If economic ignorance were a natural resource, our world would be paradise

You have to love a heading like that! It comes not from me but from the ever insightful Don Boudreaux at the Cafe Hayek blog. Boudreaux is commenting on the idea that the government subsidisation of low-skilled workers’ "housing, food, medical care, and transportation" enables employers of such workers to pay them less than some "true value" of their work.

There is an obvious question as to what this "true value' is.

Boudreaux writes,

The central economic point is this: the welfare programs to which Mr. Phelps alludes (with the possible exception of transportation subsidies) reduce the supply of labor and, thus, push wages up. Far from employers being subsidized by such welfare programs, employers of workers who receive these government benefits are obliged, as a result, to pay wages that are made artificially high.

But to show just how deeply confused this Mr. Phelps is, let’s pretend that he’s correct to insist that welfare programs artificially reduce wages. Mr. Phelps then asserts that “Failure to pay a living wage gives consumers artificially low prices and increases corporate profits.” Because nearly all employers of low-skilled workers operate in intensely competitive industries such as retail and food service, workers’ artificially low wages would indeed result in artificially low prices for consumer goods, but not in increased corporate profits. The ability to hire workers at artificially low wages would attract new entrants into these markets, as well as cause existing firms to expand their outputs, until the rate of profit earned by employers of these workers is no higher than it would be if wages were higher. That Mr. Phelps is oblivious to this reality is sufficient reason to dismiss his economic analysis.

While I agree with Boudreaux's point, I do wonder just how large the effect is. Of all the things the government does to stuff-up the labour market is this a big player?