In this post of a week ago, I invited readers to react to the following claim: if the minimum wage causes unemployment, why don’t states with high state minimum wages have high unemployment rates.
A lively discussion ensued. Particularly trenchant points were made by:
1. John Dewey (and Don of CrossMolina.blogspot) who argued that the minimum wage only applies to a very small proportion of the work force. It would be unlikely that the impact on the total unemployment rate.
2. Mark Adams and Eric H and others pointed out that unemployment may not be the right measure. You might want to look at employment opportunities. If you can’t find a job and give up you don’t get counted as unemployed.
3. Steve Bass pointed out that whether a state has a minimum wage is endogenous. Maybe states with healthy labor markets are more likely to have a state minimum wage.
I think these are the three main points, but a long debate ensued after that, with lots of interesting back and forth. At one point, Econgeek mentioned the Krueger-Card paper:
Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania
David Card; Alan B. Krueger
The American Economic Review, Vol. 84, No. 4. (Sep., 1994), pp. 772-793.
http://links.jstor.org/sici?sici=0002-8282%28199409%2984%3A4%3C772%3AMWAEAC%3E2.0.CO%3B2-O
as the "standard reference in the empirical literature.
That’s half right. It has become the standard reference for those who don’t believe that minimum wages are bad for the poor. Whether it’s a reliable source of information is a different question. It follows, I don’t know, 25 or 50 or a hundred or more papers that found that minimum wages reduce employment opportunities. Is it better than the others? Maybe. It might be. But I’d be worried about basing public policy on one paper that looked at one industry, the fast food industry, using a phone survey eight months after the minimum wage was increased in New Jersey to conclude that minimum wages don’t effect employment for low-skilled workers. I’d worry about whether eight months was a long enough time for people to react to the new law. And I’d worry about whether the rest of the econometric analysis was done correctly.
I want to thank everyone who contributed to the conversation. We’ll try another one soon.
Podcast RSS Feed
Full EconTalk Text
{ 49 comments }
I don't knopw what you mean by this , 25 or 50 or a hundred or more papers that found that minimum wages reduce employment opportunities.
what do you mean by this?
Do you know of 25 or 50 or a hundred of more papers that found that raising the minimum wage caused employment opportunities to drop?
If so, how about citing some of them?
The paper is a standard reference in the literature, and no other empirical studies had been cited up to that point, so the "half right" comment is not particularly fair; I have never seen a discusion of the effects of minimum wage that did not cite Card and Krueger. You might like the paper or not, but it is not easily dismisable and it is allmost allways referenced (thus standard reference, google scholar finds 284 referneces to it). For those who are interested, Card and Krueger also have a book on the issue (I really dislike the title of it, the "Myth" part makes it sounds like what everyone else is doing is a joke, which is very presumptous of them).
Myth and measurement: the new economics of the minimum wage. D Card, AB Krueger – 1995 – Princeton University Pres
Also, the worry about the lag is reasonable, through the stuff about worrying wether the econometrics where done properly seems a bit presumptous; Krueger and Card are not exactly amataeurs at this kind of stuff, but rather some of the most respected labour economists around
For a different perspective on the issue there is a recent post on Asymetric Information rewarding minimum wage laws as a poverty fighting tool which also references Card and Krueger. The link to it is;
http://www.janegalt.net/blog/archives/005713.html
To the libraries!
Given the impossibility of isolating cause and effect within an empiracle data analysis, it remains remarkable the degree to which logic is suspended and relegated to the back seat.
If minimum wages can be raised without reducing the supply of jobs, why not just raise minimum wage to $100 per hour. Or is it that the laws of supply and demand are only suspended within a narrower range of wage adjustment?
If you want to emprically analyze the effects of minimum wages, you must interview those who can't find jobs at the minimum wage but who would gladly work for less and those who would supply more jobs if wage costs were lower to see if they could agree on a wage that would indeed result in more jobs being created.
Meanwhile, those who aim to institute a minimum wage by law (this is government price fixing by the way) are the same one's that argue that China should revalue its currency (i.e. devalue to the U.S.) in order to allow U.S. to compete. Never mind that the standard of living in the U.S. is much greater in the U.S. – China with its many millions of poor, unemployed is not willing to compete fairly.
Minimum wage is not the answer. If you want to improve the standard of life of the poor in the U.S., end redistribution through govt deficits and monetary inflation. Under the current system, the rich will always get richer and the poor will increase in numbers. An increase in the minimum wage will only exacerbate that problem since it will remove income-earning options for those most needy of income. Data mining to seek a rationalization for the suspension of the laws of supply and demand will not change that.
Card/Kruegar was newsworthy because it's a man-bites-dog story; it reaches conclusions that are way out of line with every prior study. Over a hundred minimum wage studies are referenced and summarized here:
http://www.house.gov/jec/cost-gov/regs/minimum/50years.htm
A few of the findings in brief:
# The minimum wage reduces employment.
Currie and Fallick (1993), Gallasch (1975), Gardner (1981), Peterson (1957), Peterson and Stewart (1969).
# The minimum wage reduces employment more among teenagers than adults.
Adie (1973); Brown, Gilroy and Kohen (1981a, 1981b); Fleisher (1981); Hammermesh (1982); Meyer and Wise (1981, 1983a); Minimum Wage Study Commission (1981); Neumark and Wascher (1992); Ragan (1977); Vandenbrink (1987); Welch (1974, 1978); Welch and Cunningham (1978).
# The minimum wage reduces employment most among black teenage males.
Al-Salam, Quester, and Welch (1981), Iden (1980), Mincer (1976), Moore (1971), Ragan (1977), Williams (1977a, 1977b).
And so on…
I'd really love to become a part of this discussion because there are some really great ideas being put forth here. But really, I can't comprehend these economic problems for lack of knowledge. Instead I am going to outright claim "econgeek" as the winner, if there was one. Look at how he starts his response. First he denies the fact that the causes and effects of empirical studies are fully reliable. Which in this case of such complexity is most likely true. Then he goes on and says there is a lack of logic being used, which is also probably true. His basic tone of voice is "Hey you idiots, stop doing this and that and then everything will work out." I feel like everyone else is befuddled by the complex question when really it cannot be solved without changing the grounds on which it is based. For example: "Why can a cat not fly"? Our man econgeek is saying the a cat can flap his paws as fast as he wants, but until he gets wings he ain't flyin nowhere my man. I think this is the best way to look at the problem. I've noticed in the world that problems can be toiled with forever without solving them because the system in which they are in do not support the solution. And when the system does, the answer is clear and evident.
Glen; Yes there are a lot of regressions where one gets the expected sign on the emploment change coeficient; however before knowing the results it is not evident that there was anything wrong with Card and Krueger in fact it is rather nicely done empirically (as far as these things go).
For those who want to read something related; Labor Market Institutions and the Distribution of Wages, 1973-1992: A Semiparametric Approach, by John DiNardo, Nicole M. Fortin, and Thomas Lemieux, in Econometrica, 1996 is pretty neat. They provide some interesting evidence that the minimum wgae does help make the distribution of income more compressed (wether this is a good or a bad thing is up to you).
D-Man; I am not very sure what you mean; for the record, however, let me make it clear that I dont think anyone here is an idiot. I am sorry if the nickname comes off as arrogant, it was not the intention. If the problem was the tone of my words, the best I can do is to say that it was not my intention to demean anyone, through I understand I might have done so unintentionally (if it help, english is my third language and I dont write it as well as I wish I did).
Here's a link explaining why the Card-Krueger study was flawed:
http://tinyurl.com/ntntw
To me, the Card-Krueger method of obtaining data – asking a single question of the person answering the phone at fast food restaurants – is ridiculously non-scientific. The Neumark and Wascher refutation of Card-Krueger, which used actual payroll records of the very same restaurants, seems more likely to produce valid data.
The last I noticed, most people were ambulatory. Quite a few could even drive motorized vehicles. Why should that be important in any consideration of the perennial minimum-wage dispute?
The market for services consisting primarily of human labor is virtually inexhaustible. But the practical fact is that some capable of rendering those services are not, in fact, in the same physical location as those in which the demand exists. If they want the opportunity, they must put up with the inconvenience (and out-of-pocket costs) of relocation. The very same situation exists with regard to the one who is employed but at what he (or others) consider a substandard (or merely unsatisfactory) wage.
The wage structure in any given place is a consumer-driven allocation of the aliquots of the goods and services they wish to exchange for the goods and services they wish to consume. The employer is merely an organizer of the process in which, if successful, he will not only earn a portion of the total for his organizational and executive input but, as well, may stand to make gains (or suffer loss) as a result of change in the market data.
There is no human method thinkable for ensuring prosperity–or, indeed, even existence–through all periods of the future. All types of perfectly natural conditions occur which impact the ability of populations to prosper–or even survive–in the places to which they had formerly been accustomed. Added to such natural fluctuations must be those arising from the market, whether demographic, style, therapeutic, etc. changes.
The VERY SAME SIGNAL–the perception of inadequacy in the height of available wage (whether in one job, many, or in an entire industry) is the clearest indicator to a worker that they must change some particular of their employment, whether by training or exerting greater effort toward a higher-paying place or finding a better-paying job of the same or different type either across the street, the town, or the world. Indeed, the employer(s) is in identical position. To those who would maintain that the comparative wealth of the employer makes his movement less onerous need be counterposed the consideration that the usual existence of land and fixed assets in that "wealth" typically exacerbate the loss to be countenanced to a degree hardly imaginable to most wage-earners.
Over most of the world, populations and their authorities have thought it best to seek melioration of whatever unsatisfactory conditions exist by legislation mandating the desired result. Except for some laws treating essentially criminal conduct–theft, fraud, violent imposition, etc.–most of such laws aim at diverting the natural course of events. A few of these, if modest both in aim and enforcement, have a chance: not of success in achieving their desired end but, at least, of not disrupting the normal course too dramatically.
Minimum-wage legislation is DESIGNED and INTENDED to cause unemployment. Hardly ever emanating from the ranks of those employed at the lowest existing wages, it is usually recommended to those at that level as a political measure on their behalf–by cadres of "labor leaders" and their political and academic advance men; for those in positions at higher levels, always jealous of the height of their wages being dependent on competition "from below," every limitation on the quantity of that labor available is a support of their own position and a fair boding for the future (at least until such time as accumulated "unintended consequences" emerge).
It is useless to compile data pretending to quantify market activity; its manipulation to show one thing or another is, to put it crudely, a somewhat less productive activity than "jerking off." No data can ever prove, one way or another, whether a particular (legal) measure accounts for any particular change in the same data or whether there were not countervailing (or augmenting) forces. It is a COMPLETE waste of time and (otherwise quite respectable) brains. One can only wonder how things might be if the preponderance of the formal intellectual capacity of the world were not fixated on such chimerical and counterproductive notions.
I think it would probably be a much better idea to create a greater earned-income tax credit (even one going to those who don't make enough to pay taxes) instead of a minimum wage. There is no reason to think that those who employ unskilled workers are particularly making off with more money than they need. Its better to take money from the best place possible, such as high incomes or spending, and then give it to the poor.
IIRC, the Card-Krueger study only looked at major fast food chains. If minimum wage were rising, I'd be concerned first about the Mom and Pop fast food restaurants since Mom and Pop can't afford to increase wages quite as much. Mom and Pop can't implement capital improvements to justify a higher wage quite as easily.
Mom and Pop are more likely to close their restaurant and retire, sending all their customers to McDonald's. Card and Krueger are sitting there watching these new customers coming in and proclaiming it to be a miracle.
Catquas,
What is the rationale for redistribution of any sort?
If an unskilled worker feels he or she is not earning enough, that worker should feel motivated to acquire more skills. An earned income credit takes away that motivation for some of those workers. How can that be good?
Why do minimum wage earners need more income? It seems obvious to me that they are earning enough to live on. After all, they are alive.
Twenty years ago Senator Phil Gramm asked this question that still seems relevant today: "Has anyone ever noticed that we live in the only country in the world where all the poor people are fat?"
ELASTICITY OF DEMAND
The demand for low wage workers has very low price elasticity. So just as we saw little change in the demand for oil when the price doubled, we see little change in the demand for low wage workers when the minimum wage is raised.
And read my much more detailed post about this topic where I explain how a minimum wage does indeed benefit the class of people (low wage workers) that it's intended to benefit:
http://www.halfsigma.com/2005/04/does_a_minimum_.html
There are two reasons why states with higher minimum wages don't have higher unemployment. First because the federal minimum wage of $5.15 is now so low that few will be affected (both in terms of losing their jobs or getting a wage increase) if you raise it with a dollar or two.
However, were the minimum wage raised to the level in France, roughly $10 per hour, then higher unemployment would certainly follow.
Secondly because states with higher minimum wages are usually states with a higher cost of living, like New York or California. And so $6.50 in L.A. or San Francisco is really not higher in terms of local purchasing power than $5.15 in Bismark, North Dakota.
Stefan: "However, were the minimum wage raised to the level in France, roughly $10 per hour, then higher unemployment would certainly follow."
Yes, this is a way of saying that the elasticity of demand for unskilled labor increases as the price for such labor rises. Whether or not $10 is the magic price where suddenly demand will decrease resulting in unemployment, I cannot say for sure. But my guess is that if we could reduce the pool of unksilled labor by kicking out all the illegal immigrants and restricting legal immigration, then I think we could support a higher than $10/hour minimum wage without causing unemployment.
We really should remember how many peopl are actually affected by the minimum wage…
http://www.bls.gov/cps/minwage2004.htm
While I am familar with the paper saying that a higher minimum wage did not decrease employment, I did not review it in depth. However, I see no reason to discount it simply on the methods and not also try to figure out why it could be correct.
What do you think of these speculations:
The fast food market, while competitive, is not perfectly competitive, and there are no perfect substitutes for a whopper, (people prefer different brands, and maybe only one Burger King is within driving distance when you are on your lunch break.)
Fast food prices are set by interstate franchisors (I think), and they take their cut off of total revenues (I know) so prices would not necessarrily go up because the individual franchisee is taking the hit when operating costs go up.
There are huge entry costs to starting a franchise, it costs between 500,000 to 1,000,000 to get a McDonalds, and franchisees for McDonalds need 200,000 cash. But this must also mean there is a good return on it if the store is successful, because someone with 200,000 cash could invest it what are probably safer endeavors and get maybe 5% from 2005 to 2006 (I think that is what my mutual fund got last year) Also, if a franchisee is financing part of his or her endeavor, the return must be good enough to pay back the lender and still give a better return than can be got elsewhere.
Therefore, there must be some cushion when it comes to profits, which means it is at least plausible that you could raise minimum wages at fast food places and not see a dip in employment rates, assuming at least that fast food places currently employ what they see as the minimum number of employees they need, and that the increase in wages does not eat into profits enough to make it worth exiting.
I am not saying it therefore is good to raise the minimum wage, it most likely is a bad idea. However, I do think there are many resons why the paper everyone wants to discredit may be correct, at least for the fast food industry sector it studied.
J-Deal, While it is true that very few workers receive minimum wage pay, most unions have their pay scales tied to minimum wage. So while the AFSCME member at the DMV may be paid $15 per hour, if minimum wage increases $1, her pay will automatically become $16 per hour. Another reason unions support liberals & liberals support minimum wage increases.
I have heard that Oregon has the highest minimum wage, and also has the highest level of unemployment of workers under 24 years of age.
Half Sigma writes: "But my guess is that if we could reduce the pool of unksilled labor by kicking out all the illegal immigrants and restricting legal immigration, then I think we could support a higher than $10/hour minimum wage without causing unemployment."
And why would this be an improvement? We would then have to do without all of that unskilled labor. Further, it's not that a small increase doesn't cause unemployment; it's that a small increase doesn't create unemployment that you can attribute to the minimum wage.
You could always double the minimum wage like they did in Haiti back in the 30's, and destroy entire industries. But, please, re-run that experiment in another country than mine, if you would.
Bill,
The problems with the Card-Krueger study was that it came to the opposite conclusion of many other studies and it was inconsistent with the principle of supply and demand. It is very plausible that the poor methods used to obtain data is the reason. As I pointed out, Neumark and Wascher used payroll data from the exact same restaurants in revealing that the minimum wage increase did reduce hours worked.
Stefan,
How can you conclude that few will be affected if the minimum wage is raised a dollar or two? In some states in the South, over 4% of workers earn minimum wage and even more earn less than $6.00/hr. But few of those workers are in Houston or Mobile or Atlanta. In smaller towns in those states, the percentage is likely to exceed 10%. If liberals from New York, Massachusetts, and California are successful in forcing their economic ideas on the small towns of Texas, Alabama, and Georgia, many labor-itensive businesses will be impacted. It won't happen all at once. But distorting the labor market will eventually lead to automation and outsourcing of many unskilled jobs. It will also lead to the complete elimination of some functions.
From my obsevation the labor markets have changed significantly since 2000, due largely to globalization and illegal immigration.
I wouldn't put too much faith in any studies done before that time. We need some new research.
John Dewey,
An expanded earned income tax credit would idealy lessen inequality but not eliminate it, so there would still be motivation to get more skills. It might even allow people to get more skills because they have enough money to pay for training, or at least to make up for lost wages while in training.
Sure, there are not massive amounts of deaths due to poverty in the US, but the death rate is higher among the poor. Many poor people are malnourished and do not get sufficient primary health care. Anyway, I would argue that idealy people will make enough money to do more than survive.
Finally, many poor people are fat because they eat foods which are high in starch and fat instead of getting proper nutrition. The fact is that many are malnourished.
Catquas,
Malnourishment in the U.S. – due to improper diet – is very different from malnourishment in underdeveloped and truly poor nation – due to inadequate food. Both Senator Gramm and I were implying that the poor in this nation have plenty of funds for food. The fact that many U.S. citizens, poor and rich, choose the wrong foods is irrelevant to the point we were making.
Based on my discussions with health care providers, I do not believe a higher death rate among the U.S. lower income (they are not poor) is due to the unavailability of primary health care. The problem for many is inadequate training in basic hygiene and nutrition, and for others it is a "don't give a damn" attitude. My view is that such attitudes are a product of the entitlement culture – a culture some would seek to expand through more welfare, retitled as "earned income credit".
If you do 100 studies with a 99% confidence interval test, 1 of them will lie to you.
The Card and Krueger paper /is/ easily dismissed, because it is wrong. It was discredited long ago, and it is a testament to the left's resistance to acknowledging facts that it continues to be brought up.
The Law of Demand is really very simple. Price up, quantity down. No two ways about it.
>From my obsevation the labor markets have changed significantly since 2000, due largely to globalization and illegal immigration.
I wouldn't put too much faith in any studies done before that time. We need some new research.
———–
Right. The laws of economics change with time, right? Pre-indistrial, post-industrial, pre-information-age, post-globalization, etc. Different periods of history have fundamentally different economic systems such that a price control in one period will get different results in a different historical period, right?
Sound familiar?
That is the basis of the Historicalist Economists such as Karl Marx.
The problem is that the time period makes no difference to the basic laws of economics. Even under the harshest forced fundamnetal change, communism, the same results were produced by the basic laws of supply and demand.
As for the poor in the US, most can afford cable tv and oher luxuries – they aren't starving for lack of food or healthy food, and there are vast numbers of churches and other charities that provide food in any given location in the US.
John dewey, I don't think the law of Demand is as simple as you state it is. Obviously, demand tends to decrease the higher the price. (there are exceptions, weird art for example, who the heck would want that junk if it wasn't worth a lot? You wouldn't be able to give it away, I think.) Anyway, there is always elasticity, susbstitutes, and transaction costs. If the price of toilet paper went up 5 cents for a pack of 12, how many people would notice? of those people, do you really think people would wipe less and start buying paper towels instead? If someone really wants a whopper, they will buy a whopper, and it will probably take a somewhat significant price increase before they stop buying. Again, I'm not saying raising the minimum wage is good, or that it doesn't generally lead to higher prices, all I am saying is that a modest increase in minimum wage may not lower employment in certain special cases. It isn't "efficient" to raise the minimum wage, certainly. Someone will pay for the higher wages, certainly. However, perhaps, just perhaps, the people who pay will be the business owners and consumers instead of the workers who lose jobs or who can't find jobs. Now, obviously, if the minimum wage increase by like 10 bucks, then that will mess up everything. I am going to buy a whopper with cheese right now while the price is still low.
You people are confusing several issues. Like whether a rise in the mimimum wage causes any unemployment at all, and if so, how much? Do minimum wage workers receive a net benefit from a rise in the minimum wage even if a tiny percent of their class wind up being unemployed? Do we really care about poor people at all, and even though a minimum wage helps them it's better off not to? These are all different questions.
First of all there is the price elasticity of demand issue. There are many items that have extremely low price elasticity of demand. Why not try to identify them and then figure out what they have in common with low wage labor.
Most people's goal when buying something is to pay as little as possible. If there are two gas stations selling gas, a fungible good, and one charges $1/gallon, and the other charges $2/gallon, where will I buy the gas? Obviously from the $1/gallon retailer. But what if every gas station is charingi $2/gallon? I will buy just as much, because my total budget for gas is a pretty tiny part of my disposable income, and in fact I probably receive $5/gallon of economic benefit from each gallon of gas, I'm just lucky that the cost of producing gas is so low that I can buy it for $2.
When one compares minimum wage workes to the rest of the labor force, only a tiny fraction of total employment dollars is spent on minimum wage workers, so like a rise in the price of a gallon of gas, a rise in the minimum wage doesn't deter much consumption of labor.
Monopolists always benefit by selling LESS of a good than the market will bear, but they gain economic benefit from a higher price. How many more copies of Microsoft Office could be sold if the price were lowered? Microsoft doesn't care, they'd rather sell less at the high price.
In the same manner, minimum wage workers would benefit by jointly demanding a higher price, which is exactly what Microsoft does.
Society receives some benefits from a higher minimum wage. Employees earning a higher minimum wage may consume less taxpayer funded public assistance resources. There may be some people who see no point in working at $5.15 who would be brought into the labor force if the wage were $7, and this would increase our national productivity. Instilling a better work ethic in poor people would be a good thing not a bad thing. Higher wages would discourage turnover, resulting in better labor productivity because people new to a job don't perform it as well as people with experience doing it.
There could be a net benefit to the economy by raising the minimum wage, you really need to learn to think about more about what's going on and how everything is interconnected.
>The demand for low wage workers has very low price elasticity.
Why would you think that? They are paid that low because they barely bring in more revenue than that – hence for every small increase in wage, they are worth a large percent less in profits. FOr example, if you are worth $8/hr in revenue to my store and the minimum wage goes up from $5.00 to $6.50, your worth to me dropped from $3.00/hr to $1.50/hr. That is a 50% decrease in value to me. My elasticity is going to be great. If you sometimes only brought in $6/hr – eg because demand for my shop was low on certain days of the week or you slack off sometimes or for some other reason, I could easily decide to lay you off or reduce your hours.
Elasticity on the basis of certain factors may be low (please provide examples) but it is certainly high because the profit margins are low and because the labor is inerchangable (all unknilled workers are easily replaced). In fact, the old socialist concern was exactly about this: too high an elasticity, disregard for the individual workers, easily replacable labor can be treated poorly and "exploited", etc. The "race to the bottom" is based on the fact that a small increase in wage will lead to a lay-off and replacement with someone who is willing to work for the lower wage. etc.
>I think it would probably be a much better idea to create a greater earned-income tax credit (even one going to those who don't make enough to pay taxes) instead of a minimum wage. There is no reason to think that those who employ unskilled workers are particularly making off with more money than they need. Its better to take money from the best place possible, such as high incomes or spending, and then give it to the poor.
—-
This is a common mistake. Either the negative consequences of minimum wage is undersood and the welfare/redistribution is chosen as a replacement or vice-versa. The problem is- they are both bad for the worker. The miscalculation about welfare (or tax-credit) is that you are simply taking from the rich and giving to the poor- so the problem of hurting the poor by taking away jobs will be avoided – only the rich will be hurt, the poor will be helped. But:
1. Taking money from the rich means taking money from business, as the rich either invest, own or work for the firms and the reduced income, incentives and profits due to the tax will reduce the productivity of the firms and their need and desire to hire and expand. Hence this will lead to fewer jobs and lower wages for the poor you wish to help once they leave welfare.
2. Inevitably some poor will choose to accept welfare in place of some or all of their work income; taking them out of the labor force or reducing their productive hours will mean a lower growth economy and fewer jobs and lower wages for the poor you wish to help.
The combined effect of the above could be just as bad or worse for the poor as a higher minimum wage.
The problem is that guilt and a sense of duty lead people to believe that we – in the role of government – should help the poor actively. Libertarians are seen as heartless, leaving the poor out to die. But are we heartless if we simply recognize that jumping back and forth between programs that actually hurt the people that you want to help is foolish? Furthermore, why say that if we don't want government to help them, that we don't want to help them at all? Why is wrong to want to see it done by private groups, why is that less valid?
>Obviously, demand tends to decrease the higher the price. (there are exceptions, weird art for example, who the heck would want that junk if it wasn't worth a lot? You wouldn't be able to give it away, I think.)
– common mistake. The point is not what you *think its worth* which may be based on the rpice. The point is comparing what you think its worth to the price you must pay. If you were a billionaire who loved pricey art, would you buy more or less $1 million art pieces if you could get in on a deal that sold the $1 million pieces to you for $800,000 each?
So long as the deal still left you believing that the market value of the art was $1 million, you would buy more at the lower price.
>However, perhaps, just perhaps, the people who pay will be the business owners and consumers instead of the workers who lose jobs or who can't find jobs.
Once again assuming that hurting the business owner won't inevitably hurt the worker…
If the owner makes lower profit, will he expand and hire as many new workers? Will he have incentive to open another shop? Will a new entrepreneur have incentive to enter the market – which would raise the wages for the workers through competition?
etc
>In the same manner, minimum wage workers would benefit by jointly demanding a higher price, which is exactly what Microsoft does.
Unless they get replaced by machines, overseas workers, effiency that eliminates their jobs, or indeed the firms go out of business altogether by competition with other firms able to eliminate the jobs while they had to try to raise the price, etc.
>Society receives some benefits from a higher minimum wage. Employees earning a higher minimum wage may consume less taxpayer funded public assistance resources.
a) not if they are unemployed
b) public assistance is another government introduced wrench into the system
>There may be some people who see no point in working at $5.15 who would be brought into the labor force if the wage were $7,
And compete against the already large pool of unemployed.
> Instilling a better work ethic in poor people would be a good thing not a bad thing.
How is offering people more than they ar worth going to instill a work ethic? The ethic comes from recognizing your level of productivity and being willing to work for the wage offered voluntarily (not under coercion) by employers.
>you really need to learn to think about more about what's going on and how everything is interconnected.
You need to get off your high horse and learn why economists have recognized for 100 years that price controls distort the market.
Thank you, liberty. Your arguments seem quite sound to me.
liberty,
I was preparing a post along the exact same lines but lost it when my browser crashed. Your arguments are right on, thank you.
thanks guys, I was worried that I ranted on a bit
Seems to me like the comments are just bringing up the same points over again. "Minimum wage causes unemployment, blah blah blah." This is just a gut feeling that's not based on any evidence. The evidence to me is that it doesn't because there's a low price elasticity of demand.
Furthermore, a little bit of unemployment isn't necessarily a bad thing. Unemployment can't be completely eliminated there is usually a period of unemployment when people leave one job and start another. If someone finds a job too quickly it probably means they've shortchanged themselves by accepting too little salary.
Also, there was something written about bleeding heart liberals–hey, I don't care about the poor at all except that I thank God I'm not one of them–I'm just looking at this analystically and I don't see how the minimum wage hurts the poor any more than Microsoft is hurt by charging too high of a price for Office.
Have you considered that a high minimum wage combined with no welfare state would force the poor to learn to be productive enough to earn the minimum wage otherwise they'd die from starvation? Might be a benefit to society. Ever think of it that way?
I started working when I was 16. At a minimum wage job when MW=$3.35. That was in 1987, and since then, MW has been raised to $5.15. I have 2 observations about this time period. The first is that when ever I was up for a raise, the incremental rise in the MW took place, & my employer considered that to be my raise! I was even told I was lucky, after all the highest merit raise they gave they gave was $0.25 per hour, & since the MW went up the same amount, I had received the maximum possible raise! That may not be the text book definition of stagnation, but that was what it was to me.
That leads to my second observation, If everyone gets a free dollar, is the dollar worth the same as before, or does it drop in value? I don't believe a MW earner today has any better or worse situation as I did in 1987. If everyone gets a raise, the cost of production goes up, which raises prices, removing any benefit of the initial raise.
If one believes the pain caused by raising the MW is worthwhile due to the percieved benefits to the recipients, would one change there mind if shown that the benefits are not real? There is a line in "The Incredibles" that goes like this-'If everyone is special, then no one is special.' I think that is appropo to this discussion.
Half Sigma: "low elasticity of demand" doesn't say that no unemployment is caused. It just says that low unemployment is caused. I think you'll find that everyone agrees with you except perhaps Card and Kreuger. There is no question but that a minimum wage causes unemployment; the only question is "how much".
I see it as a displacement problem.
Raise the minimum wage, and you convince a lot of teenagers — who might have lived off mom and dad a bit longer — to enter the workforce earlier.
The problem is that there are plenty of people who already want to work at the current wage, who may be less desirable. Introduce a bunch of young, newly motivated teens, and the opportunities will dry up for the less-desirables.
Minimum wage advocates tell us the higher wage will draw better workers to the workforce (easily proven with a google search), but they never tell us what's supposed to happen to the less desirable workers who are already willing to work.
Card/Krueger has already been faulted for looking at only employment rather than unemployment (which would be consistent with my position). Some related work has also acknowledged displacement.
The biggest problem with Card/Krueger is the survey method. It was a very uncontrolled, there was only one question that was really relevant, it was ambiguous, and the focus was strictly on headcount (rather than hours). It's all garbage-in/garbage-out from there.
And the way the liberals have rallied around Card/Krueger. All the pro-minimum wage work since then does seem to reference it. It's almost circular.
My main problem is that the people who are displaced have a legitimate need to work. Is it the government's job to motivate people to work? Seems like there's already enough reward for those who are willing to work for their own reasons.
"Have you considered that a high minimum wage combined with no welfare state would force the poor to learn to be productive enough to earn the minimum wage otherwise they'd die from starvation?"
Wouldn't that work the same way regardless of the wage rate???
Half Sigma,
I agree, you are just bringing up the same points over again. "Minimum wage doesn't cause unemployment, helps the poor, blah blah blah." You are just talking about a gut feeling that's not based on any evidence. You have yet to show any evidence that there's a low price elasticity of demand.
Price controls hurt everyone, period. Have you ever considered that NO min wage AND NO welfare would also force the poor to work and that this would benefit "society" more?
Chapter XIX of "Economics in One Lesson" explains min wage.
http://fee.org/pdf/books/Economics_in_one_lesson.pdf
Dennis: "If everyone gets a raise, the cost of production goes up, which raises prices, removing any benefit of the initial raise."
Minimum wage labor is only a very tiny percent of total U.S. labor costs, so raising the minimum wage has only a tiny effect on overall price levels.
Half Sigma, I accept that, but someone has to pay for the increase in pay- the whole increase. So either McD's reduces their staff so their cost per hour remains the same, or the price of my filet-o-fish has to go up so their income per hour stays the same. So if unemployment doesn't occur, the price of everyone's Fillet-o-fish rises. Therefore everyone is paying more, removing the benefit of the raise! That is the spirit of my statement. Transportation costs are also only a small percentage of the cost of my fillet-o-fish's production, but once fuel prices reached & maintained >$2 per gallon, the cost of my sandwich went up about 30 cents.
John Dewey:
It is not true that all of the poor in the US has plenty of money for food. Sure, many might be able to buy enough food on the most part, but to do this they have to sacrifice other essentials like housing or heating.
To return to the issue of fat poor people: When you go without food for a while, your body stores more fat the next time you eat to prepare for a future possible food shortage. Because of the prevalence of food insecurity among the US poor, this becomes a reason for obesity. And again, I mention different qualities of food. If a person can afford enough fats and starches to not be hungry they can afford healthier foods. But it is much harder to do the latter, and much less obvious. Without proper education and information the poor see super-cheap starches and fats as the solution to inadequate food budgets. For more on this: http://tinyurl.com/o4ll2.
In regards to death as a result of lack of health insurance, check out this article: http://tinyurl.com/47evf.
liberty:
I’m not advocating taxes on businesses, simply on income. It is even possible to give tax credits for saving/investment. That way you would only tax consumption. The essential point is that the rich don’t only invest their extra income. If they did, what would the point of being rich be?
As for incentives, there is a mix of different incentives resulting from decreased inequality in income. On the one hand one might have less incentive to jump to the next bracket. On the other hand, if someone wants a certain level of income he has to work harder to get it. Furthermore, if the poor have more income they have a greater ability to increase their productivity. They can get better education, better nutrition, child care, cars to enable to get to places where they are most productive, and so on.
Furthermore, even if reduced income inequality leads to decreased incentive to work or become skilled, how big is this effect? It is still undesirable to be poor. You are not going to make many poor people content with their situations.
In the long run, you also are going to get benefits from low poverty levels. Higher incomes allow poor people to get out of slums, dispersing the negative cultural influence of these areas. Better education will improve productivity, obviously. Better nutrition and health will reduce the risks of health-related handicaps.
I wouldn’t make sense to have no inequality in income, both neither would it make sense to have as much inequality as possible. There is an optimal level, and I don’t think that exists in the US.
As for welfare, that is another discussion. The earned income tax credit is for people who earn income, ie. people who are working.
Finally, I do not doubt your good intentions; I simply disagree about whether these policies are in fact negative for the poor. Private charity is great, but so are public efforts to reduce poverty. If we get rid of these public efforts, they are not going to be automatically made up by private efforts. Government plus charity is better than just charity. Of course at some point an increase in government as a percentage of the economy will directly crowd private charity out, but not at this stage of the game.
>Sure, many might be able to buy enough food on the most part, but to do this they have to sacrifice other essentials like housing or heating.
Actually, according to the household surveys, they don't.
>I’m not advocating taxes on businesses, simply on income.
It doesn't matter where you tax. If I own a business and my executives make $100k a year, but you raise the tax, changing their take-home pay from $70k to $60k, I will have to raise the salary by 10k or else they will work less or go elsewhere. If I have to dump 100k more per year paying them, there goes hiring more low-paid folk, or investing in infrastructure, etc.
>It is even possible to give tax credits for saving/investment. That way you would only tax consumption. The essential point is that the rich don’t only invest their extra income. If they did, what would the point of being rich be?
Much gets invested, but consumption is good too. The rich buy a lot of cars, once they buy them and get rid of them, they go on the used car market, pushing the price down for everyone else. They buy computers, driving technology, making computers ever cheaper (eg the first line is always expensive, allowing firms to make their money back, then competition drives the price down). The rich buy a lot of everything, allowing firms to earn profit, allowing competition to then make the products cheap for the rest of us. The profits to all the firms raise wages for all, allow firms to expand and hire more people, it drives growth. If we had no rich consumers, prices would be higher in every sector. Very often people compalain that tax cuts only help when given to the poor, because they *do* consume so much, as we all know that demand is importnat. But rich consume and invest and its all important.
>Private charity is great, but so are public efforts to reduce poverty. If we get rid of these public efforts, they are not going to be automatically made up by private efforts.
Public efforts to reduce poverty have consistantly failed. Even Clinton saw this and hence enacted welfare reform. And they are replaced by private efforts – taxes lower, higher growth, etc all lead people to give more to charity. Americans give much more to charity than Europeans. And public efforts are not only wasted, but they do hurt the poor. They not only crowd out private investment (yes, at this level) but they also drag down the whole economy, increase unemployment, drag wages down and keep the poor jobless and unhireable.
liberty-
I see some validity to your first argument. Obviously decreasing the benefit of working will to some degree make people want to work less. That will decrease supply of people working and raise the price. The question is how big this effect is. I’m not quite sure, but I think it is small enough to be worth it.
You also say that if taxes are higher the rich will go “elsewhere.” Where exactly is that? The tax would apply to the whole economy. They could go to another country, but this is a big move and many people are not willing to do it. There are many economic and psychic costs of going abroad. Even if they do go abroad, that will help another country’s economy.
I’m not quite sure I see validity in the rich people consuming argument. Why exactly is the consumption of the rich more economically stimulating than the consumption of the poor? It seems that on the contrary, more spending by the poor and middle class will allow industries which supply things which poor and middle class people actually need. That is basic economics. If high-tech things which only rich people buy are needed to produce things which people with lower incomes buy, then those technologies will get investment money, that is unless there is a market failure.
I agree that lower taxes might mean more charity, but my point is that there is not a direct correlation. Obviously everyone did not give all of their Bush tax cut money away.
As for the rest of your list of negative effects of government efforts to help the poor, yes, all of those can be negative effects. Efforts to do anything can be more costly than beneficial if they are done wrong. They key is to find the policies which produce more good than harm. If Clinton was acting on the belief that public efforts to help the poor constantly fail, he would have abolished welfare, not reformed it.
Finally, government spending only crowds out private investment if it increases the deficit or takes money which would have been invested. I have already basically addressed this. Government can affect the ratio of consumption to investment in the economy, but it can easily tip the balance either way. Government can use tax money to fund current consumption and therefore reduce investment, or it can use it to fund investment and therefore reduce consumption. It can also either tax consumption, saving, or both. Of course, some forms of consumption increases future productive capacity (for example eating enough), and some forms of investment produce current enjoyment (for example college), but that is another story.
>That will decrease supply of people working and raise the price. The question is how big this effect is. I’m not quite sure, but I think it is small enough to be worth it.
Big enough that welfare reform made a huge impact.
>You also say that if taxes are higher the rich will go “elsewhere.” Where exactly is that? The tax would apply to the whole economy.
What I said was that if the employer doesn't fork over more dough, the employee will go elsewhere – eg to an employer who will. Hence employer ultimately pay for that tax.
>Why exactly is the consumption of the rich more economically stimulating than the consumption of the poor?
Its not. I was arguing against your presumption that the rich don't invest much and hence you should not let them spend their own money. My argument is about the the other effects.
>Obviously everyone did not give all of their Bush tax cut money away.
No, but overall the economy was stimulated – creating more jobs, raising wages and contributing to charity. Poor people were better off for several reasons, only one of which is charity.
>Efforts to do anything can be more costly than beneficial if they are done wrong. They key is to find the policies which produce more good than harm.
Its not about *how* welfare is done. Its just the nature of welfare and the nature of supply and demand. You can't make it not have these negative effects without getting rid of it entirely. If subsidies mean more of a thing is produced, subsidies for the poor create more poor. If taxing things create less of a thing, then taxing the rich means less rich – which means that there will be less growth. Employers pay the tax and there are less jobs and lower wages.
If it was as easy as taking from the rich and giving to the poor with no repercussion otherwise – then what you say is true: both consume so the spending of the money is equal. But there are repercussions – ones that hurt the poor.
>If Clinton was acting on the belief that public efforts to help the poor constantly fail, he would have abolished welfare, not reformed it.
He's not God, he's not perfect. But the reform alone helped the poor *a lot*. Getting rid of welfare altogether would add that much value.
>Finally, government spending only crowds out private investment if it increases the deficit or takes money which would have been invested.
Not true. Your explanation assumes that government spending and private spending are equal and that private investors act only with regard to the interest rate – not to income. 1) For government to spend it must tax, and 2) what it produces is a product.
Because of 1, private investors have less money to invest, hence investment in the private sector is reduced by government spending. Because of 2, if government spends the money wisely, whatever it buys or invests in now exists and private firms can't provde it — they can provide something else, of course, but they need to have the money for it and it may be a greater risk. If government hires workers, those workers will take the job competitively against private firms, hence private firms must compete with government with regard to wages. Similarly, if government invests, private firms must compete with the government for investments, hence interest rates etc can be affected.
Again, I don’t want to get into welfare, but I was talking about how big the effect of increased taxes on the wealthy was on how hard they work. I don’t think it is that big, and it might even be negligible given the need to work harder for the same income.
If the rich employee is taxed, this is just going to decrease his benefit of working. If you look at supply and demand it means that supply of skilled workers will fall, making the price rise. But the rise in the price paid for skilled work will only be proportional to the decrease in supply of work by skilled worker, if there is any.
The skilled worker is not going to be able to demand a high enough wage to fully counteract the effect of the tax because his work is not any more valuable to the employer than it was before. The workers labor is simply less valuable to him.
You say that the spending of the rich stimulates the economy. This might be true if there is too much savings and not enough consumption, but the poor can just as easily spend that money to consume.
Essentially, there are only two choices for a given quantity of money. It can either be spent or saved. You cannot increase both consumption and saving, given a certain output. Changing the distribution of income can have an effect on the rate of consumption vs. spending, but it cannot increase both. And it can just as easily tip the balance either way.
My suggestion is that if there is spending on consumption to be done, let the poor do it. If there is investment to be done, let the poor do it. Of course we need to maintain incentives for higher-income people, but the only reason not to equalize incomes is because of these incentive effects. The impacts on consumption and saving are not changed by who is doing the spending or saving. If we take money from a rich person who would have spent it on consumption, that money will either be used for consumption or spending. There is no “other effect” of the rich person’s consumption which is not automatically made up for.
Giving a tax cut to someone doesn’t mean that all of the sudden more productive capacity is called into play. It is simply a redistribution of what that productive capacity is used for.
Sure, if you subsidize something it will increase, and if you tax something it will decrease. That is, unless there are no other counteracting effects. I named counteracting effects on both sides. The question of which effect is bigger is an empirical one.
Finally, in regards to government crowding out investment: Unless we start talking about specific properties of the government, the government is just like another household. It takes in money and then either consumes or invests it. There is nothing magic about it. If by taking in money reduces saving, it can spend the money in a way which increases saving.