TCS Daily


Spinimum Wage

By Tim Worstall - October 16, 2006 12:00 AM

The blogger Max Sawicky has highlighted a letter being sent to economists. The letter asks them to sign and affirm the desirability of raising the minimum wage. Sad to see such an obviously bright gentleman pushing such profoundly silly economic nostrums. Raising the minimum wage is precisely and exactly what should not be done -- due both to predictable ill-effects and to the questionable morality of such an action.

As far as the effect is concerned, the letter is correct that a modest increase would only have a modest effect on unemployment. But then that's never really been the objection. While a small increase is obviously both unwelcome and painful for those who suffer it, the actual amount is swamped by the general turnover of employment in the country. Much more important is the effect on the number of hours both offered and demanded. Higher wages will lead to more people being willing to work for them and, at least if the very basis of the economic arts -- the supply and demand curves -- are valid, a drop in the number of hours offered. That this turns up as a reduction in the hours of work available, rather than jobs themselves, doesn't make this mismatch any more enjoyable for those caught in it.

As George Mason's Alex Tabarrok points out it's also an extremely inefficient way of doing what its proponents claim, reducing poverty.

"The letter says, for example, that 'The minimum wage is also an important tool in fighting poverty.' Rubbish. But don't take my word for it.

'The minimum wage is a blunt instrument for reducing overall poverty, however, because many minimum-wage earners are not in poverty and because many of those in poverty are not connected to the labor market. We calculate that the 90-cent increase in the minimum wage between 1989 and 1991 transferred roughly $5.5 billion to low-wage workers.... an amount that is smaller than most other federal antipoverty programs, and that can have only limited effects on the overall income distribution.'

"The source? Card and Krueger in Myth and Measurement (p.3)."

Harvard's Greg Mankiw is also less than impressed with the arguments involved in trying to buck the laws of supply and demand and notes that a far more cost effective measure to increase the incomes of the working poor is to increase the Earned Income Tax Credit (EITC). He also urges us to look at who actually earns the minimum wage. Well, quite, as many point out, there's a lot of teenagers in there, a lot of people who are part of families not in poverty, despite their earning said minimum wage. It's also worth noting how few of those earning the minimum wage actually depend upon it for all of their income:

"The industry with the highest proportion of workers with reported hourly wages at or below $5.15 was leisure and hospitality (about 14 percent). About three-fifths of all workers paid at or below the Federal minimum wage were employed in this industry, primarily in the food services and drinking places component. For many of these workers, tips and commissions supplement the hourly wages received."

Now it's a few years since I finished my eight-year stint in that industry (everything from the graveyard shift at Denny's to waiting table at Pierre Cardin's Maxim's) but the entire reason to do the job was the tip income, even when serving pancakes to drunks at four in the morning.

It could even be worth pointing out that poverty amongst those working full time is a very small part of any of the problems being faced. Here are the detailed statistics on who is in poverty, by race, by age, by alternative measures of poverty and, perhaps most importantly, by the number of hours worked and whether they are all year round or not.

This, to me at least, is an extremely important part of the argument. On the one side, we're told that there is something unnatural, wrong, about someone being in poverty if they work full time all year. I might even agree. But I don't see that this vanishingly small part of the problem (the vast majority of the poor are working part time or not at all) justifies raising the minimum wage for all. Rather, it might, if we accept the basic premise, justify helping those who are indeed working full time out of poverty in some other manner.

So far we seem to have evidence that raising the minimum wage is an extremely expensive way of helping a very few people out of poverty, those very few working full time yet still stuck below the poverty line. To raise the minimum wage means raising it also for a far larger group of people who are not in poverty (those earning tips perhaps?) and those not working full time. We also have those aforementioned ill-effects on the quantity of work desired and on offer, leading to, while the change in undesired unemployment might be low, an inevitable increase in undesired underemployment.

However, there is one much larger problem, as Paul Krugman pointed out:

"Consider, for example, the effects of 'Plan Y' (never mind) on the hypothetical head of a household, currently making $5.43 an hour. According to their estimates, as long as he or she remained fully employed, the living-wage law would raise earned income from $10,860 to $14,500 -- and also mandate $2,500 in health coverage. (This is, incidentally, a 57 percent increase in the cost to employers; you have to have a lot of faith in Card-Krueger not to worry that some jobs might be lost.) According to their numbers, that family would currently pay less than $900 in taxes while receiving some $9,700 in benefits such as food stamps, Earned Income Tax Credit, and health care. Their calculations also show that most of the gains from the living wage proposal would be offset by reductions in these other redistributive programs. Indeed, only about one-fifth of the mandated increase in wages and benefits actually gets manifested in disposable income; the rest is taken away as benefits decline."

You see, those in work and still in poverty, we already help them. If their wages rise then that help is withdrawn: so our rise in the minimum wage becomes even more expensive as a poverty alleviation method, we have to raise it even further to have anything more than a marginal effect upon actual disposable income.

As Krugman goes on to point out, at this point it all becomes political: there are those who despair of, say, raising the EITC and so will admit that while the minimum wage route is expensive, doesn't do very much and has a number of effects that we don't really want very much, it is the only thing that could be done. This might even be true, but if it is, I'd rather welcome economists signing a letter stating so rather than glossing over those bad effects.

There is, to my mind at least, something really rather unethical about this route though. Given that rises in the minimum wage -- at least the vast majority of them -- get taken back in lower benefits, what is really happening is that the cost of raising the working poor out of poverty is being transferred from the taxpayers to some other group. Dependent upon the incidence, it might be the investors in companies that use minimum wage labor, it might be customers of such businesses or it might be the workers themselves, suffering from either un- or under-employment. Opinions will differ here, of course, but my bet would be some combination of groups two and three -- not actually the people we would like to bear such a burden.

Think of it this way: there you are in a bar; there's a group in the corner you want to buy a drink for. Do you say "Get em' in barkeep, and put it on that guy's tab"? Or "put it on my (or our) tab"?

What's being proposed in this letter urging a raise in the minimum wage is the former. That while we as a society might indeed want to raise out of poverty those working hard, we're going to make someone else (as noted, precisely the people we don't want to bear such a burden) pay for it. The moral response, if we do indeed want to raise the hard working poor out of their poverty is the latter, to state that we, as a society, should be willing to pay for it ourselves. That means through the EITC and, yes, through the tax system.

Whether or not you agree that such action should be taken about the incomes of the poor is an entirely different question. But having said that, collective action must be taken. So deliberately to offer a solution, that doesn't not become paid for collectively? Well, pardon me, but I call that immoral. But then that's politics, isn't it?

Tim Worstall is a TCS Daily contributing writer.

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29 Comments

You are forgetting the "Good Vibrations Bonus..."
GVB is a critical factor in most liberal economic policies. The minimum wage, rent control, price-controls on drugs, etc. The GVB ensures that no bad consequences will develop from policies that come from good intentions. These intentions reverbrate throughout the community, and cause business owners, landlords and pharmaceutical companies to realize that they really need to "take one for the team," and so they will keep doing exactly what they were doing before, even if this results in economic harm.

I am shocked by the lack of study on the GVB at most departments of economics. This is a scandal on par with Watergate! Economics would not be such a "dismal science" if people would simply recognize the power of good intentions...

mini wages
Isn't the minimum wage the one that makes sure there is no one to pack your groceries at the supermarket? Isn't it the one that makes sure people can't get an entry level job for crap wages somewhere while living with his parents, then have the reality check, and decide it's better to figure out a way to make a better living?

I want a $100/hr minimum wage.
How is that any different than $8/hr?

I agree, "GV bonus" is the MAIN reason for proposed min wage increases, et al
I have now come to believe that those who propose such policies have as their key motivation the desire to "feel good" about themselves and can not be persuaded out of this by presenting them with facts to the contrary. Their need to feel good trumps all, even if their proposed policies hurt more than help.

Spinimum Wage
"Higher wages will lead to more people being willing to work for them and, at least if the very basis of the economic arts -- the supply and demand curves -- are valid, a drop in the number of hours offered."

If, and it is a big if! Talking about supply and demand curves assumes a perfectly competitive labour market!

If the labour market is monopsonistic, an increase in the minimum wage can, up to a certain point, lead to more employment and a higher wage.

Whether or not this is the best way to tackle poverty is another matter.

Inelastic demand for labor
The demand for labor at the low end is very inelastic. If you're willing to pay $5/hr for someone to mow your grass, you're probably willing to pay $6. While no market is completely inelastic, the minimum wage market comes close. Therefore, if minimum wage goes up, demand for minimum wage employees goes down just a little. The overall effect on society is positive, except for the extra grousing of grumpy rich guys.

Now, some might object that I didn't cite any statistics or sources. Well, neither did Worstall. He quotes people who agree with him, but doesn't argue his case otherwise.

Only thing
is that the assumption is that the EITC doesn't also hurt those in poverty. Of course it does, too. Doesn't make the min wage any better -- but just recognize that both are costly, to the taxpayer, the business, the consumer and the worker.

...Grumpy Rich Guys....!
Get a clue, Liberal. Rich guys don't hire minimum wage workers. It's Mom'N Pop enterprises who hire minimum wage because they can't afford to pay more. Increase the wage they are required to pay and you decrease the number of workers they hire. So how does this help the "working poor?" All it does is make people like Liberal Goodman feel nice and warm and fuzzy while it hurts the poor untrained stiff trying to get by on jobs that pay very little. Another example of Liberal policies guided by good intentions leading to bad results.

Living Wage laws
are usually instituted in locations where real estate prices are exorbitantly high. And the reason the prices are so high is that the well-to-do in the area, mostly 'progressives', restrict zoning to keep out the rif raf and keep their property values high.

How many conservatives are there in San Jose, CA or Cambridge and Concord, MA?

liberals always want to help people, but never using their own money.
...

LG loves to demonstrate his ignorance.
Out here in the real world, jobs are being replaced everyday by machines. Every time the minimum wage is raised, the machines look better.

There are many other ways to do without labor. Maybe the hotel can be vacuumed 2 times a week instead of 3.

I'm also guessing that LG didn't bother to read the article. Worstall did cite a study, he didn't quote everyline of the study, but he didn't have to.

It's ironic that a study by the hyper liberal Krugman, can be used to refute the arguement that raising the minimum wage helps the poor.

Don't you love the way liberals show compasion
In their minds, if I can use the term that loosely, employers deserve to be hurt, because they are just "grumpy rich guys".

Why do Liberals hate Small Businesses?
Don't liberals ever think that their woefully misguided plan to "help" low-income workers also helps Big Bad Corporations squash any remaining competition? The "evil" (a.k.a. big) companies can take the hit of a Minimum wage increase, Mom & Pop's General Store and Cafe cannot.

When will Liberals start worrying more about consequences than mere intentions???



Walmart
Walmart, McDonalds, ...

Inelastic means most (not all) jobs are safe.

Another example of conservatives offering few words of rebuttal and many of distain. I say, let the reader keep score.

NO jobs are safe, nor should they BE safe.
Unless you are a democrat from MA.

Ever wonder why most CEOs of big corporations are liberals?
To be able to use government to control competition.

As usual, LG doesn't read
regarding his pathetic examples.

Wal-Mart uses massive amounts of technology to decrease the number of employees it uses, as does McDonalds.

Like most liberals, LG would prefer to hold onto their fantasies, than deal with the real world.

LG flies right past the point
That very few people who work at minimum wage are poor.

Instead he makes dubious claims that while a few people will be hurt by his plans, the fact that more are helped makes up for it.

2 reasons
1) Liberals honestly believe that good intentions are all that matter.

I can't tell you the number of times I have argued with a liberal regarding the affects of a bill, only to have the liberal respond --That can't possibly happen, just look at what the name of the bill is.--

2) Liberals take great pride in knowing nothing about economics.

gimme a break
Which large corporations are headed by liberals? Haliburton? ExxonMobil? Coors? (OK, medium sized, but libation does not make liberal).

At present, being liberal is not the best way to influence government decisions, in case you haven't noticed.

Don't disagree with your position, but this is a bad arguement
The problem with a minimu wage increase is that too little has almost no effect and too much will cause serious fallout for some. A raise to $6/hr, as LG suggests, is rediculous as a very small percentage of people are making less than that and therefore there is no "help" provided by this increase and no "damage" either. (I pay the neighborhood kid more than that to mow my lawn, I doubt any gardner is making less)
Now $8/hr. is getting in the ballpark of too much. I know a few people making less than that and I'm sure there are many more (and I don't pay the neighbor kid that much to mow my lawn). That means putting the squeeze on the mom and pops you mention as well as forcing some to make employment cutbacks. There is certainly going to be a noted, if somewhat still small, effect from a raise to $8/hr. and the question is does that go too far?

Ted Turner? Soros?

gimme a break
Turner is in media. His market share is less than Fox (explicitly conservative) and way less than major TV networks (owned by conservatives even if you don't think their news is as slanted as Fox).

Soros runs a hedge fund. There are other liberals in the finance industry (e.g. Robert Rubin). Still, the finance industry as a whole is solidly, if not unanimously, conservative. The present Secretary of Treasury is from Wall Street.

More generally, the existence of a liberal among a group doesn't make the group liberal.

Man you are a liberal
Fox is explicitly conservative? Major networks conservative (but not as slanted as Fox)? You live in an alternate reality! LOL

Fox is, perhaps a tad left of dead center, though some of the commentators or decidely left or right. Most of the networks are notably left and CNN is decidedly left leaning.

How many polls, media studies and newsroom statistical analysis are necessary for liberals to admit they meida is generally left leaning?

Get a life and read a little. You are spending entirely too much time staring at the boob tube if you can even imagine the networks are conservative. LMAO HAHAHAHA

Playing Devil's advocate
Certainly the demand for low-end labor is inelastic. McDonald's Corp. doesn't stay in business without its burger flippers. And ultimately in order to make up the difference, its dollar menu will have to become its $1.25 menu.

But before that happens, Mickey D will try firing thirty percent of his labor force, then make the remaining drudges each do the work of a drudge and a half. So conditions will deteriorate. This is the money-saving tactic most commonly resorted to in the business world. So maybe these drudges will be pulling down seven an hour instead of five and something. But they'll be earning the difference in the extra crap they have to put up with.

I actually like Tim's idea better, and he puts it in right at the end of his piece where everyone has overlooked it. Rejigger the EITC, so the money transfer occurs at the federal level as another entitlement, instead of out of the pockets of the employers. Neato.

Thus the rich guys are happy with the plan as well as the fry chefs. They get corporate welfare by being able to still employ cheap labor, courtesy of a generous federal supplement. And the middle class only pays through their taxes, instead of having to fork over more money for their egg Mcmuffins.

roy and economic illiteracy
First he declares that low end labor is inelastic, then he declares that if the minimum wage is raised, McD's will fire 30% of their work force.

Once again, roy demonstrates that he has no idea what the words he uses mean.

Teddy Turner and Soros
Ted Turner started and still heavily influences CNN, one of the most liberal TV networks out there. He's pretty far left.

Soros is the major funder of many far left groups.

They are both far left, they are both major players in the world of business. They both meet the criteria you set forth.

BTW, the only reason Fox looks conservative to you, is because you are so far out in left field that you have to be carefull not to fall over the edge.

Elasticity of Demand - Paucity of Imagination
This is an absolutely fallacious assertion.

An individual employer may be willing to pay an existing employee an additional dollar an hour if forced, the drop in demand comes from longer and more rigorous hiring practices, shorter working hours, reduced, eliminated or foregone benefits, ad nauseum. Then there's foregone openings, etc.

How do I know this? These are some of the things I advise my clients to do when they look at a payroll expenses going up and call me up and say "dammit, help me I'm getting killed here".

It's too bad I actually understand the effects of this most pernicious fiction and can't just sit unenlightened by experience, insulated from reality in that most uneconomical of places-academia.

Allowing Medicare to purchase "Candian" drugs is similar "immoral" argument
In this context, people are refering to US drugs which have been exported to Canada and then reimported to the US.

Basically the politicians are hiding behind Canada's price controls - the politicians are afraid to institute price controls themself, but figure no one will notice the that we (USA) would have turned over prife fixing of a large segment of our economy to the Canadian government.

Either be FOR price fixing or AGAINST it. Dont hide behind "importing [non-existent] Canadian drugs"

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