Richard Esptein has no time for ill-informed political rhetoric, like the president’s assertion that “The truth is we’ll never be able to compete with other countries when it comes to who’s best at letting their businesses pay the lowest wages, who’s best at busting unions, who’s best at letting companies pollute as much as they want.”
For the President, each of these goals represents the ugly end of an economic “race to the bottom” that the U.S. should do its best to avoid. Unfortunately, his statement is wrong on every point.
Epstein tackles each point in this Hoover Institution “Defining Ideas” column. We’ll highlight just the first example.
“Pay the lowest wages.” There is nothing wrong with letting businesses pay the lowest wages that they can. The point of allowing them this option is not to rejoice in any decision to pay low wages; it is to recognize that once they are endowed with this freedom, they are still bound by the implicit constraint that no business has the power to set whatever wages it chooses. All firms will still have to attract workers in the face of competition.
Sometimes wages fall because of a sharp increase in supply. Efforts to prop them up artificially will lead to a breakdown of labor markets. The correct response lets firms make their individual adjustments. In each case the dominant constraint on the employer is the constant trade-off between marginal benefits and marginal costs. The firm that sets its wage scale too low will not attract sufficient labor to allow it to remain in business. In many markets, therefore, firms will be obligated to pay increasing wages, up to the point that their marginable benefits are just balanced off by their marginal costs.
In this world, there is no need for government intervention to raise wages. An increase in labor productivity will result in higher sustainable wages. Labor markets are almost always competitive because most workers can work in multiple industries that compete in different product markets. The result is that during the Progressive period, in which there was little or no wage protection, wages grew at a rapid rate, female participation increased in labor markets, and average hours of work went down with higher rates of productivity.
Contrast that picture with the stagnant results of the last five years, and it is clear that the effort to force feed employer markets by various forms of protection has turned out to be counterproductive. The President repeatedly laments the decline in employment policies and real wages during the last decade, but refuses to take ownership of his administration’s policies that have thrown multiple monkey-wrenches into labor markets, particularly at the bottom end of the distribution, that is, with the least well-off people. These are the people whom the President wishes to place in the expanding “middle class,” to which he refers repeatedly in his speech.
But the expansion of the middle class just cannot happen through labor policies that work to keep people off the first step of the employment ladder. If the President is worried about giving everyone a “fair shot” at future opportunities, why does he adopt policies that impose the greatest toll on the most vulnerable portion of the population?