Rarely can the government preform any function more efficiently than the private sector. Make no mistake, there is a space for government regulation to assure fairness and a level playing field. However, when it comes to getting something done it is hard to beat the power of the private sector. Mostly, this is a result of incentives. For a more complete understanding regarding the role of incentives and how they affect human behavior, read Freakonomics – you’ll likely gain a new perspective. Incentives drive innovation, productivity, and eliminate unnecessary activity.
Given the power of the private sector it is always interesting to watch the legislative process, especially when legislation finds its way towards “well intentioned” intent that might improve the lives of those who are economically disadvantaged. Mandating what the private sector pays started approximately one hundred years ago in the midst of the great depression. Wages are now federal and state mandates. To be clear, we want people to make as much money as possible in order for them to support themselves and their families. Nobody wants an economically stressed employee who struggles to get to work and preform their jobs. Yet, the question remains; who is better situated to set pay rates, the government or the private sector?
From this perspective it is clear. The market is best at setting pay rates. When demand is high for labor, pay rates go up. When demand is lower pay rates go down or disappear altogether. The Wall Street Journal recently reported restaurant pay to be rapidly increasing (see National Notes – Lower-Wage Workers See Biggest Gains From Easing of Covid-19 Pandemic). Since many jobs often require specialized training while restaurant employees typically do not, it is easy to understand worker demand is the key to increased restaurant pay. The market – in this case – is doing what it does best; balancing supply and demand.
America’s great strength has always been its ability to chase opportunity. When an area of the country created jobs, folks picked up, moved, and captured those opportunities. When those opportunities dried up the process was repeated. One does not need to look too hard in order to find examples. Oil jobs, as a result of fracking, recently created jobs in remote parts of Texas and North Dakota. This despite the fact neither geographic area is considered a bastion of geographical desire, beauty or attraction. During the Second World War thousands of jobs were created in Michigan and California due to an abundance of war jobs. Again, opportunity comes and goes. Wages come and go. Things change. The reality is many are uncomfortable with the uncertainty of the economic cycle. Elected officials are even more uncomfortable. However, they ought to recognize this and understand when and if they create an environment which fosters economic opportunities wage growth naturally follows. Good economic policy increases wages, bad policy decreases wages. The goal of increased wages is an honorable one. The process of how it happens remains a debate.