Let’s continue to explore the argument that counsels humility when criticizing locally set (as opposed to nationally set) minimum-wage rates.  This argument (if I understand it correctly) is premised on the notion that, while national-government officials might well be too unlikely to know enough about the details of all the markets throughout the nation in order to be trusted to wisely set minimum wage rates nationally, local-government officials can plausibly know enough about the details of each of their jurisdictions in order to be trusted to set minimum-wage rates locally.  Therefore, say proponents of this argument, it is arrogant for anyone – for example, me (Don Boudreaux) – to issue a blanket condemnation of all minimum-wage legislation.  How do I, in insisting that all minimum-wage legislation is likely to do damage, justify my stance of second-guessing local officials who are actually on the ground, each closer than I am to each different local market, when these local-government officials decide to enact minimum-wage regulations in their localities?

The question is fair.  It’s also easy to answer.

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To advocate, or even to tolerate, minimum wages set locally rather than nationally is to misunderstand not only the economic argument against minimum wages, but, more generally, the economic argument counseling humility by government officials whose instincts are to intrude into the private economic affairs of ordinary people.

Such advocacy of local minimum-wage regulation is much like pointing out, correctly, that an inexperienced swimmer is less likely to drown if he dives into 20 feet of rough water 100 yards from shore than if he dives into 50 feet of rough water a mile from shore.  Just as the reduced chance of drowning in the first case compared to the second case does not mean that the inexperienced swimmer’s chances of drowning in the first case are therefore so acceptably low as to recommend such diving, the reduced chances that minimum wages set locally compared to minimum wages set nationally will cause harm to low-skilled workers does not recommend such legislation.

To be continued in a later post.

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Quotation of the Day…

by Don Boudreaux on May 24, 2015

in Health, Standard of Living

… is from pages 56 of Angus Deaton’s 2013 book, The Great Escape:

There is not a single country in the world where infant or child mortality today is not lower than it was in 1950.

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I will return in a later post to the topic of my previous post, namely, the validity or (as I see it) invalidity of the argument that proposes a tolerance of locally set minimum-wage rates if not of nationally or super-nationally set rates.  I state, however, here and again my conclusion: Legislating minimum wages – that is, enacting a policy of caging people who insist on entering voluntarily into employment contracts on terms that political elites find objectionable – is no more attractive or justified or likely to succeed at helping low-skilled workers if the particular caging policy in question is enacted locally than if it is enacted nationally or globally.

In this short post I ask a simple question of all advocates of minimum wages: If enforcement of minimum-wage policies were carried out in practice by policing low-skilled workers rather than employers – if these policies were enforced by police officers monitoring workers and fining those workers who agreed to work at hourly wages below the legislated minimum – would you still support minimum wages?  Would you be good with police officers arresting those workers who, preferring to remain employed at sub-minimum wages rather than risk losing their current jobs (or risking having do endure worsened employment conditions), refuse to abide by the wage terms dictated by the legislature?  Would you think it an acceptable price to pay for your minimum-wage policy that armed police officers confine in cages low-skilled workers whose only offense is their persistence at taking jobs at wages below those dictated by the government?

If a minimum-wage policy is both economically justified and morally acceptable, you should have no problem with this manner of enforcement.  (You might still prefer, for obviously aesthetic reasons, enforcement leveled mainly at employers.  But if the policy is to unleash government force to raise wages above those that would be otherwise agreed to on the market voluntarily between employers and workers, then you should agree that, if for some reason enforcement aimed at employers were impossible or too costly, enforcement aimed at workers is morally and economically acceptable.)  If, however you do have a problem with minimum-wage regulations being enforced by targeting workers who violate the legislature’s dictated wage terms, then you might wish to think a bit more realistically and deeply about just what it is you advocate in the name of economic improvement or “social justice.”

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In comments on earlier posts Daniel Kuehn claims that his support for allowing local jurisdictions to experiment with minimum-wage regulations means that he is more humble in his knowledge of what policy should be than are Truong Bui, myself, and the many other economists who object to all minimum-wage dictates.

There’s much to say in response to Daniel’s claim.  (Some commenters have already said some of what should be said.)  I wish that I had time this morning to say more than I will say here, but, time being scarce, I don’t.  So I limit myself now to only three points.  (Perhaps my local government, attentive to my and my customers’ full range of preferences and constraints – or, at least, more attentive than is Uncle Sam – should compel me to spend more time blogging this morning on this issue, threatening to cage me if I don’t act in ways that these local solons determine are proper.  What could be the harm in that?)

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Quotation of the Day…

by Don Boudreaux on May 23, 2015

in History, Politics

… is from page 86 of University of London historian Frank Trentmann’s excellent 2008 book, Free Trade Nation: Commerce, Consumption, and Civil Society in Modern Britain; I again thank Walter Grinder for bringing this volume to my attention (footnotes excluded):

On the eve of the First World War, Treasury economist Ralph Hawtrey penned a long ‘Afterthought on Protectionism’ in which he criticized Free Traders and Tariff Reformers alike for popularizing and simplifying their mantras.  Yet Hawtrey had the good sense to realize that ‘philosophers are not kings’.  Politics followed a logic different from that of scholarly inquiry: ‘arguments are no use in political controversy … [if they] are too refined for the comprehension of the electorate or of the average politician’.  Nor was ignorance the preserve of the masses.  At the Treasury, the staunch Free Trader Francis Mowatt was literally in despair in 1903 during the cabinet crisis over [Joseph] Chamberlain’s proposals: half the cabinet did not appear to understand basic economics.

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… from a recent Facebook post by Truong Bui; it’s a wise response to an article by Daniel Kuehn in which Kuehn argues that minimum-wage rates are best set locally rather than nationally:

Why don’t you take that “local approach” one step further, by allowing EACH firm to set its own wage levels? By your own reasoning, diverse circumstances of INDIVIDUAL FIRMS suggest that FIRM-LEVEL voluntary wage policies may be more appropriate than the one-size-fits-all approach of a state or even local minimum.

Yep.

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Quotation of the Day…

by Don Boudreaux on May 22, 2015

in Crony Capitalism, Seen and Unseen, Work

… is from page 223 of the 5th edition (2015) of Thomas Sowell’s Basic Economics:

Just as businesses seek to have government impose tariffs on imported goods that compete with their own products, so labor unions use minimum wage laws as tariffs to force up the price of non-union labor that competes with their members for jobs.

Clever economists whose priors tell them that government generally intends (and largely, if imperfectly, actually manages) to promote the public interest by apolitically applying scientific economic theory can no doubt spin a logically coherent theory to explain that tariffs are really meant to correct for market imperfections.

Many real-world importers who buy goods from foreign sellers, after all, do not face perfectly elastic supply curves when purchasing from foreign sellers goods that are meant for resale in the home country.  These importers, therefore, are said by such economists to have monopsony power.  The result (as freshman econ students can easily explain with pen and paper) is that these importers pay prices that, when judged by the standards of a perfectly competitive market, are too low.

The same freshman econ students can also explain, using the same pen and paper, that a tariff can optimally raise the prices that importers pay for the goods they buy from foreign sellers over whom these importers exercise monopsony power.  Of course, in the case of a tariff the proceeds of the resulting higher prices go to the government and not to the foreign sellers who are victimized by the importers’ monopsony power.  But (explains the clever economist) that’s a mere distributional detail: “The fact is that because it is possible to explain tariffs as a social-engineering tool that is wielded by governments to raise the prices paid for imports up to their socially optimal levels – and, as a result, also to increase the quantities imported – we should conclude that this excellent purpose is the one that is actually served, or at least meant to be served, by real-world tariffs.”

The clever economist further explains:

This monopsony power is not the result of any phenomenon so obvious as a government-created exclusive privilege or of a market situation in which each importer happens to be literally the only buyer of the goods that he or she purchases.  Rather, the monopsony power is the result of ‘frictions’ that, sadly, are very common in the real world.  These frictions make it practically unlikely that any foreign seller who has had a commercial relationship with an importer will easily enough find other buyers for its wares if the importer refuses to pay prices for these wares that are as high as the importer should pay.  Such frictions – which free-market economists blindly ignore (these economists have a naive understanding of reality, thinking, as they do, that reality literally is explained completely by the first few chapters of an intro econ text!) – mean that, in the real world, importers will pay prices for foreign wares that are too low by the efficiency standards of sound economics.  Tariffs are simply meant to correct the ill-consequences of this monopsony power.  It is, therefore, wrong to allege that governments enact tariffs for any reasons so crass as to protect domestic producers from competition.

….

I wonder how many are the economists who believe that modern minimum-wage legislation is chiefly a justified and helpful response to real-world monopsony power also would entertain seriously the argument that tariffs are chiefly a justified and helpful response to real-world monopsony power.  I’ll bet not many (but I could lose this bet).

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In this earlier post I argued that if real-world hikes in the minimum wage were in fact premised on scientifically sound economics – the economics that pro-minimum-wage economists point to in order to justify such hikes and without at the same time denying that the law of demand applies to low-skill labor – then there is no reason why such hikes would be phased-in over time rather than increased immediately.

Daniel Kuehn very quickly accused me of error.  (He did so in the comments to the above-linked post.):

The increases are nominal, that’s why they’re introduced gradually – to smooth the real value. That’s why the same people that want gradual nominal increases also want to peg to inflation.

In other words, my argument is factually mistaken (according to Mr. Kuehn) because in reality the Los Angeles city government’s phased increases of the minimum wage are meant only to keep pace with expected inflation between now and 2020 (when that legislated wage is scheduled to hit $15 per hour).

Mr. Kuehn’s argument, alas, still fails and my criticism of the L.A. government’s action remains valid and germane.  The reason is that – according to the very legislation that Mr. Kuehn and others celebrate as a scientific effort to raise the pay of low-skilled Angelenos without simultaneously destroying some jobs for these workers – there will be no minimum-wage hike in Los Angeles until July 1, 2016 (when it rises from its current level of $9.00 per hour to $10.50 per hour.  That’s more than 13 months from now.  Further, because of inflation between now and then – inflation that Mr. Kuehn plausibly notes the L.A. city council anticipates – there will actually be a minimum-wage decrease, in real terms, between now and July 2016.

So even if every scheduled nominal increase in L.A.’s minimum wage between July 1, 2016, and July 1, 2020 is designed (however roughly and imperfectly) simply to keep the wage adjusted for expected inflation over those four years, why wait until July 1, 2016 to raise the minimum wage?  Why not raise it now, in full with no phase in, to whatever level the government thinks will correct for problems caused by monopsony power?  The fact that this wage is not being raised immediately – now, in Spring 2015 – is strong evidence against the proposition that governments raise minimum wages in order to correct for the baneful consequences of alleged employer monopsony power.  If such monopsony power exists, there’s absolutely no reason to delay raising raise the minimum wage; there’s no need for any phase in of increases in the real value of the wage to whatever level government officials deem is textbook appropriate.

The only even remotely plausible way that I can see to salvage the L.A. government’s action in order to square it with Mr. Kuehn’s theory of what motivates governments to raise minimum wages is to claim that L.A. government officials believe that today – May 2015 – the $9 minimum wage is pretty close to being the textbook appropriate wage, and that all the L.A. government did is to arrange to index today’s minimum wage for expected inflation between now and 2020.

But of course if this claim is to carry the day, why all the hoopla about L.A. raising its minimum wage?  On this account, all the L.A. government did was to rather noisily index that city’s minimum wage for expected inflation starting in 2016 – meaning, in other words, that despite all the news coverage of the past few days, there has been no move by the government there to really increase in the minimum wage.

So I’ve a question for Mr. Kuehn: Do you believe that the recent, much-discussed action by the L.A. government actually did raise the real minimum wage or did it not do so?  If your answer is the latter, fine; we can join each other in being mystified at all the hoopla and celebration.  But if your answer is the former, then how do you justify or explain the L.A. government’s decision to delay until July 2016 any increase in this wage?  How do you square this delay with the monopsony model?

….

A fun exercise, which I just did but will leave to Cafe patrons themselves to do on their own, is to calculate the annual rates of inflation that, if Mr. Kuehn’s explanation of their actions is correct, the L.A. city council likely anticipates over the next five years.

….

In my opinion (which is shared by a large number of other economists), minimum-wage hikes, such as that recently done in Los Angeles, are not remotely motivated by government officials’ belief in, or even awareness of, the real-world relevance of textbook theories of monopsony power.  Such legislation is instead the harmful consequence of a combination of politicians pandering to economic ignorance and political pressure by labor unions and other rent-seeking groups who do stand to gain from legislation that prices some of the most vulnerable low-skilled workers out of jobs.

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Why Not $15 Per Hour Today?

by Don Boudreaux on May 21, 2015

in Crony Capitalism, Seen and Unseen, Work

The only economic case for raising the minimum wage that is even potentially theoretically sound is the case built upon the belief that employers of low-skilled workers possess monopsony power in the market for low-skilled workers.  (As argued here before, monopsony power is a necessary condition for a higher minimum wage not to reduce the employment prospects of low-skilled workers; it is not a sufficient condition.)

So what are we to make of the City of Los Angeles’s move to raise the hourly minimum wage there to $15 by 2020?  Why wait until 2020?  Why not immediately or, say, on June 1st 2015?

If this minimum-wage hike is truly justified by employer monopsony power, there’s no reason for any delay in hiking the wage.  If employers of low-skilled Angelenos truly have monopsony power of the sort that the best pro-minimum-wage economists assert is prevalent enough in reality to justify government-imposd minimum wages – and if government-imposed minimum wages really are ‘scientific’ responses to the prevalence of such monopsony power – then raising the minimum wage in Los Angeles from its current rate of $9 per hour all the way up to its ‘desired’ rate of $15 per hour should be done immediately.  Why the gradualism?  Why wait five years to raise the wage to its appropriate height?  The monopsony power that justifies raising the minimum wage, if it is real, exists today in full.  And if $15 per hour is the ‘right’ minimum wage to offset the baneful consequences of employers’ monopsony power, then economic theory is clear that there is nothing to be gained, and only gains for low-skilled workers to be foregone, by any delay in raising the minimum wage to $15 per hour.

Most readers of this blog know – not because they read this blog, but because they exercise economically informed common sense (of the sort, sadly, that is schooled out of too many non-GMU-type academic economists!) – that employers of low-skilled workers (especially those in large cities such as L.A.) have no monopsony power to speak of.  Employers certainly don’t have monopsony power in such magnitudes and so generally as to justify a government-imposed minimum wage.  So it’s unsurprising to me and, I’m sure, to most of this blog’s readership that L.A.’s massive minimum-wage hike is phased in over five years.  This phasing-in not only mutes and, hence, helps to hide, the ill-effects of the minimum wage; more significantly, this phasing-in is solid evidence that minimum-wage hikes are in fact not scientific responses by government to the prevalence of employer monopsony power.

It’s high time that tweedy academic economists stop lending their professional and scientific creds to politicians seeking only cheap applause and valuable votes from the economically uninformed masses (who too readily cheer policies with lovely titles) and kudos and campaign contributions from labor unions and other rent-seekers (who gain financially from government policies that price many of the lowest-skilled and most vulnerable workers out of jobs).

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