“Here, Bear this Extra Burden, You Low-Skilled Worker. It Will Help You!”

by Don Boudreaux on July 26, 2009

in Myths and Fallacies, Reality Is Not Optional, Regulation, Seen and Unseen, Work

Plenty of politicians, pundits, and preachers are applauding today's hike in the national minimum-wage from $6.55 per hour to $7.25 per hour.  Too few pause to ponder the fact that this hike means that Uncle Sam has arbitrarily raised the hourly cost of employing low-skilled workers by 10.7 percent — a policy move always unwise, but especially regrettable when unemployment is rising.

Each semester I ask my
principles-of-economics students if they think that I would rejoice if
Uncle Sam passed a minimum-salary statute for economists, mandating
that every economist employed be paid at least $300,000 annually.  (I would, of course, very much love to earn this much money annually by teaching economics.)  I then
explain that my more talented and accomplished colleagues, such as
Tyler Cowen and Walter Williams, would surely
benefit from such a mandate.  I, in contrast, would lose my job.

……

For those of you who will accuse me of being a benighted ideologue on this topic, I refer you to this post from June 2006.

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{ 50 comments }

Mathieu Bédard July 26, 2009 at 8:17 am

We'd do our best to get you a job in Aix-en-Provence, Don! :)

Don Boudreaux July 26, 2009 at 8:29 am

Tempting Mathieu! Merci!

pi July 26, 2009 at 8:50 am

How could you lose your job? Surely you have tenure?

Don Boudreaux July 26, 2009 at 9:08 am

Tenure is not a guarantee against losing one's job as a tenured professor.

Martin Brock July 26, 2009 at 9:46 am

If the assumption behind the marginalist critique of a minimum wage is true, then everyone earning the minimum wage yesterday contributed precisely this value to a productive organization and no more.

So from a scientific perspective, a rise in the minimum wage begs two questions. First, are not less valuable laborers ruled out of employment by the increase? Critics of a minimum wage typically ask this question and only this question.

Second, why are all laborers currently employed at the minimum wage not immediately driven from their employment by the increase? Proponents of a minimum wage may ask this question, but critics must simply ignore it.

A minimum wage increase clearly does not drive all minimum wage earners immediately from employment. I know this fact, because I have two teenage children employed at the minimum wage, and both are still employed. Were their wages before the increase somehow below their marginal contribution to their productive organizations?

Personally, I prefer Friedman's negative income tax to the minimum wage, maybe even Murray's statutory minimum income (to replace other welfare state programs), but regardless of these reform, the evidence is very clear.

Income distribution in reality is not simply a matter of marginalist market theories. Established incomes are not these "free market incomes", and imposing some additional forcible constraints on incomes does not necessarily lower productivity by crowding out less skilled labor.

An additional constraint could raise productivity by counteracting counterproductive effects of the countless existing constraints. Whether a particular constraint has this effect is as separate question, and a minimum wage increase might not, but this result does not violate some law of marginalist economics, because the simplest marginalist principles of "free, efficient market organization" don't apply to the real economy in the first instance. The real economy just doesn't fit this description.

John Galt July 26, 2009 at 9:54 am

Amazing, how the unemployment position is always twisted to suggest that the obviously hypocritical observer would nevertheless welcome a higher minimum wage for himself.

Um, NO. If I say it means lost jobs, then I mean I don't want to lose my job over it.

There are revelations here about people on both the political left and the political right. On the left, we see that they don't think you even believe in your own position, believing that you will abandon that position when it suits you. Wrong.

And, second, this sort of thinking often reveals people on the right (like John McCain, worrying that Bush's tax cuts gave too much to "the rich") who not only don't get it themselves, but who also think your position is just some kind of cover story for you personal greed. Even your allies can be ignorant.

Marcus July 26, 2009 at 10:47 am

Martin, higher labor costs does not have to result DIRECTLY in lost jobs. But the money to pay for those costs have to come from somewhere. There are three main groups who can and will bear the costs: consumers, employees, investors.

The company can raise the prices paid for by consumers which would presumably lower demand.

The company can reduce the return for investors which would presumably lower the amount of investment.

Or a mixture of the two, either of which, over time can result in the reduction of the number of employees employed. This doesn't necessarily mean outright layoffs but it may reduce expansion thus reducing the number of jobs there would have been.

Of there are other dynamics also. For example, the Fed can pump out just enough inflation to turn the minimum wage into little more than a political gain for politicians.

Or, productivity over time can and will increase, making up for the costs.

Just a thought.

pi July 26, 2009 at 10:50 am

Martin Brock. The answer to your question is diminishing marginal return to labor.

Martin Brock July 26, 2009 at 10:56 am

First, Don's on the record opposing the tenure system, and I'm aware of this fact.

Tenure is not a guarantee against losing one's job as a tenured professor.

I suppose it's a guarantee against losing one's job without well established cause, reflecting the tenured employee's behavior and not some external factor, or a guarantee that some untenured employee loses his job first without this cause.

So Jul asks, "How could you lose your job?" This question has an answer. The answer involves established causes for termination applicable to your tenured position, assuming that GMU's financial position doesn't require it to terminate all untenured factors and you as well, which seems unlikely.

You could respond with this answer, but you don't. These days, you can probably link a web page summarizing the policy somewhere, easily enough, but you don't.

Of course, collective bargaining agreements often include provisions of this kind, and it's not clear to me why these provisions in these agreements are any more counterproductive than tenure in state employment.

Many people, even a majority of people, would like guarantees of this kind in their terms of employment, but we can't all have these terms of employment without eliminating the dynamism of market organization, because if everyone has these terms when an organization's financial position requires terminating employees, then no one meaningfully has them. These terms are meaningful only if some employees have them and others don't.

On the other hand, I'm not sure that "job security" of this kind is really a blessing. I usually (always so far) end up better off after changing employers, even when an employer terminates me and not the other way around.

Everyone may have these terms only if organizations need never terminate employees without these causes, and this condition rules out market organization, because market organization operates on a Darwinian principle presuming continual reorganization, including the continual death and regeneration of organizations.

Statecraft, including established propriety, is all about security established interests against this Darwinian process.

Marcus July 26, 2009 at 11:04 am

"A minimum wage increase clearly does not drive all minimum wage earners immediately from employment. I know this fact, because I have two teenage children employed at the minimum wage, and both are still employed." — Martin Brock

This also presumes that employers are incapable of planning ahead. As though they just woke up Friday morning, read the paper and discovered, "Oh labor costs have increased, guess I better get to work and lay people off."

Employers have known for months that minimum wage was increasing and when. By the time Friday arrived, the market was already adjusted.

Marcus July 26, 2009 at 11:09 am

"Employers have known for months that minimum wage was increasing and when. By the time Friday arrived, the market was already adjusted." — Me, above

Extending this line of reasoning, Martin, you don't know who might have been working along side your teenage children but because of the anticipated increase in minimum wage, aren't.

Marcus July 26, 2009 at 11:21 am

"A minimum wage increase clearly does not drive all minimum wage earners immediately from employment." — Martin Brock

When gas prices go up, do you immediately stop buying gas or do you reduce the amount you use?

Martin Brock July 26, 2009 at 11:36 am

Martin, higher labor costs does not have to result DIRECTLY in lost jobs. But the money to pay for those costs have to come from somewhere. There are three main groups who can and will bear the costs: consumers, employees, investors.

In a zero sum game, someone loses the gains of minimum wage employees. I agree, but this point doesn't contradict mine.

An increase in the minimum wage does not drive most minimum wage employees from their jobs by crowding them out, so their wages cannot reflect a marginal contribution, so that an externally imposed wage increase necessarily pushes some wage earners out of the market.

Many other constraints can exclude workers from the labor market, and a minimum wage increase could simply raise the price of minimum wage employees, relative to other factors of production, and have no other effect.

In other words, a minimum wage increase could simply limit the entitlement of other factors to claim a higher proportion of produce. No law of economics precludes this possibility. Even if a minimum wage rise always lowers employment in some theoretical "market economy", this result is inconsequential if the real economy does not conform to this theoretical model, and the U.S. economy certainly does not conform to any simple market model.

The company can raise the prices paid for by consumers which would presumably lower demand.

Not necessarily. Other results are possible. You summarize some of them yourself.

First, if consumers generally experience a similar income rise, nothing changes. That's just inflation. We just change all the price tags without changing anything else.

Second, companies may lower wages of other employees not receiving the minimum wage (including delays in wage increases), without raising prices.

Third, companies may lower dividend payments to investors or even lower interest payments to bondholders through renegotiation or bankruptcy, again without raising their prices.

Fourth, companies employing many minimum wage workers may raise prices without lowering demand, because factors not earning the minimum wage may dominate the demand. Raising particular prices need not lower demand, because the slope of the demand curve can be zero. A theoretical "demand curve" without a specified slope isn't very informative, really.

Prices generally have doubled twice in my lifetime alone. If this iron law existed, demand would continually fall, and we'd all be unemployed by now.

The company can reduce the return for investors which would presumably lower the amount of investment.

This result is not inevitable at all. Companies employing many minimum wage employees could still be attractive to investors after the increase. Other companies might pay higher prices for productive inputs provided by companies with many minimum wage employees, so their costs might also rise, so the relative attractiveness to investors is not obvious.

Or, productivity over time can and will increase, making up for the costs.

Or productivity increased before the increase but was never reflected in the wages of minimum wage employees for various reasons, including many established constraints other than the minimum wage.

Martin Brock July 26, 2009 at 11:38 am

When gas prices go up, do you immediately stop buying gas or do you reduce the amount you use?

I might not even reduce the amount. I might reduce my consumption of other things instead.

Martin Brock July 26, 2009 at 11:51 am

Extending this line of reasoning, Martin, you don't know who might have been working along side your teenage children but because of the anticipated increase in minimum wage, aren't.

You're right. I don't know. You don't now either. What's the point?

John Galt July 26, 2009 at 11:53 am

"A minimum wage increase clearly does not drive all minimum wage earners immediately from employment." — Martin Brock

And if it drives away even one minimum wage earner, then technically, isn't that person still "unemployed"? Or if it keeps your kids at entry-level jobs they've outgrown, denying other kids a chance to take those jobs at a lower rate, then aren't those other kids "unemployed"? Or if your kids only work 38 hours instead of 40 — or 40 hours instead of 42 — then aren't those two hours, relatively speaking, unemployment?

So basically, your argument — that all low wage workers are not all thrown out of their jobs immediately — is a deflection that does nothing to refute the well-established (and completely explainable) prediction that the wage increase also increases unemployment.

Martin, are you really using that argument to defend the wage hike — or to rationalize it?

Martin Brock July 26, 2009 at 12:03 pm

This also presumes that employers are incapable of planning ahead.

My statement doesn't presume that employers can't plan ahead, but planning might be less valuable than you imagine. We do plan, but in a market economy, this planning often is like the genetic recombination that occurs when we procreate subject to natural selection. The market selects some plans over others, and no planner really knows this outcome a priori. "Guessing" is a better description.

We plan regardless, because we have no choice, and our planning is useful, just as genetic recombination is useful. Genetic recombination doesn't simply throw atomic elements, or even nucleotides, into a bucket and shake. The process is much more orderly than that, but it's nonetheless "random" at the same time.

As though they just woke up Friday morning, read the paper and discovered, "Oh labor costs have increased, guess I better get to work and lay people off."

Of course, they don't. Why says they do?

Employers have known for months that minimum wage was increasing and when. By the time Friday arrived, the market was already adjusted.

Some adjustments have occurred and some are occurring and some will occur, but that's not rocket science. What's your point?

Martin Brock July 26, 2009 at 12:15 pm

And if it drives away even one minimum wage earner, then technically, isn't that person still "unemployed"?

Yes.

Or if it keeps your kids at entry-level jobs they've outgrown, denying other kids a chance to take those jobs at a lower rate, then aren't those other kids "unemployed"?

Yes, if I grant your hypothesis, then I grant it, but you present no evidence that it's true. You present no evidence that a minimum wage increase keeps my kids at entry-level jobs they've outgrown, and you present no evidence that an increase denies other kids a chance to take any job, and many other outcomes are possible. I can pose hypotheticals endlessly too. It's not difficult.

So basically, your argument — that all low wage workers are not all thrown out of their jobs immediately — is a deflection that does nothing to refute the well-established (and completely explainable) prediction that the wage increase also increases unemployment.

No, I haven't deflected the assertion you label "well-established (and completely explainable)". Here it is, after all.

You present no evidence that the minimum wage increases unemployment, and much research suggests otherwise. I'm not even sure that the current recession has disproportionately affected minimum wage employees. Do you have some evidence in this direction?

Martin, are you really using that argument to defend the wage hike — or to rationalize it?

I neither defend it nor rationalize it. As I've already said explicitly, I prefer alternatives like Friedman's.

Isaac Crawford July 26, 2009 at 12:37 pm

Maybe others have seen this before, but i haven't. A local construction project (closing off one lane of a two lane road) has replaced their flagmen with an automated gate system. Maybe this appearance in VA is just coincidence, but I can't help but think that the higher minimum wage has made those low skilled positions expensive enough that it makes sense to invest in a machine instead.

Martin Brock July 26, 2009 at 12:42 pm

Martin Brock. The answer to your question is diminishing marginal return to labor.

I'm not sure how it answers the question. Feel free to elaborate.

Also, I'm not sure that "marginal return to labor" is very meaningful, because labor, even "unskilled labor", is not remotely a commodity. You might as well say "marginal return to productive factors".

A particular productive factor has a marginal value relative to another productive factor, but productive factors generally, the aggregate, don't seem to have a marginal value in this sense.

"Labor" is an incredibly broad category. Any attempt to characterize the "marginal value" of labor, relative to some other incredibly broad category like "capital", is practically meaningless and must surely be laced with politics.

Martin Brock July 26, 2009 at 12:47 pm

… I can't help but think that the higher minimum wage has made those low skilled positions expensive enough that it makes sense to invest in a machine instead.

Maybe you need help thinking of other possibilities. Do flagmen actually receive the minimum wage? Is "flagman" a full-time, specialized position, or are flagmen construction workers that only occasionally hold flags?

Sam Grove July 26, 2009 at 1:04 pm

Do flagmen actually receive the minimum wage?

It has been my impression; that flagmen are reasonably well paid.

I can't imagine deriving any enjoyment from such a job.

John Galt July 26, 2009 at 1:19 pm

Martin, unless you plan to refute basic supply and demand, you're going to have to present some reason why labor would be exempt from the forces that affect everything else.

Otherwise you're arguing that because we cannot always measure an effect we fully expect to see, that therefore we are not justified in considering that effect in the formation of policy. WRONG.

"You present no evidence that a minimum wage increase keeps my kids at entry-level jobs they've outgrown, and you present no evidence that an increase denies other kids a chance to take any job"

Here you are relying on our inability to demonstrate "the unseen," to defend your support for "the seen." This is not just fallacious, it's fundamentally so.

pi July 26, 2009 at 1:21 pm

If we assume a production function (P) that is concave w.r.t labor (L), then the manager would hire labor until the marginal cost of labor (their wage) is equal to the marginal return to labor (dP/dL). This simple model explains why not all unskilled labor is fired once the minimum wage is increased, since the marginal productivity of labor decreases with the size of the labor force. Note that the argument holds even if labor is not homogeneous.

Bryan July 26, 2009 at 2:13 pm

I belong to the denomination of the minister who wrote the "God demands a higher minimum wage" op-ed. Unfortunately that minister does not seem to believe in one of the most basic tenets of the religion he claims to represent:

Persons are free to follow their consciences, guided by the Bible, the Holy Spirit, study & prayer, & are expected to extend that freedom to others.

BlackSheep July 26, 2009 at 2:34 pm

Martin Brock writes:
First, if consumers generally experience a similar income rise, nothing changes. That's just inflation. We just change all the price tags without changing anything else.

You want to compare the price level against money supply times velocity. If those remain constant, then forcing all prices up will give you shortages, not simple inflation. See: Fisher's equation of exchange.

With regard to the rest of the questions, just ask any laymen. I'm sure anyone can spot the absurdity of asking why won't companies pay less to borrow money, or whether people will buy less goods and services if they are cheaper.

Now, what I wonder is the effect of the minimum wage at the supply side. Consider the compensating differential. Even for those that keep employment, can utility go down? I mean, this should make job training, work safety, workplace perks, and other benefits vanish as they now become unprofitable because wage differential isn't at work. Actually it is, but the employer side; so say there is in net racism, then we should see unemployment differ between races.

indiana jim July 26, 2009 at 7:56 pm

Don,

I appreciate your humility in saying that Tyler Cowen and Walter Williams are clearly more talented than you are, but I would like to suggest that in my humble opinion you have been too humble.

Martin Brock July 26, 2009 at 8:32 pm

You want to compare the price level against money supply times velocity. If those remain constant, then forcing all prices up will give you shortages, not simple inflation. See: Fisher's equation of exchange.

I wasn't discussing the dynamics of inflation, Price increases could have the effect you describe, but it's beside the point I was making. My only point is that prices could increase without this effect.

If we define "price" appropriately, I don't see how forcing all prices up could result in shortages. I encourage you to elaborate. I assume you mean R. A. Fisher. His mathematics is not beyond me, so I can and will discuss it if you like. We'll find that he makes many assumptions. I've studied mathematical assumptions with considerable rigor and have the academic credentials to prove it, so I'm able to spot the assumptions he makes and to discuss them.

With regard to the rest of the questions, just ask any laymen. I'm sure anyone can spot the absurdity of asking why won't companies pay less to borrow money, or whether people will buy less goods and services if they are cheaper.

I don't ask this question. I only note that "cheaper" is a relative term, so if my entitlement to consume nominally doubles while the price of anything I might consume also doubles, nothing really changes.

Now, what I wonder is the effect of the minimum wage at the supply side. Consider the compensating differential. Even for those that keep employment, can utility go down? I mean, this should make job training, work safety, workplace perks, and other benefits vanish as they now become unprofitable because wage differential isn't at work.

If the game is zero sum, the increased minimum wage presumably affects other consumption, but it doesn't necessarily decrease demand for produce of minimum wage laborers. If the price of a Big Mac rises, the demand for Big Macs might be unchanged while consumers of Big Macs change their consumption of other goods.

The classical "demand curve" involves an "all else being equal" assumption, but all else is rarely equal. Also, the slope of the curve is typically unspecified. Even if all else is equal, this slope can be zero at a particular price. In other words, demand isn't always elastic.

I haven't seen research on changes in fringe benefits for minimum wage workers after a rise in the minimum wage. If you can discuss this research, please do. I'm not the least bit convinced that some formal economic theory indisputably implies the answer without the empirical research. I'm strongly convinced otherwise, because I'm well schooled in mathematical modeling.

Martin Brock July 26, 2009 at 8:41 pm

Martin, unless you plan to refute basic supply and demand, you're going to have to present some reason why labor would be exempt from the forces that affect everything else.

I don't refute basic supply and demand, and I need not present any reason why labor should be exempt from its laws. It's just that the laws don't imply what you think they imply.

Otherwise you're arguing that because we cannot always measure an effect we fully expect to see, that therefore we are not justified in considering that effect in the formation of policy. WRONG.

No. We don't fully expect to see the effects you expect, because you aren't us. Your expectation is a product of some simple ideology you accept, while the real economy is far more complex than this ideology.

Here you are relying on our inability to demonstrate "the unseen," to defend your support for "the seen." This is not just fallacious, it's fundamentally so.

No. I only refuse to assume the unseen. I don't assert anything about it. You assert things about it that you can't possibly know, like the elasticity of demand for Big Macs in the foreseeable future. You don't know this elasticity. I don't know it either, but I don't pretend know it. My only claim is that you don't know it.

Martin Brock July 26, 2009 at 9:09 pm

If we assume a production function (P) that is concave w.r.t labor (L), then the manager would hire labor until the marginal cost of labor (their wage) is equal to the marginal return to labor (dP/dL).

I'm not sure what you mean by "concave" here. You mean that dP/dL is always negative and increases monotonically with L? Is that true in reality? Does dP/dL exist at all? Is P(L) continuous? Is dP/dL continuous?

What is the quantity L precisely, the total wage a business pays laborers? Which business? Many different businesses employ labor at the minimum wage, and practically all of these businesses employ other labor at other wages. An increase in the minimum wage doesn't imply anything about the total cost of labor for a particular business.

That all minimum wage workers do not lose their employment when the minimum wage rises is an empirical fact, but I don't see how you can conclude if from this simple model, even with all of these assumptions, and I don't see how anyone can conclude that a rise in the minimum wage must result in lower employment.

This simple model explains why not all unskilled labor is fired once the minimum wage is increased, since the marginal productivity of labor decreases with the size of the labor force.

Well, a model can predict a particular outcome without actually explaining the outcome. Mutually exclusive models can predict the same outcome in a particular trial. Even so, I'm not sure how your model explains anything.

Note that the argument holds even if labor is not homogeneous.

Labor is not homogeneous in practically any sense. That's for sure.

Martin Brock July 26, 2009 at 9:12 pm

I can't imagine deriving any enjoyment from such a job.

It's also a risky job, and risk typically commands some compensation.

Curious July 26, 2009 at 9:21 pm

Labor is a product just like any other.

Higher price of any product lowers demand.

Higher price ordered by government also creates black market.

Seems simple to me.

vidyohs July 26, 2009 at 9:51 pm

Ummmm Don,

"I’ve never heard of a supermarket that seeks to clear out excessively large inventories of canned peas or laundry detergent by raising the prices it charges for these items."

I know of supermarkets, furniture stores, etc.

that do just that. Raise prices on paper, discount on paper, advertise discounted prices and sell all excess inventory.

Yes'sir indeedy.

((((Just a minor point))))

Martin Brock July 26, 2009 at 9:54 pm

Labor is a product just like any other.

No, it isn't. One bit of labor isn't just like another bit of labor either. Labor is the furthest thing imaginable from a commodity. Gold is a commodity. Labor is not.

Seems simple to me.

Right. That's the problem. It isn't as simple as it seems to you.

BlackSheep July 26, 2009 at 11:02 pm

Martin, I sincerely can't make sense of what you're saying for the most part. I appreciate your offer to teach me economics, but I think I will pass. People may be discarding aggregate and general equilibrium effects, and doing all kinds of errors, but your vague, undecipherable comments don't bringing anything to the table either.

The assumption of a downward slope for the demand of labor is only an assumption for sure. It is not only plausible as simply as Boudreaux puts it, but ever the more plausible if you don't limit yourself to consumer demand, but the existence of alternative methods of production. Ignore consumer mood swings, you can expect capital investment and the use of fewer more productive higher skilled workers wherever possible or outsource to become more profitable.

With regard to my question on compensating differentials, it is just that, a question. I thought this was a friendly forum, where chit-chat on reflexive economics was allowed. I wasn't aware I had to complement my posts with a paper.

John Galt July 26, 2009 at 11:10 pm

"Your expectation is a product of some simple ideology you accept"

You're calling supply and demand an "ideology"? Seriously???

"One bit of labor isn't just like another bit of labor either."

That may apply when comparing one person's labor to that of another, but it doesn't apply when considering a single individual's labor before and after a compulsory wage hike. Doubly so for any individual whose labor becomes unmarketable as part of the bargain. That's a crime, plain and simple.

You're not going to find a rationalization that justifies throwing any low-skilled employees out of work.

The truth is that I tire of various statists and other shysters trying to redistribute wealth by shuffling money around. It's always a negative sum game — one that usually includes some crook telling everybody else that the whole scheme's too complicated for their simple minds. Hogwash.

Sam Grove July 26, 2009 at 11:25 pm

If a person is working for the current minimum wage, we only can assume that this person's production has a higher value than that wage. How much higher may determine the effect an increase in the minimum wage has on his continued employment.

colson July 27, 2009 at 1:13 am

MartinBrock said:"Second, why are all laborers currently employed at the minimum wage not immediately driven from their employment by the increase? Proponents of a minimum wage may ask this question, but critics must simply ignore it."

MartinBrock said: Right. That's the problem. It isn't as simple as it seems to you.

I'm letting you answer your own question.

Gary July 27, 2009 at 5:40 am

Martin, you wrote: "You present no evidence that the minimum wage increases unemployment, and much research suggests otherwise."

I think you have the wrong impression about the available research. See "Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research" (Neumark and Wascher, 2006). Here's an ungated version.

For some anecdotal evidence of hour-cutting as a result of a rise in the minimum wage, see this recent news item.

vidyohs July 27, 2009 at 6:14 am

Another topic thoroughly Brocked.

Martin Brock July 27, 2009 at 7:28 am

You're calling supply and demand an "ideology"? Seriously???

No. That's you. You can find my words easily enough by scrolling up.

I call "the demand curve" ideology, and I call pi's "production function" ideology, because both are incredibly simplistic formulations of a far more complex reality. I similarly call models of anthropogenic global warming, effectively formulated to generate preconceived predictions, "ideological".

That may apply when comparing one person's labor to that of another, but it doesn't apply when considering a single individual's labor before and after a compulsory wage hike.

It even applies to a single individual's labor from one day to the next, because human beings continually change, and demand for their labor continually changes, qualitatively as well as quantitatively. Human labor is the least commoditized good imaginable.

Again (and again), if the price of a Big Mac rises tomorrow because the mandatory price of Big Mac flippers rises, the demand for Big Macs doesn't necessarily fall, because 1) the nominal income of Big Mac consumers may also rise (or have already risen) and 2) Big Mac consumers may lower their consumption of other things (like housing and related interest payments). I make these points explicitly, and you ignore them. You don't tell me how your simple theory accounts for these contingencies. You simply ignore them. You should go into politics.

You're not going to find a rationalization that justifies throwing any low-skilled employees out of work.

I haven't sought any.

Martin Brock July 27, 2009 at 7:33 am

If a person is working for the current minimum wage, we only can assume that this person's production has a higher value than that wage. How much higher may determine the effect an increase in the minimum wage has on his continued employment.

I agree. This relative height could increase continually without corresponding increases in the minimum, because countless other forcible constraints, in addition to the compulsory minimum, also exist.

Simply ignoring all of the other constraints is the favorite, political, dog and pony show around here. The principal assumption is "all else being proprietarian", and even then only a few established proprieties count.

Martin Brock July 27, 2009 at 7:49 am

I think you have the wrong impression about the available research. See "Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research" (Neumark and Wascher, 2006).

I wrote "much research", not "all research" or even "most research". I've only read the abstract of the review, but the abstract alone is far less credulous of what it calls "the traditional view" than some participants here. It finds a majority of published research supporting the traditional view but not always with statistical significance.

But that's just what I expect. You could review research on anthropogenic global warming with similar effect. I don't find this sort of "consensus" measurement very persuasive. We can discuss specific studies and their assumptions if you want.

Randy July 27, 2009 at 8:37 am

The minimum wage creates short term winners and losers, but in time people adjust. Even the unskilled aren't really hurt by it as what they lose in job opportunities they gain in having more leisure time. The politicians know this. Its all just a political exploitation game – one of many.

I_am_a_lead_pencil July 27, 2009 at 8:43 am

When a Big Mac gets more expensive, some consumers may substitute. They may cook a "Big Mac" on their back patio instead of buying one at the higher price or they may do without.

Likewise, some employers may not lower their consumption of "other things" to retain an employee. Instead they may do the employees work themselves. They may clean the windows on Sundays once a week instead of retaining that part time window washer. They may, as restaurant in Oregon recently did, wash dishes themselves a few nights a week instead of maintaining that part time dish washer.

The substitution, in both cases, is the buyers own labor in response to higher prices.

The demand for overall employment DOES necessarily fall – even if just one employer chooses to wash the windows/dishes himself.

John Galt July 27, 2009 at 8:51 am

"It even applies to a single individual's labor from one day to the next, because human beings continually change, and demand for their labor continually changes, qualitatively as well as quantitatively. Human labor is the least commoditized good imaginable."

And you believe that business owners who employ low-skilled labor will magically see some improvement in the productivity of their minimum wage employees and will not seek to reduce payroll? Even though the premium comes directly out of their pockets, causing them to raise prices for customers whose wages have not gone up? On top of which, business owners already have the correct incentives to pay more if it really does increase productivity — don't they?

"Big Mac consumers may lower their consumption of other things"

In other words, unemployment may result. The price of the free lunch rears its head elsewhere.

It is quite simple, Martin: If the law raises the price of labor, then less labor will be purchased. You maintain that the demand for Big Macs may not go down because 1) Big Mac consumers may have higher incomes and 2) they may lower their consumption of other things.

In fact, your 1 and 2 are the same thing, because Big Mac consumers with higher incomes must be buying things other than Big Macs with their raises. And whatever those purchases are, they will be reduced when the price of Big Macs goes up.

Any way you look at this, it's unemployment for somebody. And for what? For the wage to be effective, it would actually have to raise productivity — even after covering for the deadweight of those who get thrown out of work.

It's negative sum, Martin. It's always negative sum, or somebody would be doing it on his own for a profit.

This is pure rationalization. You start with the policy, and then work your way backward to some fantasy explanation of how it costs nothing — behold: the free lunch — while completely throwing away every fundamental the science tells us we should expect to see. Nonsense. Garbage. If you're looking for politics here, look in the mirror.

Martin Brock July 27, 2009 at 8:52 am

I agree with Randy.

I_am_a_lead_pencil July 27, 2009 at 9:02 am

Randy said:

"Even the unskilled aren't really hurt by it as what they lose in job opportunities they gain in having more leisure time."

This is absurd. Those who are the most unskilled and unemployed are the ones in most need of help. The least advantaged among us. Leisure time? Tell that to the unskilled 18 year old who's parents passed away and who lives with his brother and sister in a two room apartment. His siblings both have minimum wage jobs and he needs ANY job just to get a start and make something for him and what is left of his family. The last thing he wants to do is sit on his ass. He wants a start – a chance.

The prescription of a minimum wage is cruel if it isn't evil.

Martin Brock July 27, 2009 at 9:43 am

And you believe that business owners who employ low-skilled labor will magically see some improvement in the productivity of their minimum wage employees and will not seek to reduce payroll?

No.

Proprietors possibly see improvement without raising wages routinely, and labor markets possibly aren't so ideally free and efficient that competition compels them to raise wages.

Even though the premium comes directly out of their pockets, causing them to raise prices for customers whose wages have not gone up?

A minimum wage rise does not invariably cause a consumer price rise. Proprietors may cut their own consumption, cut other wages they pay, cut investment in other resources or raise prices. You simply exclude all of the other possibilities, because you focus ideologically on one effect.

If proprietors cut their own income or other wages they pay or raise prices for people who do not earn the minimum wage, other consumption could fall, but this fall does not imply any loss of employment for minimum wage employees, because these other factors could respond by consuming more of the produce of minimum wage employees.

This lowered consumption of other factors doesn't imply any fall in total consumption or total production either, because the consumption of minimum wage employees increases. Nominal production (measured GDP) might fall, but this fall could be illusory.

I might expect a change in the variety of goods and services produced, directed more toward the demands of minimum wage employees, but this change does not imply either a fall in minimum wage employment or employment generally or some measure of aggregate production. I can only know these effects by observing them.

On top of which, business owners already have the correct incentives to pay more if it really does increase productivity — don't they?

Not necessarily. Proprietors pay wages the market will bear. What the market will bear has many determinants. Productivity is only one.

Martin Brock July 27, 2009 at 10:10 am

"Big Mac consumers may lower their consumption of other things"

In other words, unemployment may result. The price of the free lunch rears its head elsewhere.

Unemployment may result regardless of any change in the minimum wage, with or without a change. Only your straw man advocates a free lunch here.

Unemployment is not the only possible result. "Unemployment" is an aggregate and could be unchanged as people shift their consumption from one direction to another.

It is quite simple, Martin: …

It's not so simple really.

… If the law raises the price of labor, then less labor will be purchased.

No. This "cause and effect" relationship is entirely theoretical and incredibly simplistic. It's not an invariable law of nature as you seem to think.

You maintain that the demand for Big Macs may not go down because 1) Big Mac consumers may have higher incomes and 2) they may lower their consumption of other things.

Right.

In fact, your 1 and 2 are the same thing, because Big Mac consumers with higher incomes must be buying things other than Big Macs with their raises. And whatever those purchases are, they will be reduced when the price of Big Macs goes up.

First, the economy is not the zero sum game that you assume here.

Second, even if the economy is nominally a zero sum game, these other things purchased by consumers with higher incomes could be less labor intensive than Big Macs. They could be houses with highly inflated prices for example.

Shifting consumption from these other things toward more labor intensive products of minimum wage employees could increase demand for minimum wage employees, and the employment of these people is what we're discussing.

Any way you look at this, it's unemployment for somebody.

No. Any way you look at it, it's unemployment for someone, because you only look at it through your ideological blinders.

And for what? For the wage to be effective, it would actually have to raise productivity — even after covering for the deadweight of those who get thrown out of work.

I suppose lots of people are being thrown out of work in the finance sector these days, and I suppose a lot more would lose employment without the mind boggling bailouts we've initiated, and I don't suppose many of these people earn the minimum wage, so I can't take seriously an assumption that other forcible constraints do not affect minimum wage employees, constraints other than the minimum wage itself.

It's negative sum, Martin. It's always negative sum, or somebody would be doing it on his own for a profit.

It might be negative sum, but when you say "it's always negative sum", you simply telegraph your ideological assumptions. That someone may do it for his own profit, within established constraints, is not obvious at all. It's only an assumption you make.

You start with the policy, and then work your way backward to some fantasy explanation of how it costs nothing …

No. I've never suggested that it costs nothing. If I have, you may quote me, but you won't, because you only bicker with straw men here.

I've only suggested that you don't know its costs. I don't know its costs either, but I don't pretend to know them.

And as I've said now repeatedly, I prefer an approach more like Friedman's negative income tax, though it's no panacea either. I've expressed this preference over and over again in this forum and in this thread, but you see only the replies of your straw men.

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