A Cause for Applause?

An Atlanta paper on Tuesday had an article lamenting the fact that inflation would eat up the gains of workers who would receive the raise mandated by the increase in the minimum wage. Not a word about decreasing and eliminating the employment options of the working poor.

Steve

From what I have seen I believe Walmart's hiring strategy is to employ a few ultra-low skilled workers in a mix of better skilled workers, I guess on the theory that the ultra-low skilled will do OK is there are enough higher skilled ones close by. Whatever their plan, they are doing a good thing because at least some of the ultra-low skilled will become much better skilled and their lives will be greatly improved.

This is good for Walmart also, a classic example of relying on others self interest rather than their benevolence.

We know that Walmart does not have to do this because they get about 10 applications for every opening. If the cost of doing it gets too high I'd bet that they will abandon the ultra-low skilled workers for good.

I am curious how many people this actually effects. My understanding is that the majority of states have a min. wage higher than the federal one and I think the market wage for nearly all workers is allready above $6.55. Please correct me if I am wrong. I understand that any government intervention is anoying and that this may be irritating because it's probably being used as a political football. But doesn't this change have very small effects compared to other interventions (especially entitlement transfers)?

Even if only one person is adversely affected by this (and loses their job), doesn't that person have a right to decide for himself what wages he'll accept?

Flash Gordon,

I thought your comment was interesting. I don't think WalMart pays any worker in the U.S. a wage that is close to minimum wage, but I could be mistaken. Are you suggesting that WalMart is paying some "ultra low-skilled" workers minimum wage?

Due to the overhead costs of doing business, which don't change much, the direct increase is less than that 12%.

The actual cost increase per minimum wage employee, assuming no time-off or other benefits (which is a good assumption as the majority of minimum wage employees are either in high school or college), will vary by the size of the business to be between 9% and that 12%. No matter what though, that's still a hefty and arbitrary hike in the cost of the least skilled and experienced workers.

But, you don't have to take my word for it or even like my assumptions - you can use this tool to run the numbers for yourself!

Qu'ils mangent de la brioche.

It is a fundamental error to describe these workers as "low-skilled." Michael Brown proved to be low-skilled, yet he was compensated at well above the minimum wage during his tenure at FEMA. There are many, many other examples, and not just in government.

In a labor market, what finally determines your wage is not your skiils, but your negotiating power.

If you wish to substitute "inept bargainers" for "low-skilled", there would be no objection.

Bargaining has very little to do with it. To say someone is bargaining assumes both sides have something the other wants. While it is possible to cheat and lie about credentials, most likely 90% of the actual labor negotiations for jobs are fairly honest. The highschool drop outs of the nation are not passing themselves off as MBAs and getting top management jobs by virtue of a silver tongue.

Hammer: "To say someone is bargaining assumes both sides have something the other wants."

Not sure I understand what you mean, Hammer. An employer hires and an employee works precisely because each has something the other wants. That's always true, isn't it?

One problem with the hypothesis that low wages are simply (or chiefly) the result of their recipients' lack of bargaining skills, rather than a result of their recipients' lack of work skills, is that this hypothesis can't compellingly explain why, say, the wages paid to fast-food-restaurant workers in New Orleans in the immediate aftermath of hurricane Katrina rose significantly. Nor can it explain why such workers in some areas (say, Fairfax County, VA) are paid higher wages than are earned by workers in other areas (say, Laurel, MS).

John,

Since in the example provided by the g-g-parent was head of FEMA contrasted with low skill workers, the answer to your question in that example is 'no'. The average low pay worker does not have what the employer of the head of FEMA is looking for, so an increase in bargaining skills will not get those workers such a high position.

I also think the example is overblown. He may have been under qualified for the position he was in, but probably not as totally unqualified as suggested.

The idea that low wages are the result of low relative bargaining skills is dead on.

Every class I took in my BA and PhD programs focused only on bargaining skills. Every class I now teach at my University also only focuses on teaching students how to bargain more share from a fixed pie.

Furthermore (and I am not sure how or why I know this, since learning anything other than bargaining is a waste of time), every single bit of theoretical and empirical evidence coming from labor economists supports this view.

In fact, the only reason I make 87K/ year and the 16 year old girl that took my taco order for lunch makes 7.00/hour is that I bargained it out of my employer and she could not.

This is not really a time for applause. According to Michelle Obama, these workers might be able to buy a pair of earrings with the extra money.

Every time I have this discussion, all I hear is "Why do you hate poor people? You just don't want anyone to get ahead."

They are increasingly horrified when I bring up the prospect of selling organs. It's a nice one-two punch.

ahem:

http://www.usnews.com/articles/news/national/2008/06/27/occupying-idle-teen-hands.html

And SteveO, that is the problem with conventional wisdom and reality. People *want* to believe something despite their underlying actions telling the world we need quite the opposite. People want to believe that raising the minimum wage will have some great effect on a lot of people while ignoring the reality it creates for others who are negatively impacted by it. People just don't rationalize very well. When it comes to giving with little recognition of the nature of scarcity, it's easy to say that you're just out to keep people down.

sorry, that link was busted:

US News article on unemployed teens.

Does anyone know where to find a good overview for the economic argument against having a minimum wage? Preferably one that references some empirical evidence as well.

dave_smith said:

"In fact, the only reason I make 87K/ year and the 16 year old girl that took my taco order for lunch makes 7.00/hour is that I bargained it out of my employer and she could not."

So you're 16 years old, selling fast food and make 87K/year? Because that's the only way comparing your earnings and hers would be any where near an accurate comparison illustrating the difference "good bargaining" can make.

Devon Steven Phillips wrote:

I am curious how many people this actually effects. My understanding is that the majority of states have a min. wage higher than the federal one and I think the market wage for nearly all workers is allready above $6.55.

But the point is that it is not the governments place to interfere in private contracts and set prices in this manner. The very fact that, according to the CNNMoney article, 91% of small businesses say they pay more than the minimum speaks volumes to the private sectors ability to set prices based on supply/demand without government interference.

dave,

That may or may not actually be the case in your position. I would not be able to refute that in part because I don't have enough information about your situation.

I believe bargaining can help you make more money however, I don't believe for a second that your 16 yo hostess would be able to, just by dint of having your bargaining skills get the same position as you at the same pay.

I also believe that, although bargaining skills could probably increase what I make, I used very little bargaining skill to get where I am, mostly because my bargaining skills suck. In my case, it was definitely work skills that got me where I am.

This from colson's link on teenage unemployment:

"All this has prompted calls for more help from Washington. More than 140 mayors have signed a letter to Congress pleading for it to pass a $1 billion authorization bill for youth activities."

arrrrrrggggghhhhhhh!!!!!!

Brian,

In response to your request for empirical literature on the minimum wage issue, here's a link to an older post on this blog:

http://cafehayek.typepad.com/hayek/

2007/01/the_empirical_l.html

My kids bagging groceries at Safeway are applauding. I could tell 'em to read Boudreaux's theory, but I don't think they'd stop applauding.

*woosh*

That's the sound of Martin's one hand clapping.

As they should, Martin. It's the people who get fired or never get hired that wouldn't be happy, right?

Also, I could be wrong but I'm pretty sure Dave's comment was tongue-in-cheek.

A hurricane is unlikely to improve one's skill as a fast-food worker. Thus, an increase in wage winning cannot reasonably be attributed to an increase in skill.

A hurricane is likely to improve the able-bodied survivors' bargaining position, both because (1) they have become relatively more scarce and (2) the catastrophe upsets standing suboptimal relationships with which the inept bargainers had been satisfied.

In light of the preceding, it appears that a wage rise among the worst bargainers following a catastrophe would be exactly what the hypothesis predicts.

When Albert Schweitzer left his practice in Germany, his wages declined. Do you think it is sensible to attribute this to him somehow becoming less skilled?

Kevin, I think you are right..

dave, good show. I think the sentence I should have paid more attention to was "and I am not sure how or why I know this, since learning anything other than bargaining is a waste of time". Everything else looked like it could be asserted by someone.

TL,

Don't forget higher demand in higher paying occupations like construction. (at least the construction jobs I worked paid significantly more than my fast food work)

I don't think bargaining is the deciding factor for wage rates among low-skilled labour. Skills are a differentiating factor and a bargaining chip and they don't have many skills to differentiate them from an average high school kid.

I think the single biggest determinant of wage rate is always supply and demand in the labour market. The post-Katrina workers didn't make more per hour because they negotiated a higher wage. The labour supply shrank after Katrina. Similarly, there are fewer low-skilled workers and/or demand for low-skilled labour is higher in Fairfax than in Laurel, MT. Right now, roughnecks on oil rigs who barely have high school educations but can make roughly $65,000 with no experience because the job is so dangerous. The amount roughnecks are paid fluctuates with boom and bust cycles in oil as demand for their labour fluctuates with the cycle.

Since wages are determined by the marginal value productivity, bargaining shouldn't have much to do with it, while skills should have a lot to do with it. Of course a low-skilled worker is better off in a country with lots of capital investment.

actually, I agree with Unit. I'm not sure bargaining skills are ever that important in either low or high skilled jobs. If you're differentiated enough from the pack of similarly skilled labour, competing employers will bid up the price of your labour. The only bargaining skill you ever need is the ability to say "the other company is offering to pay me more." If no competing employer is offering to offer you a better deal, your bargaining is done.

Speaking of bargaining...Dave, I love your post.

Thanks for all your kind comments on my post.

If you are arguing with those who believe in min wage increases, remember that you are arguing with people that have a fixed pie mentality. We (that is, free market thinkers) know that wealth can be created though competition and market forces. People who don't believe in free markets believe that wealth is a fixed pie to be divvied among people.

That's why any theory or empirical evidence will just roll off of those who want to raise the min wage. They don't think that wealth is created OR DESTROYED. They just think markets and governments push it around. A min wage increase takes from a few rich people and gives to a few poor people. People who thoughtfully agree with the min wage increase don't really care about anything else.

We all know that the min wage (or min wage increase) does redistributes income. The problem with it is that it 1) redistributes income in rather arbitrary ways (it is not just poor people winning and rich people losing...it is much more complicated that that, as anyone who has had a good econ 101 class knows.) and 2) makes the economic pie smaller.

Those two things together make the min wage horrible economic policy. It is difficult to assess all the winners and losers (meaning that there are losers that advocates of the min wage don't want to harm) and even in the best case the min wage is a inefficient way to help the poor.

Simply put, there are many, better ways to help the poor and unskilled in the US.

"Even if only one person is adversely affected by this (and loses their job), doesn't that person have a right to decide for himself what wages he'll accept?"

So you saying, CPUrick, there are low-level workers saying "aw crap I wanted for $3 an hour"? But talking of pies why would wages rise in a disaster? If anything the local pie should be smaller. How does a burger-flipper become more productive thanks to a disaser when all they are doing is still flipping burgers? It'd be understandable if "there's money to be made after a disaster" if you were referring to already well-skilled workers such carpenters, plumbers, welder, concretors, etc. After all, for me to be trapped in the desert and have someone charge me $1000 for a water bottle is engaging in bargaining and playing a sort of zero-sum game - there's nothing more magical than a standard bottle of water and I have to pay that $1000 out of blue not because of any increase of any economic pie.

So you saying, CPUrick, there are low-level workers saying "aw crap I wanted for $3 an hour"?

Nope. I'm saying there are low-level unemployed people saying "aw crap, why can't I get a job like everyone else?" But that's okay because they're mostly non-voting, minority teens who lack the economic sense to understand what's going on, and who are only more likely to vote for a Democrat if they ever do decide to vote. So, I'd say the party of populism can safely dismiss that tiny demographic's rights in its political calculations -- as it always has done.

Qu'ils mangent de la brioche.

Posted by: Sackerson | Jul 24, 2008 1:50:00 PM

Jonah Golberg wrote a really good editorial on this about four years back. Good stuff and good Economics & History lesson, too!

TL:

It is a fundamental error to describe these workers as "low-skilled."

No. It would be a fundamental error to equate Michael Brown's inadequate skills with the skill level of (basically unskilled) entry-level workers. And it would be another error to define "low skilled" by these workers even though it is correct to define the workers as "low skilled."

Finally, there's another fundamental error of interchanging bargaining power with bargaining competence. A hurricane does nothing to affect a worker's negotiating skill, and to the extent that it improves his negotiating position, it does so through rather conventional supply-and-demand terms, in exactly the same way it limited his position before the storm.

As a small business owner, I always feel the pinch when government butts in and tells me how to run my business. Sooner or later they will realize how counter-productive their meddling is.

Owner and President


Triangle Shirtwaist Company

--John Dewey

You could be right, I don't know what Walmart pays workers that I have called Ultra low-skilled. Maybe a better term would be non-skilled. Someone who can't do much of anything of value to anyone else would seem to be expensive at any hourly wage so I assumed they would paid the legal minimum. Any employer who is wiling to hire such people is doing a public service, in my view.

I know of one such person who was hired by Walmart and has flowered into a productive citizen and is still happily working for Walmart, at a wage I assume to be substantially above minimum wage. If Walmart had not hired her she would either still be on welfare or living on the street. Her children would be in foster homes, but they are living with her and doing well. I have seen tears come to her eyes when she talks about what Walmart has done for her.

Gil said: "How does a burger-flipper become more productive thanks to a disaser when all they are doing is still flipping burgers?"

Maybe after a disaster more people want an inexpensive meal cooked by someone else?

That is, the demand for the burger flipper's services go up, and using econ lingo, their marginal revenue product increases.

Flash Gordon said:

"Someone who can't do much of anything of value to anyone else would seem to be expensive at any hourly wage so I assumed they would paid the legal minimum. Any employer who is wiling to hire such people is doing a public service, in my view."

What would lead you to believe that Walmart (which frequently gets many many applicants for positions that it offers) would choose to engage in charity rather than hire the applicant whose productivity was most promising?

It appears as though the person that you cite who has "flowered into a productive citizen" and is still working for Walmart "at a wage I assume to be substantially above minimum wage" WAS hired based upon her potential for productivity - and she lived up to that potential. Good for her in getting there...and good for Walmart in seeing something in her that distinguished her from the other applicants.

All of this can occur without calling it a public service.

As much as worrying about minimum wage and the affect it has on the market, I worry about the goal of the left to install the Precautionary Principle on our entire social structure but particularly on our market(s).

I just received this from my sister:

http://www.youtube.com/watch?v=qxhi4Q8EDTU

it is a fantastic glimpse into the future, but will it be squashed by those forces that will claim it should not be done because it won't be made available equally and the rich should not have it if the poor can not get it? Will it be squashed because the forces of the left will claim that it must be proven 100% effective in every case or it can't be done?

Why are trickle-downers so cruel to working class people?

The question, Crusader, is why are people who want to raise the min wage so cruel to almost everyone? There are far more efficient ways to transfer money to the poor from the rich than the min wage, if that is what you want to do. Raising the min wage makes the economic pie smaller, which means there is less for everyone. And the gains from this policy go to many who are both rich and poor. The costs are born by rich and poor. It is a blunt instrument, to say the least.

Another comment: you don't think that someone who hires min wage workers work themselves?

Is name calling the best you can do?

Here is a suggestion: start a busness and pay your employees what ever you want. Don't try to use the government to coerce others to pay people what you think they should earn, and then feel like you've been charitable. I love how leftists are charitable with other's money. You should feel really good about your sacrifice to help the "working class."

What would lead you to believe that Walmart (which frequently gets many many applicants for positions that it offers) would choose to engage in charity...

All of this can occur without calling it a public service.

--I_am_a_lead_pencil

Well, I didn't say they do out of charity. Walmart could have any number of reasons, including public relations and goodwill.

But speaking of charity, the late John Walton who was Sam Walton's son, was a board member of Walmart, and decorated war hero, was a generous philanthropist thru the Philanthropy Roundtable and was dedicated to helping low income families send their children to private schools to enable them to get the best possible education. I have no inside information but I can see Mr. Walton using his board position to advocate hiring people who might not be given much of a chance by other employers. He was that sort of person and died way too young.

Here is a suggestion: start a busness and pay your employees what ever you want. Don't try to use the government to coerce others to pay people what you think they should earn, and then feel like you've been charitable. I love how leftists are charitable with other's money. You should feel really good about your sacrifice to help the "working class."

Posted by: dave smith | Jul 25, 2008 1:55:59 PM

Nah nah nah nah nah nah.

I just have to keep up my name-calling indefinitely to tire out your side. That way my side wins on election day and we can have the tyranny of MY majority! Hahahahhahahaha

*this is just sarcastic posting. I'm really a hard-core libertarian.

Crusader,

LOL. Nice job. The scary part is how much your sarcasm resembled real leftist arguments.

Psych!

Crusader...you didn't give any clues!!

What does it matter what the minimum wage is if the jobs all go away?

Quote from Reason Magazine On-Line.

And this paragraph in particular gives me chills about Obama's apparently deeply felt belief about how to "give hope to those left behind in a globalized world":

Obama

"This is the moment when we must build on the wealth that open markets have created, and share its benefits more equitably. Trade has been a cornerstone of our growth and global development. But we will not be able to sustain this growth if it favors the few, and not the many. Together, we must forge trade that truly rewards the work that creates wealth, with meaningful protections for our people and our planet. This is the moment for trade that is free and fair for all."

This, Mr. Hopey, is the moment where the two greatest anti-poverty policies known to mankind − immigration and free trade − are under constant attack in the rich West, precisely from the type of hope-floating politicians who would blame global warming on the Chinese, talk '70s-era bollocks about economic "sustainability," and use the kind of labor vs. capital rhetoric that fell out of fashion long before the kind of people cheering you back home today were jeering Ronnie Ray-gun for asking Gorby to "tear down this wall" two decades ago.

US News article on unemployed teens.

That article is one of the most depressing reports that I have ever had the displeasure of reading.

I honestly cant believe that in the year 2008 the best policy that bureaucrats can devise to solve the teenage unemployment problem is state funded job training and job fairs.

GROSS!!!

LOL. Nice job. The scary part is how much your sarcasm resembled real leftist arguments.

Nothing to it. I guarantee there are many more on the right who can give a convincing liberal argument than the other way around.

Says a lot about who really understands both sides of the issues.

Leftism is a mental disorder. That's why they're incapable of making coherent, logical arguments. It all comes down to emotion. Overly emotional people tend to be leftists...