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Monday, December 10, 2012

Employer of Last Resort

Businesses are subjected to lots of constraints such as competition, regulation, and taxes for example.  Each of the constraints renders certain activities either unprofitable or unable to provide an adequate return on investment to be viable.  That's how the world works and it's no big deal.

From the perspective of a business, a minimum wage law falls in that category.  It makes certain activities not worth doing because the value that potential employees could provide does not provide an adequate return after taking the wages required by the minimum wage law into account.  Again, no big deal, just another constraint.

However, from the perspective of an unskilled and inexperienced person who cannot provide adequate value to justify being paid the minimum wage, minimum wage laws are egregiously unfair.  The minimum wage law says to that person, "you may not work for anybody, any time, under any circumstances since no rational business person can justify hiring you at the required wage".

One way to rectify this situation is to have the government offer employment to all takers at or somewhat below the minimum wage.  That way the incredible imposition of the minimum wage law on the unskilled worker is mitigated by providing employment in the public sector.  The concept is that the government becomes the "Employer of Last Resort" (ELR). 

As you can probably tell, I personally am strongly opposed to minimum wage laws because of their severe oppression of young, unskilled workers.  However, given that we're probably stuck with them, having an ELR sounds almost reasonable to me.  There have been some experiments with this sort of thing (for example, one in Britain), and the results haven't been terrible.

Nonetheless, I think the concept is very dangerous.

The problem I have with it is that setting it up puts us one very short step away from all out communism.  All a regime has to do once an ELR mechanism is in place is to begin raising the minimum wage.  This would cause layoffs requiring an expansion of the ELR program.  Further incremental increases in the minimum wage would drive even more workers out of the private sector into the ELR program.

The ELR program would need capital equipment, other assets, and an ever growing management structure to successfully employ the workers and would end up inefficiently producing ever more goods and services.   Eventually, this would drive the vast majority of companies out of business and we'd all end up working for the government and that'd be the end of history.


Hey Skipper said...

How about eliminating the minimum wage entirely, period?

I don't know much about the EITC, but it can, or could, make up any difference.

That would mean all taxpayers (well, okay, 53% of them) would be subsidizing their wages.

But paying for activity instead of inactivity just has to be a heck of an improvement.

Bret said...

I would eliminate the minimum wage.

EITC is a possibility and less dangerous than ELR, but lots of opportunity for fraud, I think. For example, work part time and then work a cash (under the table) job. Maybe the total amount of money involved in the various fradulent schemes might stay low though.

Anonymous said...

The big problem with EITC is that it creates a high marginal rate on income for low income people.

erp said...

Bret, you forgot the s/off at the end of your post above.