Do Profit Maximizers Leave $4,000 on the Table?
By David Henderson
The audience was MBA students at Northwestern University’s Kellogg School of Management. The moderator was a Kellogg associate professor named Amanda Starc, whose area is health economics. She did a great job and, as I pointed out at the end, was more prepared as a moderator than I had seen in a long time. She even had her own slides as a basis for questioning both Alan and me. The discussion was quite civil.
I asked them to record the debate and they did so; I think it will be available soon for people to watch.
Alan Manning’s major claim was that even a substantial increase in the minimum wage will cause little or no job loss. In his argument, he gave the following hypothetical example. A low-skilled worker is producing something that nets the employer $12 an hour. Of course the employer isn’t going to pay $12 an hour because at that wage the employer would be indifferent between hiring or not hiring the worker.
So far, so good.
But then Professor Manning suggested that the employer would pay $8 an hour. So if the government then raises the minimum wage to $10 an hour, the employer will continue hiring the worker.
See the missing step? I did. So later, when I had a chance, I pointed it out. If the worker’s productivity is really worth $12 an hour, one would expect another employer to come along and offer $9. Then someone would offer $10. Then $11. I don’t know how close the wage would get to $12. But it’s highly implausible to think that it would stick at $8. If no one offered more than even $10, which already is $2 higher than in Alan’s hypothetical, then a potential employer is leaving $4,000 on the table annually.
Professor Starc suggested that I was proposing that the labor market is perfectly competitive. I responded that I wasn’t; I was making the much less ambitious claim that the labor market for relatively unskilled workers is competitive.