Wednesday, September 22, 2010

Illustrating laws of marginal productivity via the Daily Show

Here's a funny bit from the Daily Show featuring Aasif Mandvi.

The story/bit/skit is very instructive and illustrates the laws of economics behind how/why marginal workers are hired and/or why they are fired. It also illustrates that compensation of labor depends largely on the scarcity and skill level of each piece of "additional" (or marginal) capital added to production. If a business wants to add another factory to its operations, it must calculate the "marginal" productivity that piece of capital (the physical plant) will provide to expanding its capacity. That is, if company X wants to add one more worker, it must determine the effect that worker has on production.

This applies also to the marginal productivity of labor as well. Why are engineers, doctors, architects paid more than cashiers, janitors, or retail sales people? Why are their wages disparate if the "minimum wage" allows them all to be paid the same? Marginal productivity differentiates labor since everyone accepts a wage rate voluntarily rather than through coercible force to work dictated by State mandate.

In a nutshell, raising the wage requirements/work rules/mandated benefits for what employers MUST provide to their labor (especially marginally skilled workers) simply creates more unemployment than what would otherwise exist. Artificially raising the marginal COSTS of each element of capital (which is labor in this scenario) simply stifles and discourages where labor can move.

All natural unemployment should be voluntary since "involuntary unemployment" is a figment of government's intervention and erection of barriers to entry (i.e. minimum wage laws). If a stay at home mom wants to make some extra money and be paid $4/hour to watch other parent's children, should the state mandate that the parents MUST pay the woman $8.50 (or whatever the minimum wage is)? No! It should be up to the employer and the employee to negotiate the compensation and work agreement.

Bravo Daily Show!

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