Richman and Long on the Minimum Wage

Some good stuff by Sheldon Richman on the minimum wage. In a piece last month for F.E.E., he wrote:

In opposing the minimum wage we should champion the disadvantaged by emphasizing that:

Any regulation, tax, and trade restriction that stifles the formation of new businesses, and thus competition, reduces the bargaining power and self-employment options of workers -- low-income workers most of all. Less bargaining power equals lower wages.

Every intervention that raises the price of housing, clothing, food, and medicine harms low-income people most of all.

Every land-use rule and all government landholding keeps the price of real estate and rents artificially high, harming low-income people most of all.

The actions of the central bank devalue people's money, harming low-income (and fixed-income) people most of all.

A rotten education system harms the children of low-income people most of all.

Simply put, every interference with free people in the free market is first and foremost an attack on the poorest, most vulnerable in society. But notice that each intervention has its beneficiaries; together they constitute the privileged class. The chief enemy of the vulnerable is the corporate state, the system of mercantilist privilege for the politically connected that constrains the creation and diffusion of wealth.

In a follow-up blog post, he cited an old piece by Roderick Long critical of the orthodox marginal productivity theory of wages:

I certainly agree with Mises and Rothbard that there is a tendency for workers to be paid in accordance with their marginal revenue product, but the tendency doesn’t realise itself instantaneously or without facing countervailing tendencies, and so, as I see it, does not license the inference that workers’ wages are likely to approximate the value of their marginal revenue product....

First of all, most employers do not know with any great precision their workers’ marginal revenue product. Firms are, after all, islands of central planning – on a small enough scale that the gains from central coordination generally outweigh the losses, but still they are epistemically hampered by the absence of internal markets.... A firm confronts the test of profitability as a unit, not employee by employee, and so there is a fair bit of guesswork involved in paying workers according to their profitability. Precisely this point is made, in another context, by Block himself: “estimating the marginal-revenue product of actual and potential employees .... is difficult to do: there are joint products; productivity depends upon how the worker ‘fits in’ with others; it is impossible to keep one’s eye on a given person all day long; etc.” But Block thinks this doesn’t much matter, because “those entrepreneurs who can carry out such tasks prosper; those who cannot, do not.” Well, true enough, but an entrepreneur doesn’t have to solve those problems perfectly in order to prosper – as anyone who has spent any time in the frequently insane, Dilbert-like world of actual industry can testify. (The reason Dilbert is so popular is that it’s so depressingly accurate.)

A firm that doesn’t pay adequate attention to profitability is doomed to failure, certainly; but precisely because we’re not living in the world of neoclassical perfect competition, firms can survive and prosper without being profit-maximisers. They just have to be less crazy/stupid than their competitors....

I would also add that even if there are persistent problems – non-governmental but nonetheless harmful power relations and the like – that market processes do not eliminate automatically, it does not follow that there is nothing to be done about these problems short of a resort to governmental force. That’s one reason I’m more sympathetic to the labour movement and the feminist movement than many libertarians nowadays tend to be.

As Richman summarizes the lessons:

The upshot is that a worker whose marginal revenue product is more than $5.15 may still be making only the minimum. An increase in the minimum wage would benefit him. This doesn't mean a minimum-wage law is just. It relies on physical force, interferes with freedom of contract, and has the other costs noted in my original article. As for those who are underpaid (relative to their product), that problem should be addressed as I suggested: repeal of all business privileges, which narrow workers' employment and self-employment options, along with voluntary worker organizations to provide labor-market information and publicize abuses, etc.

I have a few things to add myself. First, this has a bearing on Rothbard's visceral aversion to labor unions. The things he said about labor contracts being unable to improve on the result of the employer's self-interest in a free market might be said just as well of all sorts of other market transactions. The bank that issues your credit card, arguably, doesn't benefit in the long run from dicking people around and arbitrarily changing the terms of their loan. Your landlord doesn't benefit from evicting people without good cause. But being an "at-will" borrower or tenant doesn't sound real pleasant, does it? It's a lot nicer to have things spelled out in a contract so you don't have to depend--in the short run--on the other party being smart enough to perceive his own self-interest. In the long run, self-interest may prevail. But in the long run, we're all dead. In the short run, it feels a lot more secure to have some contractural predictability built in. Anyone who's ever worked for an hourly wage knows the difference between being at-will, and knowing that you can only be fired with cause unless you're part of a mass layoff.

Second, there's a lot of neo-Marxist writing on the labor market arguing that wage discrimination makes sense because the employer benefits from cultural divisions within the work force--i.e., a divide-and-conquer strategy. Ignoring the mutual reinforcement of cultural and ecnomic factors greatly distorts reality. As Long wrote in the piece quoted above,

In the 19th century, libertarians saw political oppression as one component in an interlocking system of political, economic, and cultural factors; they made neither the mistake of thinking that political power was the only problem nor the mistake of thinking that political power could be safely and effectively used to combat the other problems.

Third, to the extent that wages depart from marginal productivity because of privilege and mercantilism--and that's one honking big extent, in my opinion--unions are useful to all workers as a means of compensating for the reduced bargaining power resulting from privilege, and thereby bringing wages closer to productivity. This means that unions are something more than (as right-wing Austrians claim) a way for privileged workers to artificially inflate their wages at the expense of the excluded.