Russ Roberts on the minimum wage

Russ Roberts had some good recent posts about the minimum wage on Cafe Hayek. The paragraphs below are from his post about his follow-up thoughts to a debate he participated in to abolish the minimum wage:

Everyone, on the left and the right, agree that employers are eager to save costs and will substitute machines for workers or outsource production if those changes are profitable. Why will artificially higher wages created by minimum wage legislation not lead to similar substitutions?

No joke. But, of course, proponents of minimum wage will cite ‘empirical evidence’ that shows that raising the minimum wage has no effect on jobs or employment. And, of course, they never consider that these studies may not tell the whole story or have limitations.

They also seem to forget basic econ where we are taught that if a price floor is well below the going-market rate, it won’t have much affect on supply. In other words, if the minimum wage is well below the going market labor rate, then it won’t have much effect on jobs. For example, if I set a minimum wage at $0.50/hour, most people would intuitively know that’s so low, it doesn’t  effect anyone — employees or employers.

So, while minimum wage studies are often heralded as empirical support for raising the minimum wage, they are much more likely to be empirical support for that basic econ understanding of a price floor.

Next (emphasis mine):

The weird part of the debate over the magnitude of the employment effects, is that when someone uses the reductio ad absurdum of a minimum wage increase to say $50 or $100 an hour, everyone understands that won’t work because it would destroy the labor market. So where do those disemployment effects kick in? If the minimum wage is small enough so that it doesn’t cause job losses, then it can’t be having much of an effect boosting wages.

Yes. Where do the disemployment effects kick in? Great question and I never hear anybody ask it or answer. It’s similar to the ‘rich must pay their fair share’ tax debate where the answer is always ‘more’.

It occurred to me after reading this paragraph that the same people who cite empirical evidence that changes in the minimum wage don’t affect jobs (that price floors below the going market rate don’t change supply), don’t seem interested in asking about empirical evidence that raising the minimum wage actually increases wages.

I suppose they assume that if it doesn’t change the number of a jobs and a few people are marking more now, then wages must go up.  But, that assumes a lot. For example, it assumes other things don’t change — like the number of hours worked and the value of fringe benefits like employee discounts — to name a couple.

What is ‘modest’?

Bob Murphy makes a good point while responding to Elizabeth Warren’s discussion of a $22 minimum wage:

We’re not talking about a “modest” change that Krugman et al. hide behind when we free-marketeers go nuts on this stuff. (Even here, I’m still waiting for someone to show me why going from $7.25 to $9/hour–which is a 24 percent increase–is “modest.” If the government cut the deficit by 24 percent in a year, I doubt Krugman would dismiss it as “modest.”)

…or cut government spending by 24%, lowered tax rates by 24% or increased tax rates on the poor by 24%.

 

First, cause no harm

To my The golden rule of liberty post, Wally asks a great question:

Freedom to choose how we live our lives is certainly something we value as a culture with a strong individualist current. But what if we’re wrong?

It think it’s a great question because the answer is a key reason I appreciate liberty. My answer to Wally’s question is that if we’re wrong about liberty, we haven’t caused direct harm.

This point is overlooked in greater-good cost-benefit analysis. Interventionist and non-interventionist actions are both treated as causing an outcome. But, I don’t believe the liberty-minded action causes anything. We only imagine it does through a trick of the tongue.

Consider these two statements:

1. If we raise the minimum wage, that causes some folks to have a harder time finding a job and some folks to get paid more than they otherwise would.

2. If we don’t raise the minimum wage, that causes more people to be able to find jobs, but at less pay than they otherwise would.

What’s the difference? In #1, some people are made worse off for the supposed benefit of others.

What about #2? While minimum wage advocates want us to bite on the idea that we are standing in the way of some unfortunate souls making more money, the truth is we’re not leaving them any worse off than they were before. We’ve done them no harm.

In fact, we’re not even preventing unskilled workers from earning as much as minimum wage advocates want them to. After all, nothing is preventing minimum wage advocates from hiring unskilled workers at the wage they prefer, is there?

In case that example doesn’t work for you, try this one:

1. If we pass each other on the street and you give me a dollar that you took from another passerby, you make me richer and the other guy poorer.

2. If we pass each other on the street and you don’t take a dollar from another passerby to give to me, you keep me from becoming richer.

In #1, you’ve caused harm to some else, even though it was offset by the benefit to me. In #2, you did not cause harm to me by not causing harm to someone else. You caused me no direct harm.

Now You’re Talking

I like some of the latest batch posts that I’ve read on minimum wage.  Here’s a roundup.

1. In this post on the minimum wage on Cafe Hayek, Russ Roberts does a great job articulating a world more complex than any of our models can replicate. True. That’s one reason cost benefit analyses suck. Models are to complex systems as caricatures are to people. They’re nice to hang on the wall, but they don’t talk or anything.

Here’s a sample:

So that when legislation artificially raises price, the debate is over the impact on quantity–how many jobs will be lost (or gained if you’re on the other side.)

But price and quantity are not the only way market forces work. And they are certainly not the only attributes of a job. There is how hard you have to work, how many breaks you get, how much training or mentoring or kindness. What amenities are in the workplace–snack bar, vending machine, nicely decorated walls and so on. When the government requires that wages be higher than what they would otherwise be, that creates an increase in the number of people who would like to work and reduces the number of opportunities available.

2. The Grumpy Economist, John Cochrane, suggests that discussing the minimum wage is “fiddling while Rome burns”, even if the economic magic of raising the minimum doesn’t effect employment were true.

3. Kudos to Russ Roberts’ co-blogger on Cafe Hayek, Don Boudreaux, for his response to a colleague who questioned why he spent so much time writing about the minimum wage:

I protest the legislated minimum-wage because I have a visceral hostility to shabby economics.

Encountering arguments premised on the (typically unconscious) notion that most employers routinely sit on figurative piles of excess profits or returns that can be tapped into by government diktat (“Raise your workers’ wages!”) without any compensating adjustments or reactions by employers makes my head ache.  Encountering otherwise respectable economists performing rococo theorizing in their attempts to explain why unskilled human labor is somehow exempt from the simple application of the law of demand makes my head ache.

Encountering otherwise respectable economists who lend credence, usually unawares, to the person-in-the-street creationist superstition – a creationist superstition held by non-economists on the ideological spectrum ranging from the likes of Harold Meyerson to Bill O’Reilly – that prices, wages, employment conditions, and other economic phenomena are determined arbitrarily, and more or less consciously, by someone in power rather than by decentralized and largely spontaneous market, competitive forces makes my head ache.  Letting stand unchallenged this Meyerson-O’Reilly sense that, therefore, the only question is which powerful group of people will determine prices and wages – the government or the oligarchs? – makes my head ache.

Encountering claims that human welfare can be increased so easily and so surely by mere diktat makes my head ache.

Challenging such claims is the equivalent, for me, of swallowing two aspirin tablets.

Oh yeah…liberty

Since President Obama mentioned hiking the minimum wage in his State of the Union address, it has been a hot topic on the econ blogs. Does it reduce jobs? Does it help the poor? Does it hurt them?

Credit to Grant Davies for kindly pointing out in the comments of my post about the minimum wage that the best argument against it is liberty

As I’ve read the plethora of blog posts about the minimum wage over the past few days from liberty-minded economists and bloggers, who have greatly influenced my thinking, Grant’s comment kept echoing in my mind.

The best (and only argument that should be required) against the minimum wage is liberty. Grant wrote:

As a human being, I have an absolute right to make arrangements between myself and another so long as it does not infringe on the rights of others.

Why should someone be able to prevent me from accepting a wage, if I so choose? If it is agreeable to me and agreeable to person willing to pay it, who cares?

Grant’s comment echoed in my mind as I read those blogs because so rarely was the case for liberty mentioned. They’ve taken the bait. Nearly all of the blog posts I read try to disprove the ‘greater good’ argument, rather than state the case for liberty.

Also, credit to The Pretense of Knowledge blog for including with other ‘minimum wage’ blog links, a link to a post about Dr. Higgs’ essay on the moral case for liberty. I commented on that essay here.

Besides there are also really good reasons to be skeptical about ‘greater-good’ arguments. They usually are wrong or, at best, inconclusive. Why violate liberty for that?

Even more on the minimum wage

When talk of minimum wage comes around, I think of a conversation I had with a friend once. I wrote about it in 2011 in a post titled “I support it, but it doesn’t apply to me.” My friend supported the minimum wage and used all the stock arguments for it. He also happened to own a small business and had found a way around paying minimum wage to his workers. Well, they weren’t workers. They were “independent contractors”.

More on the minimum wage

Mark Perry, on his blog, Carpe Diem has a couple of posts on the minimum wage worth reading:

1. An New York Times editorial to get rid of the minimum wage?!? It’s from 1987. Amazing how much of shift there has been since then.

2. Perry also points to these wise words from Henry Hazlitt, author of the highly recommended Economics in One Lesson (and available for free .pdf download for any of your reading devices):

Thinking has become so emotional and so politically biased on the subject of wages that in most discussions of them the plainest principles are ignored. People who would be among the first to deny that prosperity could be brought about by artificially boosting prices, people who would be among the first to point out that minimum price laws might be most harmful to the very industries they were designed to help, will nevertheless advocate minimum wage laws, and denounce opponents of them, without misgivings.

The first thing that happens, for example, when a law is passed that no one shall be paid less than $9.00 per hour [updated) is that no one who is not worth $9 per hour to an employer will be employed at all. You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering. In brief, for a low wage you substitute unemployment. You do harm all around, with no comparable compensation.

 

Should we have a minimum wage?

Here’s my attempt at the using the Costco Connections Yes/No format to answer this question. I’d like to mention, this post was in the works before President Obama’s State of the Union address this week.

Yes

Otherwise, employers would seek to exploit workers by paying them as little as possible.

Workers need to make enough to live on. Employers have more power than low-skilled workers in the market, so the minimum wage helps offset that power.

No

The minimum wage may set a price floor for wages above what some people are willing to work for and some people are willing to pay. If so, this reduces job opportunities and increases unemployment for low-skilled workers, depriving them of chances to gain work experience that would make them more productive and able to earn a higher income in the future.

If the minimum wage is successful at allowing some people to earn more than they otherwise would, it may also cause other negative trade-offs for these people. For example, their employers can treat their low-skill staff worse because there are folks lined up to take their job and they don’t have as many opportunities to find work elsewhere. This might mean that low-skilled workers have less flexibility in work schedules or have to put up with mean bosses.

Many workers do not need to make enough to live on. Many folks are want to make some extra money and get job experience. Some of these folks include teenagers, college students, spouses of full-time workers, and sometimes folks with full-time jobs looking to make extra money for Christmas gifts and vacations. Not all jobs have to provide a living wage.

If an employee and employer come to a voluntary agreement on wages, why should ‘we’ care what the amount of the wage is? Everybody’s situation is different, so why should we impose our preferences on others?

The minimum wage is a largely a do-gooder’s ruse. It feels good to support it, but in reality many folks work for less than minimum wage. They just happen to be off-the-books in the gray and black markets.

My opinions:

When I was younger, I voluntarily took on jobs below the minimum wage. For example, I delivered papers and assembled bikes for a bike shop owner (I think some child labor laws were broken as well).

But, I was glad to have these opportunities (my parents were also more than happy to get me out from in front of TV to do something productive) and didn’t feel I was exploited. The reason these jobs didn’t pay much is because they weren’t worth much.

If my employers had stuck to the letter of the law, I may not have had those opportunities. By the way, the bike shop job was a pure black market job, to my last “No” point.

I should note, my ‘employers’ in my paper-throwing job were my delivery customers. Judging how hard it was to collect $2 a month from them, they didn’t place much value on getting that paper twice a week.

I should also note, the biggest reason I gave it up was scheduling, not pay. I disliked waking up at 5 AM on Saturday to fold and deliver papers. I’ve never been a morning person.

I soon discovered that I could make well more than minimum wage and — more importantly at the time — could set my work schedule, by pushing a mower. I also learned some good sales techniques as I developed my customer base.

It turns out that the thing many homeowners dislike even more than paying their paperboy is mowing their lawns, which is why the very same people (employers) who had such a difficult time coughing up a quarter per paper were more than happy to pay me $80 a month to save them from lawn-mowing dread.

It’s easy for us to advocate the minimum wage when it applies to faceless people. But, so rarely do folks examine their own behavior and try to draw parallels.

We all value things a differently. Think of some of the things that you willingly pay for now. Do you pay someone to mow your lawn, clean your house, babysit, kennel your dogs when you’re on vacation, make coffee for you or coach your kids in soccer?

What if someone else came along and judged that you have been paying too little for these services, that you have been exploiting these powerless folks and you must now pay them 20% to 50% more for the same service?  You and your service providers would probably tell them to butt-out and mind their own business because you both are perfectly fine with your existing relationship. If you’re forced to pay more, you too may cut back.

When you advocate a minimum wage, you’re butting into to the business of others’. In my opinion, that’s the strongest argument against the minimum wage, because if we feel we have the right to butt into this voluntary arrangement between two people, then there is likely no end to what other meddling we’ll entitle ourselves to.

“Yes, but…”

Bryan Caplan wrote that in his first 17 years of life, he never encountered an opponent to policies like the minimum wage, FDA and social security. And he grew up in “bland Northridge, California”, not some “leftist enclave.”

He has me beat by 5 years. I, too, did not grow up in a leftist enclave. Just a “bland” midwestern town where the populist defenses for these policies that Bryan wrote more about in his post were taken as gospel.

Caplan’s post is worth reading. In it, he criticizes intellectuals who “yes, but…” the writings of French Economist Frederic Bastiat’s, who dismantles these populist defenses.

Caplan asserts that said intellectuals don’t display higher regard for Bastiat’s work for fear of damaging the political base they need to sport their solutions on the rest of us.

The forgotten viewpoint

Mark Perry, at Carpe Diem, reminds us of some good advice from French economist, Frederic Bastiat:

Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race.

Let’s apply this advice to some common situations.

Minimum wage.  Here’s a good story about how consumers pay for higher minimum wages (HT: Don Boudreaux, Cafe Hayek). The costs to the consumer includes higher prices and fewer options. Some of the cost is also born by low-skilled workers who will have fewer employment opportunities.

Credit card regulations: Don Boudreaux does a nice job in his Pittsburgh Tribune column, Help That Hurts, of looking at the credit card regulations from the viewpoint of consumers.  Here’s an excerpt:

Congress, the White House and most of the news media describe CARD [Credit Card Accountability, Responsibility and Disclosure Act of 2009] as “pro-consumer.” At first glance this description seems accurate. After all, don’t consumers benefit when the fees and interest rates they must pay are reduced?

Although the answer to this question is “yes,” this isn’t the correct question.

The correct question is, “Don’t consumers prefer to have the option of paying higher fees and interest rates if the alternative is having no access to credit at all?”

Not everyone is financially careful or responsible. Traditionally, credit-card issuers dealt with this fact not by refusing to lend to consumers with poor credit scores but, instead, by using an ingenious approach that helps both those consumers with poor credit scores as well as the banks that lend to them. That approach is to charge delinquent customers significant fees for late payments and to raise interest rates on delinquent balances.

Here are a couple more things where the consumer viewpoint is usually ignored:

• Foreign trade – Who would be hurt by restricting access to foreign goods? Consumers.
• Labor unions – Who funds the generous wages and benefit packages of unions? Consumers.

I’ve added a new category to my blog, Consumer Viewpoint, to remind me to continue to apply Bastiat’s advice as I encounter various situations.