Given that numerous prominent economists have publicly stated that the demand curve for low-skilled labor is vertical (that is, changes in wages have no effect on employment of low-skilled labor as long as the wage changes are "moderate," I thought it might be useful to remember the numerous ways that employers reduce employment when they are compelled to pay more simply because legislation requires it. Go to this clear and practical exposition by Coyote Blog from the past.
Coyote Blog also has this superb post up today on how so-called campaign finance regulations throttle freedom of speech.
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I'm happy to say that my most often viewed page of my website is one entitled "Demand CUrves Slope Downwards." Much to my delight, it is usually one of the first pages that google pulls up when asked "Why do demand curves slope downwards." The sad thing is that of all of the econ websites and all of the economists out there, I seem to be one of the few that actually has a page devoted to this very important topic. It's written for the non economist so it's a little on the general side but I think very accurate. I'm always looking for feedback…
Isaac
Russ, to be fair, are the petition-signers saying the demand curve is vertical, or that employers have some monopsony power, or can exploit job-seekers lack of information?
The odd part of their petition is that they note that when the minimum wage is below the market wage (my words, not theirs), then there is little harm done from an increase. That's true, but there is similarly no gain to those who keep their jobs.
Finally, my local coffee shop illustrates another way that demand curves slope downward. They have more staff than they need most of the time. But customers come in little rushes, so sometimes they need that extra person. Without him, customers would see a long line and walk out. In other words, this is not a production function where exactly L units of labor are needed for every unit of capital. There's a lot of room for the management to select the quantity of labor demanded. That last person is just barely covering costs–right at the intersection of value of marginal product and marginal cost. Push up wages, and out he goes.
"[E]mployers have some monopsony power…."
This should be in the dictionary as an example of an oxymoron.
When I read what Coyote wrote:
(1)we are competing against larger private campgrounds that are designed more efficiently.
(2)we have been forced by rising minimum wages and associated costs (particulalry workers comp.) to switch some of our cleaning and landscaping duties from our live on-site employees to local contractors. These contractors may pay their workers more than minimum wage, but the workers are often twice as productive as ours, yielding a cost savings for us.
(3)The jobs get automated away
A fully automated fee collection machine (which actually does more than the attendent, since it takes credit and debit cards as well as makes change for cash) costs $23,000. Plus, the machine never will sue over wrongful termination, never will discriminate against or sexually harass a customer, never will steal, and never will fail to show up for work
What I see is a firm that is using cheap labor to keep from inmproving his operations and make his business and his
employees more productive.
Yes, I agree that a higher minimum wage may cost some individuals their jobs.
But this is not necessarily a bad thing.
Foreign trade causes some people to lose their jobs. Yet you say this is a good thing and I agree with you.
But on the other hand you argue that coyote
using minimum wage labor is a good thing because it allows him to avoid making the capital spending or organizational changes his competition have made that lead to their employees having higher productivity and higher wages.
Take the automated fee collection machine.
Sounds like just what we want in our economy. Any economists looking at this in isolation would think replacing a poorly paid undercapatilized position is a good thing–over the long run it is what improves our standard of living.
It still comes back that your position is that we would be better off employing 100 people at $1.00 an hour than employing 99 people at $1.10 an hour.
I do not agree.
Coyote is using minimum wage employees to subsidize a business that by his own admission is much less productive then his competitors and can not compete if he had to pay his employees what his competitors pay theirs.
Why in the world do you think that is a good thing?
spencer,
Why do you think it's a good thing to interfere with an employer and employees who are happy with their current situation?
What gives you, me or anyone else the right to dictate the conditions of a voluntary agreement?
spencer,
If that's the mix of inputs that yields the most profit, why should he change? If making those improvements was what consumers wanted, and he was able to perceive this, he would make them anyway in pursuit of profit, rather than having his hand forced by market intervention.
Spencer,
If I'm following you, wouldn't it be even better to have fifty workers employed at $2/hr? Or one worker at $100/hr?
Actually, I think you are correct. In many industries, that is exactly what is happening. We have, for example, found that one Walmart making many billions of dollars per year is more efficient than thousands of mom and pops making fifty thousand or so per year. The change has provided products at lower prices and freed up resources for other uses.
But the follow-on question seems obvious. What do we do then with those unused resources? Should they stay home and have babies? Should we create a welfare state so that these don't have to work at demeaning jobs (e.g., anything paying less than $100/hour)? Or perhaps, we should allow them to find their own ways to contribute – even if it means they don't make $100/hour.
Randy, free trade causes people to lose their jobs.
So what are we going to do with all the people that lose their jobs to foreign competition? Create a welfare state for them?
Expalin what the difference is.
From 1960 to 1980 we raised the minimum wage about every time we turned around and it was the greatest era of prosperity we ever knew.
I'm quite willing to say the minimum wage causes some people to lose their jobs.
I just do not think that is a necessarilly a bad thing and the evidence seems to make a very strong case that I am right.
It is called creative destruction and a higher minimum wage is a way to accelerate this process of creative destruction.
Free trade through competition forces firms to change the way they do business that leads to rising standards of living even though some people do suffer a loss of jobs and a drop in their standard of living.
If you apply the same citeria you use to argue against the minimum wage you must also be against free trade.
Explain the difference.
And do not just give me the govt intereference bull.
Spencer,
I really do agree with you. I've pondered this before – how to best make use human resources freed up by technology.
Creative destruction is generally a good thing (at least from a social perspective) and I agree that it matters not at all if the driver of creative destruction is free trade or legislation. But creative destruction does result in free human resources, and free human resources are only of value if they can be put to other uses. So, following this line of thought, the problem with the minimum wage is not so much that it results in unemployment, but that it restricts the ability of a society to make use of free human resources. Unemployed people can be maintained through a variety of methods. But unused productive capability is socially wasteful.
Minimum wage: you lose your job due to government force.
Free trade: you lose your job due to voluntary decisions of consumers.
Tom,
Free trade; you lose your job due to the voluntary decisions of voters.
Oops – make that minimum wage, not free trade.
Spencer has hit the nail on the head with regard to having a deletorious effect on businesses' ability to compete.
If keeping wages low were the key to competing, then Costco would not be able to compete with Wal-Mart/Sam's Club. The fact that Costco not only competes, but pays significantly higher wages AND has higher customer satisfaction shows how spurious the argument against raising minimum wages is.
The number of employees affected would be a small fraction of total employment, but the positive impact to those employees would be significant.
Coffee shop tales notwithstanding, the fact is that minimum wage rates have never been the measure of any company's ability to compete.
Tom, that's not true, if I vote against a minimum wage increase and it still passes there's nothing voluntary on my part
sorry, that should last post should be addressed to Randy
Scott,
True, but this is a democracy. The reason we have a minimum wage is because people voted for it.
Democracy is also two wolves and a sheep voting on what's for dinner.
Just because a majority votes for something doesn't make it right.
Scott,
I was about to say I agree, but the truth is that what the most people vote for is what is right. I say this because the only applicable standard is what we have agreed to, and we have agreed to settle our differences with votes – haven't we?
Randy,
But where does one draw the line between individual choice and societal preference? If the majority of people prefer McDonald's to Burger King is it right to have a vote to ban Burger King? In a free society, both are allowed to operate and if Burger King can make money serving, for example, 5% of the population more power to it. But to restrict freedoms because a majority of people disagree is wrong.
Why do you think you have the right to dictate the terms in a voluntary negotiation between two outside parties?
I'm also curious to know if those who believe in minimum wages also oppose volunteering. Surely if you think it's wrong for a person to earn $5 an hour you must be against a person earning $0 an hour.
Scott,
First, I oppose the minimum wage, and I think if you read my posts above you will see that.
Second, we're getting off track with this theory of democracy stuff – but what the hell, electrons are free. Imagine for a second that the McDonalds vs Burger King issue was actually put to a vote for some reason. I can't imagine such a reason, but for the sake of argument, imagine that it actually happened. Does the majority have the right to deny McDonalds the right to operate? Yes, they do. Because the theory of Democracy isn't that the voters will always be right, just that the voters have the right to do as they choose. Its about having faith in people. If the voters decide to deny McDonalds the right to operate, we will assume they have a reason to want that. And if the voters want a minimum wage, we will assume they have a reason to want that. Which is not to say we shouldn't continue to provide evidence of the actual consequences.
Maybe I've been coming at this all wrong, here I've been thinking personal responsibility is the key but we should just trust our government officials and voters to know what's best. I'm sure research would show that people who worked a minimum 40 hours a week are less likely to be in poverty than those who work less than 40 hours. Therefore I propose a minimum hours worked law that requires everyone to work 40 hours. I think I could get a majority of voters to agree with that.
A response to Spencer's interesting point, which was:
"If you apply the same citeria you use to argue against the minimum wage you must also be against free trade. Explain the difference."
The difference is that the dislocation of minimum wage is permanent for all people whose productivity is less than the minimum wage, while that of free trade is both temporary and in general likely to raise both the wage and spending power of the person affected.
True, free trade causes job losses, but not by destroying the number of jobs, but by changing the mix. How could this not be true? Trading nations, afterall, are currently enjoying record low levels of unemployment.
Trade raises overall incomes by improving specialisation and raising productivity. I am not aware of any evidence or reason why this process systematically leaves out low wage earners. Trade also raises the spending power of the poor. Think Wal Mart.
Hi Scott
Presuming for a short and highly unrealistic moment that a minimum hours worked law actually meant everyone in the labor force worked forty hours. Poverty would undoubtedly be reduced. Equally certain, without any question whatsoever, so would the welfare of all the people currently choosing to work between 0 and 39 hours. And that's a lot.
Now relax the assumption that the economy wouldn't be wrecked. Overall, not a good idea.
The error you are making is to confuse reducing poverty with raising peoples' welfare. You have good company – every health or education or environmental lobbiest makes the same mistake by quite deliberately confusing their special interest with the overall good. That is why we have blanket bans against smoking indoors and forthcoming taxes on fat, which only exist because large and important costs are ignored.
Spencer (and subsequently Ben): I see quite often that liberal economists like to conflate the destructive nature of their policies with Schumpeter's creative destruction. The reason this is incorrect, from a strict analysis standpoint, is that creative destruction is a case of market efficiency whereas market intervention creates deadweight loss. The rent dissipation caused by price floors is a serious problem, I think–one that doesn't follow the least from comparative advantage/free trade situations.
As for my own personal opinion on the minimum wage, I think it's akin to using a hacksaw to perform brain surgery. If "we" would like to do something to reduce poverty, the minimum wage seems an unnecessarily distortionary mechanism, especially because those who bear the burden are not those who, at least in the rhetoric of its supporters, deserve to do so. If voters really want to help those in poverty and curbe the nation's rising inequality, it would be far better to directly target the richest Americans through taxes and then directly redistribute (EITC anyone?) rather than target large AND small business owners across the nation.
Tim Harford likes to put it another way. Prices that arise in a market are simply the truth–the broad aggregate values of millions of consumers and producers negotiating with each other. If we don't like these truths, it's far better to tell the economy a "little white lie" than a big lie. A useful analogy.
Swimmy
"I see quite often that liberal economists like to conflate the destructive nature of their policies with Schumpeter's creative destruction."
Do they? Its a hell of a mistake to make. I can hardly imagine two more disparate processes.
Presumably by liberal you mean left-leaning, not classical. If so, isn't it the rejection of creative descruction's overall benefits that justifies liberals' policy intervention?
Maybe I'm using "economists" too loosely. They certainly wouldn't qualify for prof. Roberts' Society of Real Economists. But they have been either students or graduates who seem to believe that, since neoclassical economists oppose the minimum wage because it causes unemployment, they must also oppose outsourcing for the same reason, or else they're logically inconsistent. (In fact, I heard the equivalent from a University of Chicago econ graduate, of all people, just the other night.)
"True, but this is a democracy. The reason we have a minimum wage is because people voted for it."
Um, no — it's not.
Spencer, why are your arguments always total crap? You can't compare components of a free market (such as comparative advantage) with components of a political market (such as a minimum wage.)
And then you say "It still comes back that your position is that we would be better off employing 100 people at $1.00 an hour than employing 99 people at $1.10 an hour. I do not agree."
I'll bet person #100 thinks you have cranio-rectal inversion.
Arggghhh! Spencer, do you understand ANYTHING about economics? You say "From 1960 to 1980 we raised the minimum wage about every time we turned around and it was the greatest era of prosperity we ever knew." Everyone else understands that to be a completely bogus argument, since we might have been even more prosperous without a minimum wage.
I'm glad that I took an Economics class, because I totally understand what your saying, and stuck explaining it to my friends.
Just a quick update, I've changed my domain. The current address for my take on demand curves is:
http://www.isaharr.com/ratchoice/demand/page9.html
Isaac
why explain reffering to income and substitution effect
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