Monday, September 28, 2009

Meddling with Prices: Supports

Price supports involve the government increasing the price, above market equilibrium, and promising to buy up any extra. Obviously, producers make more, while consumers buy less, and the extra is either given away or otherwise wasted. In the meantime, money is taken from everyone as taxes and given to the producers. In the end, everyone loses except the producers (and the government employees who are paid to buy and waste the excess product).

Minimum wages are a bit different from other price supports. Rather than leading to excess production of labor, it leads to under-utilization of the labor supply, which shows up as unemployment. You might think that the government does not pay people not to work, but it does. There is unemployment insurance, disability, WIC and AFDC. While the recipients of these benefit somewhat, it is labor unions that benefit greatly. Union contracts do not set wages at $X per hour, but rather at "Minimum wage + $Y per hour." So the most recent round of minimum wage increases, from $5.15/hr to $7.25/hr over three years, has resulted in American labor unions getting a $2.10/hr raise, that they did not have to negotiate for.

The biggest losers when it comes to minimum wages are those who are not able to produce more than it costs to employ them. Examples include young blacks, who usually do not get as good an education as young whites; single mothers, who must have more flexibility in their work schedule; and the handicapped, for whom all manner of accomodations must be made, and who may not be able to do physical labor as well. Other losers include those who would otherwise hire these low-productivity workers. They have typically gotten their customers to take the place of such workers, by "offering" the "convenience" of self-service checkouts, drink refills, gasoline pumping and windshield cleaning. Another group that loses out because of minimum wages are those who would prefer to get paid with something other than cash -- minimum wages pretty much prohibit apprenticeship, as an example.

In this series:
Supply, Demand, and Price | Price Caps | Price Supports | Restricting Supply | Excises | Subsidies

No comments: