top of page
  • Writer's pictureOren Levin-Waldman

The Problem with a Deeply Entrenched Neoclassical Orthodoxy

The neoclassical model of competitive markets holds that raising the minimum wage will lead to lower employment, either because employers will fire workers or because they won’t hire entrants into the labor market who are now searching for higher wages. This model has become an orthodoxy unto itself, which is assumed to be anti-labor. Not only does the orthodoxy have problems with wage floors, but unions too. That is, it has problems with anything which it believes artificially inflates wages. The question is why this orthodoxy has become so entrenched that it permeates economic policy.

There are several reasons for this, which aren’t unrelated to the efficiency claim. The first has to do with the composition of the labor market. Because only a small fraction of the labor market earns the statutory minimum wage, the potential benefits are presumed to be so small that they could not possibly offset the more likely larger costs. And yet, the data increasingly shows that the employment consequences are in fact minimal.

Still, related to this efficiency argument is the notion that minimum wage earners are “secondary” earners, meaning that they aren’t primary earners. Rather, they are spouses of primary earners or teenagers. And yet, this misses the fact that so-called secondary earners may in fact be necessary to the maintenance of the household. By describing them as “secondary earners,” the effect is to cast the minimum wage population as other, with the purpose of delegitimizing them. Which is to say, because the minimum wage population is so unimportant, the minimum wage could not possibly be used as a positive policy tool. Instead, they are being cast as unworthy of wage increases on the grounds that such increases aren’t necessary for the maintenance of their families.

This construction of the minimum wage population may also miss the point. When the minimum wage population is conceived as the “effective” minimum wage population — those earning around the statutory minimum — the minimum wage population is effectively broadened to include most of the low-wage labor market. Now the percentage earning the minimum wage is no longer 2 percent — those earning the statutory minimum — but close to 20 percent — those earning the effective minimum.

A second reason for the prevalence of this orthodoxy has to do with ideology and a general anti-labor bias built into economics models generally. The political dominance of business and the intellectual dominance of laissez-faire has meant that economic policy over the years has favored business at the expense of labor. Because the economics profession produces what society takes for economic knowledge, it has assumed the role of determining society’s vision of how the economy works.

The economics profession has adopted an intellectual view that is implicitly anti-labor and pro-business. Economic theory is considered to be anti-labor because the reigning model of competitive markets assumes unemployment to be caused by high and rigid wages. Because labor market institutions like unions and the minimum wage serve to raise wages, they too are presented as forces driving up unemployment. And a fundamental pillar of economic policy since the passage of the Employment Act of 1946 has been to maintain as high a level of employment as practicable.

More generally, however, competitive market theory is anti-labor because it treats labor as a commodity. Workers are simply inputs in the production process, and as such they have no personalities. That is, they are inanimate objects; not human beings. So when a low wage is paid, it isn’t a person who is unable to support herself, but a lower price being paid for another commodity in the production process.

Therefore, as competitive market theory assumes a full employment economy, the minimum wage orthodoxy is not only a product of those assumptions, but it nicely serves the interests of those who believe that all government interference — whether in the form of regulation, public programs, and other interventions — greatly undermine free market ideology and free choice.

This may also miss the point. Wages are neither set naturally, nor are low-wage workers free agents who enjoy liberty of contract negotiations. Rather they accept or reject an offer. That is their only liberty. At root, the minimum wage and minimum wage politics is a political struggle over capitalist wage relations because not everyone enjoys the same bargaining power. Aside from boosting the wages of those at the bottom, it effectively gives low-wage workers some monopoly power, which they otherwise would not have in the face of monopoly power held by capitalists.

By denying the power dimension, the model of competitive markets can effectively maintain that low-wage earners are simply not worth more than the wages they have been receiving. The onus is now upon them to improve themselves, and a minimum wage cannot solve this problem. All that a minimum wage can do is artificially inflate wages, thereby absolving low-wage workers of their responsibility for themselves.

But the model totally ignores structural variables, that is, the myriad of public and private institutions, which may affect wage-setting mechanisms or individual behavior. The effect of this is for a theory to serve a particular ideological position and varied interests. And yet, an economic theory is nothing more than a belief system that may serve to rationalize a particular reality that has been socially constructed. In the case of neoclassical orthodoxy, it has given a privileged position to the socially constructed reality that efficiency is indeed the basis for maximizing social welfare.

A yet third reason that the orthodoxy has been so entrenched is because of a crisis in vision, which isn’t unrelated to the blinders created by an over-reliance on efficiency. Modern economic thought simply lacks a vision of how society ought to be ordered and how modern scientific analysis ought to be put in the service of that vision. Because of this, we may miss the potential for the minimum wage to serve other policy interests, such as making a more just and democratic society. Ultimately, it is a question of what type of society we want to create.

Until we can take a more political economic perspective and address not only the society that we want to create, but how both economic and political arrangements can best serve that vision, we will not be able to get out from under this orthodoxy. While that may be the goal of the economic profession, it doesn’t do much to create a better society. And it is for that reason that policy will continue to fail.

74 views0 comments


bottom of page