Imagine that Walt is gently swaying in a hammock on a well-deserved vacation day when his phone rings. It’s his boss. She tells him that his co-worker has an emergency and can’t come into work. Although it’s last minute, she asks if Walt would be willing to work today—otherwise, the store will be too short staffed to open.
Walt says, “Look, I’m enjoying my time off even more than I thought I would. And, as you know, I’ve been looking forward to this vacation day for a month and I’d really rather not come in. But I’ll tell you what—if you give me double pay for the day, I’ll put down the lemonade and get to work.” His employer agrees given that the benefit of opening the store exceeds the cost of Walt’s extra pay.
I suspect that most of you can relate to Walt and, indeed, find yourself sympathetic to his situation—it doesn’t seem like it’s wrong for him to insist upon something extra for breaking up his vacation to clock in at work.
Notice, though, that Walt is guilty of “price gouging.” A wage is just the price of labor, after all. And here Walt is taking advantage of the shortage of labor and raising his “price.” But it also seems like he is making a reasonable ask.
For one, Walt has the right to ask for double pay to come in on his day off. Here’s the argument:
If Walt is within his rights to not work at all on his day off, he is within his rights to work for double pay on his day off.
Walt is within his rights to not work at all on his day off.
So Walt is within his rights to work for double pay on his day off.
What can be said in defense of the first premise? Consider that, from his employer’s perspective, Walt’s offer of expensive labor is no worse, and potentially better, than an offer of no labor. If she rejects his offer of expensive labor because it wouldn’t benefit her, she’s no worse off than if Walt had not offered to work at all. If she accepts the offer because it would benefit her, she’s better off than if Walt had not offered to work at all.
As for the second premise, I’d imagine everyone agrees that Walt is within his rights to not work at all on his day off. It’s surely generous for him to come him, but it’s not as though his employer (or the government) may force him to come in. So we should conclude that Walt is within his rights to “wage gouge.”
Moreover, allowing Walt to “wage gouge” has good consequences. If he didn’t have the right to ask for double pay, he’d have stayed in his hammock. And this outcome would have left both Walt and his employer worse off. Walt would be worse off because he wouldn’t receive the pay that he values more than his day off and his employer would be worse off because she wouldn’t be able to open the store, which is something she values more than the double pay she’d give Walt.
If you think that these reasons justify Walt in asking for double pay, you should think that they also justify more traditional cases of “price gouging.” For instance, it seems as though people are within their rights to not offer any ice at all to those at a disaster site (although it might be the generous thing to do). That is, the government doesn’t have the right to force Walt off of his hammock to buy and transport bags of ice to the site. And if Walt may offer no ice, he may offer high-priced ice—it either makes prospective buyers better off, in which case they’ll buy it, or no worse off, since they can simply refuse the offer. Moreover, the opportunity to make an unusually high amount of money can motivate Walt to get off the hammock and bring the ice to those who need it. Although we more readily empathize with “wage gougers” than “price gougers,” we have equal reason to permit both.
Christopher Freiman is a Professor of General Business in the John Chambers College of Business and Economics at West Virginia University.
READER COMMENTS
Jon Murphy
Nov 14 2024 at 11:28am
Good stuff. And let’s not forget that, in some cases, the government requires workers to price gouge. Eg, overtime pay, holiday pay
David Seltzer
Nov 14 2024 at 1:02pm
Jon: Also good stuff. Two principles of economics are incentives and opportunity cost. Old Walt believed his opportunity cost for leaving the hammock was double pay. Both employer and Walt considered their respective opportunity costs and were incentivized (verb) to reach a mutually beneficial arrangement via the price mechanism.
Monte
Nov 14 2024 at 4:21pm
Jon Murphy
Nov 14 2024 at 4:43pm
True. But there’s no particular reason to think the government, rather than the individuals affected, should make that determination
Monte
Nov 14 2024 at 6:03pm
No argument there. I suppose, like Gordon Gecco said, greed is good. But it makes an individual easy prey for trouble.
Jon Murphy
Nov 14 2024 at 6:26pm
Sure. But the same hold true in politics as well. The only difference is the individual in the market faces a cost for greed and trouble. The same cannot be said for the politician.
john hare
Nov 15 2024 at 3:38am
It can also make a company easy prey for trouble. When the number of local concrete companies got down low, a couple of them jacked their prices way up on the thought that the customers (including me) had no choice. They lost a lot of market share as we found choices.
Dylan
Nov 14 2024 at 6:33pm
First, I’ll say that I accept the general economic arguments in favor of price gouging. However, I feel like your economic intuition about Walt’s situation is hilariously off how most employers and fellow employees would think. I’ve been in pretty much exactly Walt’s position multiple times in my life. I remember one day at the lake where I had invited people over and was hosting a party, but a co-worker had an emergency and the store wouldn’t be able to open if I didn’t come in.
1) Working for a corporate chain, there literally would have been no way to pay me extra
2) Even if there would have been a way, if I’d asked for it, it most certainly would have been seen as price gouging and both management and fellow employees would have been unhappy with me
3) If no one was able to make it to the store and the store didn’t open, the manger of the store would almost certainly have been fired, even though he was in a different state on his own vacation, which was the lever used to motivate the employees to come in on their day off and work.
Beyond not getting paid extra, it’s often been the case at any of the hourly jobs I’ve had, where people would come in and help out for a couple of hours or more without clocking in, working for free in a minimum wage job, because labor costs were too high that week and you knew that if you didn’t chip in, the one person who was there, would have an absolutely miserable time.
Andrew M
Nov 15 2024 at 12:47pm
The fundamental moral question regarding price gouging is whether it’s morally permissible for a seller to hold out for the highest price that the market will bear at that moment–or whether a seller ought morally to accept a lower price that still falls within the range of prices at which the exchange is mutually beneficial. (I assume that in the real world there is typically such a range.)
I always point out to my business ethics students that, as sellers of labor, they’re fine with holding out for the highest price (i.e., wage) that the market will bear. But they’re generally unmoved by my observation, though they accept that it’s true. The reason, I assume, is that they accept the popular view that labor is automatically under some disadvantage in its trading with employers (“capital”), so that workers’ screwing over the bosses (by price gouging) just equalizes an unequal and hence unfair situation.
So Freiman’s argument may be sound, but I doubt it’ll change many minds about the cases of price gouging usually discussed.