Here’s a fact that I’d forgotten until I just now re-read James Sherk’s excellent June 25, 2013, testimony on the minimum wage before a U.S. House of Representative’s Committee:

Congress has not voted to raise the minimum wage when unemployment stood above 7.5 percent since the Great Depression ended.

This fact is inconvenient for those who endorse the theory that minimum-wage legislation is a means of addressing the problem of wages kept too low by monopsony power.  The reason is that the higher is the rate of unemployment, the greater are the prospects that employers will have genuine monopsony power which creates, at least in principle, a necessary condition (i.e., wages kept below the value of workers’ marginal products) for a hike in the minimum wage to increase the incomes of low-skilled workers without causing any job losses or other worsening of job prospects for such workers.

The higher the rate of unemployment, the worse are the prospects for dissatisfied worker Jones to find another job if she quits or is fired from her current one.  In other words, the higher the rate of unemployment, the more likely is low-skilled worker Jones not to quit her job – or to risk doing anything that puts her job at risk – even if her pay is below what her pay would be in a more competitive labor market.  Worker Jones’s employer, in short, might be said to have, and to exercise, some monopsony power over her.  So if the minimum wage is justified chiefly as a means of addressing extant monopsony power, we would expect that as the rate of unemployment rises, especially to recessionary levels, that the likelihood of the minimum wage being raised would also rise.

While the fact reported above by James Sherk doesn’t prove that there’s no positive relationship between the rate of unemployment and the likelihood of Congress voting to raise the minimum wage – perhaps such a positive relationship exists for rates of unemployment below 7.5 percent – the fact that no such vote has taken place during times of especially high unemployment (above a rate of 7.5 percent) remains a signal piece of evidence against the monopsony-power theory of minimum-wage hikes.

……

(Note to econometrically skilled young economists: I suggest an empirical study – or series of studies – to discover if there’s a statistically detectable relationship, be it positive or negative, between rates of unemployment and legislatures’ likelihood of raising minimum wages – with rates of unemployment being the independent variable.  Such a study can be time series or cross-sectional or both.  It can look also not only at the overall rate of unemployment, but also at the rates of unemployment of different age groups.  While my guess is that, if a relationship does exist between the unemployment rate and legislatures’ likelihood of raising the minimum wage, that relationship is negative, an interesting hypothesis is this one: as the rate of unemployment of unionized workers rises, legislatures become more likely to raise the minimum wage.  The reason would be to price out of the labor market lower-skilled workers who might be substitutes for unionized workers.)

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The Best Profit-Sharing Plan Is Competition

by Don Boudreaux on July 25, 2015

in Competition

Here’s a letter to the Washington Post:

Robert Samuelson offers sound objections to Hillary Clinton’s plan to fiddle with the tax code to prompt employers to share more profits with employees (“The trouble with Hillary Clinton’s profit-sharing plan,” July 23).  Allow me to offer yet another objection: her plan is too narrow.  It aims to encourage more sharing of profits only with workers of profitable firms.  A better plan is one that both encourages the creation of more profits and the sharing of these profits as widely as possible, not only with workers of profitable firms, but also with workers of unprofitable firms and with people who don’t work at all – that is, with everyone.

Such a better plan would slash taxes, reduce regulations and other government-erected entry barriers, and make trade free, all to encourage more innovation, more-ready entry into thriving industries, and more intense competition.

More innovation, by generating larger streams of novel and highly prized outputs, would produce more unusually high gains for successful firms – gains available to be disbursed not only in the form of profits shared with workers but also in the form of new products shared with consumers.  More-ready entry into thriving industries would more quickly drive down the prices consumers pay and further expand their access to new goods and services.  And free global trade in both goods and investments – by imposing ceaseless competitive discipline on American firms and by guaranteeing American consumers’ access to the fruits of the most creative and efficient producers on the globe regardless of location – would ensure that any unusually high profits that American firms earn today will soon be shared with consumers through falling prices and with workers through higher wages that are bid up to fully reflect increased worker productivity.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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Some Links

by Don Boudreaux on July 25, 2015

in Books, Environment, Hayek, Innovation, Myths and Fallacies, Taxes, Technology, Work

I’m very eager to read Eamonn Butler’s hot-off-the-press Classical Liberalism: A Primer.  I’m also very eager to read Ron Bailey’s latest: The End of Doom.

James Sherk and Lindsey Burke explain that technology and innovation will not impoverish the masses by eliminating the need for human labor; quite the opposite.  Here’s the abstract of their new paper:

Many Americans worry that automation will significantly reduce the need for human employees. This is highly unlikely to happen. Automation reduces the need for humans in particular tasks, but employees have historically moved to new or different sectors of the economy as a result. Little evidence suggests this time is different. Technological advances have reduced the demand for employees in routine jobs and increased the demand for employees in non-routine jobs. They have not reduced the need for human labor overall. Further, the rate of automation has slowed over the past decade.

Seeing eye-to-eye with Bob Higgs, I agree that (as he notes on his Facebook page) this innovation – if it succeeds – will be a great boon for humankind.

Washington Post columnist Robert Samuelson isn’t impressed with Hillary Clinton’s plan to use the tax code to prompt more employers to share profits with employees.  Here’s his conclusion:

The gains of Clinton’s proposal are overstated, the costs understated. We’d be better off with fewer preferences and lower rates. Let firms and individuals decide what’s best for them. But politicians would have to stop using the tax code as an advertising agency and benefits bargain store. That’s a long shot.

Megan McArdle puts Europeans’ often-self-righteous expressions of disdain for Americans’ use of air-conditioning into perspective.

Scott Sumner isn’t buying any defenses of Paul Krugman’s recent claim that “there’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.”  Here’s Scott’s conclusion:

There are conflicting empirical studies of the effect of minimum wages. When that occurs, it’s probably safest to go back to the basic theory. That doesn’t necessarily mean that minimum wages are bad policies, perhaps the gains in income outweigh the cost in unemployment. But it’s disingenuous to claim that we can raise minimum wages without any disemployment effects.

David Brooks writes sensibly in the New York Times about minimum-wage research.  Here’s his conclusion:

The key intellectual upshot is that, despite what some people want you to believe, the laws of economic gravity have not been suspended. You can’t impose costs on some without trade-offs for others. You can’t intervene in the market without unintended consequences. And here’s a haunting fact that seems to make sense: Raising the minimum wage will produce winners among job holders from all backgrounds, but it will disproportionately punish those with the lowest skills, who are least likely to be able to justify higher employment costs.

At Alt-M, George Selgin discusses Hayek’s views on free banking.

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… is from page 111 of the Daniel Boorstin’s great 1973 volume, The Americans: The Democratic Experience (original emphasis):

The builders [such as Gustavus Swift, the innovative slaughterhouse entrepreneur and John Hartford of the A&P supermarket chain] of the new nationwide consumption communities met bitter opposition from local merchants, hometown boosters, and champions of neighborhoods who stood for the local community.  The keepers of the old general stores had fought the big-city department stores; they would also fight RFD [rural free delivery], they opposed parcel post, and they attacked mail-order “monopolies.”  The menace of “chain stores,” they said, was a threat to the whole American way of life.

Boorstin goes on to quote a jeremiad by U.S. Senator Hugo Black (D-AL) against chain stores.  (This is the same Hugo Black who, as a senator, famously filibustered a bill to prevent lynching – not surprising given his membership in the Ku Klux Klan – and who was successfully appointed in 1937 to the U.S. Supreme Court by Franklin Roosevelt.)

As Thomas Sowell points out (I believe in Intellectuals and Society, where he notes that the 1920s was one of the most economically progressive decades in American history), “Progressives” often oppose genuine progress – such as the lower distribution costs, lower product prices, higher product quality, greater product selection, and better employment opportunities opened up by innovations in retailing.  The only sort of change that “Progressives” consistently celebrate as “progress” is a progressive increase in the role of government – specifically, an increase in the scope and depth of government’s intervention into the economic affairs of ordinary people.  Such an increase in government power is considered by “Progressives” to be “progressive” even if (as is often the case) the goals and the effects of the use of such government power are to resist the forces of creative destruction or to otherwise stymie economic progress that is not directed or controlled by the state.

Note another feature of “Progressives'” frequent opposition to innovations in retailing: it is opposition to what in accuracy should be called “shared prosperity.”  When the likes of Wal-Mart devises innovative means of creating and taking advantage of economies of scale in distribution, or Home Depot imports for resale in the U.S. more lower-cost goods assembled abroad, the benefits of these lower costs (and, also typically, of higher qualities) are shared with millions of consumers throughout America (and wherever else these firms have stores) in the form of lower prices and wider product selection.  Such a widespread sharing of prosperity was certainly a consequence of the spread of mail-order innovators, such as Sears, in the late nineteenth century and of supermarkets, such as A&P, in the twentieth century – all despite the hysteria at those times over the demise of local merchants and over the alleged permanent loss of jobs that such retailing innovations were said to cause.

These retailing innovations were, of course, market-driven technological advances that expanded consumer choice.  And so to endorse government actions to suppress the consequences of market-driven technological innovation is, at bottom, to endorse government actions to suppress consumer choice.  There is absolutely nothing genuinely progressive about such arrogance wrapped in economic ignorance and spiced with cronyism.

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Here’s a follow-up letter to Ms. Louise Lauderdale:

Dear Ms. Lauderdale:

Thanks for your follow-up e-mail.  Your point, if I may summarize it, is that it’s desirable for people as a group (through the democratic process), to “control” technology in order to protect people from “the anguish of job loss.”

I disagree.  First, unlike you I worry that the democratic process will too often be hijacked by crony capitalists and other interest groups.  The hijackers, while proclaiming their devotion to the public welfare, will in fact use the power of the state to control new technologies not for the purpose of promoting the public welfare but, rather, to gain and protect special privileges for themselves at the expense of the public.

Second and more fundamentally, technology as such destroys no particular jobs.  What ultimately destroys particular jobs is consumer and worker choice.  For example, the technology behind Uber is destroying the jobs of traditional cab drivers only because consumers choose to use Uber and because many workers choose to drive for Uber.  Labor-saving technologies on farms and factories are profitable only because consumers choose to pay lower rather than higher prices for the goods and services that they buy and because workers choose higher-wage options over lower-wage options: employers would introduce far fewer labor-saving techniques if workers did not allow their wages to be bid up by rival employers.

So to use the democratic process to protect particular jobs by ‘controlling’ technological progress is really to use the democratic process to protect particular jobs by controlling consumer and worker choice.  When one realizes that what’s ultimately being controlled are the peaceful choices of consumers and workers rather than the abstraction “technology,” a policy of control such as the one you endorse seems far less attractive.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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… is from page 189 of Arjo Klamer’s 1983 volume, Conversations with Economists; specifically, it’s from his March 1983 conversation with the monetarist economist Karl Brunner; the quotation below is part of Brunner’s response to Klamer’s question “Keynesians object that your theories are unrealistic and emphasize market failures, such as price rigidities, in their argument.  How do you react to these objections?”

The argument is that because of the market failures, the government has to intervene.  That is a classical example of the goodwill theory of government.  It expresses a belief that the government will find the proper solution to maximize social welfare and will act to achieve that solution.  But “government failure” characterizes the reality of political institutions.  The goodwill theory of government offers us little guidance to understand our socio-political world.  The “government failure” can frequently be much worse than the alleged “market failure” when assessed in terms of the public’s welfare.

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This hostility by commenter Adam Eran to my most-recent post on the minimum wage is an all-too-typical reaction of someone who does not understand the policy arguments of free-market liberals:

…So the best use of our time is to figure out how to gouge more income from the lowest tier in that bottom 90%? Really?

One can only guess the next item of busines
s for the heartless Mr. Boudreaux is a visit from the Ghost of Christmas Past.

Mr. Eran doesn’t understand that the argument against the minimum wage is not an argument against allowing low-paid workers to earn more income.  Quite the contrary.  It’s an argument based on reasoning that leads to the conclusion that minimum-wage legislation causes many of its intended beneficiaries – low-paid workers – to suffer even lower pay ($0.00 per hour) along with being denied opportunities to gain work experience (and, hence, higher future income).  Now it’s possible that this argument is incorrect, but that possibility does not make those of us who base our policy conclusions upon it “heartless” Scrooges who wish to “gouge more income from the lowest tier.”

The fact that Mr. Eran sees the issue as being not one of conflicting views over the actual effects of policy but, rather, as one of good people vs. bad people is telling.  One tale that it tells is that he likely has not thought deeply about the issue, for, had he thought deeply about the issue, he would know that a legitimate debate rages over the actual effects of minimum-wage legislation.  And were he to know that a legitimate debate rages over the actual effects of such legislation, he would understand just how inappropriate it is to accuse someone of a moral failure because he would further understand that what appears to be a moral failure to an uninformed observer is actually a disagreement over the effects of policy.

If Mr. Eran visited a hospital and saw two physicians arguing over the best treatment for a sick patient, presumably he would not accuse one of those physicians as being “heartless.”  Presumably Mr. Eran would not suppose that the disagreement among these physicians is a disagreement between one doctor who wishes to restore the patient to health and another doctor who wishes to make the patient even sicker.  Presumably Mr. Eran would understand that each of the physicians wishes to restore the sick person to health but that these physicians disagree over the best means of achieving that end.  Yet when Mr. Eran encounters a similar disagreement among people who argue about the merits of minimum-wage legislation, he leaps to the conclusion that one of the disputants is a heartless Scrooge.  It’s a mistaken conclusion.

I sincerely believe that most people who today argue for the minimum wage do so with good intentions – namely, they wish to raise the incomes of poor workers.  But I also sincerely believe that, because “intentions” is not a synonym for “results,” the intentions of minimum-wage proponents, when enacted into policy, produce results that are contrary to those intentions.  Yet were I to follow Mr. Eran’s example, I would accuse him and many other proponents of the minimum wage of being heartless Scrooges who wish to gouge income from the poorest workers.  I would accuse them, in short, of a moral failure rather than of an intellectual failure.

In this bootleggers and Baptists policy world of ours there are indeed people who support the minimum wage because they correctly understand that it prices out of the labor market many workers who would otherwise compete with interest groups that are aligned with those supporters.  Labor-union leaders, for example, likely understand this anti-competitive effect of the minimum wage, just as (as documented by David Henderson) Sen. John F. Kennedy understood that a higher minimum wage protected jobs in his home state of Massachusetts by damaging the employment prospects of low-skilled workers in southern states.  These minimum-wage supporters I accuse of moral failure even though I applaud what I believe to be their correct economic analysis of the minimum wage.

But whenever I encounter someone who disagrees with my positive economic analysis of policy my presumption is that he or she is well-meaning and disagrees with me only on the positive analysis.  That presumption of ethical goodnees is rebuttal – I have, for example, come to the conclusion that Sen. J.F. Kennedy’s economics were superior to his ethics – but unlike Mr. Eran’s apparent practice, I do not begin by presuming that disagreement over the merits of policy is a certain sign that those who disagree with me are heartless Scrooges.

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The following is a variation on a theme that I struck in this post of March 6, 2013.

Suppose you’re standing at the edge of a ordinary-sized swimming pool – say, the sort of pool that’s common in neighborhood community centers.  The pool is outdoors, and there are people swimming in it and kids jumping into it and crawling out of it.  As all of this activity is going on you gently drop into the pool a normal-sized brick.  Using the best available measuring instrument, you likely cannot discover that the dropping of the brick into the pool raised the level of the water in the pool.

For one thing, the brick is very small relative to the volume of water in the pool – so small that the best available measurement instrument is unable to detect its effect on the water level even under the best controlled conditions.  But these conditions aren’t controlled.  All of the activity taking place simultaneously with your dropping the brick into the pool also affects the water level.  Therefore, you do not conclude from the fact that your quantitative measurement detected no increase in the pool’s water level that dropping a brick into a pool does not cause a pool’s water level to rise.

As that March 2013 post of mine argued, it would be naive empiricism of the most inexcusable sort to deny – based upon such evidence – that an object with mass added to a pool filled with water causes the water level of the pool to rise.  Likewise, it would be unscientific to conclude that the question of whether or not adding an object with mass to a pool filled with water is ‘an empirical one’ (implying that sometimes adding an object with mass to a pool filled with water does, and sometimes it does not, cause the water level of the pool to rise).

(Note that the more-precisely stated prediction about reality is that adding a object with mass to a pool filled with water causes the water level of the pool to be higher than that level would otherwise be had the object with mass not been added to the pool.  The prediction – like all predictions – is embedded in a set of ceteris paribus assumptions.)

…..

Now let’s alter the hypothetical.  Suppose that you add bricks into this pool by dropping in one brick every minute.  After each brick-drop, you measure the effect of that individual brick-drop on the pool’s water level.  Each time, the detected change in the pool’s water level is zero.  You spend a full twelve hours consistently dropping bricks into this pool in this manner (one each minute) and each time measuring the effect on the pool’s water level of your most-recent brick-drop.  Again, you detect no effect on the pool’s water level of each isolated brick-drop.  No one brick-drop causes the measurable water level of the pool to be higher.

At the end of your twelve-hour escapade, you’ve dropped into the pool a total of 720 bricks.  Do you conclude, based upon the fact that after each isolated brick drop you detected no rise in the pool’s water level, that adding 720 bricks into the pool does not cause the pool’s water level to rise?  Of course not.  You realize that if you’d dropped all 720 bricks into the pool at once, you’d have gotten as a result a measurable, and not insignificant, increase in the pool’s water level.

I believe that discussions of minimum-wage increases often involve an error similar to the one that would be made were you to conclude, after dropping a total of 720 bricks into a pool and detecting after each individual drop no rise in the pool’s water level, that adding 720 bricks into a pool doesn’t cause the pool’s water level to rise.  Not only, of course, does reason inform us that each individual brick-drop causes the pool’s water level to rise (even if a careful attempt to measure the effect of an individual brick-drop detects no effect), but the appropriate baseline for measuring the effect of 720 bricks added to the pool is the level of the water before a single brick has been added.

In the United States, national minimum-wage legislation has been around since 1938 (or, depending on how you assess such things, even earlier: 1931), and has been increased (by my count) 24 different times.  It might well be that the disemployment effect of each individual minimum-wage hike was small (perhaps even undetectable), but it does not follow from this accession of small and undetectable effects – each one the result of a measurement conducted after each isolated rise in the minimum wage – that the disemployment effect of the minimum wage is small.

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Quotation of the Day…

by Don Boudreaux on July 23, 2015

in Politics

… is from page 17 of the 1997 Johns Hopkins University Press edition of H.L. Mencken’s 1956 collection, Minority Report:

The main gain of modern man has been the weakening of governments.  Unfortunately, that process is now reversed, not only in Europe, but also in America.  There is a constant accession of government authority and power.  It works inevitably toward the disadvantage of the only sort of man who is really worth hell room, to wit, the man who practices some useful trade in a competent manner, makes a decent living at it, pays his own way, and asks only to be let alone.  He is now a pariah in all so-called civilized countries.

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Forget the MBA!

by Don Boudreaux on July 22, 2015

in Not from the Onion

Here’s a letter to the Wall Street Journal:

In your report on Pres. Obama’s proposal to force more workers to accept as part of their employment contracts greater eligibility for overtime pay, you quote Sloan School of Management professor Thomas Kochan saying that such a government-imposed mandate “helps drive up productivity” by leading “management to look for more efficient ways of doing their business” (“Overtime Rules Send Bosses Scrambling,” July 21).

Wow.  One wonders what’s being taught at business schools such as Sloan.  If Prof. Kochan is correct that managers throughout the country must be coerced by government – which is manned chiefly by people with J.D.s and not MBAs – to run their firms more efficiently, the value of a business-school education must be quite low.  Do such schools teach their students even less about how to efficiently run businesses than is taught to students in law schools?  Apparently so.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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