14 Mar 2013

More on Minimum Wage

Daniel Kuehn, Economics 47 Comments

Daniel Kuehn reproduced the following chart from an EPI paper:

Daniel had this commentary:

It’s an interesting approach. One does wonder why we should expect the minimum wage to be so damaging given that it grows so much slower than productivity (again – local markets matter – it may grow at a slower rate but since it’s imposed on some low-price level areas that could still mean a high real minimum wage rate for those areas).

My first reaction was, “How do we know the minimum wage wasn’t damaging back in 1968?” I mean, suppose I tried to justify the Iraq invasion by showing that more US troops died in Vietnam. That wouldn’t really be a sensible argument, would it?

Anyway, I did a very quick search and found a JEC report with this chart:

I’m not saying this chart vindicates my position, but it does show that proponents of a minimum wage increase (or at least, those saying it won’t be harmful) need to do more than simply say, “This is nothing new.”

47 Responses to “More on Minimum Wage”

  1. Stupid guy says:

    How is this still an issue? All else being equal, people buy less of something if the price goes up. I’m pretty stupid, but even I’ve heard of the law of demand. If the price goes up and people buy MORE, then all else wasn’t equal. Period. Cus stone cold said so.

    • The Existential Christian says:

      ^ I’m with Stupid.

      • successfulbuild says:

        Of course you guys are stupid. It’s important to understand context: if prices go up, corporations can actually make more of a profit. Second, if corporations are required to raise the minimum wage, they can respond by cutting into their profits. This means that the price of products will not necessarily go up. So it’s hard to see how this sentence “proves” anything.

        Finally, demand curves can slope any which way. So again you have another scenario where raising the price means MORE profits.

        Maybe you two should go on the Alex Jones Show like Thomas Woods does. Someone there might believe your nonsense.

  2. Tom Dougherty says:

    We see what the minimum wage would be at hypothetical growth rates. What we don’t see is what the unemployment rate would be at those hypothetical levels. A minimum wage of $28.34 would cause catastrophic problems not only for unskilled labor but most workers. Given that the average hourly earnings for private sector workers is less than $23.00 an hour, we might see the unemployment rate around 60% or more. EPI should have a right hand scale with the hypothetical unemployment rate to match the hypothetical minimum wage. Just a thought.

    An $18.72 minimum wage would be pretty devastating too. The average hourly earnings in the Retail Trade industry is $16.50. Can you imagine what a $18.72 an hour minimum wage would do to Retail Trade workers? This would be bad for the average retail trade worker, and a lot of other workers as well, not just unskilled workers. This hypothetical thinking that the EPI has started is very instructive.

    Well, what about a hypothetical minimum wage of $10.46. Surely, no harm can come from that. The lower you go the less harm that is imposed on workers. But even this hike in the minimum wage would hurt those in the Accommodation and Food Services industry, where the average worker makes only $12.63 per hour. And this is the average hour earning. Those who are just starting out will be devastated.

    The lower the unemployment rate the less damage it causes to workers. But why should any worker be damaged for the benefit of someone else? The joy I receive from punching you in the nose might outweigh the damage you sustain. Even if this was true, would you still agree to the punch in the schnoz? The right minimum wage would be no minimum wage.

  3. Daniel Kuehn says:

    Right – if it’s too high to begin with then that’s a problem too. Granted, if it grows slower than productivity for decades the badness of whatever it was in 1968 (if it was bad) would be decreasing over time.

    I don’t think it ought to necessarily grow with productivity (in fact not growing with productivity is a nice way to have it become increasingly irrelevant without outright abolishing it). I just thought it was a neat way to look at the problem. My far more interesting thoughts in response to the minimum wage while you were gone are in response to Bryan: http://www.factsandotherstubbornthings.blogspot.com/2013/03/bryan-caplan-on-minimum-wage.html

  4. Daniel Kuehn says:

    Could you explain a little more how you think proponents of the minimum wage ought to respond to that chart?

    Surely there are more explanations for persistent youth unemployment than just the minimum wage. Are you saying that because you have one potential explanation the ball is in their court?

    • Ken B says:

      I’m with Bob on this issue, but with DK on this comment. All I see from the cahrt is that youth unemployment is higher consistently and in a broadly predictable fashion. Minimum wage is indeed a likely cause, maybe even the likely cause, but nothing in this chart suggests that over any other possible cause. Bob seems to think this chart presents DK and other “deniers” a particular problem. If you think, as DK does, that there are other reasons that swamp the minimum wage effect there’s nothing challenging here.

      • Bob Murphy says:

        BOB: Kicking people in the groin will hurt them.

        EPI: Why would you say that? We’ve been kicking people in the groin since 1968. I see no reason to believe it causes pain.

        BOB: OK, I just interviewed everyone you kicked since 1974, and they all agree they are in serious pain.

        EPI: ?! Talk about a non sequitur. We think it’s cosmic radiation. There was cosmic radiation back then too, genius.

        • Daniel Kuehn says:


          I must have gotten a bad transcript of the exchange.

        • LurkingSteve says:


        • Daniel Kuehn says:

          Bob: kicking people in the groin will hurt them

          EPI:Well sure, but we aren’t kicking them in the groin, we’re giving them a hug.

          Bob: no, I think you’re kicking them in the groin

          EPI: we’re obviously giving them a hug, but let’s toss that question to CEPR and that awesome Facts and Other Stubborn Things blog. One interesting point is that we’ve been hugging them at a rate that lags behind productivity growth.

          Bob: I think this metaphor is getting strained. But if you’re kicking them in the groin then it’s good that we’re doing it at a slower rate. I just interviewed everyone you kicked in the groin and they said their groin hurts.

          EPI: But we hugged them.

          Bob: But their groin hurts.

          EPI: Right, that’s because someone else kicked them in the groin. Surely we are not the only people in the world that could have possibly kicked them in the groin!

          Bob: Ball’s in your court.

          EPI: WHY? We hugged them! How do we know YOU didn’t kick them in the groin!

          Daniel: Cool graph (you EPI, not Bob).

          Bob: I’ll kick you in the groin…

          • Major_Freedom says:

            Seriously, how is pointing a gun, or threatening to point a gun, at people to prevent them from trading on their own terms, to ban voluntary trades, an act akin to “hugging” people?

            What kind of a sick and twisted mindset is required to associate gun violence with hugs?

        • Ken B says:

          I’ll Rochambeau you for it!

          This chart does not show pre 1968, so it cannot show any effect datable to 1968. All it shows is that there is something. It does not by itself indicate which something. If the pattern started in 1954 say, then the chart would be a problem for the yays not for the nays.

    • Bharat says:

      Daniel, can you explain some of the other reasons why teen unemployment would consistently be higher?

  5. Major_Freedom says:

    The “commentary” from Kuehn is flawed for a reason apart from not taking into account the effects of minimum wage on employment back in 1968.

    Real productivity has nothing to do with what minimum wage law the government “can get away with”.

    If there are 1000 total units of money, and the savings preferences result in a savings rate of 60% of every dollar spent, such that no more than 30 units of money are available for wages (the other 30 for capital), then we can imagine the wage rate of the bottom decile to be $X an hour. The thing is that it won’t make a lick of difference if real productivity is what it is, or two times more, or a half times less. Whatever output capitalists and workers are able to generate, if there is going to be unemployment generated by minimum wage laws, then we’ll see it on the side of money expenditures only.

    If the nominal demand for labor is 30 units of money, for an average price of $Y an hour (given the supply of labor), then if the government says “No labor shall be sold for less than $Z an hour”, then the law of demand says that given the 30 units of money available for wages, there will be fewer labor hours purchases. In other words unemployment.

    If we imagine real productivity to double, or triple, then this will NOT, contrary to the “commentary”, coax or encourage employers to pay more nominal wages! They’ll pay what their time preferences allow, given the total supply of money and volume of spending.

    • Daniel Kuehn says:

      I don’t follow a lot of this comment. Let me ask you a simple question: are you saying that the extent to which any given minimum wage is binding is NOT related real productivity growth? Productivity is the source of labor demand. I can’t imagine what would be more relevant to whether or not the minimum wage is binding.

      • Major_Freedom says:

        are you saying that the extent to which any given minimum wage is binding is NOT related real productivity growth?

        Yes, that is what I am saying.

        Productivity is the source of labor demand.

        That is incorrect. The source of labor demand is saving and investment, which in a barter economy takes the form of goods exchanged for labor, and in a monetary economy takes the form of money exchanged for labor.

        Production is an outcome, an effect, of labor. It is not a source of labor. It is wrong to argue that labor requires productivity. It’s the other way around. Productivity requires labor. Or, using your terminology, “labor is the source of productivity”.

        I can’t imagine what would be more relevant to whether or not the minimum wage is binding.

        That’s too bad. I guess a likely reason for that is that your theory is in large part Keynesian, which holds that the source of economic activity is what most Austrians consider to be effects of economic activity, e.g. output, aggregate (nominal and real) demand, productivity, etc.

        Just ask yourself these easy questions:

        Can there be output, productivity, and aggregate nominal (or real) demand, without wage payments and thus without wage earners?

        Now ask if there can be wage payments, and wage earners, without any productivity, output, or aggregate nominal (or real) demand?

        If you answered yes to the former, and no to the latter, then what I said is right.

        If you answered no to the former, and yes to the latter, then because that’s wrong, what I said is still right.

        • Ken B says:

          “The source of labor demand is saving and investment”
          So I cannot in an economy without savings, have work? Two naked castaways washed up on an island cannot harvest coconuts as soon as they arrive?

          • Matt M says:

            They could both harvest coconuts, but that would not be “labor” in the sense that we are using it in this discussion.

            What couldn’t happen, as soon as they arrive, is that one naked castaway hires the other naked castaway to build a shelter, and pays him in coconuts. You cannot pay someone in coconuts you do not have. You would have to gather the coconuts first, and not consume all of them, in order to be able to hire someone.

            • Ken B says:

              You could pay him in future coconuts. Most of us get paid after we work.

              • JSR08 says:

                To be able to follow through with paying him those future coconuts requires that you actually save real coconuts to pay him with. Hence:

                “The source of labor demand is saving and investment.”

              • Major_Freedom says:

                Getting paid after one provides labor is not the same thing as getting paid before the associated final consumer goods are consumed.

                Most of a modern economy is financed by saving, not consumption, and most workers are in fact paid before the final goods are even ready to be sold, let alone consumed.

              • Ken B says:

                No JSR08. We wash ashore. I am big and tall, he is short and runty. Coconuts grow high up. By myself I can get enough to subsist, and by himself he will starve. If he stands on my shoulders we get plenty. I hire him, day 1, at a rate that benefits us both. He is being paid with coconuts produced by the labor contracted for, not past savings.

                I have a demand for his labor and I have neither investment nor savings.

              • Major_Freedom says:

                Ken B, I strongly advise you to always keep in your mind the concept of property rights and who owns what, when you do these thought experiments.

                In my experience, 99% of all confusions, misunderstandings and errors concerning whether or not a particular economic concept is relevant, or applies, or correctly describes an event, can be traced back to either vague, or contradictory premises concerning property rights.

                If you just consider the physical movements of things, like people’s bodies and coconuts, and you don’t connect them to the concept of property rights, then you will not be able to come to a correct conclusion using concepts that require strict understanding of property, such as wages and wage labor.

                In your hypothetical example, you say the tall guy is “hiring” the short guy to stand on his shoulders to fetch coconuts. That presumes the tall guy owns the means of producing said coconuts. You are presuming the tall guy owns coconuts on the tree, such that the coconuts the short guy picks out are actually the property of the tall guy. If those coconuts are then appropriated by the short guy, then this constitutes “payments” out of the tall guy’s “property”, i.e. his capital.

                So if you say the tall guy is PAYING the short guy, then you are saying the tall guy is giving some of his property (coconuts) to the short guy.

                That would very much imply that the tall guy is paying the short guy out of his capital. The tall is indeed saving and investing rather than consuming his coconuts.

                Always always always make clear who owns what.

                Did I say always? I meant always.

                You didn’t display any indication you were even considering the concept of property. No wonder you arrived at the conclusion that wage payments can be made without and savings!

              • guest says:

                Or, they each traded the use of the property that is their bodies, at an agreed upon percentage of coconuts.

              • Ken B says:

                “you say the tall guy is “hiring” the short guy to stand on his shoulders to fetch coconuts. That presumes the tall guy owns the means of producing said coconuts”

                No. It means the short guy makes a contract with the tall guy. It’s a matter of agreement between them.

          • Major_Freedom says:

            “So I cannot in an economy without savings, have work?”

            I said wage earner worker work.

            Not “work” in general.

            This is precisely the distinction that led me to argue that we can have output (and hence work) without wage payments, but we cannot have wage payments without work (and hence output).

            “Two naked castaways washed up on an island cannot harvest coconuts as soon as they arrive?”

            They could of course, but the “work”, provided neither pays the other “their” coconuts in exchange for “the other’s” labor, is doing any wage earning work per se. There would be no wage payments.

            Now, in principle it is possible for one to pay the other a sum of coconuts, while the other provides their labor only, and in that case, there would be wages paid, because instead of the wage payer devoting those coconuts to his present consumption, he would be saving and investing those coconuts to make available wage payments in coconuts.

            • Ken B says:

              No, you said demand for labor, and you were restricitng the sources of that demand. As you acknowledge though, there are other sources.

              • Major_Freedom says:

                I realize I said demand for labor, but I am not sure how that constitutes a problem in my response to what you said.

        • Daniel Kuehn says:

          A worker’s productivity is not the source of labor demand?

          Look, I know they pay me to just sit around and look pretty, but most people aren’t so lucky.

          If you’re really denying this MF, I don’t know where else this conversation is going to go.

          • Ken B says:

            “If you’re really denying this MF, I don’t know where else this conversation is going to go.”

            A year of my life summed up in a sentence.

            • Major_Freedom says:

              The ego regrettably returns back unto itself after a long and arduous journey, after believing it can escape itself through obliterating other egos.

              • Daniel Kuehn says:

                Stop drinking and go to bed.

              • Major_Freedom says:

                Thus speaketh the-apparently-so-well-read-that-we-needn’t-even-stray-from-the-guild messenger.

          • Major_Freedom says:

            “A worker’s productivity is not the source of labor demand?”

            Well, if you put it that way, then you’re just saying a worker’s ability to perform labor is the source of his labor, and any demand for that labor by others must obviously presuppose said source.

            “Look, I know they pay me to just sit around and look pretty, but most people aren’t so lucky.”


            “If you’re really denying this MF, I don’t know where else this conversation is going to go.”

            This isn’t something of which my “denial” constitutes a problem, because I am not denying what you think I am denying.

            It seems as though by “productivity”, you meant the ability of a person to perform labor. The presence of a means to create output.

            Sure, if you put it that way, then I would say productivity is the source of all things economic, not just demand for labor. After all, you can’t demand what does not exist.

            But I interpret productivity not as the presence of an ability to perform labor, but the actual creative process itself. Productivity is an attribute of action.

            In this understanding, there does not have to be a demand for labor. Everyone can produce without a single good or dollar being exchanged for someone’s labor.

            So saying that productivity (defined as bodily potential for labor) is the source for demand for labor, is like saying the source for a specific form of activity, is the presence of matter and energy. Well yeah, that’s technically true, but that source is actually the source for not just that specific activity, but ALL activity.

            So if we’re talking about a specific form of activity, such as one person putting forth a demand for the labor of another, it would be much more clear to consider the proximate source, which delineates that activity from other activities that cannot occur because that particular proximate source is not present.

          • JSR08 says:

            @Daniel: I think the “source” of labor demand is whatever the “thing” is that enables a demand for labor to be made. The “source” of labor demand is not merely the desire to have what labor produces. (Could be said better)

            What enables (is the source of) a demand for labor? Savings/investment. What does not enable a demand for labor? The mere desire for the worker’s productivity.

            The reason Alice can hire Bob to produce cookies is because Alice can pay Bob wages she saved. It is not merely Alice’s desire to have cookies that causes Bob to produce cookies, it is the fact that she has saved wages and can pay Bob for his labor.

          • Major_Freedom says:

            Also, “worker productivity” as you define it here, is not found on the EPI chart.

            The chart contains a trend of economic productivity. Total output. That includes capitalist labor in addition to worker labor.

            It makes no difference to the question of whether or not minimum wage laws cause unemployment, that real minimum wage growth has been consistently below real productivity growth.

  6. Dan (DD5) says:

    Ken B: “So I cannot in an economy without savings, have work? Two naked castaways washed up on an island cannot harvest coconuts as soon as they arrive?”

    No you cannot! Production must take place prior to consumption. The period of production requires abstention from consumption – You prepare your food before you eat. You cannot do both at the same time and you cannot eat your food before you prepare them. Abstention from consumption is savings!

    While the castaways harvest their coconuts, they are abstaining from consumption (of any form), so yes, they must save in order to harvest.

    • Daniel Kuehn says:

      Are you a fan of John Papola by any chance?

      To my ears, this is John Papola obscurantism. It speaks to nothing of what’s really at stake when we think about the operation of markets and supply and demand. It’s the sort of meaningless tautalogy you’d expect from crude MMTers. Of course you have to make a sandwich before you eat a sandwich – production comes before consumption in that sense. But that doesn’t illuminate anything about savings or investment.

      • Major_Freedom says:

        I don’t think it’s “John Papola obscurantism”.

        Rather, it’s just basic economic thinking.

        Time always goes forward. Consumption is the end of production, not vice versa. You know, the whole “individuals are ends seeking entities” thing.

        • Daniel Kuehn says:

          You’re totally missing my point. I’m not denying individuals seek ends or that you make a sandwich before you eat it.

          I’m challenging treating this like some kind of deep insight that people are unaware of or that overthrows the edifice of economic science as it currently exists.

          • Major_Freedom says:

            Oh OK, you’re attacking a position not expressed here.


            As it stands though, there is in fact quite a significant prevalence of economic thinking that contradicts what you are insinuating is so obvious so as to be worthy of contempt at the mere mention of it.

            I notice it rather often. The basic truism that you can’t eat a sandwich unless you first produce a sandwich, incredible as it may seem to you, does get contradicted in swaths of mainstream economics.

            I know you’ll knee jerk reject the following, but the core of Keynesianism is a hope, a prayer, that increasing the consumption of sandwiches, “under certain circumstances”, will increase the production of sandwiches.

            In monetarism, the hope is that inflating the money supply will create more of what is sold for money.

          • JSR08 says:


            Yet you ask with a raised eyebrow: “A worker’s productivity is not the source of labor demand?!!1!!”

            The productivity happens after the demand for it has been made. Hence, the productivity is not the source for the demand. The source for the labor demand is what occurred before the demand, which was savings.

            • Major_Freedom says:

              DK defines “productivity” as ability to produce.

              To each their own I guess.

              • guest says:

                Ken B,

                Would the castaways work if there were no coconuts on the island?

              • Ken B says:

                According to some here, no. There are no savings so, per Dan DD5, no demand for labor.

                Me, I’d try fishing or searching for berries.

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