June 19, 2006
From the desk of Jane Galt:I heart Will Wilkinson
Why? You ask. Because he writes pieces like this: the piece that I would have written, if I were as smart and talented as Mr Wilkinson is . . .
The law of demand is a bitter pill for defenders of labor market price controls. Noted economic theorist Matt Yglesias has grown weary of appeals to “Economics 101″ in the minimum wage debate. “After all,” Yglesias writes, “there’s a reason they offer more economics classes and you don’t get your degree after taking just one.” His American Prospect colleague Ezra Klein says of the law of demand that “It’s a good guideline, but it’s got no end of exceptions.” The minimum wage, of course, is one those exceptions.They’re both right in general, if not about the minimum wage in particular. There are more economics classes, and they do teach exceptions. However, let’s not imagine that there is some advanced economic class in which you learn that the law of demand is false. (Well, no doubt there is somewhere. There is contradiction-friendly “paraconsistent logic,” after all.)
To use Yglesias’s misapplied example, Econ 101 principles do not stand to higher-level economics in the way that Newtonian physics stands to relativity and quantum machanics: as a useful, but literally false, simplification of reality. Economic laws are not strict laws of nature, codifying ineluctable relationships of necessity, and they do not pretend to be. So counterexamples are not ipso facto falsifying, and the law of demand is never replaced with a better, more empirically adequate, law. The law of demand is very, very empirically adequate as it is: It captures a ubiquitous regularity of human behavior that is abundantly comfirmed every moment of every day, and without which there would be no science of economics.
But it is just a regularity, like people flinching involuntarily when they hear a sudden, loud sound. It doesn’t have to happen, but it’s pretty surprising when it doesn’t. (”Is he deaf? Paralyzed?”) And when it doesn’t, there’s need for some special explanation.
Economic laws, like the principles of all the “special sciences,” are ceteris paribus generalizations: generalizations that are true other things being equal. Econ 101 lays out the basic laws and explains what follows from them ceteris paribus. Later, students learn about cases when other things are not equal — when there are exceptions to the generalization. So, it is always possible to argue that the law of demand does not apply in this or that kind of circumstance. A certain necessary auxiliary condition, which is almost always present, may be absent in a certain kind of case, causing the regularity to break down. But then, in order to predict an exception to the regular pattern, you need to cite the absence of the relevant auxiliary condition (e.g., “He can’t hear; that’s why he didn’t flinch”). I hope Yglesias is not also tired of Philosophy of Science 101.
Now, let’s note two things. First, you will be utterly hopeless in reliably identifying exceptions to a ceteris paribus law when you never grasped its logic in the first place. Exhortations to mind your Econ 101 generally aren’t exhortations to stop being so darn advanced. They are exhortations to actually comprehend the principles upon which advancement depends. And, second, the fact that a law is ceteris paribus does not mean you can deny its applicability whenever you want to. Political convenience tends not to be an appropriate auxiliary condition. You can’t wave your hands and just hope that a good argument is in some upper-level textbook you haven’t read.
I can understand why liberals get frustrated with conservatives citing "basic economics". In fact, things that make intuitive sense sometimes aren't true, because your intuition is wrong, or (more commonly), because there are other basic factors, which also make complete intuitive sense, that you have overlooked. A long time ago, on a website far, far away, I tried to explain this in relation to the conservative economic intuition that if you cut people's taxes, they will work harder:
. . . there are tradeoffs involved in decisions to save or work: every dollar saved is a dollar you can't consume now. And every hour worked is an hour of leisure lost.When people are making tradeoffs between two goods, economists commonly analyze it from the point of view of two effects: the income effect, which is the effect on your demand for a good of a change in your income, and the substitution effect, which is the effect on your demand for a good in the change of the relative prices of the good and it's substitutes.
Breathe deeply. The bleeding from the ears stops after a little while.
Seriously, it's not that hard to understand. Think of a good -- say Ramen Noodles. The income effect on this good is negative: as your income goes up, your demand for Ramen goes down.
The substitution effect is also easy to understand: if McD's is having a 99 cent Big Mac special, you shelf the cup o' noodles and head out for some mystery meat.
Got it? Great. So let's look at . . . a cut in marginal rates.
. . . the cut in marginal rates effectively increases your income. The income effect on demand for leisure v. work is unambiguous: as they feel richer, people want to work less and play more.
The substitution effect is also easy to comprehend. The tax cut just effectively raised your hourly rate. Leisure is therefore more expensive. Say you were taking home $10 an hour, but now you're getting $12. Every extra hour you decide to play instead of work is costing you more money. The marginal hours, the ones you spent watching shows you don't really like on Saturday afternoon, or arguing with your boyfriend about whose turn it was to get the car washed, might have been worth $10 but just aren't worth $12. So you work more.
. . . arguments about the effect of marginal tax cuts on the economy thus hinge on a debate over whether the income effect or the substitution effect is larger. That debate is still raging, and it's a post for another day. Suffice it to say that Bush's economists think that the substitution effect outweighs the income effect, so that cutting marginal rates will grow the economy.
Conservatives who argue the unambiguous case that people work harder when they're taxed less are overlooking a big, easily intuitive factor: when people have more money, they can afford to take more time off. (They're often overlooking another factor: most people don't have that much discretion about how much they work. This is the factor most often cited by liberals opposing tax cuts, but they too get it wrong, by forgetting that there are lots of marginal cases who do decide how much they work. A new rule or regulation doesn't have to effect every single person in the country--or the relevant market--to have an effect.)
That's very irritating, particularly since it's often exponentially harder to explain situations using multiple intuitions, even if the intuitions themselves are simple, than it is to explain them using only one. Witness the above explanation of income and substitution effects, which I think I've boiled down pretty concisely, versus: "if people get to keep more of their paychecks, they'll work harder." Truth be told, the tendency of conservatives to proclaim that their various deeply beliefs about things like property rights and hard work are not value judgements, but "Scientifically Proven! Using Economics!" sets my teeth on edge too.
But, then, liberals engage in the same sort of irritating single-intuition mongering: "Capital gains tax cuts primarily benefit the rich" . . . because, you know, taxing capital has absolutely no effect on the rest of us. We don't consume goods or services that are produced using capital, do we? After all, capital is icky--I certainly don't want any of that nasty capital in my double-frazzleberry mocha latte. I buy certified capital-free goods!
The economists who signed petitions in 2004 endorsing Kerry were, by and large, liberals who wanted a liberal president because, well, they're liberals. This is very understandable. But then they had to go and dress it up as some sort of super-scientific judgement that they'd made, not because they're liberals, but because they had Special Economic Insight that allowed them to divine a deep, universal truth which pointed to John Kerry as the superior presidential candidate. This was no more impressive than conservatives arguing that the wisdom of George Bush's tax cuts had been handed down from the divine Economist-in-Chief to Art Laffer on a pair of golden tablets. It seems to me that conservatives are more prone to this sort of economic philosphizing than liberals, but it is by no means a unipartisan vice.
More telling, though, is Will Wilkinson's point: just because economics often tells a more complicated story than political sound-bytes would suggest, doesn't mean that simple stories are always wrong. Lots and lots of simple stories are right. Rent control not only destroys the housing stock, but also eventually redistributes available housing from the poor to connected middle-class insiders, often government/non-profit employees, or to wealthy people who can afford "key fees" and the like. Confiscatory taxation produces black markets. High inflation produces high interest rates. When interest rates go up, the prices of bonds and housing go down.
Price ceilings and floors are among the most well documented economic phenomenon out there. The results are intuitively obvious: if you set the price of something below market level, there will soon be none of that thing left, and if you set its price above the market level, you will end up with a glut. These things are utterly predictible. When such regulations are proposed, they are, in fact, predicted. And with depressing regularity, the predictions come true.
In the case of the minimum wage, there is a decent argument that within the relatively small margins at which our nation's various levels of government tinker with it, the effect on employment is too small to be picked out of noisy economic data in which hundreds of variables are constantly changing. There is also the kind of complicated argument that Mr Yglesias is fond of, which is ably outlined by Mr Wilkinson:
The most popular principled explanation for the failure of minimum wage increases to create unemployment is a story about monopsony conditions for low-wage labor, i.e., imperfectly competitive labor market conditions in which there is a single buyer of low-wage labor (or a colluding band of buyers), that is able to set wages that workers have little choice but to accept. A simple model (Econ 101, even!) shows that under such conditions, an increase in the minimum wage, within a certain range, could even increase employment and raise efficiency.
It is not, to be sure, a very good argument: it is very hard to see how thousands of minimum-wage paying establishments, most of them engaged in cutthroat competition with the other mwp establishments, and all of them plagued by high turnover costs, could be engaging in the sort of collusion implied by monopsony. Proponents of this theory, such as Card and Krueger (the authors of the most famous study arguing that the minimum wage doesn't decrease employment), offer a lovely, complicated story about search costs and so forth, but this is patently unconvincing. Unless you are in a very, very economically depressed area, it's hard to see how the search costs in the minimum-wage market could fall more heavily on the workers than on the employers, who have to not only find workers, but also train them. The workers, meanwhile, can easily find out who's hiring just by driving down the main highway, or taking a stroll through the local mall. And they get paid during the difficult training period. A much more parsimonious explanation is that Card & Krueger screwed up . . . and indeed, when you look at payroll records, rather than a telephone survey, you get the result predicted by our simplistic Econ 101 model: employment went down.
That's not to say that there aren't any economists who think that the minimum wage is a good thing; there are. But as Mr Wilkinson points out, that's not the consensus view. And if you're a liberal who likes to defer to the consensus on things like supply side tax cuts, you cannot then turn around and declare that your other pet policies are okay because some economist, somewhere believes that it's a good idea. I mean, if you've ever been to the annual meeting of the American Economics Association, you'll know that there is nothing so nutty that some economist, somewhere, can't be found to endorse it.
Nor, when you propose to violate the consensus, can you escape your obligation to explain why you think this will work by grandly proclaiming that "Economics is complicated". I mean, physics is complicated--so complicated that I nevere actually took any--but as a general rule v = v0 + at just the same.
Posted by Jane Galt at June 19, 2006 12:40 PM | TrackBack | Technorati inbound linksBut the overwhelming economic consensus is that the employment impact of small changes in the minimum wage have such a small change in the economy that it can not be found in the data.
It is a minority view that a raise in the minimum wage produces a significantly large enough drop in employment that minimum wage employees are worse off. Remember, for the minimum wage employee to be worse off the drop in employment must be larger then the gain in wages.
What I see from opponents of miniminum wages is claims that it causes a drop in employment and therefore the minimum wage employees must be worse off-- but a drop in employment does not necessarily make minimum wage employees worse off.
Posted by: spencer on June 19, 2006 02:40 PMSpencer,
So how much more does a newly unemployed person make when the minimum wage goes up?
Posted by: ctl on June 19, 2006 02:59 PMSpencer, are you arguing that minimum wage workers, as a group, are better off with a wage hike or that minimum wage workers as individuals are better off? I'll grant you that in some, if not most, cases, the total amount paid to minimum wage workers increases when the minimum wage is raised. However, unless those workers pool their wages, the members of the group who lose their jobs are WORSE off. So, too, are the new entry level job applicants who will not be hired under the new, higher, wage law who would have been hired under the old law.
I can understand why liberals get frustrated with conservatives citing "basic economics". In fact, things that make intuitive sense sometimes aren't true, because your intuition is wrong, or (more commonly), because there are other basic factors, which also make complete intuitive sense, that you have overlooked.
... like if you concentrate enough power in the hands of a few individuals, you upset the political balance of power in their favor? How many econ 101 classes consider the market for congressmen?
Posted by: Ryan on June 19, 2006 03:23 PMSpencer - Small changes in the minimum wage rates do not benefit minimum wage workers, they simply make liberals feel better about themselves by "sticking it to Big Business." Say you raise MW by $.50 - if that worker is employed full time (questionable) then they make $20/week before taxes. How is that a benefit for a MW worker? It's insignifigant.
Secondly, it is plausible that instead of causing unemploymnet it simply crowds out people that are ineligible for unemployment (part time workers, students, etc).
So we have a policy that does no measurable good for an extremely small number of people that makes operating business more expensive to run.
What the plus side?
Posted by: Chris on June 19, 2006 03:25 PMThe consensus view seems to be that the effects of a small rise in the minimum wage are small but the overall effect on total welfare is negative. This negativity should manifest itself in terms of less total employment but it could be drowned out by other effects or it could manifest itself in other ways such as a decrease in the quality of working conditions. The fact that the negative effects are small is no reason for arguing in favor of minimum wages. Absent STRONG evidence that a hike in the minimum wage is unambiguously positive for workers, I don't see why anyone -- liberal or conservative -- could argue in favor of it.
Score one for Will for stating the obvious so eloquently and pointedly.
Posted by: patience on June 19, 2006 03:29 PMRyan,
Concentration of political power is not covered in econ 101, but as I recall it was covered in econ 102. Under the heading of public choice theory.
Posted by: lannychiu on June 19, 2006 03:35 PMNo patience the consensus is that the impact of changes in the minimum wage on employment is so small that it can not be found. I know of NO study that concludes that the welfare impact is
negative. Show me a single refreed study that shows that conclusion.
I believe that one of the reasons the studies on the effects of minimum wages have found either positive or negligable effects is an issue of endogeniety.
Governments are most likely to legislate minimum wage increases when the economy is doing well. Thus, we may actually see wages rise after a minimum wage is enacted: the economy was already growing such that wages were growing.
Posted by: Michael Ewens on June 19, 2006 03:50 PM"How many econ 101 classes consider the market for congressmen?"
Mine did, but then I took my econ classes at George Mason University, the home of public choice.
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The idea that liberals love sticking it to Big Business in the form of a higher minimum wage or other assorted labor regulations is so hilarious I could laugh aloud (but I won't 'cuz I'm at work). I (would) laugh because big companies LOVE regulations (and indeed lobby for most of them) because they can absorb the costs of such regs, while their smaller competitors cannot.
I think what I love most about liberals is their undying belief that all they need to do is get the Government to punish Evil Corporations for most of the world's problems to disappear. What they forget (strangely enough given their visceral hatred of profit-driven enterprise) is that companies will simply pass their new costs onto consumers. They don't just hold everything the same and watch their bottom line take a hit.
Posted by: Christina on June 19, 2006 03:51 PMI found a cool jewish site for you guys.
Cool Jewish Tshirts
C'mon, Physics Nerd, v sub zero is not a vector either, yet it is also in bold. Doesn't this argue that she is not using the convention of bold face type equals vectors?
Posted by: Rex on June 19, 2006 04:18 PMWell, I consider myself to the left of most liberals but I am willing to embrace the "consensus" of economists. I would argue that the consensus of economists is that we ought to be doing lots more for poor people. It is not Milton Friedman who thinks we ought to cut spending on poor people. (he would probably object to how it is spent) I would happily embrace that kind of consensus. Unfortunately, what we have on the right is a consensus to not spend any money. So instead of stating their real objection, they snipe at the details.
Posted by: Robb on June 19, 2006 04:18 PMNote: the bolding was just to make it stand out from the text around it. As noted in the post, I've never taken physics, and thus have no idea what its notational conventions are.
Spencer, your unawareness can be rectified by reading this document from the Clinton-era HHS, which sums up the consensus as known to other economists: the welfare effects are detectable, and negative; the employment effects are hard to detect, but probably slightly negative; and the entire thing may well be a gigantic transfer to middle-class teenagers from poor adults.
Posted by: Jane Galt on June 19, 2006 04:30 PMI'm not sure I follow what this debate is all about.... it seems, well, pointless.
If we raise the minimum wage 50 cents/hour, even if there is a 10% drop in the number of minimum wage jobs available, that just means that those people who lost their minimum wage job can just go next door and take a minimum wage job there. And work that day. What do they care? There is a glut of minimum wage jobs (Nationwide), many of these jobs will never be filled simply because there are many more minimum wage jobs, than there are people who are willing to work them.
Raising the minimum wage, leaving it alone, (or lowering it) will not impact the bottom line in the free job market as to how many minimum wage jobs there are: that is, there is always another minimum wage job available for a worker. Even in the worst of recessions, there are plenty of low pay jobs.
Posted by: Paul on June 19, 2006 04:33 PMPaul,
I don't believe that is quite correct. The argument usually follows, I may be skilled enough to produce $10 in value for some employer. If the minimuim wage is set above that amount, then no one will hire me, since I am not producing as much value as it costs to employ me.
If one takes this affect across the economy, then increases in the minimuim wage will tend to increase unemployment. This would also be true of any cost associated with employment, mandatory health insurance, mandatory pension benefits, etc..
@Christina - You are correct - I should have stated that liberals love to appear like they are sticking it to Big Business.
@Paul - You are assuming that workers that had jobs at $5/hour are employable at $5.50/hour which is not a safe assumption to make. I also question your assertion that there are is a glut of minimum wage jobs - there are very few minimum wage workers (which I understand are not minimum wage jobs) so where are you getting the numbers to say that there are a lot of jobs?
Posted by: Chris on June 19, 2006 05:29 PMTo quote the Clinton era study you cite -- it says
"However, empirical research has not found conclusive or consistent evidence that minimum wages have differential effects on employment across racial groups"
Could you please explain how you go from this to
"the minimum wage transfers money from poor people to middle-class teenagers"
I could not find your conclusion in the paper you cited.
Could you show it to us.
I am not making comments because I am in favor of a hike in the minimum wage.
Rather, I am making comments because of what I see as bad economic analysis.
What I get from my reading of the available evidence is that the minimum wage has a small posive impact on welfare of minimum wage employees but that it is very small.
But that is not what you are arguing.
You are making the case that an increase in the minimum wage is always a negative for the poor. But the evidence for that is severly lacking.
If you limited your argument do one that the negative income tax is a superior way to help the poor I would agree. But you are not doing that. So I repeat -- show me any evidence that a single historic increase in the minimum wage generated a larger percentage point drop in hours worked by minimum wage employee then the
increase in wages so that the welfare of minimum wage employees actually fell.
Cris -- the upside is that an increase in the minimum wage leads to increases in capital spinding by the employeer of the minimum wage employee so that the marginal product of the minimum wage employee will increase to the new higher wage level. Over the long term this is the only way for a society to increase its standard of living.
The greatest benefit of capitalism is that it is the best thing ever created to raise living standards.
But every time I turn around what I see from right wing supposed defenders of capitalism is opposition to everything that lead to this.
Every time you argue in favor of cheap labor you are arguing against the greatest benefit of free market capitalism.
@Paul - You are assuming that workers that had jobs at $5/hour are employable at $5.50/hour which is not a safe assumption to make. I also question your assertion that there are is a glut of minimum wage jobs - there are very few minimum wage workers (which I understand are not minimum wage jobs) so where are you getting the numbers to say that there are a lot of jobs?
Well, I can't speak for the whole country (I have no link to support the data), but here in Arizona, I can go into any mall or any store, anywhere in Maricopa County, and if the store is even open for business, there is most likely a help wanted sign in the window. Everyone is hiring, everyone. And all these jobs that they are hiring for pay minimum (or something very close to it.)
And the jobs go unfilled, all year.
No I can't say that exists everywhere, but in the couple/three states that I lived in, even during the worst of economic recessions, there have always been a glut of low wage jobs. Raising the minimum wage never really had that much of an effect (other than putting a couple Subway Sandwich shops out of business.)
Just last week, a jobs report was released (and Jane could probably find this quicker than I could) that said, nationwide, there are 5,000,000 jobs that are currently, unfilled. COmpare that to the 2,300,000 jobs unfilled in January of 2002 (the worst time in that recession) and we have more jobs now, than at any time in our nation's short history. I don't know how many of those 5,000,000 jobs offer only lower (or minimum) wages, but it stands to reason, that workers are in demand much more than jobs are.
Posted by: Paul on June 19, 2006 06:37 PMI don't believe that is quite correct. The argument usually follows, I may be skilled enough to produce $10 in value for some employer. If the minimuim wage is set above that amount, then no one will hire me, since I am not producing as much value as it costs to employ me.
That depends on how badly they need you and if business is good or bad.
Raising the minimum wage tends to destroy many jobs in this country, that we shouldn't have to being with (IMHO.) Seriously, why do we grow lettuce in Mesa Arizona? No Arizona resident would even begin to harvest that lettuce, not for the going price of lettuce (in the global economy) and what the farmer would be able to pay the outside labour. There is just not enough profit in that "industry" (much that it is) to warrant higher wages. Okay, so if there weren't a bunch of illegal aliens crossing the border to do that job, we would have to import all our lettuce. Keep the illegals out, raise the minimum wage to $10 an hour, and those jobs would be gone. We import all our lettuce. Is this such a bad thing? Do we even need these jobs? Should we really be bringing all that water from the Colorado River to irrigate the desert to grow lettuce?
I'd argue, no.
Posted by: Paul on June 19, 2006 06:49 PMthe upside is that an increase in the minimum wage leads to increases in capital spinding by the employeer of the minimum wage employee
They spend more capital so that they can replace that (now more expensive) employee - how does this help low wage workers?
But every time I turn around what I see from right wing supposed defenders of capitalism is opposition to everything that lead to this.
Every time you argue in favor of cheap labor you are arguing against the greatest benefit of free market capitalism.
Its not an argument for cheap labor, its an argument for free-market labor, how is this an argument that is "[opposed] to everything that lead to this?" Despite popular liberal belief wages are not inexorobly headed downward - very few jobs actually pay minimum wage since it is very difficult to find people that are willing to work for that amount. Wages rise without government intervention - raising them artificial merely hurts the very people that it is (theoretically) supposed to help.
@Paul - I would bet dollars to doughnuts that those jobs are not minimum wage - there are VERY few minimum wage jobs. True minimum wage jobs really only apply to regions with very few job opportunities and a high supply of labor and jobs that have very low skill requirements.
Posted by: Chris on June 19, 2006 07:03 PMPretty funny stuff over there at the EPI"
"The federal minimum wage has been raised 19 times by Congress since its introduction in 1938. Eighteen states, covering about half of the national workforce, have minimum wages above that of the Federal level. And over 100 cities have living wages--a higher minimum that applies to workers on city contracts or at firms with local government subsidies.
In other words, more than any economic policy, we've had hundreds of "pseudo-experiments"--rare in economics--that allow us to test the impact of wage mandates on various outcomes. These experiments allow us to compare before and after, or, even better, compare nearby places that face similar economic conditions but have different minimum wage laws.
The question that has received the most scrutiny is whether increases in the minimum wage lead employers to lay workers off. You probably don't want to hear the results from me, but here's how Nobel laureate in economics, Robert Solow, put it: "The main thing about this research is that the evidence of job loss is weak. And the fact that the evidence is weak suggests that the impact on jobs is small."
A great example comes from the last Federal minimum wage increase, back in 1996-97. The usual suspects predicted massive job losses among those affected by the increase from $4.25 to the current level of $5.15. Instead, low-wage workers experienced the strongest job market in 30 years. Poverty fell to historic lows, particularly for the most disadvantaged workers, such as less-skilled minorities and single-mothers. "
Like I said, funny.
Posted by: mickslam on June 19, 2006 09:47 PMSo there are plenty of jobs in Arizona?
That hardly makes the case that there is no link between minimum wages and unemployment. All it argues is that the minimum wage level does not apply in Arizona.
Or perhaps I should better have said that there is no need for a minimum wage law at its current level in Arizona.
Posted by: gazzer on June 19, 2006 10:04 PMPersonal experience dictates one other aspect of this debate. The more people pay for something (like someone's time), the more they tend to value it and take steps to make it more productive.
The simple fact of having to pay an employee a living wage (in my experience) tends to make the employer treat them better in a variety of ways, including investing more in them.
Odd, and slightly counter-intuitive, but then humans tend to place value on people and things on the basis of how much it costs them. Something that is cheap (or free) is invariably discounted as near worthless no matter how valuable it actually is. There's endless examples of people having to raise the price of an item in order for it to be considered of value. My experience is that this applies to people as well.
Posted by: Tom West on June 19, 2006 10:07 PM@mickslam - It's hard to take that evidence very seriously since the cities that employee higher minimum wages still set them below the going rates. i.e. When most jobs start paying at $7/hour raising the minimum wage to $6.5 isn't likely to show much effect.
The psuedo-experiments fail to measure the economic response in areas that have wages that are closer to the minimum wage.
Posted by: Chris on June 19, 2006 11:30 PM"A great example comes from the last Federal minimum wage increase, back in 1996-97. The usual suspects predicted massive job losses among those affected by the increase from $4.25 to the current level of $5.15. Instead, low-wage workers experienced the strongest job market in 30 years. Poverty fell to historic lows, particularly for the most disadvantaged workers, such as less-skilled minorities and single-mothers."
Like I said, funny.
It gets even funnier when you consider that right around 1996-1997, through about 2001, the entire economy experienced the strongest job market in 30+ years for reasons completely unrelated to the federal minimum wage hike.
Posted by: anony-mouse on June 20, 2006 03:19 AMOr perhaps I should better have said that there is no need for a minimum wage law at its current level in Arizona.
There is no minimum wage law in Arizona. And I'm of the opinion that if you raise the Federal Minimum wage (or leave it alone) it will not impact employment in any meaningful capcity. There will still be millions of jobs going unfilled.
Posted by: Paul on June 20, 2006 11:47 AMPaul - Just because it wouldn't effect employment in Arizona doesn't mean that it wouldn't effect it elsewhere. Besides - who is it that you think that this is going to help? The 75% of minimum wage workers that aren't poor? Or the thousands of people that aren't even employable at the current minimum wage?
I don't understand the fascination with raising the minimum wage since it doesn't actually help anyone.
Posted by: Chris on June 20, 2006 02:04 PMSpencer says, "the upside is that an increase in the minimum wage leads to increases in capital spinding by the employeer of the minimum wage employee so that the marginal product of the minimum wage employee will increase to the new higher wage level. Over the long term this is the only way for a society to increase its standard of living."
This doesn't seem right to me. Increases in spending only increase welfare if the thing being bought is actually valued at a higher price. In other words, I'm happy to trade $60 for a barrel of oil today because it's a deal. But if I were forced to trade $60 for a barrel of oil in '95, I'd be getting ripped off. Today $60/barrel makes me richer. In '95 it made me poorer.
As soon as you put the government to the task of forcing a higher minimum wage, you've removed the value out of the equation. People aren't paying more for employees because they provide higher value. They're paying more for employees because they're forced to. They're getting ripped off.
How is this substantially different than stealing someone's credit card and purchasing something with it for yourself, and then returning that credit card to them? Sure they get the benefit of all the stuff that they already bought, but the cost of all of it just went up because they're subsidizing the spending of the theif. If raising the min wage makes us all richer, why doesn't a program designed around taking people's credit cards also make us all richer?
Is there something I'm missing?
Posted by: Mark Horn on June 20, 2006 04:57 PM Well, I can't speak for the whole country (I have no link to support the data), but here in Arizona, I can go into any mall or any store, anywhere in Maricopa County, and if the store is even open for business, there is most likely a help wanted sign in the window. Everyone is hiring, everyone. And all these jobs that they are hiring for pay minimum (or something very close to it.)
And the jobs go unfilled, all year.
Wait: these stores need help and don't hire anybody? Well, Paul, then we can conclude:
1) The stores are being completely irrational;
2) The jobs they're offering are so bad that nobody will do them at any price;
3) There's so little unemployment that they can't find any qualified people who are looking for work;
4) The stores can't raise salaries and manage to stay in business -- in which case it doesn't seem like it makes a lot of sense to try to compel them to raise salaries; or
5) You're wrong about the facts you describe.
I know which one of these seems most likely.
Or maybe,
6) The stores are continually hiring people, but lose workers just as fast, so the Help Wanted signs stay up.
7) They might not actually be hiring at this moment, but want to build up a file of applications so they can immediately start calling people when staff does quit or get fired.
Paul, that minimum wage jobs go unfilled in the face of unemployment is EXACTLY what we're saying: that the existing minimum wage law has created unemployment. The people who cannot get these jobs are not sufficiently productive to justify the wages that must be paid. Were an employer to hire them, they would lose money.
Spencer, you're not a very good economist. You should either get better or stop trying. You said "Cris -- the upside is that an increase in the minimum wage leads to increases in capital spinding by the employeer of the minimum wage employee so that the marginal product of the minimum wage employee will increase to the new higher wage level. Over the long term this is the only way for a society to increase its standard of living."
This is only true if the capital spending is *voluntary*. When it's imposed, then you end up with people spending capital in *worse* ways than they would choose. If you think people should be allowed to vote, then for the same reasons you should think that people should be able to make the capital improvements they think are correct.
For this reason and others, minimum wage laws do not make society better-off. They unarguably improve the lot of some workers. They equally unarguably cause some employment (yes, I'm aware of the price insensitivity argument, but you cannot reasonable argue that ALL employers prices are insensitive between the market-clearing price and the price floor set by market interference).
Jane the Clinton era study you cited also says the following that implies just the opposite about the impact of a minimum wage hike on teen employment.
"Economic theory suggests that teens bear most of the disemployment effects resulting from a minimum wage hike, compared with any other demographic group (e.g., adult males), since minimum wages directly affect a high proportion of employed teens. Thus, a great deal of the research examines the economic impact an increase in the minimum wage would have on teenagers. Researchers have typically examined the influence of the minimum wage on teenagers 16 to 19 years old.(10) Earlier time-series studies that analyzed the impact of minimum wages on teen employment over time found that, in addition to the disemployment effects, some teenagers withdraw from the labor force (stopped actively looking for employment) following a minimum wage increase.(11)"
Posted by: spencer on June 22, 2006 04:40 PM"Economic theory suggests that teens bear most of the disemployment effects resulting from a minimum wage hike, compared with any other demographic group (e.g., adult males), since minimum wages directly affect a high proportion of employed teens."
That statement is almost a pure tautology. It says nothing about why teenagers dominate the minimum wage market in the first place. Ask that question, and Jane's apparent view is certainly a possibility -- i.e., that the minimum wage causes employers to grdually displace long-term hires with cheaper alternatives, such as a more-transient teenaged workforce.
Posted by: anony-mouse on June 23, 2006 01:54 PMPaul, that minimum wage jobs go unfilled in the face of unemployment is EXACTLY what we're saying: that the existing minimum wage law has created unemployment. The people who cannot get these jobs are not sufficiently productive to justify the wages that must be paid. Were an employer to hire them, they would lose money.
Why are unemployed people unemployed? The assumption seems to be that if you lower the minimum wage enough, you'll have full employment.
Would you offer an internship to an ex-con, if he (or she) worked for free? Couldn't some potential employees have negative value?
Are there any industrialized countries without minimum wages?
Russell Nelson wrote "This is only true if the capital spending is *voluntary*. When it's imposed, then you end up with people spending capital in *worse* ways than they would choose."
I agree, and I think the point of the free market movement is that all the benefits of capitalism come from allowing the effects of free choices to be felt by those who make those free choices.
There are a couple things that some commenters have not fully understood, so I want to try to explain them more simply.
1) There is always a net effect one way or the other, and once you have ignored all the situations in which the net effect works out to zero, you're left with the situations that really matter. In other words, the fact that most people don't choose how may hours they work and the "fact" that changes in minimum wage don't effect the level of unemployment in AZ are grounds to leave those people and AZ out of the respective discussions of how many hours people choose to work and how MW changes effet the rate of employment.
2) People make decisions, and the net effect of those decisions define whether or not they were good decisions or bad ones. Running a business involves a lot of decision making, and the less control a business has over those decisions, the longer it will take for that business to close because the decision maker does a poor job, or grow because the decision maker does a good job.
There are other effects of the minimum wage that can't be easily measured but are obvious to a reasoning mind. Every employer who would have employees with sub MW pay if it were legal has less money to spend on everything else. That money is not being spent on things that are more valuable to that business than the employment for which it pays. This mean that suppliers, research and development, marketing, and all other players who are paid by that business get less money to motivate or improve themselves. Every employee whose choice to work depends on the level of the minimum wage uses skills that appear to be more valuable than they actually are, and leaves more valuable skills either undeveloped or atrophying. Every unemployed person whose productivity is below the minimum wage is legally prohibited from working except for businesses that are bound to fail. These effects cannot be measured, but how can they not be present?
I cannot agree that raising or lowering the minimum wage is a good thing. My understanding is that both of these actions merely change the rate and number of people who suffer because of it. A lower minimum wage will slow down the rate and lower the number, but the only good solution is to allow people to choose to hire and be hired at whatever rate they can agree upon.
Posted by: Dave Scotese on June 25, 2006 11:45 PMUm, I think you made a methodology error when explaining the substitution and income effects. Both of these terms refer to the two effects of a PRICE change, not an INCOME change.
Here's an example of the "income effect" of a price change. The Ramen, of which you were previously purchasing 100 packages at price $0.25, is now cheaper at price $0.20, you now have $5 more effective income to spend on anything you want -- Ramen or otherwise. We usually assume, for simplicity, that you buy a little more of everything you were buying before (in different proportions, according to the marginal utility), and thus the income effect of a price drop is positive.
Arguments from methodology need good methodology!
Posted by: ModalHubby on June 26, 2006 01:50 PMComments are Closed.