(L120 & 125) The Broken Window Fallacy: Minimum Wage Requirements

Why wouldn’t someone voluntarily offer you a job at twice today’s minimum wage?

Story time! Let’s say that a small business opens up selling handmade jewelry and other goods in the middle of a New Hampshire town. Let’s also say that the current minimum wage in New Hampshire is $10.00 an hour. At this rate, the business owner can really only afford to hire 5 employees (in total). So the owner hires his employees, and business is alright; they are new in town, so large profit margins and excessive foot traffic are not to be expected.

After about 6 months of being open, business is rapidly growing. The owner is finally getting out of the red, and into the black! There is so much business in fact, that the owner needs to hire more workers just to keep up. He decides to add 2 more people to the team; it won’t quite cover all of his needs, but because of the high minimum wage, it is all that he can afford right now.

The night that he interviews for his two new employees, a woman comes in asking for nearly $20.00 an hour. Her skills are extensive, and she would be able to bring brand new products into the shop without any training whatsoever. Not only would she save him time, but she would make him money! He thinks back on his other employees; no prior knowledge or skills, no new ideas, nothing even nearly as valuable as this employee would be worth to him. If it were up to him, he would be paying his employees exactly what he deemed their skills to be worth; maybe that would mean $8.00 an hour for a cashier, $8.75 an hour for an opener and a closer, etc. However, since he was forced to overpay for their basic services due to government intervention, he cannot afford to hire this valuable and worthwhile prospective employee.

In short, he is in need of two more workers. He would be able to afford both the above average woman and another cashier/clerk if it was not for minimum wage requirements. With these requirements however, he must choose between superior product and a shortage of man power, or basic work and enough workers to scrape by. In the end, a shortage of workers is just not something that a business (owner) can afford, and so he must kiss this great opportunity goodbye. This issue could have been completely avoided had he and the employees been able to come to an agreement on a fair hourly wage without government intervention or mandate.

When an owner is forced to pay someone more than they’re worth, they lose out on opportunities to hire higher quality employees for a greater cost. This is the broken window fallacy; the seen and the unseen. While we do see that an average worker is being paid very well, we do not see that a better worker is being paid less than they deserve or not being hired at all (because of the average worker’s forced wage).

(L35) The United States: Healthcare and Antitrust

1.) What are some of the factors that have contributed to rising health-care costs in the United States?

The birth of the rise in health care costs can be pinpointed in WWII. It was during this time that businesses were desperate to attract labor, but they couldn’t raise wages because the government had frozen the price. So, to compensate for this, businesses began to offer employer-supplied medical insurance; it was not considered a wage increase and thus, could not be taxed. After the war, labor unions demanded employer financed medical insurance be a continuous part of their contracts. This forced the hand of nonunion businesses to also provide health insurance in hopes of avoiding unionization. The result of all of this was that medical care was barely paid for out of pocket by Americans, which in turn caused people to care much less about price comparing. Since the client was not the one paying, (their employer was), health care suppliers then developed an incentive to offer high cost treatments. Ultimately, this created an ongoing price increase in the healthcare business.

2.) How is the actual history of antitrust different from what the average person probably thinks it is?

Antitrust is generally presented to the public as program that would help people pay ‘fair’ prices, and favor consumers. In reality however, the antitrust acts (Sherman Antitrust Act, 1980 and Federal Trade Commission Act, 1914) did the opposite of favoring consumers, and created a history of attacking successful and efficient businesses. One example of this would be the US vs. American Tobacco, in which this ness had merged with other smaller companies, (but not created a monopoly); American Tobacco was able to raise product output all the while lowering prices. There was still easy entry into the tobacco industry for competitors, and no consumers were being harmed whatsoever. However the US government decided to step in to punish and limit them by law, for favoring consumers.