With Governor Perry entering the Presidential race this weekend, there has been a noticeable uptick in the level of scrutiny directed at Texas’ jobs record. Specifically, some in the media have grown dismissive of job creation in the state because some of these new positions entail wage rates that are lower than the national average.
So do the critics have a point? For the answer, we turn to Dr. Steve Pejovich, writing for The Institute for Policy Innovation, who explains why this premise is fundamentally wrong:
The demand for labor, like the demand for all scarce goods, is a function of price. The lower the wage, the more people are hired.
What’s known as the “market-clearing wage” (i.e., price) is the wage at which all people who want to work at that wage have jobs. At any wage above the market-clearing wage not all people who want to work at that wage have jobs.
Government can’t determine the market-clearing level, only markets can. But government can distort it by imposing regulations on business, minimum wage laws, and unions (think of the Boeing case), which force wage rates above the market-clearing level.
[Governor] Perry’s critics are confusing the wage rate with income. The higher the wage rate (above the market-clearing level) the more who are unemployed. That is, high wage rates mean zero income for many. The market-clearing wage rate means positive income for all.
Governments can choose to make labor markets less or more competitive. Perry has chosen the latter for Texas. Yes, the average wage rate in Dallas might be lower than in Detroit, but more people are earning money from work in Dallas than in Detroit. This raises an important question upon which a free society depends: the freedom of choice.
Any person in a right-to-work environment can choose between zero income and the wage he or she could get in the labor market. No person in a union-controlled or government-regulated environment can choose between zero income and the wage at which he or she is willing to work.
No one has to work for a lower wage, but at least in Texas more people can choose that option over being unemployed.
– James Quintero