Tuesday, October 18, 2005

Preferences & Costs

Given the choice between platinum and silver, which would you choose? Naturally, everyone’s first response would be platinum. It is more valuable, more rare and of higher quality than silver. Can we therefore expect that most people wear platinum jewelry rather than silver? On the contrary, we observe more people purchasing silver than platinum, even though silver is less desirable.

The same is true for workers. People might prefer an attractive employee than an unattractive one. People might prefer someone of their own race than of another race. People might prefer to hire only those who have obtained a Ph.D. However, these people do not express their preferences without incurring some cost.

Minimum wage laws reduce that cost. Employers can express their preferences for one race over another, for some physical attributes over others, and higher levels of skill over lower levels. Prior to the imposition of a price floor on wages, the worker who did not have the preferred level of education, was not of the preferred race, or did not possess the most attractive features could have the job that he desired. He merely had to lower his price enough. Prior to the imposition of minimum wage laws, he also had the freedom to do so.

People do not purchase more silver than platinum because they believe silver is the better material. They purchase more silver because it is cheaper. It provides a good substitute for platinum at a much lower cost. If the price of silver increases and the price of platinum is held constant, we should not believe this to be good for sellers of silver. Rather, we would find that it would benefit sellers of platinum because the relative cost of platinum is lower when the price of silver increases. When the price of silver goes up, more people will buy platinum. Likewise, minimum wage laws benefit those who are earning above minimum wage. When the price of the less desirable workers increases, more of the desirable workers will be hired.

Increasing the minimum wage will only magnify levels of discrimination on non-price bases. Employers face a downward sloping demand curve, just as everyone else. When their preferences become cheaper, they will indulge more of them. Minimum wage laws only serve to harm their purported beneficiaries by encouraging employers to more frequently express their preferences for a particular race, for higher skill levels or attractiveness.

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