Minimum Wage and Sequester Politics: Cognitive Dissonance
Those who expect employers to adjust to a 24% increase in costs for their lowest-skilled/marginally-productive workers (precluding consensual exchanges) without any adverse consequences are the same people who agitate that calamity has befallen society because of a 3% “cut” on a budget increase (facilitated on non-consensual funding).
If the minimum wage is, in short, raised from $3.35 to $4.55 an hour, the consequence is to dis-employ, permanently, those who would have been hired at rates in between these two rates. Since the demand curve for any sort of labor (as for any factor of production) is set by the perceived marginal productivity of that labor, this means that the people who will be dis-employed and devastated by this prohibition will be precisely the ‘marginal’ (lowest wage) workers … the very workers whom the advocates of the minimum wage are claiming to foster and protect.
— Murray Rothbard
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. Ironically, the minimum wage creates a reserve army of the unemployed. That in turn allows employers to be less thoughtful, helpful, and kind. It destroys the civilizing effect of competition by muting it. That encourages exploitation. It reduces the cost to employers of racism or cruelty. Before the increase, being obnoxious or racist made it much harder to find employees. A minimum wage makes it easier to indulge in bad behavior. The costs are lower. Before the minimum wage, a cruel, selfish employer might have had to mentor his employees or train them or be nice to them despite his nature. Now he won’t have to. He can still get workers to work for him. Even more cruelly, the minimum wage encourages workers to exploit themselves. They work harder and put up with more abuse from the boss because the minimum wage reduces the alternatives that are available.
The Push For a Higher Minimum Wage Ignores Economic Reality →
We all know we’re more likely to go shopping when there’s a big sale going on. Retailers don’t try to entice customers by announcing price increases. The more expensive something is, the less people will buy.
But those pushing for a higher minimum wage pretend that labor is an exception to the rule. The administration can point to a few economists who claim to show that raising the minimum wage doesn’t raise unemployment among low-paid workers. Dean Baker and John Schmitt of the Center for Economic and Policy Research in Washington insist that when employers are forced to pay higher wages, they reap large benefits, in the form of higher productivity and lower turnover.
This is the liberal equivalent of the conservative belief that tax cuts always pay for themselves. Anything so ideologically convenient just has to be true.
But if businesses came out ahead by increasing pay at the bottom, they wouldn’t have to be forced into it. They would act on their own, in the relentless pursuit of profits. Instead, many employers have calculated—based on real-world experience meeting payrolls and competing with rivals—that higher pay for entry-level workers is not a free lunch.
Raising the minimum wage may indeed raise average worker productivity — not by inducing existing workers to work harder or smarter, but by inducing companies to get rid of less productive workers. If you raise the floor from $7.25 an hour to $9, employees whose work output is less than $9 an hour will be let go.
Saying that a higher minimum wage would increase productivity is like saying that banning anyone under 6-foot-10 will make NBA players taller. It will, but not because anyone will grow.
Even the famously liberal Nobel laureate economist Paul Krugman has pointed out these realities. On the blog EconLog, economist David Henderson of Stanford’s Hoover Institution cites a 1998 article in which Krugman ridiculed those who “very much want to believe that the price of labor — unlike that of gasoline, or Manhattan apartments — can be set based on considerations of justice, not supply and demand, without unpleasant side effects.”
Obama argues for an increase by saying no one who works full time should remain poor. One fact he doesn’t mention is that the great majority of people who earn the minimum wage are not poor. More often, they’re middle-class teenagers.
Another likelihood, which he denies, is that while some workers will go from $7.25 an hour to $9 an hour, others will go from $7.25 an hour to zero. They won’t be poor despite working full time. They’ll be poor because they’re unemployed.
There is no “free lunch” when the government mandates a minimum wage. If the government requires that certain workers be paid higher wages, then businesses make adjustments to pay for the added costs, such as reducing hiring, cutting employee work hours, reducing benefits, and charging higher prices. Some policymakers may believe that companies simply absorb the costs of minimum wage increases through reduced profits, but that’s rarely the case. Instead, businesses rationally respond to such mandates by cutting employment and making other decisions to maintain their net earnings. These behavioral responses usually offset the positive labor market results that policymakers are hoping for. [E]mployers are simply not going to hire workers whose labor produces less than the cost of hiring them. Employers will not pay $8.25 an hour to hire a worker whose hourly efforts bring in $7.25. A higher minimum wage will price even more low-skilled individuals out of a job. Although a small share of workers will get a raise, others will lose opportunities for employment. Minimum wages generally don’t distribute income to workers from employers, but to a small group of lucky workers from the unlucky workers who lose jobs.
In case the written argument is too much to digest, here’s Bob Murphy on why Obama’s economically-illiterate call for an increased minimum wage will only hurt those the minimum wage is intended to help.
(Source: youtube.com)
Minimum-wage laws date to the 1930s, and supporters in Congress at the time were explicit about using them to stop blacks from displacing whites in the labor force by working for less money. Milton Friedman regarded the minimum wage as “one of the most, if not the most, anti-black laws on the statute books.” When you artificially increase the cost of labor, you wind up with surplus labor, which takes the form of unemployment. Younger and less-experienced workers—a disproportionate number of whom are black—are more likely to be priced out of the labor force when the cost of hiring someone goes up. Prior to the passage of minimum-wage laws—and in an era of open and rampant racial discrimination in the U.S.—the unemployment rate for black men was much lower than it is now and similar to that of whites in the same age group. Today, unemployment stands at 7.9% overall but is 13.8% among blacks (versus 7% among whites), 14.5% among black men (versus 7.2% among white men) and 37.8% among black teens (versus 20.8% among white teens). Yet Mr. Obama has proposed increasing the minimum wage by 24% to $9 an hour to placate his union supporters who want less competition for their members. A higher minimum wage might lift earnings for existing workers—provided they keep their jobs—but it also reduces job opportunities for millions of people out of work. Out of political expediency, Mr. Obama is putting the interests of Big Labor ahead of the urban poor.
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Jason Riley: Minimum Expectations
As a member of a Hollywood union, I face a sort of minimum wage hurdle of my own. The next step up in my career is a substantial one - and one in which I am more than capable of making (a position I held - with, in fact, greater pay - on a number of non-union reality shows). But because of the union, I cannot take that position without being paid the union minimum for that position. In other words, the studio and producers would have to pay me the same rate they would pay a multiple-Emmy winner with 30 years of experience. I cannot offer to work for less as an opportunity to prove myself. I have no leverage - I cannot offer any incentive - for producers to hire a [relatively] young and eager talent over a reliable veteran. And indeed, I have missed out on multiple jobs precisely because of this artificial price floor.
Related:
Obama’s Minimum Wage Nonsense
In his State of the Union speech last night, Barack Obama expressed his desire to increase the minimum wage. In fact, he pronounced it as an unmitigated economic miracle:
Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour. This single step would raise the incomes of millions of working families. It could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead. For businesses across the country, it would mean customers with more money in their pockets. In fact, working folks shouldn’t have to wait year after year for the minimum wage to go up while CEO pay has never been higher.
Of course, contrary to his economically-illiterate fantasies, his efforts will only result in more people in poverty.
In short: “not only does a minimum wage price some workers out of the market altogether, it also incentivizes employers to find ways to use existing labor less and in a less favorable manner. This is what Bastiat called ‘that which is not seen.’ …
“[M]aking something more expensive tends to force people to use less of it (by eliminating it altogether, finding ways to do more with less, or simply turning to alternatives, including black market options). Statists seem to understand this principle with regards to things like sin taxes, gasoline taxes, or penalties for overwatering a lawn - but unfortunately they fail to make the connection when it is the price of labor that is increased.”
If you wish to educate yourself on the realities of the minimum wage and its unintended consequences, I offer the following:
The Truth about the Minimum Wage
Related:
- Repeal the Minimum Wage
- A Response to “An economic argument for the minimum wage”
- Re: On Minimum Wage, “show me the equity”
- Minimum Wage, a Synopsis
- #Minimum Wage
(Source: youtube.com)
Business cycles are caused by the governmental intervention of bank-credit expansion. Unemployment is caused by unions or government keeping wage rates above the free-market level. Only coercive intervention, not private spending, can bring about inflation.
— Murray Rothbard, Power & Market
[U]nemployment relief, instead of helping to cure unemployment, as often imagined, actually subsidizes and intensifies it. We have seen that unemployment arises when laborers or unions [through the state] set a minimum wage above what they can obtain on the free market. Tax aid helps them to keep this unrealistic minimum and hence prolongs the period in which they can continue to withhold their labor from the market.
— Murray Rothbard, Power & Market
Compulsory unemployment is achieved indirectly through minimum wage laws. On the free market, everyone’s wage tends to be set at his discounted marginal value productivity. A minimum wage law means that those whose DMVP is below the legal minimum are prevented from working. The worker was willing to take the job, and the employer to hire him. But the decree of the State prevents this hiring from taking place. Compulsory unemployment thus removes the competition of marginal workers and raises the wage rates of the other workers remaining. Thus, while the announced aim of a minimum wage law is to improve the incomes of the marginal workers, the actual effect is precisely the reverse—it is to render them unemployable at legal wage rates. The higher the minimum wage rate relative to free-market rates, the greater the resulting unemployment.
— Murray Rothbard, Power & Market
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. All demand curves are falling, and the demand for hiring labor is no exception. Hence, laws that prohibit employment at any wage that is relevant to the market (a minimum wage of 10 cents an hour would have little or no impact) must result in outlawing employment and hence causing unemployment.
— Murray Rothbard, The Crippling Nature of Minimum-Wage Laws
Minimum-wage laws are costly for the unemployed →
With the best intentions in the world, lawmakers cannot raise the value of anyone’s labor to $9.80 an hour (or $7.25 an hour, or even 25 cents an hour) merely by passing a law. Making it more expensive to hire workers who are just starting out doesn’t advance beginners’ prospects; it worsens them. Decades of economic research and empirical studies confirm what common sense should tell anybody: Boost the minimum wage beyond what low-skilled workers are worth, and more low-skilled workers will be priced out of a job. That is why minimum-wage hikes are historically so devastating to those at the bottom of the economic ladder.
Minimum-wage laws are not cost-free. When legislators raise the price of low- and unskilled labor, it’s usually low- and unskilled laborers who end up paying the price. … It may not be easy to survive on $7.25 an hour. But life gets a whole lot harder when your hourly wage is nothing.
A Response to “An economic argument for the minimum wage”
Libertarians and conservatives often argue that the minimum wage causes unemployment. They cite their trusty supply and demand graph and say something along the lines of “look, if you draw a price floor above the equilibrium price, then there is a surplus of supply, aka unemployment”. However, this simple analysis is not accurate. I’m going to make an argument for the existence of a minimum wage within capitalism.
Short Version:
When you have a minimum wage, a company will probably fire some workers to maintain its current level of profit. However, the workers who still have jobs, will have an increase in income. These workers will spend almost all of their income because poor workers tend to spend almost all of their money to survive. (Marginal propensity to spend decreases with income). Thus, aggregate demand will increase.
Aggregate demand increasing means more sales in retail and similar companies, who will in turn hire more workers. This does not mean an infinitely high minimum wage is good, but there is an optimum minimum wage: the one whose increase in aggregate demand (via higher wages) is greater than or equal to the decrease in aggregate demand caused by the firing of workers in the short term. If you cause too many workers to be fired, then aggregate demand won’t increase.
There are two ways that demand can change. 1. Quantity demanded can shift along the demand curve or 2. The entire demand curve itself can shift.
If there is a price floor above the equilibrium price, that definitionally means prices would rise. You seem to acknowledge this. When prices rise, demand itself does not change - only the quantity demanded. After all, that’s what a demand curve represents: a graphed schedule of quantity demanded at, theoretically, all prices in a snapshot in time (which can be constructed for one person or many).
For example, if there is a sale on something you value, your demand for it does not change, only the amount you are willing to purchase at that price. It also works in reverse, except unfulfilled demand presents itself more urgently. That’s why it’s considered a curve and not a straight line; people value goods based on their marginal utility. The first amounts of a given good typically have the highest utility, whereas utility diminishes with each unit increase (this is known as the Law of Diminishing Utility).
Take gasoline, for example. Without that first gallon of gas, your car is useless. Therefore, that first gallon has the highest utility (or relative satisfaction). If you go to pump some gas into your car and the price seems oddly high, you may opt to only purchase a couple of gallons, just enough to get you by for a day or two in the hopes that the price will come down. You can make adjustments in your driving to extend its use, but those first gallons are of the highest use to you. If the price is not as high, you might put in a few more gallons to extend that window of when you hope the price may come back down. If the price is low enough, you’ll fill the tank. You have the same demand in all cases, only the quantity you are willing to purchase at a given price changes.
A shift in the demand curve itself does not occur because of a price change. Overall demand for a good may change if people find more or less usefulness in said good. For example, if it is discovered that a batch of tomatoes is poisonous the demand itself may be said to change. After all, there is no price in which most people would find the tomatoes of any utility. Conversely, demand may increase if a new discovery finds that tomatoes eaten before dinner increase life expectancy. Or your own demand may increase if you start dating someone who loves tomatoes.
Now that we’ve got the basics out of the way, let’s address your post.
First, there’s an inherent contradiction in your reasoning, see if you can spot it:
When you have a minimum wage, a company will probably fire some workers to maintain its current level of profit. However, the workers who still have jobs, will have an increase in income. These workers will spend almost all of their income because poor workers tend to spend almost all of their money to survive. (Marginal propensity to spend decreases with income). Thus, aggregate demand will increase.
You say “poor workers tend to spend almost all of their money to survive” because “[m]arginal propensity to spend decreases with [increases in] income.” In my explanation above, I noted that indeed the first of any good is of the highest utility. But here’s where you’ve got it backwards: if “propensity to spend decreases with [increases in] income,” why would increasing income on some while dropping the income of others to zero increase aggregate demand? It would not. Especially when you disuade yourself of the false Keynesian notion, if you so hold it, that savings is a negative economic activity.
You very nonchalantly declare that “a few workers would be fired,” as if this was a necessary condition to improve society. I suppose when an ideology promotes the idea that the individual is subservient to the collective, then such an attitude must be adopted. Unfortunately, the “greater good” you seek to serve is not served at all, irrespective, even, of the elasticity of demand. Bryan Kaplan addressed this when Krugman made a similar argument:
Cutting wages increases the quantity of labor demanded. If labor demand is elastic, total labor income rises as a result of wage cuts.
Even if labor demand is inelastic, moreover, wage cuts reduce labor income by raising employers’ income. So unless employers are unusually likely to put cash under their matresses, wage cuts still boost aggregate demand.
An even simpler way to explain it: Imagine every firm divided its existing payroll between a larger number of workers. How is that bad for aggregate demand - or anything but good for employment?
This is an argument that Murray Rothbard makes in America’s Great Depression. He also further explains that when wage rates are artificially prevented from clearing, gains of one group are at the expense of an another group.
It is true, however, that the wider the extent of the artificially high wage rates, the more likely will mass unemployment be. If, for example, only a few crafts manage, by union or government coercion to boost the wage rate in their fields above the free-market rate, displaced workers will move into a poorer line of work, and find employment there. In that case, the remaining union workers have gained their wage increase at the expense of lower wage rates elsewhere and of a general misallocation of productive factors. The wider the extent of the rigid wages, however, the less opportunity there will be to move and the greater will be the extent and duration of the unemployment.
How would such a shift, then, affect aggregate demand according to your argument? With your “[m]arginal propensity to spend,” some are more poor and thus have less to spend but spend more of it while there is a correlation of others who are less poor and thus have more to spend but spend less of it…
Additionally, there are other issues you ignore. For starters, employers may compensate for greater labor expenses with a drop in workplace quality. Also, employers may alter their business practices in ways to reduce their overall demand for labor. When prices for a given good rise, not only is there a glut in supply but demand becomes unfulfilled. This unfulfilled demand drives consumers to alternatives. In the case of labor, producers may find it cheaper to invest in machinery to replace the lost productivity in labor since, after all, there’s no fixed fund for wages but instead a general “capital fund.” And once the initial investment has taken place, demand for labor will decrease in the long run.
In sum, unless the goal is greater unemployment and - at best - a stagnant economy, there is no credible economic argument for the minimum wage.
If you’d like, please take a few moments to peruse my posts on subject.
- Repeal the Minimum Wage
- Minimum Wage, a Synopsis
- Re: On Minimum Wage, “show me the equity”
- #Minimum Wage
