George Will nails it

by Russ Roberts on January 4, 2007

in Work

George Will on the minimum wage:

A federal minimum wage is an idea whose time came in 1938, when
public confidence in markets was at a nadir and the federal
government’s confidence in itself was at an apogee. This, in spite of
the fact that with 19 percent unemployment and the economy contracting
by 6.2 percent in 1938, the New Deal’s frenetic attempts had failed to
end, and perhaps had prolonged, the Depression.

Today, raising
the federal minimum wage is a bad idea whose time has come, for two
reasons, the first of which is that some Democrats have an evidently
incurable disease — New Deal Nostalgia. Witness Nancy Pelosi’s "100
hours" agenda, a genuflection to FDR’s 100 Days. Perhaps this nostalgia
resonates with the 5 percent of Americans who remember the 1930s.

That’s how it opens. The close is better, talking about how it might be a good idea to let state minimum wages vary:

But wait. Ronald Blackwell, the AFL-CIO’s chief economist, tells the
New York Times that state minimum-wage differences entice companies to
shift jobs to lower-wage states. So: States’ rights are bad, after all,
at least concerning — let’s use liberalism’s highest encomium — diversity of economic policies.

The
problem is that demand for almost everything is elastic: When the price
of something goes up, demand for it goes down. Obviously were the
minimum wage to jump to, say, $15 an hour, that would cause significant
unemployment among persons just reaching for the bottom rung of the
ladder of upward mobility. But suppose those scholars are correct who
say that when the minimum wage is low and is increased slowly –
proposed legislation would take it to $7.25 in three steps — the
negative impact on employment is negligible. Still, because there are
large differences among states’ costs of living and the nature of their
economies, Sen. Jim DeMint (R-S.C.) sensibly suggests that each state
be allowed to set a lower minimum.

But the minimum wage should be
the same everywhere: $0. Labor is a commodity; governments make messes
when they decree commodities’ prices. Washington, which has its hands
full delivering the mail and defending the shores, should let the
market do well what Washington does poorly. But that is a good idea
whose time will never come again.

I don’t agree with the last line—I’m an optimist. But my favorite word is in the next to last paragraph—"scholars." Notice that he didn’t say economists. I don’t think it’s a coincidence.

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{ 20 comments }

spencer January 4, 2007 at 4:50 pm

But if you look at the states with the highest share of their employees earnings the minimum wage you get a list of the poorest states in the country like Mississippi and West Virginia. By way of contrast if you make a list of the states with the highest minimum wage you find that it is a list of the wealtiest states in the country.

Again, you have a great theory with absolutely no data or facts to support your theory.

Patrick January 4, 2007 at 5:04 pm

We've been round and round with this question on this forum. Most free trading capitalist just don't believe in mandatory minimums (the Mississippi analogy from Spencer is silly, whatever the lowest wage is in the lowest paying states will be the minimum wage-so what, insurance guys make 20% of what I make in Florida, I don't understand what the point is???).

But the socialist, "social contract as they have in Europe", income redistributors like the minimum wage but see it as only a half measure-the other half: a MAXIMUM wage. Don't believe, just listen to any one from Lou Dobbs to Paul Krugman rant about CEO and other senior executive pay. They'd love to cap it and tax it and give it away (to underqualified people in Mississippi maybe?)

Tim V January 4, 2007 at 5:24 pm

How elastic is employment? Every time I see someone claim raising the MW doesn't do that much to harm employment, they use the number of people (unemployment rate) rather than the number of hours (demand for labor). Using the first is incredibly misleading. I want to know, if anyone here can tell me, what is the elasticity when measuring labor hours demanded?

Half Sigma January 4, 2007 at 5:38 pm

Just about everyone with something to sell can make more money if they can form a monopoly or an anti-competitive cartel.

Minimum wage is a government created cartel of low skill workers. It's as if all the workers got together and agreed that none would work for less than $x/hr. If the low skill workers had the organizational ability to to this themselves it would be a very sensible strategy.

I don't know why you think that the rules for unskilled workers are different than for other every other product.

Randy January 4, 2007 at 5:46 pm

Half Sigma,

Its an interesting theory. The problem is the assumption that they actually gain anything from it. Some members of the cartel make a bit more at the expense of those who lose their jobs and higher prices for all. Again, it is ultimately just a regressive tax.

JohnDewey January 4, 2007 at 5:58 pm

half sigma,

One problem – of many – with a mandatory minimum wage is that it's mandatory. It deprives workers the right to work for less. Retarded adults may not be worth $7.00 an hour to an employer. But they may be worth $3.00 an hour. Why take from such workers the opportunity to contribute?

The really stupid idea from liberals is mandating the same national minimum wage. The cost of living in a small East Texas town is about one third the cost to live in Boston or Los Angeles. Why should congressmen from Massachusetts and California decide how much the East Texas employer pays? So that Texas will have the same screwed up its economy – with outrageously uncompetitive cost structures?

spencer January 4, 2007 at 6:00 pm

Very good Half Sigma.

It is nice to see someone here actually think.

Don Boudreaux January 4, 2007 at 6:19 pm

Half Sigma argues that minimum-wage legislation is device to cartelize unskilled workers. (It's not really, of course; in fact, the original purpose of the minimum-wage was to price low-wage southern textile workers out of competition with higher-wage workers in the northeast.)

But let's grant the usefulness of Half Sigma's analogy: it makes the familiar economists case against the minimum-wage. Cartelists restrict output and, indeed, as a consequence, earn higher prices per unit sold. But they sell less — that's what restricting output means. Units of output that would otherwise be sold are never produced and sold.

The minimum-wage likewise causes the market to run up the demand curve, from a lower-price/higher-output combination to a higher-price/lower-output combination.

In short, the artificially high wage is achieved only because some workers are artificially excluded from the market.

Don Boudreaux January 4, 2007 at 6:48 pm

Spencer says that the argument against the minimum-wage is based on "a great theory with absolutely no data or facts to support" it.

This claim is dead wrong. I have not seen any recent, scholarly survey of empirical studies of the empirical effects of minimum-wage legislation, but I'll bet that at least half of such studies show negative employment effects. More likely, such negative effects are shown by a majority of studies.

Economist David Neumark at UC-Irvine, for example, published in 2004, from the NBER, a major empirical study of minimum-wages, finding that it does indeed price low-skilled workers out of jobs:

http://www.nber.org/papers/w10656

This study is hardly unique. Indeed, the very first thing I ever read on the minimum-wage was an empirical study that appeared, I think in 1973, in the Journal of Political Economy by Douglas K. Adie: his empirical finding was that higher minimum-wages reduce employment.

beeper January 4, 2007 at 7:04 pm

Yea, spencer. Half sigma is the only thinker on this blog. Roberts and Bourdreaux aren't thinkers.

Good offereing by Will except he should have said "quantity demanded goes down" instead of demand goes down.

python January 4, 2007 at 8:18 pm

Spencer,

If one state was wealthier than another, and some governing body fixed a minimum wage for both states, which state would you expect to see more people working closer to the minimum wage?

Wages are and should be different across different environments. Why does this surprise you, or make you think it is an argument for raising (and probably making more states have similar) minimum wages?

Suppose there was a minimum humidity law, that said that all states need to have air that is 40% humidified. And some bright-eyed blogger said "Don't you know that the naturally dry states are very close to the minimum wage? Therefore we should increase the humidity further." What would you think of that statement?

lowcountryjoe January 4, 2007 at 11:00 pm

Spencer: Very good Half Sigma. It is nice to see someone here actually think.

Well, Spencer, 'seeing someone think' like Six Sigma the Statistical outlier (over cyberspace no less) must be quite a feat requiring uncanny skills. You know what I think, though, I think such skills have a value and are worth at least $3.75 an hour…don't ever let the guy who posts as JohnDewey short-change you!

Half Sigma January 4, 2007 at 11:05 pm

"Roberts and Bourdreaux aren't thinkers."

They have a philosophy that the government should NEVER interfere with the free market, which is an interesting philosophy, but the problem is that they will make any argument, no matter how dishonest, to support their anti-government philosophy.

One of these dishonest arguments, that they repeat over and over, is that minimum wage laws somehow HURT the low wage workers, which I don't buy. If the minimum wage rises by 40% but 1% of minimum wage employees lose their jobs, that's a darn good deal for the class.

lowcountryjoe January 4, 2007 at 11:22 pm

Half Sigma,

Let's say that you could play central planner for the day and you'd get to choose what the minimum wage rate would be set at. What's your personal price floor on labor that you'd choose? Why do you choose that rate? And, why didn't you consider choosing an even higher rate? Shouldn't be tough for a progressive critical thinker to noodle out some forthright and entertaining answers.

Steve Miller January 5, 2007 at 6:29 am

Half Sigma: "One of these dishonest arguments, that they repeat over and over, is that minimum wage laws somehow HURT the low wage workers, which I don't buy. If the minimum wage rises by 40% but 1% of minimum wage employees lose their jobs, that's a darn good deal for the class."

That would be a good deal. But do those numbers come close to representing the tradeoffs?

Spencer's statement also makes no sense. If more workers earn the minimum wage in, say, Mississippi, then an increase in the minimum wage will be more harmful there than elsewhere.

Steve Miller January 5, 2007 at 6:53 am

HS: Let me explain why I think your suggestion that the tradeoff of 40% higher wages for 1% of unemployment in implausible in the low-skilled labor market. You are essentially suggesting that the demand for low-skilled labor is highly inelastic. Very, very, very inelastic.

Yet low-skilled labor is used most in industries where labor costs are a large portion of operating costs, which would tend to make employers more wage-sensitive, i.e. labor demand would be more elastic. Second, low-skilled workers are more easily substituted for one another, which would also make the demand for labor more elastic, not less.

You're confusing high demand (which makes small increases in the minimum wage essentially non-binding) with inelastic demand.

Randy January 5, 2007 at 9:13 am

What I don't understand is why Half Sigma favors giving money to one low income group out of the pockets of an even lower income group. Again, the EITC would accomplish the same objective with a progressive tax, as opposed to a regressive tax like the minimum wage.

EcoDude January 5, 2007 at 10:29 am

"But if you look at the states with the highest share of their employees earnings the minimum wage you get a list of the poorest states in the country like Mississippi and West Virginia. By way of contrast if you make a list of the states with the highest minimum wage you find that it is a list of the wealtiest states in the country.

Again, you have a great theory with absolutely no data or facts to support your theory."

Your simple observation regarding the minimum wage is a perfect example of omitted variable bias. This is why econometric studies of the minimum wage include many regressors on the right-hand side.

James Howe January 5, 2007 at 2:42 pm

Half Sigma: "[...] If the minimum wage rises by 40% but 1% of minimum wage employees lose their jobs, that's a darn good deal for the class."

Income groups aren't schools or clubs where the success of the group brings pride and good feelings to the members. If I'm a black teenager who just lost my job (or finds it even harder to get work) I'm probably not terribly consoled by the fact that somewhere else there may be others who are now earning a little more money.

Russell Nelson January 9, 2007 at 3:42 am

Half Sigma writes: I don't know why you think that the rules for unskilled workers are different than for other every other product.

Obviously not. How about this: a monopoly is only significant if it can raise prices by restricting output. In this case, a minimum wage functions by restricting the amount of labor you can hire for less than that wage. So can you see that a minimum wage requires restrictions on the introduction of increased supplies of unskilled labor?

So, if workers really could cartelize labor voluntarily, they would necessarily have to exclude the least productive workers from employment.

And that, my friend, is exactly what happens when a minimum wage is forced on people. Funny how the real world intrudes on your theories.

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