Gross Errors

I think Daniel Gross does a generally good job discussing economics in the Moneybox column over at Slate, but his recent two-part (so far) series on the labor market and immigration misses the mark, I think. While not an anti-immigrant stance per se, that is clearly the net result of his analysis, although he at least officially blames business owners and/or managers for the "problem" that he sees. In answer to the "we can't find Americans to do these jobs" argument, he trots out a standard dismissal: just pay more! Gosh, why hasn't anyone thought of this before? Just pay more and Americans will do the work!

Does the word "inflation" ring a bell? While Gross wants to attribute the problem to greed by business owners and managers, or perhaps stinginess on the part of the customers of these businesses, he loses sight of one of the basic concepts of economics (or is deliberately ignoring it). If the price goes up for the exact same thing, that's inflation. Doesn't matter if it's milk, eggs, or labor. The price of labor will work its way through the economy and less stuff gets produced and consumed. No free lunch, folks!

Consider landscaping, a business I know a little bit about. To be sure, if landscapers raised their wages they are paying for labor dramatically, they surely could find some price point at which Americans will be enticed away from other work, or out of comfortable non-work (but since we continue to have low unemployment and high workforce participation, as Gross points out, there's not a whole lot of non-working slack), but there is only so much profit margin in any business. Most landscapers I know aren't fat cats eating truffles on their yachts. To stay in business, they will have to raise prices to their customers. Now, surely there may be a few people in the market for landscaping who aren't price sensitive. The real fat cats are going to get their landscaping, if that's what they want. But the rest of us non-fat cats are sensitive to little things like price. So, raise the price of landscaping and what happens? People buy less of it. People may buy the plants and do it themselves. (Or go down to Home Depot and pick up some Mexicans! ;-) Or do without.

And there's the rub! That is real work that doesn't get done, and therefore real wealth that doesn't get created. So you can say that we just have to raise wages, but that doesn't really create wealth, it actually does the opposite.

No. Free. Lunch.