Minimum Cents
A recent op-ed in my beloved WSJ got me fired up about the minimum wage debate.
It is interesting to note that the majority of conclusions wrought by economists tend toward what is typically considered conservative policy. This is true while the majority of university economists, about a 3:1 ratio, are liberal.
Raising the minimum wage makes low-skilled workers, most of whom are minorities, less competitive. Less competitive you ask? Well who are they competing against? Answer: Machines (capital) and desperate, hungry, poor foreigners who are willing to slave in factories.
The reality and ease of outsourcing makes the minimum wage even more dangerous than in years past. Put your mind in long-run mode, put on your glasses, and lose your myopia. In the long-run, higher American labor costs mean fewer and fewer companies will plan or desire to operate domestically. It is true that American workers will usually be more productive because of the availability of capital and machines. Jobs here are more capital intensive such that an American worker will produce more bouncy balls than a Chinese worker because the American knows how to use machines better and actually has machines at his disposal. But if you think in terms of marginal costs and marginal production, then you can see that every time the minimum wage is increased another job will be exported. Higher labor costs mean that the U.S. worker has to be even more productive than he was previously to compensate for his greater cost.
The other threat are the machines (Be weary of I-Robot). The greater labor costs become, the more incentive owners have to make their production more capital intensive, which means people get fired. Again, think about marginal costs and production. For every penny more expensive a worker becomes, the ratio of his cost to his output decreases (productivity). At some point, after each incremental increase, it is going to become more profitable for the owner of production to substitute Marx’s prole with Asimov’s dreambot.
We need to avoid the five hour café break economics of Old Europe. The world’s economy is currently very strong. At the end of 2005 the world’s unemployment rate was 6.36%, while the U.S. rate was 5.11% (It is currently 4.6%). Meanwhile, the wonderfully progressive labor laws of Germany and France had their unemployment rates at 11.52% and 10.23%, respectively. Sure, workers in France enjoy comfy minimum wages and the job security to know that they have to stab their boss more that four times to get fired after they reach the age of ~26 (Not certain about the age). Remember all those young French people protesting their right to never be fired? Notice that the people in those protests were students, none of them were low-skilled, uneducated and unemployed French. The cost of giving those French college punks job security and a 35 hour work week is that 10% of Frenchies who are willing to work are unable to find a job. Very “progressive” and “caring,” eh? One of the best statements on welfare state labor laws and high taxation comes from the 2004 Nobel Economist, Edward Prescott.
But you know, it’s progressive to make sure people have enough money, right?
It is interesting to note that the majority of conclusions wrought by economists tend toward what is typically considered conservative policy. This is true while the majority of university economists, about a 3:1 ratio, are liberal.
Raising the minimum wage makes low-skilled workers, most of whom are minorities, less competitive. Less competitive you ask? Well who are they competing against? Answer: Machines (capital) and desperate, hungry, poor foreigners who are willing to slave in factories.
The reality and ease of outsourcing makes the minimum wage even more dangerous than in years past. Put your mind in long-run mode, put on your glasses, and lose your myopia. In the long-run, higher American labor costs mean fewer and fewer companies will plan or desire to operate domestically. It is true that American workers will usually be more productive because of the availability of capital and machines. Jobs here are more capital intensive such that an American worker will produce more bouncy balls than a Chinese worker because the American knows how to use machines better and actually has machines at his disposal. But if you think in terms of marginal costs and marginal production, then you can see that every time the minimum wage is increased another job will be exported. Higher labor costs mean that the U.S. worker has to be even more productive than he was previously to compensate for his greater cost.
The other threat are the machines (Be weary of I-Robot). The greater labor costs become, the more incentive owners have to make their production more capital intensive, which means people get fired. Again, think about marginal costs and production. For every penny more expensive a worker becomes, the ratio of his cost to his output decreases (productivity). At some point, after each incremental increase, it is going to become more profitable for the owner of production to substitute Marx’s prole with Asimov’s dreambot.
We need to avoid the five hour café break economics of Old Europe. The world’s economy is currently very strong. At the end of 2005 the world’s unemployment rate was 6.36%, while the U.S. rate was 5.11% (It is currently 4.6%). Meanwhile, the wonderfully progressive labor laws of Germany and France had their unemployment rates at 11.52% and 10.23%, respectively. Sure, workers in France enjoy comfy minimum wages and the job security to know that they have to stab their boss more that four times to get fired after they reach the age of ~26 (Not certain about the age). Remember all those young French people protesting their right to never be fired? Notice that the people in those protests were students, none of them were low-skilled, uneducated and unemployed French. The cost of giving those French college punks job security and a 35 hour work week is that 10% of Frenchies who are willing to work are unable to find a job. Very “progressive” and “caring,” eh? One of the best statements on welfare state labor laws and high taxation comes from the 2004 Nobel Economist, Edward Prescott.
But you know, it’s progressive to make sure people have enough money, right?
posted by Billy Joe Mills at 3:15 AM
5 Comments:
It's not that I don't see the logic of what you're saying, and there's any number of things you said about France and Germany that I would agree with. But all of what you just said is an argument based on a train of logical thought that would seem to apply at any given time in any given place, which would lead me to ask if you believe that we should not, either now OR at any time in the future, raise the minimum wage. It perhaps even follows from your line of reasoning that maybe we shouldn't have a minimum wage at all. But I don't think that's what you actually believe, so I would just ask that why is now not the right time to raise the minimum wage, and if now isn't the right time, what would have to happen for it to be the right time? I'm honestly asking, I don't actually know that much about minimum wage policy. I understand that there's a balance to be struck between decent wages and employment (and, again, I would agree France and Germany seem to be striking a piss poor balance in that regard), but couldn't the minimum wage at least keep up with the rate of inflation? I mean, it's great that our unemployment is so low, but the percentage of people living below the poverty line is also 12%, which is twice what it is in France. And I would image those living below the poverty line, as well as those unemployed, who are living in France are not struggling as much as those in the US (could easily be wrong about that, correct me if so).
The poverty data is misleading. Whenever that data is collected it is specifically done with the total exclusion of government aid. So welfare, Social Security, Medicare/Medicaid, etc. are all excluded from that calculation. I have never seen what the poverty rate would be if you included those assistance programs because I don't believe the gov't collects that data.
If you read the WSJ article that I like to you will see a great quote from a NY Times op-ed,
"The Right Minimum Wage: $0.00. There's a virtual consensus among economists that the minimum wage is an idea whose time has passed. Raising the minimum wage by a substantial amount would price working poor people out of the job market."
While it might sound extreme to have a $0 minimum wage policy, or rather no policy at all, it wouldn't change things nearly as much as you might fear. Jobs have a market value which is based on what a person in that job will produce, most don’t earn what they do because there is a minimum wage law. Plus, in an era of illegal labor, the higher the minimum wage is, the more it discourages employers from legally employing immigrants and paying taxes.
Not all workers are worth the same. Think of a high school. Every time the principal hires a new janitor, that janitor contributes less and less to the cleanliness of the school. If there are 1000 janitors then each one contributes very little. There is a diminishing marginal return to labor, which I began to describe in the main post. But to respond to your question, no one can know how many people will lose their jobs because of a significant hike in the minimum wage. We can guess by looking historically and overseas. I am familiar with the overseas data, but not the historical US data, which would be very interesting to look at.
While I disagree with the NYT of old when they said there should be no minimum wage, I also disagree that a significant rise is currently appropriate. I might be in favor of a more modest rise than what has been proposed. The reason that the hikes should not longer keep pace with inflation pertains to the reasons I argued in the main post. Workers in the US used to just compete with workers in other states, because they used to be unquestionably more productive than cheap Asian and African labor. Today that is no longer true. Thus the hikes should be slower than inflation.
The questions you ask are very good ones. But they argue more for my side than the liberal side. You’re precisely correct, we don’t know that this is the wrong time to raise the minimum wage, but we also don’t know whether it’s the right time. In economics, when you have a deficiency of knowledge it is almost always best to allow the market to work things out. This is why centrally planned, socialist economies don’t work out. The central planners can’t possibly have as precise of information as individual entrepreneurs and consumers. So they make inefficient allocations of capital, labor, and land. So too here, we just don’t know. Economics is not a precise science. It’s more like a sophisticated guessing game. But we do know, not just from faith but from fact, that the market works things out the best.
Ok, I guess most of that makes sense, but when would we ever know that it is the right time to raise the minimum wage? And I still don't know why you believe in a minimum wage at all.
Right, I forgot that part. I believe in a minimum wage because we should strike a balance between a minimum income for those who are employed and the number of people who are employed. In other words, we should create some unemployment with the gain of higher income for those employed at the minimum.
When do we know to raise the minimum wage? Well, we raise it when it's right to raise it. hahahaha. When is that? Well that depends on the confluence of multiple factors and I currently feel, as do the majority of economists as evidenced by that WSJ article, that those factors don't presently tend toward a hike. As I said, it's not a science, so don't expect a definitive answer. But again, in economics, when we don't know then we should allow the market the gather the information itself and make decisions at the micro level, rather than one macro government woven blanket.
i love the use of "frenchies"
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