Economics Nobel Laureate Gary Becker and Judge Richard Posner have a co-authored op-ed in today's Wall Street Journal (subscribers-only link). In their article, titled "How to Make the Poor Poorer," Becker and Posner explain why raising the federal minimum wage is a supremely bad idea.
An increase in the minimum wage raises the costs of fast foods and other goods produced with large inputs of unskilled labor. Producers adjust both by substituting capital inputs and/or high-skilled labor for minimum-wage workers and, because the substitutes are more costly (otherwise the substitutions would have been made already), by raising prices. The higher prices reduce the producers' output and thus their demand for labor. The adjustments to the hike in the minimum wage are inefficient because they are motivated not by a higher real cost of low-skilled labor but by a government-mandated increase in the price of that labor. That increase has the same misallocative effect as monopoly pricing.They further note that while some economists do not believe minimum wage increases have a significant effect, this view is in the minority, and few are likely to contend that a substantial increase, such as the 40 percent increase currently before Congress, would not have a negative employment effect.Although some workers benefit — those who were paid the old minimum wage but are worth the new, higher one to the employers — others are pushed into unemployment, the underground economy or crime. The losers are therefore likely to lose more than the gainers gain; they are also likely to be poorer people. And poor families are disproportionately hurt by the rise in the price of fast foods and other goods produced with low-skilled labor because these families spend a relatively large fraction of their incomes on such goods. And many, maybe most, of the gainers from a higher minimum wage are not poor. Most minimum-wage workers are part time, and for the majority their minimum-wage income supplements an income derived from other sources.
If politicians want to help the poor, Becker and Posner argue that the Earned-Income Tax Credit (EITC) is a more efficient (or, really, less inefficient) means of achieving this end. The EITC is more effective means of redistributing wealth to the poor and produces fewer unwanted side effects.
UPDATE: I agree with those commentators who argue that it is important to consider the available empirical evidence. The bulk of this evidence shows, however, that the minimum wage generally has those effects that economic theory would predict (although the effects are often quite small). A recent summary of the empirical evidence can be found on Greg Mankiw's blog here.
Sk
Yes, if we made the minimum wge $20 per hour, it would have an effect. But, as I recall, the US economy performed very well in 1968 when the minimum wage (adjusted to current purchasing power) was over $9 per hour. And if you want to say, well, let's look at other things, then the Posner-Becker scam becomes apparent: Yes, let's look at other things and realize the increase in the minimum wage Congress is proposing is not going to significantly impact the economy, but it will help most workers at that level and those making slightly above.
To appreciate the harmful nature of the minimum wage, consider a simple anecdote. Wal Mart was opening a store in Chicago and was in need of 350 employees. 25,000 candidates applied. Anyone with a rudimentary knowledge of economics knows that when supply drastically outpaces demand like in this example, that the market clearing price (i.e. the offered wage) is too high. By reducing the clearing price, supply would fall to meet demand.
What does this actually mean? It means that absent a minimum wage, Wal Mart could pay employees far far less than they currently do, effectively setting the wage at the true market clearing price where supply and demand for labor are in equilibrium. But wouldn't this be a detrimental outcome for societal welfare? No. With Wal Mart able to pay much less, they could open far more stores, hire many more of the unemployed, reduce prices to much lower levels and the benefits of an increase in REAL PURCHASING POWER would accrue to all Americans. Even those working for the much reduced wage would benefit from the lower real prices they would be paying.
The example of In-N-Out is a strawman. So they can succeed while paying an above market wage rate. Great. Perhaps they have efficiencies in sourcing their supplies. Or they have an intangible value of taste and name recognition that brings in customers even if they aren't the low cost producer. Nothing in your example refutes the logic of eliminating the minimum wage.
There is no sensible explanation for your claim that states with higher minimum wages have lower unemployment, at least not if you phrase it that way (suggesting a cause effect relationship).
Switching the terms is more correct-- states with low unemployment have higher minimum wages. That is, states that already have booming economies, and tight labor markets, will naturally have higher wages. Higher minimum wages is an effect of low unemployment, not the cause.
Walmart has prospered by exploiting workers in low competition/low wage/low opportunity areas. When they try to compete in advanced economic areas they lose.
In &Out salaries are no more relevant to the debate than those of Sullivan &Cromwell, which is fantastically profitable even with starting salaries of $160,000 (approximately $27.50 an hour).
There's a reason Wal-Mart calls for an increase in the minimum wage: it will hurt its competitors more than it will hurt Wal-Mart (which usually pays above minimum wage).
Why is In-N-Out a strawman? Just because you say it is? They don't have efficiencies in sourcing their supplies, in fact just the opposite. They use fresh beef and potatoes (cutting their fries in the store), which of course is a lot less efficient than using frozen beef and pre-cut frozen fries. True, they do have an amazing customer loyalty. I live in New Orleans, but go out of my way to get an In-N-Out burger every time I visit my in-laws in Phoenix. But it is precisely because their product is so good, their employees so well trained (because they stick around) and seem to enjoy their jobs (because they are well paid and well treated) and their prices are competitive with Burger King or McDonalds, where the employees are sullen and the product bland.
It means that absent a minimum wage, Wal Mart could pay employees far far less than they currently do, effectively setting the wage at the true market clearing price where supply and demand for labor are in equilibrium. But wouldn't this be a detrimental outcome for societal welfare? No. With Wal Mart able to pay much less, they could open far more stores, hire many more of the unemployed, reduce prices to much lower levels and the benefits of an increase in REAL PURCHASING POWER would accrue to all Americans.
But this assumes that WalMart would pass all the savings from reduced wages on to its customers (theoretically its workers) rather than just boosting the price of its stock and the pay of its executives (who probably spend a relatively small percentage of their incomes at WalMart). So rather than increasing the real purchasing power of all Americans, eliminating the minimum wage (or reducing its value by not raising it over time) reduces the purchasing power of many Americans while increasing the purchasing power of the Walton family (whose members are four of the ten richest people in America--numbers 7--10).
Many union contracts don't specify a specific wage. They specify a certain number of dollars above minimum wage. Minimum wage goes up, union member wages go up.
There are so few people that try to survive on just a minumum wage job that the whole argument is a strawman. The reality is that this is hidden way to drive up salaries nationwide and make people believe the real purpose is to help poor people.
Did it ever occur to you that if you treat people decently and fairly and as important members of a team rather than disposable annoyances they will respond in kind? That the reason In-N-Out has more competent and productive employees is that they assume their employees will be competent and productive if they treat them like competent and productive human beings?
I would hate to work for you.
On the economic side, In-N-Out's success is premised on different circumstances than any others' (eg, WalMart). What works for InNOut may not work for WalMart. And InNOut's wage has a slight effect on the market, while a federal minimum wage law would.
Second, the basic idea of "supply and demand" deflects a lot, especially in Joe's scenario (10:24). What would motivate Walmart to drop their prices, especially if they could earn more by paying less to employees. If stock prices increase by the increase of prophets, why would Walmart drop its prices? Do you have any examples of this happening? It seems that the "supply and demand" that students learn in Middle School deflects away from desire for prophets, working environment, and employee satisfaction. Some of these topics you cannot measure sufficiently. The market is not as always free as we pretend it is; this holds true with supply and demand as well.
I'm glad we don't live in a society where such ideas are "silly".
I, for one, am for deregulation and defunding welfare from the top all the way down. But it is true, I believe, that a tax cut for the rich will help the poor and middle class a lot more than raising the minimum wage.
This is pie-in-the-sky, ivory tower stuff. Becker and Posner can believe it and support it because they've already got theirs and don't have to worry about making ends meet. The idea that slashing workers' pay will actually help them is absurd. Full-time Wal-Mart employees making $120/week sans minimum wage might be able to buy some items at newly lowered Wal-Mart prices, but it won't magically lower the price of gas, rent, electricity, etc.
Eliminating the minimum wage would undoubtedly help the wealthy and middle class in terms of purchasing power. It might even have an aggregate benefit for the overall economy. But it would be a benefit gained from further shafting those already on the margins in favor of those already comfortable.
1) Would you disagree with a demand to raise the minimum wage to $50/hour?
2) If so, why?
3) Why do the reasons in response to Question #2 not apply to a demand to raise the minimum wage 40%?
I can't provide a direct counter-example to WalMart, but I can to Sam's Club, which of course would be Costco. Employees at Costco are paid better (most if not all of the stores are unionized), as are the managers. Yet it competes successfully with Sam's Club and certainly has much better customer satisfaction than Sam's.
Duh.
So increasing the minimum wage will not increase employment.
The next question is, will it decrease employment? Well of course it will, perhaps to a minor extent, perhaps to a larger extent. You have only to look at the Samoa dispute on this issue (Samoa was exempt in some versions of the Bill because of the impact the rise in wages would have on its primary industry).
So the question for society is, will the loss of employment opportunities for X people, coupled with the higher prices the wage increase will impose on all people, outweigh the benefits Y minimum wage earners who are able to hold onto their jobs?
Becker and Posner basically answer this question by saying the benefits are vastly outweighed by the detriments.
The trouble is that the truth doesn't matter here. Minimum wage rises have been Democratic dogma for, let's see, forever. It doesn't matter whether they are good or bad, it's just a fact of nature that when Dems are in power the minimum wage will rise whether or not it is a good thing.
So American economy: just lie back and try to enjoy it.
Rather than respond to this inane argument, I'd rather wait and see if any supporters of the Becker-Posner thesis will denounce it as obviously silly.
There are plenty of good arguments to be made against raising the minimum wage, but absurd hypotheticals about raising it to $50/hour surely aren't among them.
Because you assume people are incompetent and unproductive and don't deserve more than the minimum wage.
Some people don't want to pay a premium for the additional quality of service that In-n-Out provides (and that they can provide through a higher wage).
People aren't paying a premium for the quality of service, In-N-Out prices are not higher than McDonalds or Burger King. The difference in the business model is that owners of the company share more of their revenues with their employees rather than keeping it for themselves or doling it out to stockholders (of which they have none since it is a family owned company).
Like most opponents of the minimum wage increase, you take into account the secondary drawbacks, but completely refuse to acknowledge the secondary benefits.
It stands to reason that when you put extra money in the pockets of people who spend virtually 100% of their income on consumption, it's going to be good for the economy. Those people will spend their extra money lots of places, including places that hire minimum-wage employees, thus augmenting their revenues and enabling them to expand operations and hire more employees.
I don't think we have the tools to quantify this effect, but it's certainly a factor so long as we're determined to consider all the other marginal impacts. Again, we see the conservative resistance to believing the economy can be stimulated at the bottom. Give extra money to the rich, and they'll open new factories and do wonderful things for everyone. Give extra money to the poor, and apparently it just goes down a rabbit hole. (The reality is, of course, all such "rabbit holes" are at the top.)
such as? and I mean in the real world. Not one of infinite supply of jobs.
Yep, that's certainly been the case with the current round of cuts for the rich.
If Becker and Posner want to attack the economics of pay, they could start with people like Home Depot's Nardelli, who took home a $210 million *severance* package. At $9.50 per hour, you could pay 10,600 workers for a full year of full-time work. So tell me again why the drag on the economy is the minimum wage, and not the gross excesses of executives?
It's always amusing seeing obviously false claims like this in the middle of posts which lament the economic ignorance of Americans.
Even the Heritage Foundation acknowledges that 20% of minimum wage earners live in households below the poverty line. Obviously, these are not "teenagers in a home with household income well above the national median," nor are they "second wage earners in higher income households." Good luck getting to 85% at this rate.
If we raise the minimum wage by fifty dollars, the effect would be massive unemployment.
The issue is precisely how much unemployment is an acceptable trade-off for increasing the hourly minimum. The problem is compounded by the difficulty in prognosticating.
In any event, if one's goal is to increase the income of poor people, the EIC is more efficient than the blunt force of a minimum wage.
Rather than respond to this inane argument, I'd rather wait and see if any supporters of the Becker-Posner thesis will denounce it as obviously silly.
There are plenty of good arguments to be made against raising the minimum wage, but absurd hypotheticals about raising it to $50/hour surely aren't among them."
I think the point he was trying to make is that even proponents of raising the minimum wage would admit that, at some point, raising the minimum wage would be more harmful than helpful to the economy. The question is: where is that point? Would you support raising the minimum wage to $9/hour? $11? $15? $19? There was a movement in Massachusetts a few years ago to institute a law requiring that all employees be paid a "living wage", which I believe proponents calculated as being somewhere around $17/hour for a 40 hour per week job.
Higher minimum wage = higher unemployement = higher prices on goods bought by many low income people. I would like proponents of this minimum wage increase to either (1) refute this assertion, or (2) explain how the benefits of a higher minimum wage outweigh this increase, and if so, at what point (if any) the costs of a higher minimum wage start to outweight the benefits.
So I don't get it. If the only people making minimum wage are extremely low-skilled workers who are probably incapable of holding down a job anyway and the high-school kids slinging burgers after school why on earth are you so adamantly opposed to raising it. By your logic it shouldn't matter at all if it goes up. McDonalds will still need high school kids and will raise the price of their burgers a nickel to compensate and maybe the hopelessly incompetent will find it harder to find a job, but so what, they were only going to keep the job for a few months anyway. The working poor are already making a lot more than the minimum wage so they won't be affected.
Some of you seem to have tacitly accepted a mental model wherein workers are somehow "prisoners" of their employers. As if, were there not a minimum wage, employers would be free to pay peanuts to everyone.
Wages are set a whole lotta ways other than by government fiat. In other words, there are other market forces that would come into play if employers just decided to underpay employees. For starters, no one would work for them. Just that simple. And workers would bond together to form unions and workers guilds that would negotiate collectively with employers. Precisely the same way it happened in the past.
In fact, does anyone know, did the minimum wage destroy/damage unions? I mean the minimum wage is a kind of collective bargaining. If the government is going to do it for you, why do you need a union?
Also, doesn't the fact that there has been no minimum wage increase in 10+ years, and workers today are doing pretty good, suggest that the minimum wage is not all that important?
Either way, these operations are simply counterexamples, and they prove nothing beyond the fact that not all businesses that pay more than the minimum wage will go bankrupt, a fairly obvious point. There are many decisions about where to allocate capital, and wages are one such area. The problem with a minimum wage is that it forces the market in a certain direction regarding wages, hurting both businesses that choose to pay as little as possible, as well as businesses like In-and-Out who choose to offer a more competitive wage in hopes of attracting better candidates. I recognize the counter-argument that 5.15 is disgraceful as a wage because it's not really enough to live on, and that's a good point, but it doesn't change the economic calculus of the minimum wage, and neither do single counterexamples that prove nothing.
Giving the rich the tax cut is supposed to free up more capital for investment, which creates a higher volume in the economy, more jobs, etc. But at the same time, leaving the bottom people out to dry also hurts growth.
The middle-class of small biz owners and professionals are the group who drives true innovation, which gets copied and mass-produced by the big corps and conglomerates, and their services are consumed by the poor. Yet, when they prosper too much, they price out the poorest people and they stagnate the flow of ideas and innovation to protect their stable growth.
The poor people provide the consumption of goods/services and labor that the other two need to survive. Abe Lincoln said that without Labor, there is NO Capital. Walmart needs the blue-vesters to make their ginormous profits.
It seems to me that we make decisions on a sliding scale of who gets hurt more by the decision.
We can create volatility at any of the three levels (cutting wages/benefits for poor, increasing regulations on professional groups for middle, raising taxes or adding regulation to corporations for rich), and the other two class groups will benefit or enjoy stability of some sort.
Strong unions or professional groups will leverage thier power against the executive class to benefit their own class of people. What is the happy medium? Or is the happy medium found in a soup that continually gives each group their druthers on a cyclical basis?
What makes you believe that workers today are doing "pretty good"? Let's define worker as a family making around the median income ($46,000) in this country and compare their status to that of a worker of thirty years ago when the minimum wage was around $9.00 an hour in todays dollars. Are they more or less likely to have health insurance or a pension? How about the ability to pay for a college education for their children?
It's unlikely that employers can pass the increased labor costs on to the customers. If McDonalds could increase burger costs by a nickel, they would already have done so to pocket the profit.
The second half of that sentence is pretty good, though. They may not be able to find jobs, but they were only crappy jobs anyway, so (for some people) it's no big loss.
"The working poor are already making a lot more than the minimum wage so they won't be affected."
That's also an argument for not raising the minimum wage.
If a little increase is good, a bigger one should be better.
I have a lot more respect for the opinions of experts like Becker and Posner than I do for the zombies who stagger around claiming that Econ 101 explains all.
Yet again, people who have no problem perceiving all sorts of wonderful trickle-down benefits when you introduce more money at the top of the economy can see no benefit whatsoever when you introduce more money at the bottom. Will lower-income workers consume more if they make more money, thus increasing corporate revenues at the margins, thus stimulating growth and encouraging job creation? You'd surely never know it from the folks who stopped paying attention after Econ 101, figuring they now understood all the mysteries of the universe.
The fallacy here lies in not realizing that costs will be passed on to consumers on an industry-wide basis.
Sure, just like if someone thinks that raising the speed limit from 55 to 65mph is a good idea, then they're obligated to believe that raising it to 500mph is a great idea. And if you want 2 slices of pizza instead of one, then you're a hypocrite if you refuse to eat 100 slices.
There's enough contention here already without adding ridiculous strawmen.
Market pressure will force them to pass the savings to consumers because all their competitors will have lower-priced inputs and can now price their goods closer to Walmart's. It's actually more fallacious of you to assume all the savings will be paid to executives.
There are many ways of improving the lot of all workers in the US. One strategy independent of EIC is below:
All of us need services like education, healthcare and some kind of insurance against a rainy day (limited unemployment benefits). These also happen to be the best services to centralize to mine savings resulting from imroved efficiency while ensuring that they are available to all.
Whiel centralizing, private providers should be allowed to step in (vouchers are fine) if they offer the services to all comers without restriction (no prexisting conditions, religous tests, etc.). Then, the efficiencies being mined are those of organization and delivery. Physicians should be able to decline to accept the rates and use alternative methods for charging patients. All insurance plans should be required to no screen out people for preexisting conditions, race, religion, gender etc. They can elect to be pricey but not discriminatory-- and no immunity from lawsuits.
Estimates suggest that in the case of health care about half of the expenditures are a waste, being directed to keeping people out of private plans. This saving is enough to pay for extension of health care to all. The government can pay the private providers on a pro rata basis, i.e., tax or other revenue earmarked for these expenditures based on the number of people served by the private plans. Thus, the government will be a provider of last resort.
This will put a useful benefit in the pocket of the poor, improve everyone's mobility to seek better opportunities, and is not enough to make people forgo work altogether and rely merely on a benefit fueled lifestyle. Further, having people pay a certain amount (a large copay) will provide an incentive to use medical care with care while reducing the cost of charity care.
Presently, charity care extends to all patients. The high end patients consume a lot of time, but the physicians cannot bill any of it (only procedures not advise, interviews, midnight responses or trips to the hospital by physicians) are billable, in effect charity care as the liability of the physician stays the same. Lower end patients pay even less. This perverse reality is effectively the result of monopoly pricing (HMOs etc. are monopolies), but for the limited benefit of private individuals and with no consideration of quality. (disclosure: my wife is a physician who provides generous dollops of charity care to the well-heeled who think nothing of paging her at odd times.)
Of course, if we decide to stop subsidizing stock and bond investors with the ongoing tax holiday from Medicare and Social Security taxes, probably the crisis on those fronts would be tackled as well. It is the broad tax exemption and extraordinarily low tax rates for people earning income in the form of Capital Gains that is increasing the cost of providing these necessary service on the rest of us. Ending the tax holiday (these vacationers also use SS and Medicare) will also ease the burden on the poor by making their taxes reasonable. It seems, we will not need bandaids like EICs for anyone then.
And that's the problem--it's just Econ 101. Like Psych 101, people who take Econ 101 are the most dangerous people around, because it makes economics sound so simple. It's basic supply and demand. Of course a high school graduate applying at WalMart has equal bargaining power with corporate headquarters in Bentonville and every job interview involves a back and forth where there is a heated negotiation where offers and counter-offers are considered and lawyers pore over every detail of the employment contract. Finally there is a meeting of the minds, the contract is written and Lee Scott personally flies down from Bentonville to sign each and every employment contract and congratulate the new employee for the difficult but fair and equal negotiations. The new employee, with his unique compensation package, proudly puts on his blue vest and stands at the door and welcomes each new customer, knowing he has done his best to get the best possible compensation package and is on equal footing with his employer.
Oh wait, you mean it doesn't work that way in the real world? But that's how Econ 101 says it should work.
(1) Economic disparity is increasing in this country, which means the middle class is getting squeezed.
(2) A strong middle class and less wealth inequality is a societal good.
(3) Contrary to the famous line, greed is bad.
(4) Corporations have too much power over our government, which means fewer and fewer people are advancing their interests over more and more of the citizenry.
(5) The minimum wage was substantially higher a few decades ago, and the U.S. economy is still the world's strongest.
If those who argue against the minimum wage can agree with the above premises, then please explain what is the best means of making things better. Pure capitalism is as effective as poor Marxism: they both sound great on paper, but quickly deteriorate once introduced to the real world, with real flawed human beings, who do not always act rationally or in their best interests.
To wit : they still go to bat on lots of issues.
They are not as strong as they used to be, as many companies learned over the years (from the examples provided by the strong unions and workers' parties and NOT from big business) that toning down the adversarial portion and providing competitive benefits is worth the admin, the cost, the hassle, and the potential for risk or abuse.
Stockholders responded accordingly and didn't ding those companies who take care of employees vs the stockholders in the long run. It is its own reward - fewer work comp claims, disability, employee theft, book of business theft, lower turnover, and general loyalty.
They provide health insurance, pensions, and savings plans. Those three things alone are enough to keep them around - there are still companies that are very hesitant to offer competitive benefits to the lower rung of society. It is a very expensive thing to do, and if your employee doesn't feel the bond of loyalty to you like the unions usually inspire or maintain, then the employee holds a lot of power over the pursestrings of the employer.
The real question to ask to improve the lives of the poorest - and this is one I don't see many economists asking - What are the things that the person needs to survive and produce? It isn't just a dollar amount, as the costs of those different goods and services like cars and healthcare change dramatically and are always out of the full scope of current economic theory.
If I know that the person should have an opportunity to save a percentage of income for retirement, should have a threshold of protection for catastrophic healthcare issues, should have the chance to purchase or rent the car or home for a percentage of income - that is what we need to work for.
It is like that anecdote for being generous to the homeless person. That person might not have the tools needed to budget for his own needs, so he'll blow the 20 bucks on booze instead of a blanket or haircut for a job interview. If he is in need, show him how to fill a loan application, how to dress for an interview. Teach him how to fish. Don't throw the fish at him once a month and hope he shuts up or pray he can educate himself by himself.
This takes the current nannystate we have now and focuses it in a different direction. Now, we simply qualify incomes and pay cash out directly. Food stamps and low-rate loan initiatives are things that I see being more effective in solving the many different and disparate problems of poverty, rather than just getting your check each month. Having job-seek initiatives are the most important leg of support, otherwise you get the cadillac welfare queen nightmare scenario of no motiviation required for survival.
Econ 101 says no such thing.
You wrote:
"Estimates suggest that in the case of health care about half of the expenditures are a waste, being directed to keeping people out of private plans."
Slightly off the topic, I know, but can you provide credible back-up for this claim?
http://www.epinet.org/content.cfm/briefingpapers_bp150
Wealth inequality is not inherently a societal "bad". What truly matters is the purchasing power of the lower class and the qualify of life they are able to attain. For example, someone in the lower middle class who can afford a house, car, and various luxury items like a television shouldn't care that his neighbor is now 100 times richer, all things being equal. (Though I do understand that costs of good will increase, but we've already assumed the middle class person can afford a quality lifestyle).
I'm fairly certain nobody is arguing that the minimum wage has had a deleterious effect on the US Economy. Most economists only argue that the minimum wage does not have the positive effect on the poor that many people think it does and in fact, has a negative effect.
As far as socialist programs go, the minimum wage is a very poor way of redistributing wealth. It would be much better if there were government-funded programs for the poor to increase the value of their labor, such as trade school.
Of course it does. One of the assumptions you make in Econ 101 is equality of bargaining power. Supply and Demand (as taught in Econ 101) only works when you have perfect knowledge marketplace, have equality of bargaining power, and all kinds of other assumptions to simplify the concepts so that they are almost worthless when they are applied to the real world.
My example, while admittedly extreme, is one of equality of bargaining power, a basic assumption of Econ 101. It is implied in the examples you learn.
That will happen if McDonalds is only competing against Burker King and Wendy's and other fast-food places, and if those places pay minimum wage, and if minimum-wage labor is a similar fraction of the cost of a burger. But if all the fast food places raise their prices and more people start brown-bagging their lunches, employment will decline across the industry.
(Actually, I think you'd be hard-pressed to find a McDonalds that only pays minimum...)
2. The problem with applying Econ 101 to the labor market is that Econ 101 doesn't apply to the lower end of the labor market. Remember when the instructor drew the supply / demand curves and said "this is a MODEL"?
what are the elasticities at the lower end? And providing an incentive, through raising labor costs, to develop alternative methods of doing work that currently can only demand minimum wage might actually be a good thing. Or do we want to return to cotton being picked by hand in the deep south because there are people who will do it for free so long as room and board is provided?
anyone remember the Phillips curve -- the relationship between unemployment and interest rates. Too low unemployment causes a wage/price spiral (in theory), so our federal government cools the economy, by raising interest rates, whenever the labor market gets too tight.
so some level of unemployment is structurally built in to our economy. that means that there is always [ALWAYS] downward pressure on wages at the low end.
those who believe in no minimum wage believe either (a) in a return to indentured servitude or (b) that the taxpayers (through the EITC or its equivalent) should subsidize low-end employers.
In other words, would the argument against the minimum wage also apply to the law requiring a maximum of 40 hours per week? The law requiring matching social security investment by companies? The law requiring Family Leave (and if they are laws) vacation, sick leave, OSHA, etc etc etc?
In other words, while it may be economics 101, isn't the argument against the minimum wage the same argument against all legal controls or protections on employer behavior.
Similarly, arguments FOR the minimum wage are similar to arguments FOR maximum hours worked laws, employee protection laws, retirment fund laws, etc etc.
So, arguments AGAINST minimum wage laws are simply arguments for a maximally efficient system, with no protection for the worker (120 hours in the coal mine, no health requirements, no retirement, no employer protection laws from sexual harassment, no fair labor laws, etc).
And arguments FOR minimum wage laws are simply arguments for protection of workers, with no concerns for economic efficiency (resulting in a bloated, inefficient system which ultimately hurts everybody).
Thus, here in the real world, the system will be somewhere in between these two extremes-some attention to efficiency, some appreciation for human protection.
And, in this real world, the pro-minimum wage arguments win (I say this as a personally pretty conservative guy). Because real world economic arguments accept that neither extreme in efficiency nor extreme in human protection are reasonable ways to run the economy-a political compromise between the two is (inevitably) going to win out.
You're going to tell me that minimum wage laws shouldn't exist because they aren't maximally efficient? My response is, no kidding. Neither is OSHA-neither are sexual harassment laws. If you want to say that the specific value being proposed for the minimum wage shouldn't exist because it's too high? My response is, tell me why-what level should the minimum wage be? What's the political, argued compromise that should exist?
Sk
Nonsense. If a minimum hourly wage is good public policy, it should be subsidized by the taxpayers generally, not by any one business or its customers.
He told me this from his cell phone in his Lexus SUV on a Friday afternoon as he drove to play golf at his private country club.
I don't think challenging Posner/Becker's pronouncements of what certainly will happen as a result of changes in minimum wage laws necessary means we throw out all aspects of microeconomics. However, I do think it plausible to ponder the notion that the theories don't always predict free market behavior as neatly as the died-in-the-wool economist would have us believe. Certainly a Cass Sunstein would have something to say about the pitfalls of overeliance (not non-reliance) on economic theory to predict behavior.
Obviously, no one would approach business for anything other than a profit. But it seems erroneous to me to argue that the minimum wage law will with certainty erode those profits to a degree to have the absolute effects on employment that Posner/Becker predict. It also seems plausible that business, such as my friend's, could simply reduce their profits. It's obviously a matter of choice (add/fire employee, versus joining exlusive country club), but shouldn't that factor into the analysis?
You'll have to define what you mean by "equality of bargaining power", then. Econ 101 certainly doesn't assume (or, at least I hope it doesn't) both parties have equal leverage.
That doesn't mean it's the only way (or even a sensible way) to project bargaining power. Econ 101 in no way assumes the laborer will engage in contract negotiation in such a fashion. The most common case is that a laborer has multiple opportunities from various competing employers and the wage will reflect that. And if he doesn't have many opportunities, the likely explanation is that the minimum wage has priced him out of the market.
Great point. The theory says there should be unemployment, but attempts to measure it have had poor results. It seems like we can get away with small increases in the minimum wage without hurting employment.
Perhaps inefficiencies in the market discourage employers from cutting employment when the minimum wage is increased. Or maybe inefficiencies prevent employees from bargaining effectively so employers can pay "below market". As long as the minimum wage is below the market clearing price, it doesn't affect employment.
1) Eating fast food on a regular basis isn't good for you.
2) People who earn the minimum wage can't afford to eat fast food, except for the occassional special occasion.
Do you people pay any attention to the poor?
I have no interest in defending the Econ 101 models as good models of more or less anything. (My favorite is the "labor/leisure choice" model of worker behavior, in which the worker gets paid by the hour and has total freedom to set the number of hours they work. Who the hell does that describe?) But if you want to criticize Econ 101 you should know what you're talking about.
My point was, with an obviously over the top, hyperbolic and exaggerated example, that Econ 101 assumes a perfect market where all the players are on equal footing and have perfect knowledge. Sheesh, you people take things much too literally.
Econ 101 is an introductory course in economics and is meant to introduce basic concepts. You should never apply its concepts to the real world. That's why they don't hand out economics degrees just for passing Econ 101. Saying that the minimum wage is bad because Econ 101 says so is just a bad argument.
I'm not criticizing Econ 101. I'm criticizing those who think the concepts learned in Econ 101 should the be all and end all of economic policy.
Why does disparity "squeeze" anyone? Are you arguing that the economy is a zero sum game? You can try to argue that that middle class is materially worse off than it was two decades ago (though you'd have a tough time doing that when the biggest problems facing the middle class are how to fight the obesity epidemic and where to put the flat screen TV) but I don't see how you are going to argue that their problems are caused by Bill Gates being too rich.
Less social inequality is a societal good. Less poverty is a societal good. Take care of those two and I don't give a fig about wealth inequality.
Envy is bad as well. Why do we have an entire political class that indulges in this vice and proclaim themselves virtuous?
Along with every other rent seeking special interest group. McCain and Feingold did a pretty good job on the speech part of the first amendment. Maybe they can take a crack at the right to petition.
I have no idea what you are trying to say here. It sounds like you are trying to argue for a minimum wage by saying that our economy is strong because our minimum wage is so low.
No, it doesn't. At least, Econ 101 doesn't assume everyone has the same amount of ability to price their labor. Obviously, someone with a technical degree has a lot more leverage than someone who doesn't have any skills.
What exactly do you mean by "equal footing"?
Except that without minimum wage and work laws, we don't see 120 hours in the coal mine (or at least we only see a very limited set of industries that have such harsh conditions and they tend to pay well for the level of skill or only hire illegal immigrants). Why? Because in an efficient economy we have high productivity and very robust competition; and with high productivity and output and high employment, competition forces wages (and work conditions) up. In order for employers to fill their positions, they must offer a good deal to workers.
So, we need not settle on something in-the-middle. We can let the market set the wages and working conditions, and allow it to be efficient. The government need not play any role.
Also, has anyone responded to Steve's point about the failure of minimum wage opponents to consider the stimulating effect of a subsidy at the bottom? That seemed important, yet has been completely ignored by all the confident posters here. Maybe I just missed that response.
But what about those remote parts of the country where Wal-Mart gets thousands of applications? Can we say the same there? Maybe stores in remote areas don't get the kind of traffic that allows higher wages. On the other hand, that means the employees in those stores are probably doing a lot less work per hour. Stores can compensate by having fewer people on shift, of course, but odds are they will still have enough different jobs, located in different parts of the store, that no employee is working at the kind of intensity people have to use in busier markets.
SHOULD employees in the two locations earn the same? It doesn't make sense to me, because all the cost falls in the place that has the fewest economic options in the first place. Maybe only a few people actually get fired in such places, but others could end up working shorter hours. Some businesses might close entirely, and others might have to close a lot earlier in the evening.
Ultimately, there have to be more economic options in some of these places. Or people have to leave them for other parts of the country. The latter happens all the time, but I would like to see some efforts to encourage more businesses to locate in rural America. It might be a viable alternative to moving businesses overseas.
A decent model or empirical analysis should be able to capture any stimulating effect of the higher income of those who are paid more, but would also capture the lack of income for those laid off, the lower income for those with reduced hours, the higher cost of living due to inflationary effect, etc etc.
Wal-Mart pays way more than minimum wage. They pay a starting unskilled salary of $9.50/hr on average, higher in higher cost cost areas. They tend to pay quite a bit more than small businesses in the same area.
The $950 an hour jobs at In and Out (taking orders, putting them in a register, making hamburgers and french fries) are not any different than the $6/hour jobs at McDonalds.
I actually pay a fair amount of attention to the poor. Do you? You claim they don't patronize fast food joints very often. What businesses do they patronize? What wages do those businesses pay? The current minimum wage is so low that few businesses around here pay it. But its pretty common among businesses that cater to the working poor. Becker and Posner are right that the poor would feel the brunt of the effect both on their pocketbooks and on the businesses they patronize. I'm willing to listen to any rational argument that the gains by those whose wages were raised would offset the negative effects caused by losses of jobs and loss of businesses in poor areas. But most of the attacks are ad hominem.
A recent summary of the empirical evidence can be found on Greg Mankiw's blog here.
For summaries of other recent empirical work, see:
http://ideas.repec.org/a/oup/ecinqu/v40y2002i3p315-333.html
http://ideas.repec.org/p/fip/fedcwp/0412.html
http://www.nber.org/papers/w10656
I also discussed some of the evidence in this op-ed length piece on the proposed Ohio minimum wage hike here.
JHA
That's actually untrue. In N Out jobs require you to do a lot more in a short period of time. Since nothing is frozen everything has to be made by hand. Burgers have to actually be cooked on a grill, potatoes have to be sliced and fried, etc etc ... And In N Out establishments are generally busier than your average McDonald's. Go by an In N Out during the lunchtime or dinnertime rush and compare. In fact, the In N out next to my house limited employees to 4 hour work shifts because they were so intense.
Certainly you're not arguing that running a business and working at one (in this case, for minimum wage) are the same level of difficulty? I would argue that there are a great many small business owners out there, that, if forced to give up their lexus or country club membership to keep some staff around, might decide that the whole operation wasn't worth their time and just close up shop. It's much easier to work for someone else anyway.
(2) I have a couple of questions that I invite any pro-minimum wage advocate to address:
A. Do you dispute the fact that there are some people seeking jobs that are simply not worth the minimum wage?
B. If not, do you dispute the fact that the government cannot force a company to make a job available or hire someone for a position?
C. If not, would you dispute that if a worker provides $4/hour of benefit to a firm, that it would be against the company's interest to hire that person at $6/hour?
D. If not, would you dispute the fact that if the government can't force a company to hire someone, and the company cannot find someone worth hiring, then they won't hire anyone?
E. Finally, given that you have made it this far, how could you argue that raising the minimum wage could possibly help those who simply aren't worth minimum wage?
Because the arguments against the minimum wage argue that it actually hurts the people it purports to help - in the very way it is supposed to be helping. (Unless, of course, the purpose of minimum wage laws is to make liberals feel good about themselves, or to convince the poor that it is in their interest to vote for the Democrats.) I don't know anyone who argues that OSHA laws cause more injuries. I don't know anyone who argues that family leave laws cause people to spend less time with sick relatives. But Becker and Posner are arguing that minimum wage laws make the working poor poorer.
But by how much?
All the theoretical arguments about the economic effects of raising the minimum wage don't exclude the possibility that the curve is relatively flat. Perhaps a company would be willing to hire a million workers at $6, and only willing to hire 999999 workers at $9.50. Perhaps the curve is so flat that it takes a much larger increase before even one worker will get fired.
So in the end, these theoretic arguments prove nothing useful unless you have some idea how large the effect of raising the minimum wage is, something which the theory won't tell you.
That is their average pay for associates, not starting pay.
there's no assumption about "bargaining power" or any such thing in econ 101, because bargaining is too complicated for econ 101.
Like I said, you took my example much too literally while overlooking the broader point--which you are actually making for me in this statement.
Except that without minimum wage and work laws, we don't see 120 hours in the coal mine (or at least we only see a very limited set of industries that have such harsh conditions and they tend to pay well for the level of skill or only hire illegal immigrants). Why? Because in an efficient economy we have high productivity and very robust competition; and with high productivity and output and high employment, competition forces wages (and work conditions) up.
Oh really, or is it because workers fought and often died to secure a right to decent working conditions and the right to organize? We were shocked last year when 50 coalminers died in this country while thousands die each year in China. Do you really think that it was competition alone that accounts for the safer mine conditions in this company. Because a little examination of labor history will clearly show you that the mine owners spent a hell of a lot of time, effort and money doing every thing they could to stymie efforts to institute safer working conditions and frustrate unionization, including hiring private armies to bust unions.
About 2 million net new retail payrolls.
2001-present
(-118,000) net new retail payrolls. BLS numbers. Easily Googled.
Same time frames, 10.2 million payrolls vs. 3.7 million total payrolls. The idea that the Republicans delaying that minimum wage Senate bill is out of concern for anything but yet more business welfare is simply delusional.
And since we had a Nobel economist start off the thread, check out 2004 Nobel economist, ASU's Ed Prescott, Nobel prize paper on the "puzzling" way-above-trend labor "supply" 1996-2000. The paper is available on the web, a neoclassical economics "puzzle", says Prescott. Two economists, three opinions, as usual.
The whole thing is a joke, with the benefit that Americans can see the Republicans at work, Republicans who originally tried to tie the minimum wage increase to repeal of the estate tax profess their great concern for the minimum wagers and potential job losses. Surprising that trained lawyers, normally somewhat skeptical, so easily accept the "evidence" of economists, especially after the last six years. For real amusement see Bush's 2001 budget speech.
True. Do you know their starting pay? Most associates don't stay at Wal-Mart long, and those who do move out of the associate position (become managers) within a few years or less. So, I don't think that they start very low or that it matters much if they do (considering you must get a raise pretty fast in order for them to achive that average associate pay).
They also provide non-trivial benefits.
"Do you really think that it was competition alone that accounts for the safer mine conditions in this company. Because a little examination of labor history will clearly show you that the mine owners spent a hell of a lot of time, effort and money doing every thing they could to stymie efforts to institute safer working conditions and frustrate unionization, including hiring private armies to bust unions."
Yes, I do. All that labor unions and laws can do is make short-term gains and tradeoffs. Only higher productivity can actually change the underlying situation and achive long-term real wage increases and real changes in working conditions. With our economy, no company could offer the wages or conditions you see in China - nobody would work for them, not even illegal Mexicans - because they could do better. And no number of laws and restrictions would make the wages and working conditions in China as good as what we have here - no company would choose to locate there, they could not be profitable.
As an aside, the ones around my area (a college town) all start employees at $5.15/hr. The first raise opportunity comes at 3 months, when employees sometimes get raised to $5.50/hr, where they stay for a long time.
Because the arguments against the minimum wage argue that it actually hurts the people it purports to help - in the very way it is supposed to be helping."
I don't buy it. Raising minimum wage has a certain cost to it (I agree). That cost will cause some businesses to not hire some people (I agree). Those people not hired will then be forced into unemployment or crime (I agree).
But logically, that should be true of EVERY additional cost to doing business. Obligatory retirement benefits (social security) have a certain cost, that will cause some businesses to not hire some people, who will then be forced into unemployment or crime. OSHA has costs (of enforcement, for purchasing additional, safer equipment, for inspections, etc), which will cause some businesses to not hire some people, who will then be forced into unemployment or crime. If any obligatory burden (unemployment insurance, OSHA, retirement benefits, minimum wage) can be qua