Labor Markets Aren’t Special

The laws of economics are universal.  They apply to all markets, everywhere, at all times.  At times, governments or other hostile forces may restrict certain markets in particular ways to cause them to be unique, but the general laws still apply.  This is true regardless of the size of the market, the location of the market, the variety of the market, or the market’s relation to the “common man.”

The labor market is unique in that it likely to be the only market on which the “common man” will be a seller, rather than a buyer, of goods.  However, this distinction is irrelevant in terms of economic laws and principles.  The state has successfully convinced the layman that this distinction makes labor markets a special subset of economics, where the typical laws of supply and demand no longer apply.  Labor markets are not only safe from the negative consequences of state interference, but they actually benefit from it, say the socialists.  Sure, price controls may not work and may cause negative consequences in the market for raw materials, but such measures are necessary in the labor market in order to prevent the exploitation of the worker by nefarious capitalists.

Of course, this is all nonsense.  The labor market functions like any other.  It is responsive to interference in the same way any other market would be.  Let’s examine a few basic principles of economics and relate them to the labor market:

1.  Exchange occurs for mutual benefit.  This is true of any market in the absence of coercion.  To suggest that an employer can “exploit” an employee by offering as low of a wage as possible makes about as much sense as suggesting that a football fan can “exploit” the Dallas Cowboys by refusing to pay anything but an exceptionally low price for tickets.  The suggestion that this principle does not apply to labor markets because a job is a “necessity,” is false.  The division of labor is a relatively recent phenomenon in the grand scheme of human history.  Anyone who feels “exploited” by their employer is free to return to this level of human existence, that is to say, subsisting on what you can hunt or gather.

2.  Price floors create a surplus of supply.  Products are sold at a price above their market value, therefore supply greatly exceeds demand.  This is a relatively well understood principle that is rarely argued with when referring to markets for physical goods.  By this same reasoning, we can clearly state that a minimum wage creates unemployment.  A minimum wage is a price floor on labor.  It causes the supply of labor to greatly exceed the demand, resulting in a surplus of labor, which manifests itself in unemployed workers.  Somehow, people continue to deny this simple economic truth.  They come up with a myriad of excuses as to why labor markets are special and do not respond to supply and demand in the same way as a market for wheat or corn would.  This, of course, is false.

3.  Price ceilings create a surplus of demand.  Of course, the opposite affect is also true.  This one does not come into play as often, but could in terms of proposed regulations on CEO pay.

4.  In any transaction, both parties will desire to maximize their profits and minimize their expenses.  Capitalists, entrepreneurs, and business owners are universally vilified as greedy.  They are decried for their desire to lower wages whenever possible, and keep as much income for themselves.  Of course, the average minimum-wage employee behaves in the exact same way.  They would, and often do, seek to maximize their wages by any means possible.  Conversely, they also celebrate when economic conditions allow them to pay less for the things they buy.  The only difference is that the capitalist and the “common man” are on different sides of various exchanges.  The owner of a gas station profits most when the price of gas is high, and the cost of providing gas (part of which is represented in the salaries of gas station employees) is low.  Meanwhile, the gas station employee would prefer that the price of gas be very low (because he is a consumer of gas) and that his wages (which represent a cost to the gas station owner) be very high.  Both parties are primarily concerned with their own self-interest.  Yet the owner is seen as villainous, and the employee is seen as a victim of oppression.

As an extension of this, consider the question of outsourcing.  It is considered morally despicable for an employer to “ship jobs overseas.”  They are presumed to be excessively greedy and without compassion.  Yet, the reason the employer does this is because Chinese labor is cheaper than American labor.  Outsourcing allows him to minimize his costs.  Of course, the “common man” who decries outsourcing, engages in the exact same behavior anytime he purchases manufactured goods that were produced in China.  Consumers universally seem to prefer low-cost Chinese goods to high-cost American ones.  Yet somehow, this is not considered reprehensible behavior.  While the leftists may protest Apple headquarters and criticize the executives for purchasing low-cost Chinese labor, nobody ever thinks to protest an Apple store and criticize the customers for purchasing low-cost Chinese manufactured goods.  Why the lack of consistency?

Many contentious political issues of our day are excessively muddled by statist rhetoric designed to obscure basic economic truths.  The fact of the matter is that in terms of economics, the exchange between a business owner and a laborer is no different than a baker exchanging bread for a farmer’s apples.  The basic economic laws apply equally to both transactions.  Seeing the labor markets as “just another market” will do much to increase one’s understanding of why free markets are beneficial to the welfare of humanity as a whole.

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About Dude Where's My Freedom?

My name's Matt and I love Freedom.
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3 Responses to Labor Markets Aren’t Special

  1. Pingback: Why Not “Equal Pay for Equal Goods?” | Dude, Where's My Freedom?

  2. Pingback: Health Care Markets Aren’t Special | Dude, Where's My Freedom?

  3. Pingback: Economists Oppose Immigration Because “Dey Took Our Jerbs!” | Dude, Where's My Freedom?

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