14 November 2009

Minimum Wage

I don't really like it. I don't like most government actions if they prevent individuals from voluntarily making themselves better off. Some may say that is too simple a view, but I trust people, and I trust them to know what is best for them. Recently, the NY Times said the following in a recent editorial:
The country also needs a program that would create jobs for teenagers — ages 16 to 19 — whose unemployment rate is currently a record 27.6 percent. Deep and prolonged unemployment among the young is especially worrisome. It means they do not have a chance, and may never get the chance, to acquire needed skills, permanently hobbling their earnings potential.
Some articles mildly frustrate me, but this one angered me enough to respond, and they published my letter (3rd one down). Although it's quite nice to get published, it's disheartening to read the other letters and to reread the editorial and come to understand that my viewpoint is probably considered kooky, especially because I live in Bezerkeley. I think most economists agree that the minimum wage hurts, so we must not be very good at conveying the terrible costs of the minimum wage.

Bottom Line: Let people sell their time for whatever they feel is fair.

12 comments:

Anonymous said...

dude, read your own link. for economist, you don't seem to understand economics....it says most economists are split NOWAWDAYS on whether or not minimum wage is bad. at worst it says, it causes negligible effects.

Eric said...

Nice letter. Too short to have the impact that you want.

Don't undersell yourself by assuming that people are against Berkeley even if they are.

Two examples in the letter would have helped-- an historical example whose message is crystal clear and a current example is pretty clear.

My favorite historical example is the Merchant Marine. Minimal wages were fixed by union contract. The wages were so high that the entire commercial ship building industry moved abroad. It has never come back.

In the short term, the shipbuilders kept paying the most talented people and did not hire any apprentices. The company owners could not figure out how to make enough money back from the apprentices that it made sense to hire them.

A current example is Work for Others at national labs. The costs are so high that it is cheaper to hire 5 to 10 graduate students at a university, even if half of the students are not very good, than it is to hire a single national lab scientist. The decision turns on freshman level return on investment calculations.

Mister Kurtz said...

People who believe in the minimum wage also probably believe that if we change to a ten inch foot, there would be lots more seven footers who could play in the NBA.
All I have ever seen it do is inspire business owners to invest in labor saving machinery, or move jobs to a lower wage area. It is true that something like a fast food outlet can't move away,so perhaps those workers benefit (at the expense of many others. But who the heck thinks anybody doing minimum wage work in a fast food place ought to do that forever?

Jay said...

Minimum wage laws are a great example of the Law of Unintended Consequences. Mimium wage laws also have an unsavory history including racisim and protectionsim. Sorry for not providing a direct link, but I have read many analyses supporting the sconclusion. The analsis that comes to mind now is the history of support for minimum wagwe laws by New England textile manufactures who used the legislation to protect the high wage union jobs from competition from non-union southern mills. An example where the mill owners and the union representatives cooperated in defending their common interests at the expense of business and labor in another part of the country.

Unfortunately public policy discussions rarely seems to consider the consequences of past policy decisions. Discussions instead focus on ideas that "sound right". Who could be against the goal of raising everyone's wages, except for those few people that have been trained in, and understand, free market economics.

Bottom Line: The market for political ideas (laws and regulations) is important to the functioning of the financial and labor markets, and the economy as a whole.

Eric said...

@Jay,
The consequence to the politician appears to be that minimum wage laws get the politician re-elected. The longer term or farther away consequences have no effect on the reelection and so do not matter.

Josh said...

Another pro-min. wage person here, but without the rancor...

The medium-term consequences of minimum wage do include consumer spending increases which would appear to offset the earlier losses to jobs. The reason there is no clear consensus is because there is no major, obvious link between minimum wage and jobs (it really shouldn't be hard to see if it were as bad as opponents say). The good thing about that (because economically speaking, it would appear that the effects were negligible), is that spending has increased among a certain group of people who were living in poverty, so they were able to acquire more goods/services, and thus lessen the impacts of poverty among them (the actual reason for refining economic thinking for many of us).

The alternative is the notion of trust, but we've learned time and again that the market system can have a bunch of trustworthy, yet unemployed people living right next to a trustworthy, yet shut-down company. By a bunch, I don't mean 27% of high schoolers, I mean 33% of every potential worker.

I'm not seeing a causal link between our current high levels of unemployment and minimum wage. I'm seeing it more as the result of a free market oligopoly allowed to buy and sell contrived commodities in markets with information highly skewed toward the oligopoly.

Damian said...

@ Josh " I'm not seeing a causal link between our current high levels of unemployment and minimum wage."

I don't mean to imply that the bad unemployment now is a result of the min wage. But it does have an effect - and I disagree that it should be easy to see. Tomato harvesters displaced many workers here in CA way back when, and many would say that labor scarcity (high labor costs) was a contributing factor. But after the fact, is it easy to find unemployed workers that don't have a job specifically because of the harvester? I think its really difficult to do that. Am i misunderstanding you? Keep in mind also that economists have to work with real data as well when trying to use econometrics to ferret out these results, and that is relly difficult when we are talking about small changes in one sector showing up in others...

Jay said...

@Eric - Agree. However, Thomas Sowell, in Knowledge and Decisions, gave an excellent defense of how political markets (I think he used the Chicago machine as his example) can be long term oriented.

@Josh - While many people have argued that in the aggregate minimum wage laws have a small effect (I don't remember reading about a positive effect, just slightly negative effects) the aggregate is less important than discriminatory effects it has on specific groups and individuals.

I have read numerous analyses that show minimum wage laws disproportionately affect the young, the low skilled, the poor, and the ethnic minorities. For example, for much of the 20th century labor unions discriminated against minorities by barring their membership in unions, than lobbied to keep wages above the equilibrium level for low skilled workers, thereby protecting the jobs of its members.

Part of the reason I believe many people and politicians support the minimum wage laws is that it protects voters (older people) from competition from non-voters (younger people). One reason older people think they need protection is the notion that the economy is static and there are only a limited number of jobs, that employment is a zero sum game).

Bottom Line: View of the economy as a static system is not only wrong, it is dangerous.

Eric said...

@ Jay
Interesting book. Thanks.
As to zero sum, all the business products that my companies are working on did not exist three years ago. This is clearly not zero sum.

Damian said...

Jay those are impt points. The political part is interesting, because those priced out of work are indeed not usually voters. And I as well am tired of hearing about aggregate effects when it hurts those most in need.

Jay said...

Here is an article I just came upon. Very timely, and the author even uses the "Bottom Line" style.
http://r.smartbrief.com/resp/sQbQdcAzrctZlIipetuj

Even in the most optimisitc example where the elasticity of demand is very low the example shows more low productivity workers unemployed, despite higher agregate earnings of the fewer employed workers.

Bottom line: When I was unemployed as a youth, I took little comfort that the aggregate earnings of those who were working was higher than it would have been otherwise.

Dereck said...

Some people selling their time for whatever they feel is fair drive down wage and consequently make most people (who usually have responsibilities like to their children, etc) unable to meet basic needs.