It’s surprising how frequently people want to “fix” prices because they aren’t aesthetically pleasing.
- Activists around the country are urging us to “#FightFor15,” meaning “fight for a $15 per hour federal minimum wage.
- Birmingham leaders want a higher minimum wage.
- Seattle recently implemented a minimum wage increase and, to their credit, commissioned a team of scholars to evaluate the policy carefully.
- Some activists in California herald the success of their push for a $15 per hour minimum wage and others are renewing calls for rent control in Silicon Valley.
No one can argue that low wages and high rents can be devastating to many within the United States. However, government price control policies like minimum wage laws and rent control often hurt the people they’re supposedly helping.
You’ve probably heard this assertion before, as well as a few reasons behind it: unemployment, shortages, etc. What I’m going to do is demonstrate why price fixing policies are bad even for those who seem to have directly benefited from them.
Minimum Wage Laws: How the Winners Win
Let’s address minimum wage laws first. The first problem with them is that they create unemployment among those who can least afford it.
One could argue, however, that the minimum wage is a good social policy because while it creates some unemployment, it transfers gains from trade from firms to workers. Yes, workers might have their hours cut or we lose some existing jobs, but the trade-off is that some workers earn higher wages. Some lose, but some win.
However, people want to work more hours than firms wish to hire at the minimum wage. Potential workers will compete with one another for these employment opportunities not by offering to work for lower wages—that’s precluded by law—but by offering to accept lower benefits, less schedule flexibility, and fewer workplace perks (think “free” meals and uniforms for fast food workers).
Another point worth noting: Just as airlines offered larger, more comfortable seats and fancy meals when they were not allowed to compete with one another by lowering prices, workers might buy nicer clothes or get more haircuts or earn more degrees than they otherwise would. The simplest way to compete for artificially scarce employment opportunities is to try to outwit others in the employment office.
Price Ceilings: The Consequences of Fighting for Low Prices
Similar logic applies to price ceilings like rent control and laws against price-gouging. If demand surges (a lot of people want to buy a particular product), the price isn’t allowed to rise. Instead we get shortages: the quantity people want at the controlled price is greater than the quantity people are willing to supply. At the controlled price, this means a lot of people have to do without.
Just as some people might argue that an inefficient minimum wage is a good policy because it means that some workers are earning higher wages (even though others are shut out of the labor market), some might argue that price controls are acceptable because it means that those lucky enough to get the price-controlled goods will pay lower prices.
Once again, however, low-quantity supplies combined with high-quantity demanded means that people will compete with one another in ways other than by offering higher prices.
Imagine people waiting in a long line for price-controlled gas. The cost they bear is the income they could earn by doing something besides standing in line. If the opportunity cost of your time is $10 an hour and you wait for four hours, then you are effectively paying $40 for whatever you’re getting.
As the economist Michael Munger has pointed out that price ceilings don’t change how much you pay, they just change how you pay.
Rent Control: Jumping Through Hoops to Get an Apartment
Think for a minute about rent control, which is one of economists’ best examples of public policy working to the detriment of its supposed beneficiaries. People cannot compete with other prospective renters by offering higher prices, as they are legally prohibited from doing so.
Changing what people are allowed to pay will not change what they are willing to pay.
Someone who is willing to pay $1000 per month for an apartment but who is only allowed to pay $750 can come up with a lot of creative ways to make up the difference. Note that she needs to do so because she is competing with a lot of other people who are also only allowed to pay $750.
- Perhaps there’s a far larger security deposit with deductions taken out for the most trivial offenses.
- Maybe she agrees to pay $750 for the apartment but then must agree to pay an exorbitant amount to rent furniture from the landlord.
- Or maybe she just waits, trying to beat the other renters in the equivalent of a staring contest.
In any case, she is compelled by circumstance to invest time and energy searching harder for an apartment or finding creative ways to get around the restrictions. Since she’s not producing any new goods and services or enjoying any additional leisure as a result, she’s worse off, as is the rest of the world.
Economics can be counterintuitive and abstract, but it is also essential for understanding how the world works—especially when we’re trying to make policies in the spirit of good intentions.
For a more detailed discussion of minimum wages (with graphs!), download this PDF I prepared for my introductory econ students.