Quote of the Day: The Difference Between Minimum Wages and Free Markets on Unemployment

Professor Don Boudreaux at the Cafe Hayek provides an awesome explanation: (bold mine)

(1) The unemployment caused by a minimum wage is permanent, in the sense that even in theory it will always exist. Unlike the unemployment that arises when trade becomes freer, the unemployment that is caused by minimum-wage legislation is not the result of transaction costs and other frictions that prevent workers who lose their jobs from finding alternative employment immediately. Put differently, in principle if not in practice, no workers need be rendered even temporarily unemployed by freer trade. In contrast, the minimum wage necessarily (in the absence of genuine monopsony power) causes some workers to lose their jobs and causes these destroyed jobs to remain destroyed for as long as the minimum wage remains in place.

Put in yet another different way, unlike with free trade, the creation of unemployment is not a temporary or incidental consequence of minimum-wage legislation. Lasting job destruction is part of the essential logic of the minimum wage. While in principle, and over time also in practice, free trade does not lead to permanent job losses, job losses caused by the minimum wage, in addition to springing from the very logic of the minimum wage, are indeed permanent.

Second, unemployment caused by free trade is, in reality, simply a particular instance of unemployment caused by changes in the pattern of economic activities. In both principle and practice this unemployment differs not a whit from the unemployment caused by, say, consumers coming to prefer more chicken to beef, more outdoor recreation to indoor entertainment, more wine to whiskey, or living in Arizona to living in Michigan. That is, the unemployment caused by freer trade is inseparable from the very logic of a market economy driven by consumer sovereignty and competition. Far from free trade being an exception to the rules of a market economy, it is protectionism that is an exception. The minimum wage, in contrast to free trade, is emphatically not part of the logic of a market economy; like protectionism, the minimum wage is a suspension of, or an interference with, the logic and principles of a market economy and of consumer and worker freedom. If this fact means nothing else, it means that free trade (like any competition-driven change in the pattern of consumer spending) enjoys a presumption of legitimacy while the minimum wage, which is a restraint on the operation of the market and on voluntary contracting, operates under a presumption of illegitimacy.

Third, economic theory and empirical evidence strongly suggest that the ill consequences of the minimum wage are not randomly distributed. These ill consequences are suffered only by low-skilled workers and, even among low-skilled workers, disproportionately by those who are the least advantaged (for example, by inner-city blacks rather than by suburban whites). The downsides of free trade, in contrast – and in addition to being only temporary and part of the larger logic of the real-world market – are much more random. These ill consequences are not more likely to fall only on low-skilled workers, or on blacks rather than whites.

Politics: It’s Not About Jobs But About Income or Value Producing Opportunities

Speaking about the controversial political issue on employment or jobs, I’d like to share my experience.

Technically I am jobless; that’s because I don’t have an employer who pays me in salary. I also don’t run a formal business or enterprise, so I am not a business person.

Yet to survive, my livelihood depends on a mishmash of several accrued tasks; particularly free lance sales agent work for clients who trades the Philippine equity market, my own personal investments or trades, provides consultancy work for a broker firm via newsletters and doing this blog (where I earn a smidgen from sponsored ads).

In other words, while I am technically unemployed (if measured in wages), I have many jobs.

So the issue isn’t the lack of jobs- that’s because basically everyone can find something to do (like me)-but one of income or the willingness of someone to pay for service rendered and whose payment is acceptable to those providing the labor.

And here we find GMU's Professor Don Boudreaux arguments fundamentally valid and applicable, (bold highlights mine)

``The reason you refuse my offer of a (full-time!) job is because what you really want is not the opportunity to toil for someone else but, rather, the income that you can earn by toiling.

``No matter how prestigious the job, few of us are willing to toil unless we're paid to do so.

``The reverse, of course, isn't true. Nearly all of us are willing to be paid without having to toil for it.

``Only a moment of reflection is necessary to make clear that no society can survive if significant numbers of its denizens try living without working -- without producing. So the reverse course of action -- being paid without working -- is impossible to generalize. It's impossible to establish such a course of action as a general policy open to all.”

My comment:

Put differently, the politically colored issue of unemployment or the lack of jobs is essentially a diversion to promote entitlement "free lunch" privileges by means of interventionism.

Yet, interventionism precludes the elementary societal function that requires that we have to provide or produce what the markets needs or wants for us to be able to consume and survive.

Again Professor Boudreaux,(bold highlights mine)

``By speaking incessantly about "jobs" we lose sight of the above realities. What each person ultimately wants is not a job. What each person wants is income -- the ability to consume -- that enables ready access to a rich, and hopefully growing, array of goods and services.

``And in a society that affords widespread prosperity, income is attainable for each willing worker not by merely producing, but by producing goods and services that other people value.

``Rather than speak of "jobs," therefore, I wish that people who discuss economics would speak instead of "value-producing opportunities."

``Such a term is unquestionably awkward. But the clarity of thought that would be promoted by replacing "job" with "value-producing opportunity" would more than offset the cumbersome terminology.

``This change in word usage would make clearer that what people seek are not opportunities to toil. It would indicate more directly that what people want is maximum possible opportunities to produce value, for only by producing something that other people value will those other people pay a worker handsomely for his or her toiling.

``Substituting "value-producing opportunity" would also help expose the flaws in policies such as protectionism and government make-work programs. Such policies can indeed transfer wealth from society at large to people whose jobs exist only because government relieves them of the need to participate fairly in the market process. But such "jobs" clearly are not "value-producing opportunities" -- for the amount of value that such workers produce is less than they are paid.

``And no society can long survive by institutionalizing such unproductive policies on a widespread scale.”

My comment

As a final thought, interventionism via inflationism that essentially redirects resources from what is required by the market aimed at promoting the interest of a politically vested few leads NOT to more “value producing opportunity” or job based INCOME but LESS. That's because governments essentially don't create wealth, they can only tax and redistribute.

Yet we can’t expect an economy to become wealthy by simply having everyone to dig holes and fill them. Unfortunately, politicians, academic dogmatists and mainstream media tells us otherwise.

It's odd how deception can be construed and imbued as the truth.

Growing Finance Jobs In Asia: Recovery Or Bubble Symptoms?

The good news is that hiring is taking place once more again in Asia's financial sector.

chart from the New York Times

This from the New York Times, (bold emphasis added)

``Asia has already emerged more forcefully from recession than the United States and Europe, economic reports over the past month have shown. Now, that upturn here is starting — at least tentatively and in certain sectors — to feed into the job market. Hiring is starting to pick up again, recruiters and bankers say.

``Broad unemployment is still rising, a normal pattern even after economies begin to emerge from recession. But economists say that any early signs of job growth are a prerequisite for a more solid-based recovery — one in which more confident consumers, and not just huge government stimulus packages, can play a role in lifting the economy."

``Perhaps the most striking element in the new hiring: Almost a year after Lehman Brothers folded — roiling financial markets, spurring a remake of the banking landscape and feeding one of the worst recessions in modern history — it is the financial sector that is leading the way."

chart from stockcharts.com

The article didn't make any comparisons on the relative hiring rates on an industry basis.

Nevertheless, we can infer that the recent the recent spikes in the regional equity markets has had a significant influence on the emerging hiring dynamics in the region.
However, based on the FTSE Asian averages, unlike in the US where Finance has led the way, Asian Financials have had a mediocre performance on relative basis, where auto & trucks, technology and basic resources have basically assumed the role of market leaders.

Based on my understanding of the business cycles, if Asia's markets continue with its ascent over the longer period, with the same sectors leading the way, these industries would account for the long term production segment of the misallocation process whose financing would be facilitated by the financial industry. Of course, the finance sector would also cater to the consumer end.

Nevertheless the transitioning roles of the business cycle could be in play from which could signify as the initial symptom of an emerging bubble.