June 4, 2007

Yglesias's fallacy

Matthew Yglesias, who is normally quite good, has a terrible post up at his blog on the Atlantic Monthly's website. He argues:

Say unemployment is low in the county where I run my business. That means a tight labor market. That means valued employees asking for higher wages. Wages above the prevailing rate. And I need to give it to them. And that's how working people obtain prosperity in this country. Well, welcome to the United States of Guest Workerdom where if you ask for a raise, I just tell you "no" and if you quit I import a foreign worker to do your job at the old old (i.e., prevailing) rate. If my business does well, I'll expand my operation and hire more and more people, but no matter how tight the labor market gets I'll never to raise wages since I can always complain that nobody wants to do it at the prevailing rate.
Ugh...First of all, his logic is false. If a worker asks for a raise in a tight labor market its not like the firm has to give them the raise. There are substitutes to labor other than labor, namely capital. If I'm a burger flipper at McDonald's and I demand to get paid $20 an hour, even if there is no one else who can replace you at your original wage, I'm not going to pay you that if its cheaper to buy a burger flipping machine.Of course, if all of a sudden burger flipping machines became insanely cheap, it would put a lot of burger flippers out of business, but in doing so it would make everyone better off. Why? First, because burgers just got a hell of a lot cheaper. That's a lot of consumer surplus. Second, you just created a ton of skilled, high paying jobs in the burger flipping machine industry. That means higher wages and utility for everyone.The same scenario plays out with cheaper unskilled labor. Sure some lose their jobs, but prices go down and more higher paying jobs are created than would otherwise.Second, immigrant labor isn't going to affect everyone's wages. It is only going to effect the wages of the sorts of jobs they can supply, namely unskilled labor. Last time I checked it wasn't the goal of the government to allow the same sort of increasing returns to unskilled labor that skilled labor gets (god that would distort the hell out of people's labor and education decisions). Now that is not saying that we, as a society, should just let unskilled unemployed people fend for themselves. Less distortionary government programs ought to exist to help them, but it is just nonsense to massively reduce economic efficiency in the country (and to reduce everyone's utility from reduced prices) in order to have businesses increase the wages of unskilled labor in the same way they do skilled labor.Update: In a shocking turn of events, Ezra Klein actually disagrees and makes some good points. Go check it out.