All Commentary
Thursday, April 28, 2011

Free Markets Have Room for Everyone

No zero-sum game.

Many of the most pernicious anti-market fallacies relate to labor markets and employment.  Perhaps the most damaging is what we might call the “fixed pie of jobs” fallacy.  The crudest version of this argument is that immigrants coming to the United States “take our jobs.”  The underlying premise is that any job a person acquires must have come at the expense of someone else, hence the “fixed pie of jobs.”

What’s interesting about this argument is that it’s almost always applied to immigration but rarely to native population growth.  If the claim were true, every child born in the United States (at least in excess of the death rate) would someday take a job from a working adult when he enters the labor market in adulthood .  If markets can find work for the native born, why can’t they do the same for immigrants?

To see through the fallacy we need a little economic theory.  According to economists, wages are determined by the value of a worker’s marginal product, or VMP. We look at how many units of output are added by hiring that worker and multiply that number by the value of the output to determine the value of the marginal product.

Neither More Nor Less

Employers will be unwilling to pay workers more than their VMP because that would mean spending more than the workers earn for them.  The risk to paying workers less than their VMP is that a competitor could bid them away, making a small profit by paying them that slightly higher wages and collecting the revenue the workers add.  So wages and VMPs tend to be closely related.

This means that in a genuinely free market there is always a job for anyone whose VMP is greater than zero. Even the least-skilled worker, say a teenager who can produce only three dollars worth of output an hour, is potentially employable at a wage just under that VMP.  Or consider someone with a physical or mental disability.  That person may be capable of producing only a limited amount of value per hour, but in a genuinely free market he or she can find work at a wage just under that amount.  This insight, combined with the idea that each of us has some comparative advantage, shows that every productive person has a way to contribute to society and be compensated for it.  It’s one of the great things about free markets.

The job you get is not taken from someone else.  (Even the person who loses out to someone else for a given job can find another one if his or her VMP is positive.) Firms will be willing to hire additional employees if they believe those workers will create a bit more value than the wage paid (including, to be technical, the costs of hiring them).  After all, the U.S. economy had no problem finding jobs for the massive influx of women into the labor force in the twentieth century, not to mention the various waves of immigrants.  There is always work to be done to provide the goods and services people want, and where employers are free to pay people a wage commensurate with their VMPs, that work will mean jobs.

Less-than-Free Market

Of course this is not how things work in our less-than-free market.  Teenagers, the disabled, those with little education, new immigrants with limited language and other skills, as well as other groups, often have trouble finding work because their VMPs do not exceed the minimum wage or other minimum compensation laws.  As economists like to point out, minimum wage laws are really minimum productivity laws.  They essentially say that those whose VMPs are less than the legislated wage may not work.

Considering that such laws cause unemployment, it is ironic that they are supported out of supposed compassion for low-skilled workers in order to prevent exploitation.  Real exploitation comes from laws that prevent perfectly productive people from contributing to the well-being of others, consigning them to lives of unemployment and perceived inadequacy. Cutting off the bottom rungs of the income ladder also prevents these folks from gaining valuable job skills and moving from their current low wage to a level of compensation that will enable them to live progressively better and more independently. Compassion should be judged by results not intentions.

Free markets by contrast have room for everyone.  If you can create pretty much any amount of value, there’s a wage at which you can be hired and a job for you to do.  Jobs aren’t a zero-sum game. On the contrary, they are as limitless as human wants and human creativity  – as long as people are free.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.