Quotulatiousness

June 4, 2014

A real-life experiment – does a higher minimum wage cause job losses?

Filed under: Business, Economics, USA — Tags: , , , — Nicholas @ 00:01

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

Minimum-wage jobs becoming more likely to be replaced by robots

Filed under: Economics, Technology — Tags: , , — Nicholas @ 07:44

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.”

December 7, 2013

QotD: Minimum wage and Social Darwinism

Filed under: History, Quotations, USA — Tags: , , , , , — Nicholas @ 10:53

Consider the debate over the minimum wage. The controversy centered on what to do about what Sidney Webb called the “unemployable class.” It was Webb’s belief, shared by many of the progressive economists affiliated with the American Economic Association, that establishing a minimum wage above the value of the unemployables’ worth would lock them out of the market, accelerating their elimination as a class. This is essentially the modern conservative argument against the minimum wage, and even today, when conservatives make it, they are accused of — you guessed it — social Darwinism. But for the progressives at the dawn of the fascist moment, this was an argument for it. “Of all ways of dealing with these unfortunate parasites,” Webb observed, “the most ruinous to the community is to allow them unrestrainedly to compete as wage earners.”

Ross put it succinctly: “The Coolie cannot outdo the American, but he can underlive him.” Since the inferior races were content to live closer to a filthy state of nature than the Nordic man, the savages did not require a civilized wage. Hence if you raised minimum wages to a civilized level, employers wouldn’t hire such miscreants in preference to “fitter” specimens, making them less likely to reproduce and, if necessary, easier targets for forced sterilization. Royal Meeker, a Princeton economist and adviser to Woodrow Wilson, explained: “Better that the state should support the inefficient wholly and prevent the multiplication of the breed than subsidize incompetence and unthrift, enabling them to bring forth more of their kind.” Arguments like these turn modern liberal rationales for welfare state wage supports completely on their head.

Jonah Goldberg, Liberal Fascism: The Secret History of the American Left, From Mussolini to the Politics of Change, 2008.

July 18, 2013

Foodstamps as a form of corporate welfare

Filed under: Business, Government, USA — Tags: , , , , — Nicholas @ 09:43

Mike Krieger explains how the US foodstamp program can be seen as a form of corporate welfare:

This ridiculously condescending budget put out by McDonald’s in partnership with Visa has been making the rounds today. I’ll allow excerpts from the Gothamist article on it and their corresponding video do most of the explaining, but the key point I want to hammer into people is that food stamps are corporate welfare. They actually are not welfare for the workers themselves, who undoubtably don’t have wonderful lives. What ends up happening is that because the government comes in and supplements egregiously low wages with benefits like food stamps, the companies don’t have to pay living wages. So in effect, your tax money is being used to support corporate margins. Even better, many of these folks who get the food stamp benefits then turn around and spend them at the very companies which refuse to pay them decent wages. Who benefits? CEOs and shareholders. Who loses? Society.

From the Gothamist post by Nell Casey:

Let’s take a look at what else McDonald’s imagines its employees’ expenditures should look like. First off, the site sets employees’ mortgage/rent at $600, which even if we didn’t live in an outrageously expensive city is still a laughably small figure. Next, the site tallies health insurance at a mere $20 per month. Where is this magical land of nearly free independent healthcare? We want Obama’s unicorn to fly us there! Also as a McDonald’s employee, your cable and phone bills should only come to $100 a month (HA!), your electric bill should hover around $90 (for serious?) and apparently if you work at a fast food chain there’s absolutely no need to ever buy any food ever. Maybe they offer employees a lifetime supply of fries?

So tallying up all of these totally realistic expenses, a McDonald’s employee would need to net $2,060 per month to make this budget work. Broken down, that would mean working at least 40 hours per week and making at least $15 an hour pre-taxes to earn the necessary $12.86 an hour. Currently, McDonald’s workers earn an average of $8.25 per hour, barring any funny business.

Update: A couple of comments have been logged on this post, and Megan McArdle’s first Bloomberg column also addresses the McDonalds/Visa budget thingy:

Speaking of food, a sample budget put together by Visa Inc. and McDonald’s Corp. is rocketing around the Internet. Most of the commentary suggests that McDonald’s is heartless, and gauche, to suggest how its employees might live on the embarrassingly paltry wages that they are paid. (According to the Census Bureau’s American Community Survey of 2009-11, median earnings for a fast-food worker were $18,564 a year.) The budget is based on two jobs, which has aroused special ire: Is McDonald’s telling its employees to get a second job so they don’t have to pay them anything?

[…]

Keep in mind that most McDonald’s workers don’t live close to New York City or Washington, the sources of much of the commentary I’ve seen. These are, respectively, the first- and fourth-most-expensive cities in the country. In many areas, the median after-tax household income is not that far from that on the McDonald’s worksheet, and it’s pretty easy to rent a room in a friend’s house for less than $600 a month. Memphis, Tenn., for example, has a median household income of $35,000, which, according to Paycheckcity.com’s take-home calculator, would give a single person about $2,300 a month after taxes. And that’s the median — 50 percent of the city is below that. You should not develop a theory of household finance that declares that the city of Memphis does not exist.

Survival on such a lean budget is possible because people who do it are not trying to live the atomized life of an upper-middle-class college graduate. They band together, sharing rent, cars and cash when needed, handing down clothes and generally spreading fixed costs over as many people as possible.

Should McDonald’s pay enough to support a thrifty-but-not-too-difficult independent lifestyle? Is that now the minimum decent standard for society? Obviously, a lot of people think that they should. Washington’s City Council just passed a “living wage” law directly targeted at Wal-Mart Stores Inc. that aims to force the retailer to pay its workers $12.50 an hour.

What would that look like nationwide? Let’s set the floor a little above the amount in the budget — about $27,500 after taxes, which will allow them to enjoy the full McDonald’s budget, plus health insurance on an exchange. That’s a minimum wage of $13.75 an hour for a full-time worker, almost double the current minimum; obviously, everyone else would also have to be paid more. The minimum that a two-earner household could bring in would be $55,000 a year — not that far from the current median income for a two-earner household.

Even if it were possible to mandate that everyone in the country make almost the median income, this would come with a cost; I’d guess that most economists would agree that such a hike in the minimum wage would cause fairly significant job losses.

June 28, 2013

QotD: In praise of Bastiat’s “What is seen and what is not seen”

For me, [Bastiat’s “What Is Seen and What Is Not Seen“] is the pinnacle of economic profundity. You can call it obvious. But when I first started learning economics at the age of 17, none of Bastiat was obvious. I was an honors student at a well-regarded California high school. Yet as far as I can remember, I had never heard any argument against the minimum wage, Social Security, or the FDA in my entire life.

Every teacher and book I ever encountered treated naive populism like the Law of Gravitation. Evil businesses aren’t paying workers enough? Raise the minimum wage; problem solved. The elderly are poor? Increase Social Security payments; problem solved. Evil businesses are selling people bad drugs? Impose more government regulation; problem solved.

If you favor these programs, you can call these arguments straw men. But I assure you: These “straw men” were never presented by opponents of these policies. On the contrary, these “straw men” were invariably presented by people who favored these policies. How is that possible? Because during my first 17 years of life, I never encountered an opponent of any of these policies! You might assume I was grew up in a weird Berkeley-esque leftist enclave, but bland Northridge, California hardly qualifies.

What was going on? The best explanation is pretty simple: I only heard straw man arguments in favor of populist policies because virtually everyone finds these straw man arguments pleasantly convincing. Regardless of the merits of the minimum wage, Social Security, and the FDA, economic illiteracy is the reason for their popularity. If someone like Bastiat convinced people that the pleasantly convincing arguments are inane, proponents would have to fall back on arguments that are intellectually better yet rhetorically inferior.

Bryan Caplan, “Who Loves Bastiat and Who Loves Him Not”, EconLog, 2012-08-15

February 14, 2013

Why raising the minimum wage won’t help the poor

Filed under: Business, Economics, Government — Tags: , , — Nicholas @ 09:22

November 10, 2012

Minimum wage and “living wage”

Filed under: Britain, Business, Economics — Tags: , , , — Nicholas @ 10:47

Tim Harford discusses the image and reality of Britain’s campaign for “living wages”:

Living wage?

The minimum wage, £6.19 an hour for those 21 and over, is a legal obligation. The living wage, £8.55 an hour in London and £7.45 an hour elsewhere, is the result of a very successful publicity campaign and can count Ed Miliband and Boris Johnson among its advocates. There are no legal sanctions for paying less than the living wage, although Mr Miliband did announce plans to “name and shame” those companies who didn’t. Apparently that is helpful, because “name” rhymes with “shame”.

Why do campaigners say that you can’t live on the minimum wage?

Try living on £6.19 an hour and see how you get on.

For an economist you’re getting very high-minded all of a sudden.

I think it’s perfectly reasonable to point out that £6.19 an hour isn’t a lot of money. £8.55 an hour isn’t a lot of money, either, but a lot of people have to get by on less. Unfortunately we economists have to ask awkward questions — for instance, whether these campaigns are likely to help people without much income.

[. . .]

Perhaps we should just raise the legal minimum wage to the same level as the living wage.

Perhaps. Perhaps we should raise the legal minimum wage to a £100m an hour. I think if we did we’d find unemployment might rise. A minimum wage does two things. It will shift money from employers in an imperfectly competitive market to low-paid workers and it will induce some employers to sack workers, even if both employer and employee would prefer a deal struck at an illegally-low wage rate. There’s a case that for the good of low-paid workers, there should be no minimum wage at all. There should be one but it needs to be modest if it isn’t to cause too much unemployment.

Is there any evidence on the right level?

There’s lots, and it is mixed, but on balance it’s in favour of the idea that if you raise the cost of employing people, fewer people will be employed. It is worth bearing in mind that, for a lowly paid worker shifting from job to job, having less work available but at a high hourly rate, isn’t a bad deal. The concern has to be that certain types of people — especially young unskilled workers — will be shut out completely and denied the chance to learn on the job.

January 14, 2012

How much is your time worth?

Filed under: Britain, Economics, Railways, Randomness — Tags: , , , , — Nicholas @ 12:00

In an article about the recently approved high speed train link between London and Birmingham, Tim Harford points out a few oddities in the calculations that supposedly show how beneficial the new railway connection will be:

But it’s not just about forecasts — it’s about the value of time saved because of a faster journey, right?

That’s true. The high-speed link would save about 40 minutes on a journey from London to Birmingham. How much that is worth is an interesting question.

If you have a morning meeting it might mean an extra 40 minutes in bed.

It might indeed, which is priceless. HS2 Ltd told me that they use numbers from the Department for Transport. The DfT apparently values leisure time at about £6 an hour — this, intriguingly, implies that the UK government’s official position is that anyone under the age of 21 is wasting their time earning the young person’s minimum wage and would be wise to chillax in front of the Nintendo.

What about business travel?

Well, business travel is valued at £50 an hour. Unless the business travel in question is commuting, in which case it’s £7 an hour.

What?

Doesn’t make a bit of sense to me, either. Perhaps the idea is that commuting is eating into your leisure time, which is almost valueless apparently, whereas business travel is eating into your employer’s time, which is precious indeed. Complain to the DfT if you don’t like it.

July 23, 2009

The wrong measure

Filed under: Economics, Law — Tags: , — Nicholas @ 07:29

The economy is struggling, employers are shedding excess workers, the banks are floundering, so what can the government do to make things better? Other than getting the hell out of the way, not much . . . but they can certainly make things worse:

Come Friday, the federally mandated minimum wage will jump from $6.55 an hour to $7.25 — an 11 percent increase. At a time when employers are laying off workers, Washington is going to make it more expensive to keep them.

If you’re a minimum wage employee, your job will pay more, but only if it still exists. These days, most companies are scrutinizing every position on the payroll to make sure it’s worth the cost. Raise the toll, and some employees will find they are no longer valuable enough to make the cut.

Economists generally agree that increases in the minimum wage cause unemployment even when the economy is prospering—something it has not been doing for the last year and a half. David Neumark, a professor at the University of California, Irvine, estimates this rise will destroy some 300,000 jobs among teens and young adults.

The problem is that by trying to forcibly change the relationship between entry-level workers and employers, the government actually hurts both parties. Entry-level workers whose lack of training or aptitude makes their work less economical at a mandatory higher pay rate lose the most: their jobs and their prospects of other minimum-wage jobs. Employers lose out, too, because some work is now uneconomical to have done, it either doesn’t get done at all or is outsourced.

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