Jobs, trade, and the minimum wage

Posted: 4 April 2016 in Uncategorized
Tags: , , , , ,

James Sanborn, “Adam Smith’s Spinning Top”

As is well known, mainstream economists are generally opposed to significant increases in the minimum wage and in favor of free international trade. That’s what you’ll find in all the major economics textbooks, the articles and books written by mainstream economics, and in the policy advice they give.

You’ll find a good sampling of their views in the IGM Economic Experts Panel—in questions about trade (from 2012) and the minimum wage (from 2015).



But there’s a fundamental inconsistency in the case against raising the minimum wage and for free trade. Mainstream economists argue against a minimum-wage increase because it will, so they say, increase unemployment (at least at the bottom of the labor market) . But when it comes to international trade, which has generally hurt employment (at least among certain groups of workers), the argument turns to other things, like efficiency and lower prices for consumer goods.

Their conclusion is that, while the aim of the minimum wage is to help low-wage workers, it actually hurts them. But when it comes to free trade, some workers may be hurt but they (and everyone else) will eventually benefit from lower prices. And, if they don’t all benefit from free international trade, at least it’s possible for the gainers to pay off the losers—but no such argument is made about the minimum wage.

What’s going on? Well, technically, mainstream economists are looking at partial equilibrium (when it comes to the minimum wage) and general equilibrium (concerning free trade) effects. They’re examining a single market in isolation (the labor market) and all markets together (in the case of international trade).

Even more important, they’re demonstrating their theoretical commitment to free markets—the idea that people are hurt by interventions into free markets (like increasing the minimum wage) and benefit from more free markets (especially at the international level). That argument is so ingrained in mainstream markets that it’s impervious to criticism, at least from within mainstream economics.

The idea that the economy might be organized not on the basis of free markets, but on some other foundation—call it community, sharing, subsidiarity, sustainability, or something else—literally makes no sense within mainstream economics.

That’s why mainstream economists continue to spin their free-market top, even though it stops and topples over on a regular basis.

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