An Argument For A Maximum Wage

Simon Wren-Lewis makes a good case for implementing a maximum wage. All the other points aside,, what Wren-Lewis is really talking about are price controls on labor. And that may not be a bad thing.

Price controls typically create what’s known as a “deadweight loss.” It’s a loss that occurs when the (mostly) “free” market is regulated – or rigged. What most economists refuse to acknowledge (or forget) is that price controls are not the only thing that causes a deadweight loss. Social costs (such as environmental damage), and monopolies also create deadweight loss.

And depending on who’s doing the losing will determine who loses less. Here’s a model with maximum price ceiling, and let’s say that it’s all about labor:

cooperecon-fig12_002

If the price ceiling were a maximum wage, then the seller, or corporation would lose more than the consumers. And in Model A, there is a minimum and maximum in which equilibrium could occur. This means that the supply curve could easily shift to to the “crosshairs” in Model B, to make sure no one loses.

If we just have a price floor (as in minimum wage) with no maximum, then consumers lose more, through the loss of supply. This ends up forcing consumers (labor) to pay monopoly rents to firms, whether or not  there actually is a monopoly.

Capital never disappears, it only transforms. The deadweight loss isn’t really a loss when it’s factored into the supply curve as marginal cost. Paying taxes or social costs is a part of doing business, just like labor costs and paying capital rents.

If everyone loses equally, then no one loses. And if everyone doesn’t lose equally, then labor will lose less with maximum wages. The only question remaining is this: are CEOs really worth; really producing more than the equilibrium price?

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This entry was posted in Economics, Labor, Political Economy, Public Policy, Wages. Bookmark the permalink.

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