Why Raising the Minimum Wage is a Bad Idea - John C. Goodman

Hillary Clinton has a solution to the problem of low wages: Government should make them higher. , writing in The New York Times, endorses the idea. There was a time when Krugman dismissed rhetoric like Clinton’s as economic quackery. These days he’s trying to sell the same snake oil as the politicians.
Paul Krugman

As I wrote in a column at Forbes, here is what economists know about the labor market: Employees tend to get paid their marginal product – the value they add to final output.

In a competitive market this is almost a truism. Wages are not a gift. They are not at one level, but could have been substantially higher or lower. They are what they are because of the employees’ skills and the market value of what they produce.

Now suppose that were not the case. Suppose there was a firm that paid employees more than their marginal product. That would mean the firm is collecting less from customers at the margin than it is paying out in wages. The firm can try to raise prices to cover the deficit, but then it would lose sales to rivals whose costs are lower and it would eventually go out of business. Or it could cover the deficit with lower profits. But then the investors would fire the manager and hire someone who gets the wages right and provides a market rate of return.

Suppose that there was a firm that paid employees less than their marginal product. In that case, rival firms would hire the employees away – since they are worth more than what they are being paid.

To summarize: a firm that pays workers more than they are worth cannot survive because it cannot match the prices and the rate of return to investors of its rivals. A firm that pays workers less than what they are worth, cannot survive because it will not be able to retain its employees. Competition in the marketplace tends to determine wages; there is a definite logic to what people are paid; and it has nothing to do with miserliness or generosity.

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