Reply To: West rich because Third World poor?


Social phenomena are complex. That’s why in economic theorizing we start with Crusoe and build progressively toward situations that capture the features of the circumstances we wish to analyze. The free market is an interim step in the analysis of such circumstances. It is the necessary ground upon which the theory of government intervention rests.

If the circumstances we wish to explain are the difference in wages for textile workers in Vietnam versus America and how those wages will change over time, then we start with what would happen in the free market. After that we can add the complications of government intervention that are relevant to explain the circumstances we’re interested in.

An effective, general, minimum wage law in America will make legally unemployable any worker whose productivity is less than the minimum wage. The workers who remain employed still have their wages determined by their DMRP. Depending on the line of production, a worker’s DMRP may be different after the imposition of the minimum wage as capital investment is reallocated away from low wage areas toward high wage areas. Minimum wages do not contradict the market principle of wages being determined by DMRP they simply modify the level of worker productivity.

Whether or not this wage effect is significant in areas we are studying, like textile workers’ wages, is an empirical question. If a textile worker in America is making $20 an hour and the minimum wage is $7.25, the effect is probably insignificant. But, again, this is an empirical question that one needs to investigate to answer correctly.

There is also the question of the underground economy. If American entrepreneurs are willing to illegally hire textile workers (and use less capital intensive production processes) at wages below the minimum wage, then the minimum wage would have only minor effects. Every so often a story about such production will appear in the L.A. Times. But, again, this is an empirical question that one needs to investigate.

The effect of legally privileged unions is different than that of minimum wages. Minimum wages cause unemployment of workers with the lowest productivity. Unions exclude workers in one industry, raising DMRP and wages there, and push workers into non-union industries, lowering DMRP and wages there. If workers in the textile industry are unionized, then it is relevant for our investigation and if they are not unionize, it is largely irrelevant. But, unions do not raise wages generally throughout the economy.

Unionized labor makes up less than 10 percent of the private labor force in America. It’s likely that their effect on international wages differences is not that great. But, again, one would have to do the empirical work to find out in each industry.

There are also government restrictions on capital flows, different tax laws, the security of private property, and so on that would have to be considered in a full analysis.