Minimum Wage and False Assumptions →
Submitted By Lyszandor
I thought I would throw out, again, as regards the recent minimum wage discussion, that whether or not Austrian predictions will occur depends on how closely Austrian theoretical assumptions actually hold. One of those theoretical assumptions is perfect competition: if people don’t think they’re being paid properly, they can go somewhere that will. But in reality, in at least some cases, the labor market is at least somewhat monopsonistic—a term which refers to a situation where one buyer faces many sellers (as opposed to monopoly, where one seller faces many buyers). In Monopsony in Motion, economist Alan Manning shows that near–monopsonistic conditions hold more often than not, since it is time–consuming and costly for workers to change jobs, and most have reasons (proximity to family, etc.) to stay within a limited geographical area. Now, if this is true (and Manning makes a very strong case), then it is easy to explain how a minimum wage could in theory raise both wages and employment, as it has occasionally been found to do.
Austrians do not assume perfect competition because that would require perfect, fully informed, always-rational individuals - which Austrians very clearly understand does not describe the entirety of humanity. These are classical and neo-classical assumptions (beginning most famously with Adam Smith) that many Austrians denounced. Early Keynesians assumed certain markets produced perfect competition. Hayek and Mises regularly denounced central planning for the very reason of man’s fallibility - so why would they assume infallibility in competition? Kirzner wrote at length of the wrongness of the assumption of perfect knowledge and perfect competition. In fact, it is often the imperfections and inefficiencies of a free market that hone it into greater efficiency - after all, as Mises famously said, ”The market is not a place, a thing, or a collective entity. The market is a process.”
I’m not sure what posts you reference as having recently discussed the minimum wage, but here’s my stance: minimum wage - in theory and in practice - leads to greater unemployment.
