I Knew This Would Happen: Minimum Wage Shenanigans
Remember back when we were arguing about the minimum wage? One of the things I pointed out–here’s a post on the topic but unfortunately I can’t find myself making this specific point–is that even if you conceded that “modest” increases in the minimum wage wouldn’t lead to significant drops in employment, that that had no bearing on whether Obama’s proposed 24% increase (to $9/hour) would have an effect.
Now check this out. As you probably know, fast food workers are striking because they want the minimum wage to more than double, from its current $7.25/hour to $15.
In a story on August 29, NPR reported this:
Industry officials say a sharp increase in the minimum wage would kill jobs.
“Doubling the minimum wage is absolutely, positively going to reduce the number of jobs,” says Scott DeFife, executive vice president of policy and government affairs at the National Restaurant Association.
Yep, there’s nothing wrong with that statement at all. To my knowledge, there is not a single empirical study claiming that a doubling of the minimum wage wouldn’t lead to a reduction in employment.
And yet, Media Matters jumps in to “correct” this shocking falsehood:
Contrary to industry officials’ claims, economic studies have concluded that raising the minimum wage has no effect on employment. In a Center for Economy and Policy Research report titled “Why Does the Minimum Wage Have No Discernible Effect on Employment?” senior economist John Schmitt determined that there is “little or no employment response to modest increases in the minimum wage.” According to Schmitt, extensive research revealed that raising the minimum requirement has little or no statistically significant effects on employment at all.
Schmitt’s conclusions are supported by more than 650 economists — including Nobel Laureates and former presidents of the American Economics Association — who signed a statement affirming that increasing the minimum wage would have little or no effect on employment but would improve workers’ well-being:
We believe that a modest increase in the minimum wage would improve the well-being of low-wage workers and would not have the adverse effects that critics have claimed. In particular, we share the view the Council of Economic Advisors expressed in the 1999 Economic Report of the President that “the weight of the evidence suggests that modest increases in the minimum wage have had very little or no effect on employment.” While controversy about the precise employment effects of the minimum wage continues, research has shown that most of the beneficiaries are adults, most are female, and the vast majority are members of low-income working families.
OK, so the parts I put in underline above come from the Media Matters writer, Samantha Wyatt. In contrast, the parts in bold come from the economists when she’s literally quoting them, not “paraphrasing” them. Notice an important difference, in the context of a proposal to (more than) double the minimum wage?
Anybody care about the minimum wage of the cow that got butchered so these imbeciles could get a job at McDonalds?
I don’t know, but I now have a craving for a Big Mac.
The real question that arises is was the Media Matters writer a moron, or did they know they were being dishonest?
That’s always the question with our opponents. Always always always.
Moron, most likely. Confirmation bias extends to misinterpreting and over-interpreting results you think are favorable.
The Media Matters writer — posting on the NPR site — is a she, named Samantha Wyatt, with a degree in “philosophy, politics, and economics” from the University of Pennsylvania, according to her bio.
The economist she quotes is John Schmitt, a lefty who works for a far left think tank in Washington, DC called the “Center for Economic Policy Research” (CEPR).
CEPR has come out in the past strongly in favor of Hugo Chavez and his strong-arm governance of Venezuela. Failure of Chavez’s policies was usually blamed on “opposition groups.”
Wyatt doesn’t strike me as an intellectual interested in economics as a “value-free” science that investigates the consequences of Human Action. She’s simply an ideologue of the left.
Those 650 economists ought to read Robert Murphy’s ‘Lessons for the Young Economist’ before they embarrass themselves further.
The 650 are fine. It’s some of the others here that are the problem…
If you go to the source (http://www.epi.org/files/page/-/pdf/epi_minimum_wage_2006.pdf), you’ll find the following
“The minimum wage has been an important part of our
nation’s economy for 68 years. It is based on the principle
of valuing work by establishing an hourly wage floor beneath
which employers cannot pay their workers. In so doing, the
minimum wage helps to equalize the imbalance in bargaining
power that low-wage workers face in the labor market. The
minimum wage is also an important tool in fighting poverty.”
I’m hoping the 650 didn’t read this part before adding their names to the list. It’s troubling enough that the listed 15 “leading economists” apparently think this an appropriate thing for professional economists to agree with.
Yeah, they’re “the problem”. Thanks Dan
Leave it to DK to think that only “professional” economists are smart enough to know economics. Maybe Jared Bernstein should go back to learning music instead of commenting on economics since he has no formal training in it.
It’s especially amusing since Keynesian economics is as relevant to economics as astrology is to astronomy. Is there any other profession where you actually come away from all that schooling and study not knowing jack shit about your area of supposed expertise?
Which is exactly why I did not pursue a graduate degree in economics. After getting a second degree in mathematics, I realized how silly is the whole mainstream economics profession. Thankfully I found a real career in software development, and saved myself a great deal of money in the process.
J Reeves wrote:
Those 650 economists ought to read Robert Murphy’s ‘Lessons for the Young Economist’ before they embarrass themselves further.
Well, I’m presuming professional economists are already familiar with the standard arguments about the minimum wage law. They would claim that empirical studies show that modest (a key word) increases don’t lead to statistically significant reductions in employment.
Now as I argued back when this stuff was hot (see the link above in the original post), I actually am very skeptical of these empirical studies. If I understand them, they too find that there is a prima facie reduction in employment when, say, one state raises its minimum wage while the adjacent state doesn’t. But then this effect is washed out when you overlay a dummy variable for each state, to capture geographical effects. In my mind, this is a patently silly move, which serves only to hide the actual effect, but I wouldn’t bet my life on this; it’s just my reaction to a quick perusal of this line of research.
In any event, these economists would not be persuaded by my junior high level discussion in LFTYE.
Probably because the logic conflicts with their emotions and so the logic gets redirected up and over their heads.
If the existing minimum wage is having a significantly bad impact upon employment, it’s conceivable that a “modest” increase would not make things that much worse. Anyway, thanks to interventionist policies, there are important alternatives to gainful employment, such as welfare and crime.
In an Austrian free-market model then a minimum wage will always reduce employment. However its quite easy to invent models where this is not the case.
here’s 2.
A: A farmer owns an orchard where he hires workers who pick 30 apples a day. His own demand for apples is inelastic at 100 apples a day. He negotiates to pay workers 5 apples a day and hires 4 workers to pick enough apples to provide his 100 plus the workers wages.
The govt steps in and raises the minimum wage to 10 apples a day. He now hires 5 workers to cover wages plus income.
B: Same orchard but a market economy. The farmer sells apples at cost+markup. The govt doubles the min wage from $5 to $10 and the price of apples increases . Less apples will be sold to non-apple workers at the higher prices, but apple-workers will buy more with their increased wages. Depending upon the relative elasticities (apple workers buy more than non-apple workers buy less) then it could be the case that demand for apples increases and with it employment amongst apples workers.
When I look at the world it is not much like an Austrian free-market model. How do we know it is not more like my Model A or Model B ?
I would suggest that the real world doesn’t look anything like those models.
In model A you have a producer making profit hand over fist. In the real world, I think the Austrian story of new producers entering the market and bidding up the factors of production (increasing wages), is much more realistic than believing in huge equilibrium profits.
In model B you have to ignore the very obvious observation that the division of labor in the real world means people make much much much more of something than they themselves want to consume. How many products can you name where it is even remotely plausible that the demand for the product by the producers themselves is anywhere near the demand of non-producers? I’m guessing 99.99999% of the world looks more like the Austrian picture.
Both of the models have other significant shortcomings, but you get the point.
In Model A: suppose producers use the state to help them prevent entry into the market ? Wages are held artificially low and a minimum wage may mitigate this.
In Model B: Before the minimum age: $1m worth of apples are sold to non-apple workers and 0 to apple-workers. After the minimum lets say the price of apples doubles. $2.1m worth of applies are now sold ($1,9m to non-apple workers and $.2m to apple workers). Total demand for physical apples has increased but .apple-workers only consume 9% of the output.
I’m not saying these models hold – I’m just saying in non-free markets its not such a no-brainer that minimum wages don’t increase employment as Austrians seem to think.
Are the workers free to leave the produce picking industry for one with higher wages? If so, how does the farmer keep these wages artificially low?
Perhaps he owns all the land in the area and they have no choice but to work for him.
So they can’t move to a place with more opportunities?
Not in my example,
Oh, so just like other mainstream economic models, your assumptions are based on fantasy.
In that case, this represents the best job those workers can get, so what is the problem? It’s like my friend who complained about the poor old door greeters at Wallmart. He felt they were being demeaned by doing such a ‘lowly’ job, but he never stopped to think that maybe that’s the best job those people could find. If that were to be denied to them, they’d have to take an even worse job.
If the farmer is the only employer in the town, then he calls the tune as far as wages go. The workers can always refuse the job.
The point is that a state-imposed minimum wage would increase employment given my assumptions.
The fact that the original situation may be the best the workers could obtain before this intervention just adds to my point.
“The workers can always refuse the job.”
Or start their own business, unless artificial restrictions disallow them from doing so. From where do those come? Hmmm
In an Austrian free-market model then a minimum wage will always reduce employment. However its quite easy to invent models where this is not the case.
Remember that the Austrian argument is ceteris paribus.
A: A farmer owns an orchard where he hires workers who pick 30 apples a day. His own demand for apples is inelastic at 100 apples a day.
An individual’s valuation of any particular good goes down with each additional unit he acquires (this is called Marginal Utility). So his demand will always be elastic.
He negotiates to pay workers 5 apples a day and hires 4 workers to pick enough apples to provide his 100 plus the workers wages.
The govt steps in and raises the minimum wage to 10 apples a day. He now hires 5 workers to cover wages plus income.
First of all, it will at least cost the guy time to hire workers, so he is foregoing something else he would have done with that time were it not fore the Minimum Wage. There is a cost, even if the cost isn’t in terms of apples (or money).
Second, apparently this guy has 30 extra apples lying around that he somehow forgot to either sell or use to buy the labor of better workers (in order to acquire his inelastic demand for 100 apples QUICKER). And that’s assuming it doesn’t cost any more to clean up the rot left over from 30 unspent apples before the Minimum Wage.
And then what about competitors who DON’T let 30 apples go to waste? How come they aren’t bidding workers away from the farmer with inelastic demand?
In short, the Minimum Wage always results in less employment, ceteris paribus.
B: Same orchard but a market economy. The farmer sells apples at cost+markup. The govt doubles the min wage from $5 to $10 and the price of apples increases . Less apples will be sold to non-apple workers at the higher prices, but apple-workers will buy more with their increased wages.
Here, similar to the prior example where the farmer has 30 apples lying around, you have a farmer who didn’t spend $5 more to bid away better quality labor from his competitors.
So far, your examples require that the employer doesn’t realize that he has the capacity to make more profit, and then the government comes in and comandeers that previously unrealized profit.
The government was never required, in either of those cases, for raising wages. All that needed to happen was for the farmer to see that he could use his resources in a way that better served his own purposes (in the specific examples you provided).
I agree with you that in a totally free market where everything ran along the lines envisaged by Rothbard neither of my models would work (In A as, you say , an entrepreneur would likely rent the farm for 100 apples and expand production. In B, even if by some fluke the minimum wage did increase employment in the apple industry this could probably only be at the expense of greater employment losses else where).
However we live in a world of state intervention into markets, resource under-utilization and general dis-equilibrium. In this situation I don’t think we can discount effects like I have invented occurring in the real world.
It does seem to always come back to the question of whether government can better run a business or whether the business owner is better at running that business. To consider the question properly, government does collect a lot of statistics and may have access to “big picture” information that individual business owner do not have, but invariably the business owner knows more about what is really happening on the shop floor.
You would think that if governments did discover an excelent strategy to improve both profits and wages, they could get that message across to business owners without resorting to brute firce. After all, even if a small number of businesses adopt the strategy, and find themselves successful, those will expand and overtake their competitors. It’s the Walmart vs Costco thing, both are successful, Walmart mostly is successful in low income areas where buyers are sensitive to price and not much else, Costco aims for middle income areas where buyers will pay a small premium for service, quality, etc.
You would think that if governments did discover an excelent strategy to improve both profits and wages, they could get that message across to business owners without resorting to brute firce.
Since government would have to fund its research through coercion, this is impossible.
The money taken for the purpose would have been used by the taxpayer in the pursuit of his subjectively valued ends, so a portion of the data collected by the government would represent a non-optimallity (as subjectively determined by the individual) which was created by the government – and there’d be no way of knowing how much that portion is, since there’s no way to know what each individual person WOULD HAVE done with that money;
And those who would benefit from the information collected would be cronies, since the government stole on their behalf.
In a modest increase has little or no effect on employment, I propose that we modestly raise the minimum wage every month for the next 100 years.
“Helping the less fortunate, while still in tune with latest scientific research!” That’s my motto. Now where is my blog on the NYT website?
*In=If
You can’t really expect much else from Progressivism. It is a cancer.
http://kenpruitt666.wordpress.com/2013/08/31/the-shortcomings-of-progressivism/
It’s pretty hard to argue that doubling the minimum wage would not increase unemployment. Perhaps it would increased the labor market participation rate?
It bothers me to see “starter jobs” treated as the kind of job that should provide a “living wage” so you can support a family. Do people actually retire from McDonalds without becoming management? Should someone working at McDonalds make an income near the top 1% of world incomes?
I think one of the biggest effects would be reduced turnover of starter jobs, leading to fewer positions for new potential-employees entering the labor market. Nearly everyone I know has worked a minimum wage job at some point.