Monday, June 11, 2007


In my last attack on the minimum wage I neglected what I consider to be an interesting argument. It is interesting since I haven't seen it made before, surprisingly, since it is a rather "Austrian" take on the minimum wage. The argument is short and simple:

Wages are a price for labour services. The purpose of prices, in a market economy, is as a means of communication: Consumers can signal to producers when more of something is needed, because high demand relative to supply means high prices; and they can signal to producers that less of something is needed, because low demand relative to supply means low prices. Likewise, producers can signal to consumers that there is a shortage of some good, because low supply relative to demand means high prices.

So, prices are a means of signalling, and wages are prices, meaning wages are a means of signalling. Putting a price floor on labour services, therefore, prevents consumers of labour from signalling that less labour is needed in one sector.

Minimum wages, therefore, cause a misallocation of labour.


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