Tuesday, August 10, 2004

Can Politicians Abolish the Law of Supply and Demand?

Do you believe that politicians can abolish the law of supply and demand? Can they work magic and make people buy a good for a price higher than its judged value? Despite how great and powerful politicians seem to be, I tend to think that they are less than capable of such a feat. Suprisingly, there are many people who do believe that the politicians are capable of abolishing the law of supply and demand, especially regarding minimum wage laws. They must believe that the those who will have to pay workers more due to a minimum wage law will actually do so, without a loss in jobs. Unfortunately, evidence from past laws and the pesky law of supply and demand disagrees.

Let's start of with an example of a non-labor good-- televisions. Let's say there are two types of televisions in the store--one is bigger with extra features and costs $100, and one is smaller with regular features and costs $75. Some people decide they want or need the extra features, so they by the bigger TV for $100. More people, however, do not need the extra features, so they buy the smaller TV for less -- $75.

But then, a politician sees this, and believes that the small TV company isn't making enough per TV. Then he sees that the big TV producer may have to lower it's prices due to competition-- that would make them poorer, and he can't let that happen! So, he decides to enact a minimum TV price of $100.

Consumers, not wanting to spend $100 on a TV that's worth $75, all react to the politician's act of social justice by passing over the smaller TV and buying the larger TV with extra features for $100. So, the $100 TVs start selling like hotcakes and the former $75 TVs collect dust on the shelf. After all, if you have to spend the money, you might as well buy something that's worth the money you're spending, right?

Thus, despite the politician's believing that he could raise income for both companies by creating a minimum TV price, he has destroyed the business that produced the lower-cost TVs. All of their business has gone to the company that produces the larger TVs which people deem worth the $100 that they will have to spend regardless of quality. Even people who would have forgone the extra features for a simple TV will not do so now, thanks to the politician's "benevolence".

These same results occur when minimum wage laws are enacted. The people with least amount of skills, the young, the poor, and the uneducated, are shut out of the labor market because of a politician's professed benevolence. Many of them ave their only chance at a job taken away because of a politician's belief that the law of supply and demand does not apply to labor. Their jobs are destroyed just as the business was destroyed in the previous example.

On the other end, those who gain from minimum wage laws are the people who have more skills than those on the bottom. More employers will seek workers with more skills, even if they don't really need the skills that the worker has. Why? Because to hire someone without the extra skills would amount to wasting money thanks to the minimum wage law, and we know that waste is a no-no in the business world. Employers would rather hire more skilled workers and find other ways to use those skills than pay a less skilled worker for more than they're capable of producing.

But you say this is only a theory? Well, this "theory" has been realized in many different examples in history. One notable example is often overlooked in the history books. The first minimum wage laws in the United States, enacted by FDR in his "New Deal", threw thousands of low-skilled, poor, uneducated laborers out of work, most of whom happened to be black. The beneficiaries were the racist white labor unions who no longer had to compete with the cheaper labor, not the poor and downtrodden who were (supposedly) the target of the program. The same can be said even today, where unemployment is at its higest levels among black youths, whereas before minimum wage laws, they were just as likely to hold a job as white youths, if not more so.

Then you ask, if the poor suffer the most from minimum wage laws, why are such laws still around? Well, my guess is that many people believe that politicians can indeed abolish the law of supply and demand when it's applied to labor, just like they believe the other nonsense the politicians spew regularly. Then there are others who know what's going on, and realize that they can benefit from it. Either way, wages set artificially by governments arbitrarily inflict a loss on one group or another. Sure, it's unfortunate, but it's how things are whether we like it or not.

For more on this issue: Minimum Wage Causes Maximum Pain
Minimum Wage Myth

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