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"I am impressed by how often errors in economic analysis made by some commentators (including by me!) are caught in other comments. One example is the posted statement that my claim that the ordinance would encourage large retailers to substitute labor for capital is wrong because they have already made all the feasible substitutions. Another post correctly points out that a government-imposed higher wage would encourage more of these substitutions because that raises further the cost of labor relative to capital."

As I am the correcting poster and also a law student, this seems like a good time to ask Messrs Becker and Posner whether they have needs for clerks or research assistants next summer.

Arun Khanna

Chicago could create zones within the subway system map that are on the periphery of the city. This would allow Mayor Daly to make his point, let big box retailers pay competitive wages within those zones and higher wages in areas outside the zones that lie in high density urban areas in Chicago. This system would allow Chicagoites to have a true free choice in retail.



You said, "No, a rise in minimum wages does not automatically lead to greater inflation. It depends how the Fed reacts, if it reacts at all. Since even national minimum wage laws cover only a small fraction of the labor force, the Fed will surely not respond to a higher minimum imposed on large retailers in Chicago. The effect will initially be to raise unemployment of low skilled workers, and ultimately to reduce wages of low skilled workers employed at other than large retailers."

Why? If a firm, Wal*Mart for example, is forced to raise wages, why would that increase unemployment among low-skilled workers. Why would a small pay increase lead a skilled worker to a low skill position? I assume that a profit-driven enterprise would not employ low skilled workers unless it needs them.


Professor Becker wrote:

"I do not believe the ordinance would violate ERISA by requiring a minimal amount of fringe benefits. After all, companies on their own sometimes raise their fringe benefits to much higher levels than those required by any law."

I have to say I am confused by this comment. I do not see how the two sentences are related. What does the fact that companies sometimes raise fringe benefits to higher levels have to do with whether a local law is preempted by the federal ERISA benefit requirements (which are zero for welfare benefits)?

See the discussion in Part V of Retail Industry Leaders Ass'n v. Fielder.



Forced higher wages would reduce the demand for labor. Firms will hire only to the point that the marginal productivity of labor is equal to the wage rate. If the wage rate is forced up, those employees whose productivity is below it [$10/hr here]. Since the lowest-skilled workers are those with lowest productivity, they would be the ones who would lose jobs. The remaining jobs would be filled by higher skilled workers, either productive people already employed by WalMart or skilled people from the outside. It makes little difference to those who lose jobs who gets the remaining ones. In essence, the ordinance creates fewer jobs at $10 rather than more jobs at the prevailing market wage. The lowest-skilled thus lose out, to the gain of the remaining workers and WalMart's small competitors. Any economic model will show that their gain is less than the workers' loss. [That's even without mentioning that higher unemployment is linked to higher crime.] Thus, rather than helping the lowest-skilled workers, the ordinance punishes them.


When any discussion of minimum wage arises, the simple supply demand curve is produced to show it will hurt unskilled workers by increasing unemployment. Yet when empirical evidence is sought for this, the effect is found to be between very small to nonexistent. (Even for the largest measured increase in unemployment, the total money payments to the group increase.) More sophisticated analysis suggests that the increase in the income generate increased economic activity which goes a long way toward canceling the negative effect predicted by the supply demand curve analysis. What is clear but almost never discussed, it is the “well off” that is hurt by increases in the minimum wage. As I read comments on the web, I am coming to the conclusion that undergraduate economics classes are teaching students little more than how to be shills for the rich. If physics education worked the same way, the world would be full of physics students explaining to the “uneducated masses” that that steel balls and feathers fall at the same rate, because of the law of gravity.


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