Dr. Hank and debunking Marx' Labor Theory of Value

The minimum wage is in the news again thanks to the Biden administration’s stimulus bill (1). While I’ve already written about the history of the minimum wage and its effects on the poor, I wanted to address the root source of the minimum wage fallacy: Karl Marx’ Labor Theory of Value.
To put it simply, the theory says that someone should be compensated based on how hard they work. If you have an easy job and aren’t required to work very hard then you should be paid little. If you have a more difficult job and have to work hard at it, then you should be paid more (2).
While this sounds good on its face, this assumption is very dangerous and can lead a country down the path of minimum wage laws, price controls, and government controls of production (socialism).
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Meet Dr. Hank, an average (Level 5 out of 10), everyday brain surgeon. He has a good work ethic (8 out of 10) and a positive attitude (7 out of 10). As an average, everyday brain surgeon, Dr. Hank earns a yearly salary of $500,000, which averages out to $240 per hour (3).
Dr. Hank is also an equally average welder (again Level 5 out of 10). He picked it up as a hobby during his many years of school and is able to repair his car and make Christmas gifts for his in-laws.
Now one morning, Dr. Hank wakes up and decides he is tired of brain surgery and wants to be a full-time welder instead.
Would you expect welder Hank to continue making the same amount of money as Dr. Hank?
Of course not! The average welder makes $50,000 (4).
But why specifically did Hank’s salary change? It’s the same person, with the same Level 5 skill set, with the same work ethic and attitude. What changed?
The work changed and the competition changed. When these factors are combined, Hank’s value to his customers and employers (but I repeat myself) changed as well.
Dissatisfied, Hank goes before his city council. “It’s not fair,” he says “I’m putting in the same effort so I should be getting the same pay.” The city council, touched by his story (and the cash that he promised to their reelection campaigns) passes a minimum wage law requiring Hank be paid $260 per hour to match his original salary as a brain surgeon.
So now that Hank can get a “fair” wage as a welder he gets to live happily ever after right?
Wrong, because now that Hank has made himself 5 times more expensive than his competitors, no one wants to hire him. He has effectively fired himself.
Indignantly, Hank returns to his city council and bribes (lobbies) them into passing another minimum wage law requiring all welders be paid a “fair and equitable” rate of $240 per hour.
This policy is even more disastrous, because while the wages of all welders may be equal, their skill levels are not. If you have the choice of paying $240 for a Level 5 welder or $240 for a Level 10 welder, you will obviously want to pick the Level 10. So as a Level 5 welder, not only is Hank still unable to find work, but neither can other lower level welders now find work. Hank, with the help of the city council, has priced all lower level welders out of work.
Hank and all other Level 1-9 welders now have 4 options: 1) increase their skill to a Level 10 so that he can continue working as a welder, 2) find another line of work (Hank could go back to being a brain surgeon), 3) live on unemployment benefits, or 4) ask the city council for subsidies or require a “fair proportion” of all welding jobs be given to Level 1-9 welders. If this last option were approved, the government will have complete control of the welding industry, the textbook definition of socialism.


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