Prevailing Wage Theory and NYC

The recent ruling in finding NYC’s prevailing wage unconstitutional was the correct decision. Bloomberg understands the fundamental economic premise regarding paying a wage what the market dictates the worker is worth. Those that support the prevailing wage policies do not. It is both unfortunate and dangerous, because implementing a prevailing wage has two effects: 1) it devastates the very people its proponents think they are helping and 2) it erodes NYC’s economy by creating more barriers for businesses.

When a government takes taxpayer money, it takes it as a fiduciary; that is, it implies a relationship — legal, ethical, and economical — between “trustee” (government) and beneficiary (taxpayer).Therefore, the government has a moral, if not legal, obligation not to spend more money or pay anything more than the market demands.

The very act of paying $10 for something that costs $8, under the notion of “prevailing wage”, would put any other private businessman in trouble. Prevailing wage theory is not the government acting out of the kindness of heart, like its proponents would have you think. It raises the cost of goods to all constituents, increases the cost of living, and slows down the local economy.

The judge, although he ruled correctly, did so reluctantly — seemingly only under the technicality that the “law contravened state law”. He described how, “this court believes that the prevailing wage law could benefit the people of New York and does not see wisdom in the mayor’s zeal for the possibility of welcoming to New York City a business that would pay its building service employees less than the prevailing wage”. Bloomberg, however, hit the nail on the head when he countered that “legislation like this makes it harder for companies to invest in New York City.”

Here’s what the prevailing wage campaigners fail to discuss or flat out don’t understand from fundamental economics. The extra money being paid in a prevailing wage only benefits people that you can see. You do not see the hidden costs that add up to the employer, which create a net loss to the economy (deadhead costs). When you pay $10 for $8 worth of labor, it is identical to imposing a tax from an accounting point-of-view. What you see is the extra $2 going into the employee’s pocket. What you don’t see is the effects of the price increase on the business owner or the economy — how he absorbs the cost, offsets the cost, changes or slows production, cuts back hours or product, and so forth. That is the unspoken deadhead cost, a loss which has a ripple effect on the rest of the economy.

Prevailing wage is a scourge that must be stopped in its entirety, or else it will continue to grow. It doesn’t matter that one judge in open court halted the process. The people pushing for its policy must come to understand the basic economic premise — that when you artificially raise the price of something, you get less of it. Ergo, if you artificially raise the price of wages, you get less of that too — because many companies cannot afford the additional costs (or they would have to pass on the higher costs, but at the higher price there would be fewer buyers).

Artificial wage prices impede a business’ ability to grow and invest. There are many arguments against a “prevailing wage”, chief among them the burden on businesses — which are already struggling. The failure to understand the true effect of artificial wage control on the economy-at-large is frustrating. Such faulty logic is representative of the current trend to focus on feel-good rules rather than economic well-being for all. At least Mayor Bloomberg, who has been a successful businessman, (despite all his other faults) was willing to fight against measures like a “prevailing wage” that would keep NYC’s economy both depressed and sluggish.

crossposted at alanjoelny.com