded increases. This is not controversial in economics. Moreover, it’s so clear that it is part of our mutual understanding, even for non-economists. When you hear that Macy’s is having a sale, you don’t say, “Oh, I’d better not shop at Macy’s during the sale because the prices are temporarily higher.” No. You understand that Macy’s is having a sale in order to sell more and that the way to sell more is to lower their prices. Or consider what we all know to be true when strawberries are out of season: their price will be higher than when they’re in season. In other words, a reduction in supply, all else equal, will lead to a higher price; the way to sell the lower amount and have all demanders satisfied is to increase the price.
This is the opening paragraph of my latest Hoover article, “High Minimum Wage Laws Hurt Many Workers,” Defining Ideas, April 25, 2024.
In it, I discuss the effects, some of which have happened already, of the April 1 increase in the minimum wage for fast-food workers in California to $20 an hour. After quoting a news writer named Jack Birle suggesting that the higher minimum wage will make it harder for school cafeterias to compete for labor, I write:
Give Birle a little credit. As least he understood that school districts are competing with fast-food employers. But then he forgot to follow through on what the minimum wage increase is doing to job opportunities in the fast-food industry: it’s reducing them. So the minimum wage increase will make it easier, not harder, for school districts to find employees. There will be a reshuffling of workers. Higher-productivity workers will find it more attractive to work in the fast-food industry. They will displace some less-productive workers who are not producing enough to make it worthwhile for fast-food employers to hire them. But the overall net effect will be fewer jobs in the fast-food industry and, therefore, more workers looking for work in other industries.
I excerpted different parts of my article on my Substack. But if you want to read the whole thing, which is only about 1,800 words, go here.
READER COMMENTS
Ahmed Fares
Apr 27 2024 at 2:48pm
I believe this is right for the wrong reason. The compression between wages and prices takes place from the price side, not the wage side. Rather than pay the employee $9, the new employer reaches into the reserve army of the unemployed and hires a worker for $8 but sells for a price of $11. The original employer lowers his price to $10. This continues until there is just enough spread between wages and prices to cover the capitalists’ cost of hazarding their capital stock.
Workers bargain for the nominal wage, but the market sets the real wage. As competition between capitalists for market share lowers prices, it raises the real wage of the workers.
This supports marginal productivity theory. As long as there are no constraints to competition, it is impossible for capitalists to exploit workers.
Jon Murphy
Apr 27 2024 at 8:11pm
Hm. There’s a problem with your hypothesis: switching costs. If the worker is currently working for $8 but feels undervalued, then he would leave for $8+epsilon+costs of switching jobs. There’s no reason to switch if the competitor offers the same wage (absent switching costs, the worker would be indifferent. With switching costs, the worker would prefer to stay).
Now, I notice you did slip another assumption in (a “reserve army of unemployed”), but that would only hold true if nominal wages are too high, in which case the wage would be competed down to where MPL = wage. In a flexible labor market, there would be no “reserve army of unemployed”.
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