Carpe Diem

The minimum wage and the ‘Fallacy of the Special Case’

Don Boudreaux at Cafe Hayek poses some questions for his fellow economists:

What would the bulk of economists predict to be the result(s) of each of the following government actions?

1. An effective price ceiling on retail gasoline?

2. An effective price ceiling on residential rental units?

3. An effective price ceiling on condoms?

4. An effective price floor on cable-television subscriptions?

5. An effective price floor on hamburgers at fast-food restaurants?

6. An effective price floor on low-skilled labor?

I strongly suspect that a large majority of economists would predict shortages for numbers 1 through 3 (and, in addition, some other consequences – such as queueing or falling product quality). I strongly suspect also that a large majority of economists would predict, for numbers 4 and 5, surpluses – at least of the amounts that producers would be willing to sell at those ‘floored’ prices if they believed that consumers would buy those high quantities. These economists would likely also agree that the actual amounts of cable-TV subscriptions sold, as well as hamburgers at fast-food restaurants sold – that is, the quantities of these items that actually find their way into the homes and bellies of consumers – would be less than the amounts that would find their way into homes and bellies if the government did not interfere with the market’s pricing process.

But I’m less confident today about what most economists would say about number 6. It is, though, a deep mystery. There’s nothing at all about the service identified in number 6 (save for the fact that it often serves as a convenient political mascot) to distinguish it in any economically essential way from the five other goods or services identified above.  I, for one, will never understand the readiness that so many economists today seem to have to regard low-skilled labor as being uniquely exempt from the economic reality and laws that are recognized to apply nearly everywhere else.

MP: I completely agree with Don that it’s a deep mystery why some economists will exempt the unskilled and low-skilled labor market from the well-established, universal laws of supply and demand. We could excuse politicians and the general public who support raising the minimum wage for their economic illiteracy, but what excuse do economists have when they have been formally trained in price theory?

Although I can’t explain Don’s mystery, let me at least propose a name for this misguided form of economic thinking (economic amnesia?) that allows for exceptions to economic reality and the market’s pricing process: the Fallacy of the Special Case.

That is, to exempt the labor market for low skilled and unskilled workers from the laws of supply and demand is to fallaciously create a “special case” for that market when in reality that “specialness” cannot be supported by the theoretical or empirical evidence. As Don correctly points out above, there is really nothing “special” about the market for unskilled labor that “would  distinguish it in any economically essential way from the five other goods or services identified above.” In other words, the Law of Demand and the Law of Supply are economic laws that apply universally, without exception, and without any “special cases,” in the same way that the Law of Gravity applies universally, without any exceptions or special cases. To allow for exceptions or special cases to market fundamentals and economic reality is faulty and fallacious thinking.

Here are some other examples of the Fallacy of the Special Case:

1. After a natural disaster like a hurricane, flood, tornado or earthquake, price controls to prevent “price gouging” are often imposed because those major disruptions are somehow a “special case” that justify temporarily ignoring economic fundamentals and market pricing.

2. Tickets to concerts or sporting events are a “special case” that justify laws and price controls that prevent those tickets from being sold above face value (i.e. “ticket scalping”). In contrast, other goods like old coins that sometimes sell above face value, new cars that sometimes sell above their sticker price, bonds that sell above their par (face) value, and houses that sell above their listed price are not “special,” and there are therefore no laws against “coin scalping,” “car scalping,” “bond scalping” or “house scalping.”

3. Rental apartments in some cities like New York City, Berkeley, Washington, D.C., and Santa Monica are a “special case” of housing that justify special treatment in the form of rent control laws that exempt rental housing from the economic laws of supply and demand. Other housing options like condominiums, homes, co-ops and hotels are not special, and are therefore not subject to any special exemptions from economic reality and market pricing.

Bottom Line: The real danger of the Fallacy of the Special Case is that those allegedly special exceptions to economic fundamentals almost always result in legislation that is based primarily on political, and not economic, considerations – minimum wage laws, price gouging laws, ticket scalping laws and rent control laws. Ignoring economics and/or attempting to circumvent market pricing by allowing for some markets or goods to be “special” might make sense politically, but the legislation that follows makes us much worse off economically, makes us all poorer, and lowers our standard of living. Politicians and the general public can be excused for falling for the Fallacy of the Special Case and supporting price controls like the minimum wage that make us worse off, but shouldn’t the economics profession really know better?

53 thoughts on “The minimum wage and the ‘Fallacy of the Special Case’

  1. The two main arguments I’ve heard for number 6 are as follows:

    1) Monosopony
    2) Benefits outweigh the costs

    Monosopony seems unlikely considering there are 8.8 million firms in the United States

    If the benefits outweigh the costs (the increase in demand from those who keep their jobs outweighs the costs to those who lose it) is also weak. Why isn’t that thinking then applied to other markets? Why do so few economists insist that, despite resulting gasoline shortages, price caps on gasoline bring such benefits to those buyers lucky enough actually to get gasoline at the lower, capped price that the losses suffered by the less-fortunate would-be buyers are swamped by the benefits of the more-fortunate buyers?

      • Never is. It’s either about hope (“Well, this could happen” or “This may happen”), radical self-deception (“This will work if we assume away all the factors that make it not work!”) or just pushing some political agenda.

          • ron-

            precisely. it’s actually just adherence to another law of economics:

            if a product is in demand and people are willing to pay for it, firms and individuals will seek to provide it and profit.

            in this case, the product in demand is political white wash. you have politicians who want to push tariffs or min wages for narrow electoral reasons. they do not care if it does overall harm, but they must appear as though they do, so they pay economists to provide a pretext for such action by performing flawed or falsified studies that deliberately distort their results.

            economists that do this get added to political councils, get grant money, get hired by think tanks, etc.

            he who pays the piper calls the tune.

            this is not science, it’s propaganda masquerading as science to fool the unwise and arm the disingenuous.

          • morganovich

            this is not science, it’s propaganda masquerading as science to fool the unwise and arm the disingenuous.

            Sadly there seems to be an endless supply of both.

  2. The layman’s term for The Fallacy of the Special Case is “Wishful Thinking”. It is the same thing that drives people to buy lottery tickets when the expected return is negative. It is also what allowed Carmen Reinhart to sell a lot of books titled “This Time It’s Different”.

        • You are being satirical right now, right? It’s hard to tell via the internet when someone is joking and when they are not.

          I’d just find it hard to believe someone who has studied economics would make such an obviously false claim that wages are not prices. I mean, it’s taught in economics that wages are the price of labor. Given that this is hardly a point of contention among the differing economic schools of thought (in fact, this is a basis. Keynes said so. Hayek said so. Krugman says so. Mises says so. Freidman says so. Every econ textbook ever has said so), I can only assume that you are joking around here, right?

          • Jack, I find it hard to believe someone over 16 and living on earth doesn’t know at least one difference between wages and prices.

            Nominal wages = real wages and inflation (or change in prices). If nominal wages rise 10%, prices won’t necessarily rise 10% (for reasons I stated before).

            I’ve shown an increase in price will reduce demand and an increase in wages can increase demand, etc..

          • Believe it, Jack, the troll is deadly serious. There is no amount of logic or reason that will convince him otherwise. The demand curve for labor is upward sloping, unlike any other scarce resource in the universe, and that’s all there is to it.

          • Economics is just supply and demand to the real trolls here like Ron, who has a hard time pounding round pegs into square holes. He doesn’t have a clue of the extent of his ignorance. LOL

          • Oh, I get it. You’re trying to coin a new phrase! That’s great and all, but I think you’ll have a hard time doing it here, in the comments section of an economics blog. You’d be better off, I should think, writing a paper on it and getting it published somewhere. With all due respect, I don’t think there are many textbook authors out there who skim the comments sections looking for material.

            But I still think you’ll face an uphill battle. You’re trying to change the lexicon and fundamental understanding that has been around since day 1. It can be done, but expect resistance from all sides! I mean, this is kind of like trying to say friction is not a force because it is not air resistance.

            Best of luck to ya, bro! Let me know how it all turns out.

          • I’m sorry, I looked through that entire thing, but I don’t see anyone saying that wages are not prices.

            Granted, I didn’t read each paper individually, but I just don’t see anything here to support you trying to change the well-established definition of a wage as the price of labor, either in the real sense or the nominal.

          • Jack Harkness,

            You are wasting your time having any sort of economics discussion with PeakTrader. That you waste your time wouldn’t bother me. However, by rewarding PeakTrader with attention, you encourage him to waste more of our time.

          • John Dewey,

            You’ve wasted your time and other people’s time, since you’ve been on this blog.

            You should go somewhere else, where there is no economics.

            I’ve shown you, and your sidekicks, wages don’t equal prices, which you never proven wrong.

            Playing politics or calling people names is not proof.

          • I already explained how the (positive) income and multiplier effects may be stronger than the (negative) employment effect raising the minimum wage (e.g. the very small employment effect), perhaps, up to $15 an hour: how workers making up to $25 an hour will benefit greatly (e.g. comparing low marginal propensity to consume to high marginal propensity to consume), while workers making over $25 an hour will lose little (e.g. from faster economic growth): how it’ll somewhat offset the structural problems in the economy built-up over several decades (e.g. idle capital in a saving glut), etc..

            However, it’ll also make firms much more efficient in production (weak firms will fail and stronger firms will take their market share and also benefit from the increased demand). Real example:

            There was a fast growing firm that was also very disorganized, because it was so busy. One of the recommendations was raising the starting wage from $11 to $13 an hour for all factory workers. However, management decided that was a bad idea. One reason was there were always plenty of applicants for $11 an hour, over the prior five year period, and of course, there was concern profits would fall, substantially.

            However, roughly six months later, management raised the starting wage to $13 an hour and something miraculous happened.

            Turnover rates dropped like a rock, overtime was almost completely eliminated, including six day weeks, injuries fell dramatically, hardly anyone called in sick, damage to equipment and products almost disappeared, including steep declines in reject rates, quality rocketed, moral was lifted, management no longer had to spend enormous time interviewing workers, with related paperwork and training, supervisors no longer had to cover for sick workers, to do their jobs, and had time to actually do their work, and profits soared.

            Experienced workers who rejected the job when they learned it was $1 or $2 less than they were willing to work for took the jobs at the higher rate. Management had much more time to manage and supervisors had much more time to supervise. So, operations became much more organized and efficient.

          • Peak,

            I don’t care about minimum wage. You guys can banter about that until the cows come home, for all I care.

            Now, I am largely self-educated in the matter of economics. I am a military man, by trade (Captain Jack Harkness, at your service). But in every textbook I have ever read, in every piece of literature I have ever read, in the few papers I have tried to read, I have always heard of wages as the price of labor. Yes, you can have your real prices (inflation adjusted) or your nominal prices (non-inflation-adjusted), but they are all still prices.

            Literally, all I am saying is that you are going to have a hard time making your argument when you use definitions that no one else uses.

            You may be right about minimum wage. I don’t know (frankly, I haven’t seen anything conclusive one way or the other). But when you come to a clearly-free market oriented blog, begin your argument with something that radically changes the convention (in this case, changing the definition of wages), claims this change is why they are not subject to conventional laws, and then not back it up with anything, you are going to face resistance. You’d face resistance from the pro-minimum wage group, too as their arguments seem to fall mostly on the “one buyer” side of things.

            Your hypothesis that “The fallacy is assuming prices equal wages” may be right, but you’ve not really done anything to prove this, or even suggest that it’s true. And, quite frankly, you’re beginning to insult me by constantly changing the topic rather than answering my questions. Please do not insult me and answer my question.

          • Jack, it’s the same topic and I haven’t changed any definitions.

            I’ve shown the relationship of wages to other variables.

            My statements are supported by mathematical and empirical models, along with the labor economics literature.

            Every economist I talk to, on this subject, completely understands what I’m saying, and acknowleges it’s orthodox economics.

            I stated before, wages are prices only in one dimension, not in a general equilibrium model.

            And, I’m not anti-free market. There are market failures and inefficiencies.

            I’ve shown laissez faire is suboptimal, and labor standards can move the economy towards optimization.

          • jack-

            peak is as serious as he is stupid.

            there is literally no arguing with him as he cannot grasp basic logic and makes endless appeals to debunked authority (including, most hilariously, his own) by calling it mainstream then resorts to name calling and slinks off when he inevitably gets cornered.

            he’s a troll, a liar, and a fool.

            i would be pleased if you would join our outright peak embargo so that we can avoid cluttering up thread after thread with his endless inanity.

            he’s either a pathological liar or one of the most extreme cases of cognitive dissonance i have ever seen.

        • For Christ’s sake, you are impossible!

          I thought you were a jerk to other people because they are a jerk to you, but now I see you are just a jerk.

          No, no other economist says wages are not prices. None.

          You are arrogant! No one would say this is orthodox! Go away!

          Lie to yourself if you have to but do not dare to lie to me!

          • Jack, are you Morganvich?

            The last sentence in your prior comment was:

            “Please do not insult me and answer my question.”

            I did both.

            You not only insult yourself, you attempt to insult the American mainstream economics profession, and labor economists in particular.

            When you figure out the difference between wages and prices, let me know.

          • Wages are the price of labor.

            When you realize that, let me know.

            Until then, we have no more business.

          • Didn’t take PeakTrader very long to earn the deserved respect of a new acquaintance, did it?

          • The man is a f-ing moron. No wonder why you all treat him with contempt.

            He states something that even I, a guy with no formal training in economics, knows is wrong (“The fallacy is assuming prices equal wages,”) then claims it is “orthodox” and “Every economist I talk to, on this subject, completely understands what I’m saying, and acknowleges [sic] it’s orthodox economics,” and continues to “support” his obviously wrong claims with “evidence” that has nothing to do with anything.

          • John Dewey,

            Jack isn’t new. He pretends he’s “civiilized,” and when he hears exactly what he doesn’t want to hear, i.e. rigorous mainstream economics that contradicts his beliefs, he explodes. LOL.

            He has the exact pompous attitude, low character, and plays the same cute little games as Morganvich.

            His reactions to my statements are funny. He’s just a punk, like you.

          • To the ironically names “Peak Trader”:

            Let’s ask mainstream economists what wages are, shall we?

            “Wages: the Price of Labor” -Greg Mankiw, Principles of Microeconomics, 6th Ed Pg 385

            “Economics 101 tells us to be very cautious about attempts to legislate market outcomes. Every textbook — mine included — lays out the unintended consequences that flow from policies like rent controls or agricultural price supports. And even most liberal economists would, I suspect, agree that setting a minimum wage [price of unskilled labor] of, say, $20 an hour would create a lot of problems.” -Paul Krugman, “Raise That Wage”, NYT 17 February 2013 (he later goes on in other editorials talking about the price of labor as wages, such as his column “The Price is Wrong.”

            So, if the author of the most popular textbook in America and the author of the most popular economics blogs in America both say wages are the price of labor (and they are of differing political views), then I’d say the mainstream economic thought is that wages are prices.

            How many mainstream economists that you can quote would agree with you that “wages are not prices?”

          • In the context of a partial equilibrium model, wages are prices, cetrius paribus and under certain assumptions.

            In the context of a general equilibrium model, wages don’t equal prices, which I’ve shown above.

            It makes no mathematical sense to exchange prices for wages or vice versa in many of the relevant equations in econ grad school.

            Basically, you’re saying something like a bear is black, and I’m saying it’s also a mammal, and then you say no, it’s black. So, it can’t be a mammal too.

    • You don’t have to “embrace” American mainstream economics, i.e. NeoClassical economics. You can embrace Austrian economics or Marxism instead.

      Some people on this blog cling more strongly to their ignorance when their beliefs are challenged.

  3. The fallacy of the special case also applies to health care. The supply and demand for health care is little different than the market for houses, cars, entertainment, vacations, iPhones, computers, refrigerators, etc.
    Bill

  4. One only has to look to Krugman for an explanation to this issue.

    In 1998 he claims that advocates of higher minimum wages “very much want to believe that the price of labor–unlike that of ….Manhattan apartments” are not subject to the usual laws of supply and demand whereas in his 2013 piece, where he supports an increase in minimum wage he asserts that “workers aren’t… Manhattan apartments; they’re human beings” and therefore not subject to the usual laws of supply and demand.

    Hope that clears things up for you

    http://bluecravat.blogspot.com/2013/09/does-krugman-know-meaning-of-word-modest.html

    • I’ll clear it up for you:

      In 1998 Krugman wrote:

      “So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. This theoretical prediction has, however, been hard to confirm with actual data.”

      And what he wrote in 2013:

      “Now, you might argue that even if the current minimum wage seems low, raising it would cost jobs. But there’s evidence on that question — lots and lots of evidence, because the minimum wage is one of the most studied issues in all of economics. U.S. experience, it turns out, offers many “natural experiments” here, in which one state raises its minimum wage while others do not. And while there are dissenters, as there always are, the great preponderance of the evidence from these natural experiments points to little if any negative effect of minimum wage increases on employment.”

      You’re a bigger political hack than Krugman (which is saying something). Of course, Krugman is also an excellent economist, while you’re just an economic lliterate.

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