Minimum-Wage Follow-up

It occurs to me that something Roderick Long wrote on the male-female wage gap ("Platonic Productivity") is relevant to my recent discussion of the minimum wage. The main economic argument against the minimum wage is that in the market, workers are paid their marginal revenue product. Therefore, mandating a wage above that level will result in unemployment. The advocates of the minimum wage resist this argument, insisting that some people are not paid what they worth. As I pointed out in my article, part of the answer to the minimumists is that we don't have a free market and that if we did, the problem that concerns them would largely disappear. I say largely because according to Long there is a sense in which the minimumists have a valid point:

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 – just as the existence of equilibrating tendencies doesn’t mean the economy is going to be at or near equilibrium. I would apply to this case the observation Mises makes about the final state of rest – that although “the market at every instant is moving toward a final state of rest,” nevertheless this state “will never be attained” because “new disturbing factors will emerge before it will be realized.”

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. (And I’m rather skeptical of attempts to simulate markets within the firm à la Koch Industries.) 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 [Walter] Block [pdf] 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.

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. Indeed, it’s one of the glories of the market that it can produce such marvelous results from such crooked timber....

I should add that I don’t think my skepticism about the productivity theory of wages is any sort of criticism of the market. The tendency to which Austrians point is real, and it means that markets are likely to get us closer to wages-according-to-productivity than could any rival system. (Since neoclassical perfect competition is incoherent and impossible, it does not count as a relevant rival.) If employers have a hard time estimating their workers’ productivity (the knowledge problem), or sometimes cannot be trusted to try (the incentive problem), that’s no reason to suppose that government would do any better. Employers are certainly in a better (however imperfect) position to evaluate their employees’ productivity than is some distant legislator or bureaucrat, and they likewise have more reason to care about their company’s profitability (even if it’s not all they care about) than would the government. So there’s no reason to think that transferring decision-making authority from employers to the State would bring wages into any better alignment with productivity. People in government are crooked timber too, and (given economic democracy’s superior efficiency in comparison with political democracy) they’re even less constrained by any sort of accountability than private firms are....

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. 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.

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.