Thursday, April 24, 2014


A bit of economic theory today; well, I do seem to do a lot of economic ranting so this is not unusual and you should be used to it by now.

A rule in economics is that there are "trade-offs". Most of us can always get more of something but only at the cost of not getting something else. We can, as reasonable folks, disagree about many things (I want a Ford Super Duty Pickup and you want a Toyota Prius, I have my reasons and you have your reasons). We all can make smart, informed decisions on any issue as long as we understand that there are trade-offs and we understand the impact of these trade-offs.

Lets consider one trade-off involved in the minimum wage. A government imposed minimum wage will make employers less likely to hire people because it will cost the employers more of their profit. The trade-off here is that although some people will be earning $0.0 per hour [because they don't have a job] other workers will be made better off by X amount per hour. The trade-off for the employer is that because of the higher wage he is forced to pay, thus cutting into his profits, he will have a larger pool of workers to chose from and so will have more efficient and productive workers which should increase the production of the goods he is providing for sale and thus increasing his profit.

This is not a new idea. Philip Wicksteed discussed it in his 1910 book The Common Sense of Political Economy where he talks about how it is in the interest of the powerful Trade Unions to give people with jobs a higher wage at the expense of those looking for jobs.

To have any type of intelligent debate about minimum wage, or economic issues, requires that the people debating the issue have an understanding of the trade-offs.


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