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Salam’s Criticism of Puzder Misses the Point

Sunday, February 19, 2017 6:30
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At EconLog, Scott Sumner rightly calls out Reihan Salam for getting the economics wrong in objecting former Labor-secretary nominee Andy Puzder.  The specific target of Scott’s criticism is this passage from Salam:

Puzder has also been an influential critic of minimum-wage hikes and overtime regulations, warning that such measures would force employers to replace low-wage workers with machines. He seems animated by the Luddite conviction that productivity-boosting automation is necessarily a bad thing, despite the fact that rising productivity levels are essential to wage growth.

After offering the above quotation from Salam, Scott goes on to argue eloquently against the “lump of labor” fallacy that he sees in Salam’s objections to Puzder.

But it strikes me that there’s a more direct objection to this criticism leveled by Salam against Puzder.  Here’s a comment that I left at EconLog:

Perhaps I missed it in the comments and in Scott’s post, but isn’t there an even more straightforward criticism of Salam’s quoted objection to Puzder? I would respond to Salam by saying:

Yes, real wages rise as worker productivity rises. And yes, mechanization generally raises worker productivity. And yes, the sorts of machines that employers would put in place in response to minimum-wage hikes would raise the productivity of the workers who remain employed. But to admit all of this is to miss Puzder’s objection to the minimum wage – namely, it puts some workers out of jobs. That is, Puzder points to the option to mechanize in order to help people understand that employers have options other than simply keeping the same number of workers and paying them more when minimum wages rise.

Put differently, Puzder points to the mechanization option to help explain why in reality raising minimum wages does indeed destroy jobs for some low-skilled workers. For Salam to infer from this explanation a Luddite fallacy is, well, fallacious.

To point out (as Puzder correctly does, and as many others do also) that artificially raising the price of labor relative to capital will cause employers to substitute, at the margin, out of labor and into capital – and to point out further that this induced substitution is one reason why it is fallacious for minimum-wage proponents to insist that minimum wages cause no job loss – is not to evinced a fear of mechanization and even less a Luddite fear.

Salam seems to suppose that all mechanization is good because it improves the productivity of workers who remain employed.  Salam is mistaken.  Given supplies of labor and of capital, there is at any one time – and for each individual firm and plant – an optimal degree of mechanization; there’s an optimal ratio of capital to labor.  (See Kevin Erdmann’s comment.)  The minimum wage causes the capital-labor ratio to be higher than it would be otherwise.  The higher ratio is now optimal for employers, but only given the minimum wage; it’s not optimal given the supply of labor and of capital.

This point is worth repeating: the minimum wage distorts the price signal, causing the capital-labor ratio to be excessively high given available supplies of low-skilled labor and of capital.  For Salam to object to Puzder’s pointing-out this fact is akin to objecting, say, to someone who opposes a proposed requirement that each and every homeowner in New England buy a heavy-duty snowblower.  While the productivity of each worker using a snowblower would thereby rise, homeowners in neighborhoods with lots of teenagers willing to shovel snow would become less likely to hire these teenaged snow-shovelers.  Many snow-shoveling jobs would be destroyed.  And pointing-out this fact is hardly evidence of Luddism.



Source: http://cafehayek.com/2017/02/salams-criticism-of-puzder-misses-the-point.html

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