Fraser Forum

My ‘Aha! Moment’ on minimum wages… and more

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I spent last weekend in Toronto at the first of two Fraser Institute “Economics for journalists” seminars that we're holding this year. The second is in Vancouver at the end of the month. Each seminar brings together 25 journalists from across the country for two-and-a-half days of intensive economics following a program developed by Mark Schug, professor emeritus at the University of Wisconsin (Milwaukee), and Scott Niederjohn, dean of the J. Garland Schilcutt School of Business and Entrepreneurship at Lakeland University in Plymouth, Wisconsin. Our presenters this year are Scott, Tawni Hunt Ferrarini of Lindenwood University in St. Charles, Missouri, and Ninos Malek from De Anza College in Cupertino, California. I’m on board mainly to provide simultaneous translation into Canadian.

The sessions run 8 to 5 Friday and Saturday and 8-11:30 Sunday. Yes, we meet for a half day Sunday morning. That’s at the suggestion of the very first class some six or seven years ago, who thought two 8-to-5 days weren’t enough.

First thing Saturday and Sunday mornings we ask the journalists for their “Aha! moments” from the day before. “Aha! moments” are about something that particularly struck them. My own most recent “Aha! moment” occurred Sunday morning when one of our journalists reported that her “Aha! moment” was when she read one of our slides showing that 47 per cent of economists surveyed supported doing away with the minimum wage. (This statistic is from a 2006 survey by Richard Whaples of Wake Forest University of members of the American Economic Association.)

This 47 per cent (not to be confused with Mitt Romney’s 47 per cent) was not new to me. We’ve been using the slide for several years. But the journalist finding it so striking reminded me how liberating it is to have your eyes opened to the fact that things you’ve always taken for granted don’t actually have to be that way, and that people who have studied those things closely believe they shouldn’t be that way. It’s a joyous thing to have the scales removed from your eyes in this way.

At least that’s what I think her “Aha!” meant. Maybe it meant she couldn’t believe 47 per cent of economists would actually think such a silly thing. That’s a reaction many people might have: If we don’t have minimum wages, won’t wages fall to zero or might-as-well-be-zero? That’s where the economic way of thinking that we try to impart to the journalists comes in.

What are employers buying when they hire workers? They’re buying their productivity. Employers are people too and enjoy human relations as much as the next person. So they don’t just get productivity out of their workers. But what they’re interested in when they hire someone is whether the new worker will contribute more to the firm’s economic mission—which is to make money, after all—than he or she costs in wages and other benefits. If people have positive productivity, they’re going to make positive (not zero) wages.

Employers might prefer to pay workers a pittance, rather than what their productivity warrants. If you can pay very productive people a pittance, you can make lots and lots of money. But can you pay very productive people a pittance? Not if there are other employers around, for if they pay a pittance plus $1, they get your workers and still make big profits off them—albeit not quite as big as you were making. But of course, someone else can play a pittance plus $2 and steal the workers away from the firm that just stole from you. And so on and so on.

If firms don’t collude on wages—and if there are lots of them around, that will be hard—then wages will be driven up until they’re equal to worker productivity, at which point it doesn’t pay to hire any more. It’s a process governments may have to police, so as to prevent employer collusion (which Adam Smith himself believed was common in 18th-century Britain), but not to guarantee any particular wage. Wages will rise to the level of worker productivity. If average productivity isn’t high enough to provide a decent living, governments may want to supplement worker earnings with some form of income assistance.

What determines worker productivity? Their intelligence, knowledge, physical and mental stamina, and their willingness to work, among other things, and also how much machinery they work with. Governments can influence all those things by helping workers get educated and by not unduly taxing firms’ investment in machinery and other productivity-enhancers, whatever they may be.

If governments do that, they don’t need to set wages by fiat. Our journalist was right: That’s a big “Aha!” moment.