Markets adapt to political changes, and the hierarchy of values that distinguishes between an hour’s worth of warehouse management, an hour’s worth of composing poetry, an hour’s worth of brain surgery, and an hour’s worth of singing pop songs is not going to change because a politician says so, or because a group of politicians says so, or because 50 percent + 1 of the voters say so, or for any other reason. To think otherwise is the equivalent of flat-earth cosmology. In the long term, people’s needs and desires are what they are; in the short term, you can cause a great deal of chaos in the economy and you can give employers additional reasons to automate rote work. But you cannot make a fry-guy’s labor as valuable as a patent lawyer’s by simply passing a law.
This is not a matter of opinion — that is how the world actually works. One of the many corrosive effects of having a political apparatus and a political class dominated by lawyers is that the lawyerly conflation of opinion with reality becomes a ruling principle. Lawyers and high-school debaters (the groups are not alien to one another) operate in a world in which opinion is reality: If you convince the jury or the debate judges that your argument is superior, or if you can get them to believe that your position is the correct one, then you win, and the question of who wins is the most important one if you are, e.g., on trial for murder. But if you shot that guy you shot that guy, regardless of what the jury says — facts are facts. Galileo et al. were right (or closer to right) about the organization of the solar system than were Fra Hieronimus de Casalimaiori and the Aristotelians, and the fact that Galileo lost at trial didn’t change that.
Kevin D. Williamson, “Bernie Sanders’s Dark Age Economics”, National Review, 2015-05-27.
January 13, 2017
January 9, 2017
When the minimum wage goes up, owners do not en masse shut down their restaurants or lay off their staff. What is more likely to happen is that prices will rise, sales will fall off somewhat, and owner profits will be somewhat reduced. People who were looking at opening a fast food or retail or low-wage manufacturing concern will run the numbers and decide that the potential profits can’t justify the risk of some operations. Some folks who have been in the business for a while will conclude that with reduced profits, it’s no longer worth putting their hours into the business, so they’ll close the business and retire or do something else. Businesses that were not very profitable with the earlier minimum wage will slip into the red, and they will miss their franchise payments or loan installments and be forced out of business. Many owners who stay in business will look to invest in labor saving technology that can reduce their headcount, like touch-screen ordering or soda stations that let you fill your own drinks.
These sorts of decisions take a while to make. They still add up, in the end, to deadweight loss — that is, along with a net transfer of money from owners and customers to employees, there will also simply be fewer employees in some businesses. The workers who are dropped have effectively gone from $9 an hour to $0 an hour. This hardly benefits those employees. Or the employee’s landlord, grocer, etc.
There are secondary effects beyond the employment market too. Proponents of a higher wage are claiming that this will boost the local economy by putting more money into the pockets of workers. This is the same sort of argument you frequently hear for the construction of massive new sports complexes. But of course, the money has to come from someone else’s pocket — the customer and the employer. What were those people doing with it? If the answer is “buying stuff from Amazon,” then maybe diverting more money to wages is a net gain for the Los Angeles economy. But if the answer is mostly “buying stuff produced in LA” — for example, paying rent, or buying services performed by low-wage workers — then this is like trying to get rich by picking your own pocket.
There’s no question that the wage increase will transfer money around within the economy — out of the pockets of commercial landlords, for example, and into the pockets of folks who own real estate in low-rent districts. But little evidence has so far been offered that any boost in local spending will cancel out the deadweight loss, much less exceed it.
Megan McArdle, “$15 Minimum Wage Will Hurt Workers”, Bloomberg View, 2015-05-20.
June 18, 2016
Few policies have origins as ugly as that of the minimum wage. “Progressive” intellectuals in the early 20th century supported the minimum wage because they believed it to be an effective policy detergent to help cleanse the gene pool of ‘undesirables.’ By pricing low-skilled, ‘undesirable’ workers out of jobs, ‘undesirables’ are less likely to successfully pro-create and to immigrate. The fact that the minimum wage, by pricing ‘undesirables’ out of work, thereby artificially raises the incomes of white workers was considered to be an added benefit of this social-engineering device.
Business owners and labor unions in higher-wage regions of the United States supported the minimum wage because it would dampen the competition they were under from businesses and workers in lower-wage regions of the United States.
The ethics of these early supporters of the minimum wage were despicable. But say this much for these racist, protectionist creeps: they understood economics better than do many people today (including some economists) who believe either that the law of demand is uniquely inoperative in the market for low-skilled workers or that the American market for low-skilled workers is monopsonized.* Each belief is as inexplicable as it is unsupportable.
* And monopsonization of the labor market is only a necessary condition for a minimum wage to not destroy employment opportunities for some workers; it is not a sufficient condition.
Don Boudreaux, “Quotation of the Day…”, Café Hayek, 2016-06-01.
May 31, 2016
In truth, there is only one way to regard a minimum wage law: it is compulsory unemployment, period. The law says: it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars an hour. This means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment. Remember that the minimum wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result.
Murray Rothbard, “Outlawing Jobs: The Minimum Wage”, 1998.
October 6, 2015
J.R. Ireland describes what happened to Puerto Rico’s economy when the minimum wage was raised to the mainland level by congress in 1974:
Prior to 1974, Puerto Rico had its own minimum wage and was not tethered to the general American wage. Then, in their infinite wisdom, the US Congress decided to normalize the minimum wage across all US territories and passed legislation making Puerto Rico’s minimum wage the same as the American wage had always been.
Well what happened next, you might ask? The economy imploded. Puerto Rico had an unemployment rate around 12% and an employment to population ratio of approximately 78% pretty much continuously between 1960 and 1974. The numbers had gone up a bit — they had come down a bit — but overall, year in and year out, you could look at Puerto Rico and be sure that the unemployment rate would be between 10 and 14 percent and the employment to population ration would be between 75 and 80 percent. You could set your watch by this kind of consistency.
Then Puerto Rico’s minimum wage was raised substantially beginning in 1974. The Puerto Rican unemployment rate then proceeded to increase for four consecutive years until it peaked at 20%. It roughly plateaued for half a decade or so, and then it went up again until Puerto Rico had an unemployment rate of 25% by 1984. Meanwhile, the employment to population ratio fell from 78% to 60% and has never recovered.
It is not just me pointing out the absolutely catastrophic consequences of the minimum wage increase in Puerto Rico — the National Bureau on Economic Research agrees. According to them:
Imposing the U.S.-level minimum reduced total island employment by 8-10 percent compared to the level that would have prevailed had the minimum been the same proportion of average wages as in the United States. In addition, it reallocated labor across industries, greatly reducing jobs in low-wage sectors that had to raise minima substantially to reach federal levels. (3) Migrants from Puerto Rico to the United States are drawn largely from persons jobless on the island, with characteristics that make them liable to have been disemployed by the minimum wage. As the Puerto Rican minimum rose toward U.S. levels, the education of migrants fell below that of nonmigrants. (4) Migration was critical in allowing Puerto Rico to institute U.S.-level minimum wages and played a major role in the long term growth of real earnings in Puerto Rico by reducing the labor supply and raising the average qualifications of workers on the island.
In other words, the minimum wage increase caused massive unemployment, forced hundreds of thousands of unemployed Puerto Ricans to flee the island because there were no jobs, and the only reason the entire territory wasn’t rendered destitute is because the poorest Puerto Ricans all moved to Chicago or New York rather than choosing to remain unemployed on the island itself.
September 18, 2015
Okay, perhaps the headline is a bit strong, but Warren Meyer explains why even “small” businesses need to be bigger than ever in order to be able to file all the appropriate government forms, rather than concentrating on serving their customers and growing their client base:
Over the last four years or so we have spent all of this capacity on complying with government rules. No capacity has been left over to do other new things. Here are just a few of the things we have been spending time on:
- Because no insurance company has been willing to write coverage for our employees (older people working seasonally) we were forced to try to shift scores of employees from full-time to part-time work to avoid Obamacare penalties that would have been larger than our annual profits. This took a lot of new processes and retraining and new hiring to make work. And we are still not done, because we have to get down another 30 or so full-time workers for next year.
- The local minimum wage movement has forced us to rethink our whole labor system to deal with rising minimum wages. Also, since we must go through a time-consuming process to get the government agencies we work with to approve pricing and fee changes, we have had to spend an inordinate amount of time justifying price increases to cover these mandated increases in our labor costs. This will just accelerate in the future, as the President’s contractor minimum wage order is, in some places, forcing us to raise camping prices by an astounding 20%.
- Several states have mandated we use e-Verify on all new employees, which is an incredibly time-consuming addition to our hiring process.
- In fact, the proliferation of employee hiring documentation requirements has forced us through two separate iterations of a hiring document tracking and management system.
- The California legislature can be thought of as an incredibly efficient machine for creating huge masses of compliance work. We have to have a whole system to make sure our employees don’t work over their meal breaks. We have to have detailed processes in place for hot days. We have to have exactly the right kinds of chairs for our employees. We have to put together complicated shifts to meet California’s much tougher overtime rules. Just this past year, we had to put in a system for keeping track of paid sick days earned by employees. We have two employee manuals: one for most of the country and one just for California and all its requirements (it has something like 27 flavors of mandatory leave employers must grant). The list goes on and on. So much so that in addition to all the compliance work, we also spent a lot of work shutting down every operation of ours in California, narrowing down to just 3 contracts today. There has been one time savings though — we never look at any new business opportunities in CA because we have no desire to add exposure to that state.
Does any of this add value? Well, I suppose if you are one who considers it more important that companies make absolutely sure they offer time off to stalking victims in California than focus on productivity, you are going to be very happy with what we have been working on. Otherwise….
September 5, 2015
Louis DeBroux on the plight of some marginal businesses in California who are seeing lower support from their customers as they raise prices to ensure they can keep paying their current employees at the new mandated minimum wage:
Earlier this year, labor unions in Los Angeles whipped up low-wage workers into a frenzy with demands for a minimum “living” wage of $15 per hour. They achieved their goal and the $15/hour wage bill was signed into law. This was supposed to be a huge victory for the workers (though, it should be noted, within days of the law going into effect, the same labor unions that lobbied for the $15/hour minimum wage were lobbying government for an exemption for union companies, so that union companies could pay well below the new minimum wage).
Even so, some California business owners decided to show solidarity with the cause of low-wage workers, significantly increasing their starting wage of their own volition.
Vic Gumper, owner of Lanesplitter Pizza (with stores in Albany, Berkeley, Oakland, and Emeryville, California), voluntarily raised wages for his employees to between $15 to $25 per hour. In order to cover the cost of the higher “living” wage, Gumper began advertising $30 “living wage pizzas” to his customers, which include patrons from the Pixar Animation Studios and biotech companies located near his shops. In doing so he declared these pizzas “sustainably served, really … no tips necessary”.
The result? Sales have dropped by 25% as liberals in these communities have balked at having to pony up more money for the pizzas. The hit has been so significant that Gumper has had to close during lunch hour at several locations (think about that…a restaurant that has to close during LUNCH because it can’t afford to stay open!).
Gumper says that “The necessity of paying a living wage in the Bay Area [which has one of the highest costs of living in the nation] is clear, so it’s hard to argue against it, and it’s something I’m really proud to be able to try doing…At the same time, I’m terrified of going out of business after 18 years.”
There really isn’t a free lunch … if you use the power of government to raise the costs of doing business, either the local businesses pass on that increased cost by way of the prices they charge to their customers or they economize by reducing their labour costs (and the number of employees they support). A more drastic solution is going out of business or moving out of the jurisdiction: neither of which is typically considered during the legislative process.
August 11, 2015
At Coyote Blog, Warren Meyer explains how one particular economic study wields far more influence in the fast food/minimum wage debate than any other similar study:
Pick a progressive on the street, and in the unlikely event they can name any economic study, that study will probably be Card and Krueger’s study of the effect of a minimum wage increase in New Jersey. Sixty bazillion studies have confirmed what most of us know in our bones to be true, that raising the price of labor decreases demand for that labor. Card and Krueger said it did not — and that a minimum wage increase may have even increased demand for labor — which pretty much has made it the economic bible of the Progressive Left.
What intrigues me is that Card and Krueger specifically looked at the effect of the minimum wage on large chain fast food stores. In this study (I will explain the likely reason in a moment) they found that when the minimum wage increased for all businesses in New Jersey, the employment at large chain fast food restaurants went up.
So I wonder if the Progressives making this ruling in New York thought to themselves — “we want to raise the minimum wage. Well, the one place where we KNOW it will have no negative effect from Card and Krueger is on large fast food chains, so…”
By the way, there are a lot of critiques of Card & Krueger’s study. The most powerful in my mind is that when a minimum wage is raised, often the largest volume and highest productivity companies in any given business will absorb it the best. One explanation of the Card & Krueger result is that the minimum wage slammed employment in small ma and pa restaurants, driving business to the larger volume restaurants and chains. As a whole, in this theory, the industry saw a net loss in employment and a shift in employment from smaller to larger firms. By measuring only the effect on larger firms, Card and Krueger completely missed what was going on.
July 20, 2015
Published on 25 Feb 2015
Price floors, when prices are kept artificially high, lead to several consequences that hurt the consumer. In this video, we take a look at the minimum wage as an example of a price floor. Using the supply and demand curve and real world examples, we show how price floors create surpluses (such as a surplus in labor, or unemployment) as well as deadweight loss.
June 3, 2015
I missed this post a few weeks back from Kevin Drum at Mother Jones, pointing out that we won’t really know the full impact of the Los Angeles experiment with significantly higher minimum wages:
So my near neighbor of Los Angeles is poised to raise the minimum wage to $15. How should we think of that?
Personally, I’m thrilled. Not because I think it’s a slam-dunk good idea, but because along with Seattle and San Francisco it will give us a great set of natural experiments to figure out what happens when you raise the minimum wage a lot. We can argue all we want; we can extrapolate from other countries; and we can create complex Greek-letter models to predict the effects — but we can’t know until someone actually does it.
So what do I think will happen? Several things:
In the tradeable sector, such as clothing piece work and agriculture, the results are very likely to be devastating. Luckily, LA doesn’t have much agriculture left, but it does have a lot of apparel manufacture. That could evaporate completely (worst case) or perhaps migrate just across the borders into Ventura, San Bernardino, and other nearby counties. Heavier manufacturing will likely be unaffected since most workers already make more than $15.
In the food sector, people still need to eat, and they need to eat in Los Angeles. So there will probably be little damage there from outside competition. However, the higher minimum wage will almost certainly increase the incentive for fast food places to try to automate further and cut back on jobs. How many jobs this will affect is entirely speculative at this point.
Other service industries, including everything from nail salons to education to health care will probably not be affected much. They pretty much have to stay in place in order to serve their local clientele, so they’ll just raise wages and pass the higher prices on to customers.
Likewise, retail, real estate, the arts, and professional services probably won’t be affected too much. Retail has no place to go (though they might be able to automate some jobs away) while the others mostly pay more than $15 already. The hotel industry, by contrast, could easily become less competitive for convention business and end up shedding jobs.
While I’m certainly in favour of people being able to afford to live on their base income, I’m afraid that this experiment is going to hurt a lot of already at-risk poor people who will have few other options if their jobs go away. I’m especially amused that LA-area union reps are now reported to be pushing to exempt the businesses where their members work (so that unions will have an effective monopoly on low-wage jobs because non-unionized companies would have to pay a higher wage). That, after putting all their organizational muscle behind getting the minimum wage raised in the first place. That’s a high grade of cynicism.
May 25, 2015
Published on 3 Feb 2015
What’s the difference between a wage subsidy and a minimum wage? What is the cost of a wage subsidy to taxpayers? We take a look at the earned income tax credit and how it affects low-skilled workers. We also discuss Nobel Prize-winning economist Edmund Phelps’ work on wage subsidies.
January 14, 2015
January 1, 2015
In 1913, turnover reached an unbelievable 370 percent, and Ford hired more than 50,000 people to maintain an average labor force of about 13,600. When profits swelled, he paid well for labor, creating an uproar when he doubled the basic wage to $5.00 a day, which triggered a virtual stampede of job seekers. Paying higher wages for labor was not altruistic in Ford’s eyes. Moreover, it wasn’t simply that Ford was trying to pay his workers “enough to buy back the product,” although he did preach a high-wage doctrine after the stock market crash in 1929. Rather, paying relatively high wages was, for Ford, a matter of smart business. He regarded well-paid skilled workers as important as high-grade material. By paying workers well, he effectively lowered his costs because higher wages reduced turnover and the need for constant training of new hires. (At the time, the newspapers saw Ford’s wage increase as an extraordinary gesture of goodwill.)
Mark Spitznagel, The Dao of Capital: Austrian Investing in a Distorted World, 2013.
June 4, 2014
Seattle just changed their minimum wage to $15 per hour (that’s the city, but not the surrounding suburbs). Tim Worstall outlines what we may see in this handy real world economic experiment:
The first and most obvious effect of a $15 an hour minimum is that there are going to be job losses. Don’t forget that the message from the academic literature is that “modest” increases in the minimum don’t seem to have “much” effect on employment levels. And we’d all agree that a $100 minimum would have rather large effects. So our puzzle here is to try to decide what is the definition of “modest”. Clearly $100 an hour isn’t. But also we can dismiss something like $1 an hour as being problematic. Since no one at all gets paid a sum that small making the minimum $1, or $1.50, has no effect on anything whatsoever.
The best result we have from the academic literature is that a minimum wage in the 40-45% region of the median wage has little to no effect on unemployment. The reason being similar to that of a $1 one. So few people get paid so little that it just doesn’t affect the wages of anyone very much. The same research tells us that once we get to 45-50% of the median wage then we do start to see significant unemployment effects.
This $15 an hour in Seattle will be around 60% of the local median wage. We would therefore expect to see reasonably large unemployment effects.
We would also expect to see unemployment among high school graduates rise very much more than the rate in general. For this minimum applies only inside the City of Seattle: it doesn’t apply to the surrounding counties or suburbs that aren’t part of that political jurisdiction. Imagine that you were a college graduate having to do some basic work to make ends meet while you were waiting for that career opening. If you’re going to get $7.25 outside Seattle and $15 inside it you’d probably be willing to make the trip each day to earn that extra. Of course, as a high school graduate you would too. But now think of yourself as the employer. You’ve got the choice of a college graduate or a high school graduate, both willing to do the same job at the same price. Who are you going to hire? Logically, the higher grade worker, that college grad.
So we would expect minimum wage jobs within Seattle to be colonised by those college grads at the expense of those high school ones. We would therefore expect to see a much larger rise in the unemployment rate of those high school grads as against the general unemployment rate. In fact, we’d expect to see this happening so strongly that we’d take the empirical evidence of that widening unemployment gap to be evidence that it was this minimum wage rise causing it.
March 26, 2014
Everyone seems to want to raise the minimum wage right now (well, everyone in the media certainly), but it might backfire spectacularly on the very people it’s supposed to help:
It’s become commonplace for computers to replace American workers — think about those on an assembly line and in toll booths — but two University of Oxford professors have come to a surprising conclusion: Waitresses, fast-food workers and others earning at or near the minimum wage should also be on alert.
President Obama’s proposal to increase the federal minimum wage from $7.25 to $10.10 per hour could make it worthwhile for employers to adopt emerging technologies to do the work of their low-wage workers. But can a robot really do a janitor’s job? Can software fully replace a fast-food worker? Economists have long considered these low-skilled, non-routine jobs as less vulnerable to technological replacement, but until now, quantitative estimates of a job’s vulnerability have been missing from the debate.
Based on a 2013 paper by Carl Benedikt Frey and Michael A. Osborne of Oxford [PDF], occupations in the U.S. that pay at or near the minimum wage — that’s about one of every six workers in the U.S. — are much more susceptible to “computerization,” or as defined by the authors, “job automation by means of computer-controlled equipment.” The researchers considered a time frame of 20 years, and they measured whether such jobs could be computerized, not whether these jobs will be computerized. The latter involves assumptions about economic feasibility and social acceptance that go beyond mere technology.
The minimum-wage occupations that Frey and Osborne think are most vulnerable include, not surprisingly, telemarketers, sales clerks and cashiers. But also included are occupations that employ a large share of the low-wage workforce, such as waiters and waitresses, food-preparation workers and cooks. If the computerization of these low-wage jobs becomes feasible, and if employers find it economical to invest in such labor-saving technology, there will be huge implications for the U.S. labor force.
H/T to Colby Cosh, who said “McDonald’s is going to turn into vending machines. Can’t say this enough. McDonald’s…vending machines.”