News & Analysis
Economist's Wishing and Hoping Won't Make a Minimum Wage Effective
Minimum human wages ... The empirics of the minimum wage debate are complex, but it isn't impossible to draw some conclusions. A recent Free exchange column attempted to do just that: America's academics still do not agree on the employment effects. But both sides have honed their methods and, in some ways, the gap between them has shrunk. Messrs Card and Krueger moved on to other work, but Arindrajit Dube at the University of Massachusetts-Amherst and Michael Reich of the University of California at Berkeley have generalised the case-study approach, comparing restaurant employment across all contiguous counties with different minimum-wage levels between 1990 and 2006. They found no adverse effects on employment from a higher minimum wage. They also argue that if research showed such effects, these mostly reflected other differences between American states and had nothing to do with the minimum wage. – Economist
Dominant Social Theme: There is a case to be made for a minimum "human" wage.
Free-Market Analysis: Price fixing is back with a new title, "human" – as in "minimum human wage." We are indebted to the The Economist magazine for bringing us this latest jargon.
We disagree with the concept, of course ... profoundly. As we pointed out just yesterday, The Economist's editors and writers are expert at creating government-oriented arguments where none existed before.
The idea is always to disparage government while providing a reluctant argument for its utility.
It's bad, government is, but even in its badness, there are elements to recommend it. One of them apparently is the idea that government can set a minimum wage without disrupting the economy. This is a variant of the old saw that government – the imposition of force on economic choice – can rectify "market failure."
In this case, what is being floated is the argument that if government sets a wage floor, it will have an inexorable ripple effect, raising wages for others as well. Government, in other words, can effectively combat the forces of the market itself and expand salaries for all, or almost all. The Economist article excerpted above continues (paragraphing ours):
Britain's experience offers ... insights. The country's national minimum wage was introduced at 46% of the median wage, slightly higher than America's. A lower floor applied to young people. Both are adjusted annually on the advice of the Low Pay Commission. Before the law took effect, worries about potential damage to employment were widespread. Yet today the consensus is that Britain's minimum wage has done little or no harm.
The most striking impact of Britain's minimum wage has been on the spread of wages. Not only has it pushed up pay for the bottom 5% of workers, but it also seems to have boosted earnings further up the income scale—and thus reduced wage inequality. Wage gaps in the bottom half of Britain's pay scale have shrunk sharply since the late 1990s.
A new study by a trio of British labour-market economists (including one at the Low Pay Commission) attributes much of that contraction to the minimum wage. Wage inequality fell more for women (a higher proportion of whom are on the minimum wage) than for men and the effect was most pronounced in low-wage parts of Britain.
In sum, the employment effects we'd expect if labour-markets were perfectly competitive " don't emerge. That's because there is some monopsony power to labour markets, associated with frictions like the cost of searching for new jobs. Those frictions give employers a bargaining-power advantage that a minimum wage can in some cases counteract.
Further, minimum wage increases may give both workers and employers an incentive to raise their productivity levels in order to preserve jobs: people work harder to justify the higher wage. That helps explain why minimum wage increases can influence pay higher up the income scale. That dynamic—that higher minimum wages often have less of an employment effect because they cause workers to exert more effort—is also something that left-leaning supporters of higher minimum wages should take into account.
To put it bluntly, this sort of argument is, well ... useless. Anything the government does via regulation or law is basically a price fix, transferring wealth from those who have generated it to those who have not and won't understand its deployment.
Government, unfortunately, is force and human beings don't react well to force and tend to change their behaviors, as has been amply documented by the Austrians in free-market economic theory. Human action is not a hypothesis but an observation.
The Economist journos involved in this article claim there is a study that shows government can force some employers to pay their employees more – and that this force will have a beneficial effect on other wage earners.
We guarantee that at some point the findings of this study shall be overturned. In months or years – at some point – it will be found that the study didn't take certain variables into account, that the methodology was flawed or the statistical evidence insufficient.
It is not possible on the face of it to force people to pay other people a certain amount and expect anything positive – ultimately – from the process.
What is taking place here is the application of a kind of dominant social theme, that bigness renders results that smallness would not. If the model is big enough, common sense can be suspended.
But it's not true. Just because we are observing an economy of tens or hundreds of millions doesn't mean that human nature itself is reconfigured. Raise wages and some will benefit but many will not. Certain businesses will suffer and the overall labor pool may shrink.
Of course, union-affiliated business may gain power and clout while non-union business will lose. The result will be increased cronyism, corruption and political favoritism.
Conclusion: There's no such thing as a free lunch no matter how Economist editors may wish for it to be so.
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Posted by CelticFire69 on 02/20/13 01:02 PM
I find it amazing that restaurants woud be used as an example. Not only are they on a different scale than minimum, many owners work their wait staff at a tips only status, even while utilizing them extensively in food prep which offers no tip potential. This has come about to offset the cost of the non tip employees. Less cooks are hired, more "free labor" is utilized. Sadly this kills much of the tip income for the waiter as his side of the labor pool gets highly diluted. The big food suppliers benefit by the move to more preprepared foods (note Sisco's dominance in the industry) to facilitate the reduction in cook staff. To attempt to pay "minimum" to all raises the price of eating out far beyond middle class budgets. An added insult to injury has been the regulation and taxation issues have eliminated payment structure options that would allow the industry to better tailor owner/participant reward to match effort and market. You guys nailed it again in your analysis.
Reply from The Daily Bell
Thanks. Interesting points.
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Posted by taxesbyanyothername on 02/20/13 01:11 PM
At first agreeing with, and later disagreeing with The Economist, is one of the things that eventually led me here. Glad to be a recovering (recovered?) neocon.
Reply from The Daily Bell
Our elves had the same experience.
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Posted by jdwheeler42 on 02/20/13 01:22 PM
Once you put the selection bias in, the findings of the study are not that remarkable: FOR THOSE WHO HAVE JOBS the minimum wage has a positive effect on earnings. "Consensus" has no place in a scientific study. Even if people didn't lose jobs when the minimum wage was put in place, it is hard to measure the people who never got hired because of it.
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Posted by GoodBusiness on 02/20/13 01:39 PM
It is time to end the madness that viral in the Potomac valley of DC. The Government is dysfunctional and has become a Central Collective that has usurped the Constitution and destroyed the Liberty and Freedom of the people. State Republics must take action to force the Federal structure back under the ORIGINAL CONSTITUTION AND THE COMPACT WITH THE STATES.
Visit this research library and learn how to Restore Liberty and States rights and powers.
Click to view link
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Posted by Ol' Grey Ghost on 02/20/13 02:06 PM
Based on the works of Mises and Hazlitt, I wrote a simplified explanation of how minimum wage laws cause unemployment that an Eighth-grader should be able to comprehend...
Click to view link
Based on the works of Sowell and Williams, I wrote a simplified explanation of how, based on its effects, a minimum wage law could be interpreted as racist...
Click to view link
Of course, if the government would ever make the big jump to a $100 an hour minimum wage, instead of the usual small increases, it would prove to be so disasterous to the economy that even a liberal progressive like President Obama would have to admit something was wrong.
He would, as usual, misdiagnose the problem and prescribe the wrong cure, just like his masters tell him to do...
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Posted by IndyLyn on 02/20/13 03:13 PM
They just can't grasp that force is never good... and force by any level of government is ALWAYS bad.
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Posted by GWBramhall on 02/20/13 03:47 PM
There is always the reductio ad absurdum argument that often wins.
Why not raise the minimum wage to $1000.00 per hour and make everyone
rich and viola, Shangri-La? Perhaps we can balance the budget as well
as there will be a surplus of rich to attack. These people do not
realize that a business will not hire someone if they cannot see the
hire making money for the firm. This way of thinking is the fatal flaw
of most Progressive ideology. It sounds great to the unthinking beneficiaries of these proposals but, in fact, they are the ones most
hurt by them. You might say they deserve what they get, but it hurts
the rest of us as well.
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Posted by Friend_of_John_Galt on 02/20/13 05:54 PM
GWBramhall made the "thought experiment" that I was planning to write.
"Minimum wage" regulations are an economic disaster for those at the low-end of the wage scale. Markets set wage rates. I owned a small business in an affluent community. I had need for a couple of workers who would do relatively unskilled tasks (that is, the basic training took no more than one or two shifts).
The reality of my area was that minimum wage did not draw sufficient qualified applicants, so my opening wage had to be somewhat above the minimum simply to get access to workers who would come to work on time and perform their tasks with a reasonable degree of diligence. (Admittedly, some of the work was mind-numbing and repetitive.) Even so, many of the employees who worked for me for a short time were not able to arrive on time or complete assigned tasks in a reasonable time. (I knew what was reasonable, because as a small business owner, I performed many of the tasks myself when we were short handed.)
The bottom line was that each employee had to be cost effective so that the amount paid was less than the revenue their work generated. One "pure" example involved placing labels on envelopes (I had a print shop) -- The volumes were low, so there were no cost effective ways to do the work with machines -- We were paid (at that time) 3 cents per label applied. To earn $8.00 per hour (the going wage rate at the time), an employee would have to place labels on 267 envelopes for me to break even on the wage vs. revenue. That's just under 5 envelopes per minute -- that's about 20 seconds per label per envelope. Tedious? Yes. Mind numbing? Yes. Difficult? No -- my dear wife was able to place labels at the rate of nearly 20 per minute! (She has excellent eye-hand coordination.) But there were few who were willing to do this task and remain cost effective. (Ultimately, a young high school student, who played the drums, became a 'regular' part-time employee -- his eye-hand coordination made him an excellent employee at the stapling, folding, labeling tasks that we often had. He appreciated the work and learned job skills (like coming to work on time, relating to other employees, etc.) that would serve him well for his future.
There were employees I could have had (for less money) but they could not produce more than they cost. They quickly became "ex-employees." What is so hard for the "progressives" to get about this concept?
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Posted by The Federal Farmer on 02/20/13 06:37 PM
Back when I was young and stupid, an employer took me aside and explained what Friend_of_John_Galt did here about how hard I had to work (how much I had to produce) in order for him to break even on my wage, and that he was in business not to employ me, but to earn a profit from my labor. New workers need to understand this too in order to grasp how the working world functions.
His explanation saved me from becoming a socialist.
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Posted by The Federal Farmer on 02/20/13 06:40 PM
@GoodBusiness, when you say the "original constitution" do you mean the one ratified March 1, 1781 or the one ratified March 4, 1789?
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Posted by 1776 on 02/20/13 06:59 PM
Senate Dems look past sequester to government shutdown fight Posted by Greg Sargent on February 20, 2013
Click to view link
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Posted by mava on 02/20/13 11:32 PM
"There is a case to be made for a minimum "human" wage."
This dominant theme is the one I find particularly stupid.
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Posted by mava on 02/20/13 11:40 PM
jdwheeler,
"Once you put the selection bias in, the findings of the study are not that remarkable: FOR THOSE WHO HAVE JOBS the minimum wage has a positive effect on earnings. "Consensus" has no place in a scientific study. Even if people didn't lose jobs when the minimum wage was put in place, it is hard to measure the people who never got hired because of it. "
Absolutely.
And more so, the people who already had jobs and haven't lost the job because of new minimum wage, will experience ZERO positive effect. Because the prices will immediately compensate, there will be no effect. The same purchasing power will be spent on employing the labor, therefore the same purchasing power will be earned by that labor.
This is not why the minimum wage is EVER instituted. It has nothing to do with improving anyone's life. (as, of course, you had been showing, too).
The minimum wage control is always and everywhere instituted with a purpose to increase nominal earning of the private sector, in order to collect more revenue by resulting upward shift in tax brackets.
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Posted by mava on 02/20/13 11:42 PM
I should have put the word [b]nominal[/b] in bold, as it was the main point of the sentence.
