Friday, May 09, 2008

Minimum Wages and Monopoly Prices

An interesting possible line of argument not explored often enough is that the minimum wage law is actually a monopolistic privilege, effectively enforcing cartelisation of the labour supply.

Think of it like this: A cartel is classically thought of as occurring when different competitors in an industry, or supply a particular type of good or service, get together to agree not to undercut each other. They threaten to withold supply of goods unless buyers agree to pay a higher price, or they just reduce the supply anyway, so that supply falls relative to demand, and prices increases.

Well, what examples do we have of this? People like to alledge that supermarkets do this, that railways did it in the nineteenth century, and other such examples. However, surely the most common occurence of a cartel, or collusion in order to withhold supply in order to raise prices is one that people just don't like to point out. Maybe because they are supposed to be nice, benevolent things. The most common attempts at forming cartels are unions.

Think about it: Unions are when suppliers of labour get together so that they can threaten to strike unless they get a better wage. Ultimately the idea of "collective bargainning" with union negotiated wages rests on this power of striking, that is the threat to withhold supply unless the price rises. This is classical, typical cartel behaviour.

Now, libertarians believe that people have a right to form unions. Unions may well occur in free markets - which is not to say that they can effect general wage levels, because they will not be able to charge monopoly prices. The reason why people should be free to form unions, is because if one person has a right to withhold his labour, by virtue of owning himself and hence his labour, if follows that a large number of people have the same rights. On utilitarian grounds, though, people sometimes fear the power of unions "in restraint of trade." I think they are wrong to do so, because cartels are inherently unstable in a free market economy.

Why is this the case? For at least two reasons. Firstly, the most obvious, if you were a businessman and you, with reasonable certainty, knew that your competitors were going to keep their prices high, or raise them, though costs, say, were falling, what would you do? Cut your prices, of course, and take business from your competitors. A cartel agreement provides this certainty, by definition: It is when a bunch of your competitors, and you, get together and announce to each other that you will fix prices. However, you don't know if anybody else will also stick to this agreement, so perhaps it is not so certain. So, suppose you don't know whether your competitors will keep their prices high? Again, you will reduce yours, so that you don't lose business to them in case they cut prices too.

So, either you can be certain they will stick to the cartel agreement, in which case you don't. Or you can't be certain they will stick to it, in which case you don't. Either way it simply is not rational for you to abide by the cartel agreement.

Secondly, though, the new, higher price will attract new suppliers to compete with the established suppliers in that industry. The cartel would then be forced to compete with these new suppliers, and could only do that by reducing prices.

However, moving away from a free-market, a cartel can be made more stable if these instabilities are removed. What the cartel needs is a means to ensure that members will abide by the agreement to keep prices high - that means a method to enforce the cartel agreement. But what is also needed is a way to stop new competitors selling at less than the cartel price.

Unions have accomplished both these things. Cartel agreements are strengthened by unions threatening to withhold benefits or legal support or protection, etc, for members that cross picket lines. They also support legislation preventing employers from hiring "scabs," or even to force workers in a particular workplace to join a particular union. In fact, many unions workers are also professional workers, meaning that workers in that industry must be licensed, and the licensing authorities are usually staffed by members of that industry, probably unionised.

However, one of the most effective ways of enforcing the cartel agreement is for the government to simply enforce the cartel price, and make it illegal for members of the cartel to sell at less than the monopoly price. This is precisely what the minimum wage does.

Milton and Rose Friedman wrote, in Free to Choose, that

These laws are defended as a way to help-low income people. In fact, they hurt low-income people. The source of pressure for them is demonstrated by the people who testify before Congress in favour of a higher minimum wage. They are not representatives of the poor people. They are mostly representatives of organized labour, of the AFL-CIO and other labour organisations. No member of their unions works for a wage anywhere close for the legal minimum. Despite all the rhetoric about helping the poor, they favour an ever higher minimum wage as a way to protect the members of their unions from competition.

The minimum wage is a means of ripping off employers by enforcing a cartel agreement.


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