Hillary Clinton has a new economic plan. In essence, government should get actively involved to make everyones wages higher. Paul Krugman, writing in The New York Times, endorses the idea. There was a time when Krugman dismissed rhetoric like Clintons as economic quackery. These days hes trying to sell the same snake oil as the politicians.
Here is what economists know and its backed by mountains of research. Employees tend to get paid their marginal productthe value they add to final output.
In a competitive market this is almost a truism. Wages are not a gift. They are not at one level, but could have been substantially higher or lower. They are what they are because of the employees skills and the market value of what they produce.
Now suppose that were not the case. Suppose there was a firm that paid employees more than their marginal product. That would mean the firm is collecting less from customers at the margin than it is paying out in wages. The firm can try to raise prices to cover the deficit, but then it would lose sales to rivals whose costs are lower and it would eventually go out of business. Or it could cover the deficit with lower profits. But then the investors would fire the manager and hire someone who gets the wages right and provides a market rate of return.