My undergraduate degree is a Bachelor of Science in Discrete Mathematics. I have always been drawn to math because of its precision and predictability. We live in a complicated world, and there is something really appealing about working in a field in which there is a set of agreed-upon rules that work every time to arrive at the one, agreed-upon right answer.
This is also part of the appeal of economics. Markets are magical. My colleagues and I write about this magic a lot. Subject to just a few rules and without need for outside intervention, markets find prices that equate quantity supplied with quantity demanded and maximize efficiency. They are almost mathematical in their predictability.
Almost.
The primary difference between mathematics and economics is the reliability of the rules underlying the predictability of outcomes. The rules in math are typically definitions and axioms establishing how numbers or symbols behave or relate to each other. The rules in economics are typically assumptions about how humans behave. Numbers can be counted on (pun intended) to follow rules. Humans cannot. Therefore, assumptions in economics are much more likely to fail than axioms in mathematics.
When assumptions fail, outcomes are not as easy to predict. Though I loved math, this twist is what ultimately drew me to apply my knack for mathematics to economics. The predictability of math is comforting, but the challenge of understanding that which is less predictable is exciting.
My colleague Dr. Don Mathews has written here a series of columns lately on the minimum wage. This provides an excellent example of when reality may diverge from theory due to market participants’ inability to play by economists’ rules.
Dr. Mathews’ columns have provided a brilliant overview of economic theory and the history of economic thought on minimum wage. And, like many economists before him, Dr. Mathews concludes that “the minimum wage is still bad economic policy.”
If all of the traditional assumptions of labor market theory hold, I agree completely with Dr. Mathews. But, what if they don’t? What if participants in a labor market do not follow the rules assumed by the theory?
Theory assumes employees have many options of places to work and can move freely among those options, giving them some bargaining power in the negotiation of wages— the ability to say, “If you won’t pay me enough, I will go somewhere that will.”
In reality, for many individuals, life is not that flexible and options are not that abundant. This is especially true for the poorest among us—those without stable housing, transportation, or childcare. And we know from the literature on differences between male and female workers that even when workers may have some power to negotiate, many do not for a variety of reasons including lack of knowledge about the process, lack of confidence, or fear of repercussions.
Whatever its reason, this inability for employees to negotiate their wages creates an imbalance of power in the labor market and gives employers the ability to hold wages below the efficient market equilibrium.
There is evidence that this does happen. Employees with similar skills are not paid a uniform, market wage, neither within a firm nor across firms. People who ask for raises are more likely to get them. And unionized workers earn an average of 11.2% more than nonunion workers in the same industries and job types.
The success of unions especially showcases what markets might look like if power were not so heavily concentrated in the hands of employers.
This is why I believe we cannot always dismiss the minimum wage as bad economic policy. If an imbalance of power is holding wages below the efficient market wage, then a well-set minimum wage would lead to an increase in market efficiency and NOT an increase in unemployment. And as they place more money in the hands of the least-paid workers, increasing their ability to purchase goods and services for their households, firms may even experience increases in profit!
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Dr. Melissa Trussell is a professor in the School of Business and Public Management at College of Coastal Georgia who works with the college’s Reg Murphy Center for Economic and Policy Studies. Contact her at mtrussell@ccga.edu.
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