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Home | Mises Library | Maximum Confusion over Minimum Wages

Maximum Confusion over Minimum Wages

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Tags Free MarketsLegal SystemInterventionismProduction Theory

10/28/2009D.W. MacKenzie

Given that we have rising unemployment, a reduction in minimum-wage rates might bring relief to some unemployed workers. Demand for labor increases with lower wages.

However, advocates of minimum-wage laws often have trouble with economic reasoning. Some see the wealth of large corporations as a sign that they can afford to pay their workers more per hour. Others think that employers exercise monopsony control over wages from the buyers' side of labor markets.

Such errors are somewhat understandable. People who see wages as an issue of total wealth and corporate greed are simply unfamiliar with even the most basic concepts in economics. The truth is that businesses can afford to pay workers according to the worker's marginal productivity, regardless of the business's total assets.

However, recent events have revealed an even-less-understandable objection to lowering minimum wages. Various reports indicate that Colorado will soon reduce its minimum wage. Unfortunately, these reports are inaccurate. Colorado ties its minimum wage to its price level. Statistics indicate that the cost of living in Colorado has fallen 0.6 percent. Consequently, the nominal minimum wage will be lowered by 0.6 percent.

The Colorado chapter of ACORN has sounded the alarm about falling minimum wages. According to ACORN organizer Ben Hanna, a minimum-wage reduction from $7.28 to $7.24 will adversely affect Coloradoan workers. Hanna, among others, is concerned by even this four-cent loss (or three-cent, considering that the federal minimum wage kicks in at $7.25).

The really strange thing is that it is obvious that wages are not actually falling. A decline in the cost of living indicates that the real minimum wage has risen, and the official minimum wage must be adjusted to offset this change.

We cannot blame the confusion over the Colorado wage situation on sheer ignorance of economics: after all, this issue is being reported and discussed in terms of cost-of-living adjustments. Furthermore, we cannot blame this confusion on the complexity of cost-of-living-adjustment concepts: this is a much simpler matter than explaining monopsony labor markets.

How can anyone fail to understand that inflation- and deflation-adjusted wages can never really change, except for lag in adjustments? One needs only to understand the concepts of statistical averages and subtraction to comprehend cost-of-living-adjusted wages.

Moreover, supporters of indexed minimum wages have been reported as saying that they never intended wages to fall! If they are thinking strictly in terms of nominal wages, their statements would be internally consistent but economically invalid. On the other hand, why would people who think in terms of nominal wages push for cost-of-living indexing in the first place?

I am rather confused by all this confusion. I am not surprised by people failing to understand what they don't know, that is only natural. But when people fail to understand things they do know, I have a harder time figuring it out. Worse still, if we cannot explain how these people got confused in the first place, then we cannot dispel theirconfusion. After all, they already know what they do not understand, right?

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Of course, those who favor minimum wages typically push for regular increases in these rates. These seemingly confused people may be silently lamenting the loss of a recent increase in the purchasing power of the Coloradoan minimum wage. But this possibility raises the question as to why minimum-wage advocates understand the importance of real wages as regards the affordability of goods, but not the importance of marginal labor productivity to the affordability of wages?

Of course, the implications of marginal reasoning do not stop with the minimum-wage issue. Much of economics consists of the general application of common sense to real life problems. There are complex aspects of economics, but laymen typically focus on common sense and avoid lengthy discussions of markets and policy.

Common sense and a few basic concepts can guide most people through economic issues — provided that our thoughts overshadow our emotions. One small step of reason on the minimum-wage issue could be a giant leap for all mankind.


Kristen Wyatt, Associated Press, "Colorado Minimum Wage to Drop as Living Costs Fall."

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