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Becker & Posner on the Minimum Wage:

Economics Nobel Laureate Gary Becker and Judge Richard Posner have a co-authored op-ed in today's Wall Street Journal (subscribers-only link). In their article, titled "How to Make the Poor Poorer," Becker and Posner explain why raising the federal minimum wage is a supremely bad idea.

An increase in the minimum wage raises the costs of fast foods and other goods produced with large inputs of unskilled labor. Producers adjust both by substituting capital inputs and/or high-skilled labor for minimum-wage workers and, because the substitutes are more costly (otherwise the substitutions would have been made already), by raising prices. The higher prices reduce the producers' output and thus their demand for labor. The adjustments to the hike in the minimum wage are inefficient because they are motivated not by a higher real cost of low-skilled labor but by a government-mandated increase in the price of that labor. That increase has the same misallocative effect as monopoly pricing.

Although some workers benefit — those who were paid the old minimum wage but are worth the new, higher one to the employers — others are pushed into unemployment, the underground economy or crime. The losers are therefore likely to lose more than the gainers gain; they are also likely to be poorer people. And poor families are disproportionately hurt by the rise in the price of fast foods and other goods produced with low-skilled labor because these families spend a relatively large fraction of their incomes on such goods. And many, maybe most, of the gainers from a higher minimum wage are not poor. Most minimum-wage workers are part time, and for the majority their minimum-wage income supplements an income derived from other sources.

They further note that while some economists do not believe minimum wage increases have a significant effect, this view is in the minority, and few are likely to contend that a substantial increase, such as the 40 percent increase currently before Congress, would not have a negative employment effect.

If politicians want to help the poor, Becker and Posner argue that the Earned-Income Tax Credit (EITC) is a more efficient (or, really, less inefficient) means of achieving this end. The EITC is more effective means of redistributing wealth to the poor and produces fewer unwanted side effects.

UPDATE: I agree with those commentators who argue that it is important to consider the available empirical evidence. The bulk of this evidence shows, however, that the minimum wage generally has those effects that economic theory would predict (although the effects are often quite small). A recent summary of the empirical evidence can be found on Greg Mankiw's blog here.

Houston Lawyer:
The minimum wage is effectively a tax on those businesses who employ low skilled workers. So every increase in the minimum wage is a tax increase on those businesses who employ the least skilled segment of our workers. The EITC is a much better way of spreading that cost to the general tax paying public. In addition, the EITC won't provide a windfall to teenagers working for gas money.
1.26.2007 10:06am
J. F. Thomas (mail):
You know every time I hear the Beckners and Posners and oh-so-wise economists of the world deride the minimum wage and tell us how companies just can't afford to pay more than the minimum wage, I want to ask them to explain the success of In-N-Out Burger in the extremely competitive fast food business. Somehow In-N-Out manages to start their workers at $9.50 an hour (and pays their managers among the highest salary in the industry), yet offers an excellent product at a competitive price. And their employee churn is the lowest in the industry (gee, I wonder why).
1.26.2007 10:08am
sk (mail):
Is the logic of this argument that there should be NO minimum wage (rather than that the minimum wage should stay where it is)?

Sk
1.26.2007 10:09am
Mitchell J. Freedman (mail) (www):
Sorry, but the horror stories Posner and Becker are peddling are just that--horror stories, not reality. The truth is that most states with higher minimum wages have lower unemployment than those which rely on the federal minimum. Most minimum wage workers do well by the increase and most businesses adjust either price of their goods or services (slightly) or take less profit. Finally, there is nothing inconsistent in increasing the EITC and the minimum wage. I happen to like both, as did Clinton--one of the few times Clinton actually governed like an economic populist.

Yes, if we made the minimum wge $20 per hour, it would have an effect. But, as I recall, the US economy performed very well in 1968 when the minimum wage (adjusted to current purchasing power) was over $9 per hour. And if you want to say, well, let's look at other things, then the Posner-Becker scam becomes apparent: Yes, let's look at other things and realize the increase in the minimum wage Congress is proposing is not going to significantly impact the economy, but it will help most workers at that level and those making slightly above.
1.26.2007 10:10am
joe (mail):
Yes SK, ultimately the underlying logic of Becker and Posner is that there should be no minimum wage. It is a position held by a surprisingly large number of economists. I say suprisingly not because I disagree with them - in fact I'm completely in favor of elimination of the minimum wage - but because it is counterintuitive to many who are not versed in economics and markets.

To appreciate the harmful nature of the minimum wage, consider a simple anecdote. Wal Mart was opening a store in Chicago and was in need of 350 employees. 25,000 candidates applied. Anyone with a rudimentary knowledge of economics knows that when supply drastically outpaces demand like in this example, that the market clearing price (i.e. the offered wage) is too high. By reducing the clearing price, supply would fall to meet demand.

What does this actually mean? It means that absent a minimum wage, Wal Mart could pay employees far far less than they currently do, effectively setting the wage at the true market clearing price where supply and demand for labor are in equilibrium. But wouldn't this be a detrimental outcome for societal welfare? No. With Wal Mart able to pay much less, they could open far more stores, hire many more of the unemployed, reduce prices to much lower levels and the benefits of an increase in REAL PURCHASING POWER would accrue to all Americans. Even those working for the much reduced wage would benefit from the lower real prices they would be paying.

The example of In-N-Out is a strawman. So they can succeed while paying an above market wage rate. Great. Perhaps they have efficiencies in sourcing their supplies. Or they have an intangible value of taste and name recognition that brings in customers even if they aren't the low cost producer. Nothing in your example refutes the logic of eliminating the minimum wage.
1.26.2007 10:24am
godfodder (mail):
Mr. Freedman:
There is no sensible explanation for your claim that states with higher minimum wages have lower unemployment, at least not if you phrase it that way (suggesting a cause effect relationship).

Switching the terms is more correct-- states with low unemployment have higher minimum wages. That is, states that already have booming economies, and tight labor markets, will naturally have higher wages. Higher minimum wages is an effect of low unemployment, not the cause.
1.26.2007 10:28am
FantasiaWHT:
The conclusions reached by Posner &Becker are based in the basic economics I learned in middle school. It's amazing that more people don't understand the simple mechanics of supply &demand and the wage/price spiral.
1.26.2007 10:30am
Eli Rabett (www):
Ah yes, the race to the bottom. This idiocy might have some validity in a society with a functioning social welfare system. However, in the US there are enough deparate people who will take any wage as to make the lack of a minimum wage an encouragement to others who would reinstitute unpaid slavery (and please don't try and tell me that slaves were well cared for). Not for their kids tho.


Walmart has prospered by exploiting workers in low competition/low wage/low opportunity areas. When they try to compete in advanced economic areas they lose.
1.26.2007 10:34am
Ted Frank (www):
By offering $9.50/hour wages, In &Out can screen for competent and productive employees more easily (which is why it has lower turnover). Other businesses prefer a model with cheaper labor and economies of scale (which In &Out eschews). If the minimum wage were raised to $9.50/hour, In &Out would lose that advantage in hiring.

In &Out salaries are no more relevant to the debate than those of Sullivan &Cromwell, which is fantastically profitable even with starting salaries of $160,000 (approximately $27.50 an hour).

There's a reason Wal-Mart calls for an increase in the minimum wage: it will hurt its competitors more than it will hurt Wal-Mart (which usually pays above minimum wage).
1.26.2007 10:38am
TheGoodReverend (mail) (www):
If we assume that jobs that pay below the minimum wage are not paying what some refer to as a "living wage"--that is, the hourly wage that, if paid to a full time worker, enables that worker to afford basic necessities and some minimal standard of living--then people who work full time at such jobs are not making enough money to survive. This is not to say they end up failing to survive--instead, they make up the difference in welfare programs. Essentially, employers who pay below a survival wage are exploiting their bargaining position to shift the costs of keeping their workers alive onto society as a whole. If the going rate for the labor of picking grapes or flipping burgers isn't enough to keep a person alive to actually perform the labor, maybe it should be. Maybe it would be if both employer and employee had perfect information and if there weren't a welfare state to fall back on. Or maybe employers would innovate and find alternatives to labor at its real cost. If all jobs paid enough to provide people with the basic goods and services our society considers necessary enough to provide them through the government, the only people who would need welfare would be those without jobs.
1.26.2007 10:43am
J. F. Thomas (mail):
The example of In-N-Out is a strawman. So they can succeed while paying an above market wage rate. Great. Perhaps they have efficiencies in sourcing their supplies. Or they have an intangible value of taste and name recognition that brings in customers even if they aren't the low cost producer. Nothing in your example refutes the logic of eliminating the minimum wage.

Why is In-N-Out a strawman? Just because you say it is? They don't have efficiencies in sourcing their supplies, in fact just the opposite. They use fresh beef and potatoes (cutting their fries in the store), which of course is a lot less efficient than using frozen beef and pre-cut frozen fries. True, they do have an amazing customer loyalty. I live in New Orleans, but go out of my way to get an In-N-Out burger every time I visit my in-laws in Phoenix. But it is precisely because their product is so good, their employees so well trained (because they stick around) and seem to enjoy their jobs (because they are well paid and well treated) and their prices are competitive with Burger King or McDonalds, where the employees are sullen and the product bland.

It means that absent a minimum wage, Wal Mart could pay employees far far less than they currently do, effectively setting the wage at the true market clearing price where supply and demand for labor are in equilibrium. But wouldn't this be a detrimental outcome for societal welfare? No. With Wal Mart able to pay much less, they could open far more stores, hire many more of the unemployed, reduce prices to much lower levels and the benefits of an increase in REAL PURCHASING POWER would accrue to all Americans.

But this assumes that WalMart would pass all the savings from reduced wages on to its customers (theoretically its workers) rather than just boosting the price of its stock and the pay of its executives (who probably spend a relatively small percentage of their incomes at WalMart). So rather than increasing the real purchasing power of all Americans, eliminating the minimum wage (or reducing its value by not raising it over time) reduces the purchasing power of many Americans while increasing the purchasing power of the Walton family (whose members are four of the ten richest people in America--numbers 7--10).
1.26.2007 10:44am
Spartacus (www):
The idea that a system (dubbed "idioocy" by Eli R.) of no minimum wage "might have some vlaidity" in a society with a functioning social welfare system puts the cart before the horse. While the economic arguments against minimum wage are irrefutable, the more fundamental argument is the libertarian one--that people should ahve a right to offer any wage they choose, and workers have the choice to accept or reject the offer. If wages are so low as to be unlivable, workers can find another way to live. That any employer has a duty top provide jobs or a given wage is as silly as the idea that "society" has a duty to provide a social welfare net for those who cannot find a job that pays a living wage, or otherwise take care of themselves.
1.26.2007 10:48am
Spartacus (www):
The idea that a system (dubbed "idioocy" by Eli R.) of no minimum wage "might have some vlaidity" in a society with a functioning social welfare system puts the cart before the horse. While the economic arguments against minimum wage are irrefutable, the more fundamental argument is the libertarian one--that people should have a right to offer any wage they choose, and workers have the choice to accept or reject the offer. If wages are so low as to be unlivable, workers can find another way to live. That any employer has a duty top provide jobs or a given wage is as silly as the idea that "society" has a duty to provide a social welfare net for those who cannot find a job that pays a living wage, or otherwise take care of themselves.
1.26.2007 10:48am
Don Miller (mail) (www):
There is an additional hidden cost to the minimum wage that most people aren't aware of.

Many union contracts don't specify a specific wage. They specify a certain number of dollars above minimum wage. Minimum wage goes up, union member wages go up.

There are so few people that try to survive on just a minumum wage job that the whole argument is a strawman. The reality is that this is hidden way to drive up salaries nationwide and make people believe the real purpose is to help poor people.
1.26.2007 10:52am
J. F. Thomas (mail):
By offering $9.50/hour wages, In &Out can screen for competent and productive employees more easily (which is why it has lower turnover).

Did it ever occur to you that if you treat people decently and fairly and as important members of a team rather than disposable annoyances they will respond in kind? That the reason In-N-Out has more competent and productive employees is that they assume their employees will be competent and productive if they treat them like competent and productive human beings?

I would hate to work for you.
1.26.2007 10:53am
Spartacus (www):
In-N-Out is a srawman because they have the right to offer as high a wage as they like, as another emplyer should have the right to offer as low a wage as they like. How come volunteer organizations aren't violating minimum wage laws?

On the economic side, In-N-Out's success is premised on different circumstances than any others' (eg, WalMart). What works for InNOut may not work for WalMart. And InNOut's wage has a slight effect on the market, while a federal minimum wage law would.
1.26.2007 10:54am
rarango (mail):
It seems to me that to reject Becker and Posner's argument, one has to reject the basis of modern microeconomics: supply and demand theory. Is that what we want to do? It's enetirely possible to accept Supply and Demand analysis, recognize what it says about the theoretical impact of minimum wage, and treat the issue as a political problem (which of course it is) without throwing out what I think is a pretty important theory.
1.26.2007 10:55am
Steve:
It's amazing how many conservatives believe the economy can be infinitely stimulated at the top, but never at the bottom. Convenient.
1.26.2007 10:55am
solon (mail) (www):
First, the example of In-and-Out is not a straw-man; it is a counter-example. The question remains as to how many other counter-examples exist before they become the norm. Other examples like this exist, such as Mighty Taco in the greater Buffalo area. Mighty Taco pays workers more and the workers seem happier there. Yet, this may not be the only cause. Typically, these stores are run better, creating a better environment, etc.

Second, the basic idea of "supply and demand" deflects a lot, especially in Joe's scenario (10:24). What would motivate Walmart to drop their prices, especially if they could earn more by paying less to employees. If stock prices increase by the increase of prophets, why would Walmart drop its prices? Do you have any examples of this happening? It seems that the "supply and demand" that students learn in Middle School deflects away from desire for prophets, working environment, and employee satisfaction. Some of these topics you cannot measure sufficiently. The market is not as always free as we pretend it is; this holds true with supply and demand as well.
1.26.2007 10:56am
Spartacus (www):
. . . a federal minimum wage law would have large one, that is.
1.26.2007 10:56am
J. F. Thomas (mail):
That any employer has a duty top provide jobs or a given wage is as silly as the idea that "society" has a duty to provide a social welfare net for those who cannot find a job that pays a living wage, or otherwise take care of themselves.

I'm glad we don't live in a society where such ideas are "silly".
1.26.2007 10:57am
Spartacus (www):
"It's amazing how many conservatives believe the economy can be infinitely stimulated at the top, but never at the bottom. Convenient."

I, for one, am for deregulation and defunding welfare from the top all the way down. But it is true, I believe, that a tax cut for the rich will help the poor and middle class a lot more than raising the minimum wage.
1.26.2007 10:58am
Ted Frank (www):
Why would you hate to work for me? All I pointed out is that In-n-Out has a different business model than McDonald's. Some people don't want to pay a premium for the additional quality of service that In-n-Out provides (and that they can provide through a higher wage). Some people, however, simply don't have the skills to get a $9.50/hour job. I'd rather that they be able to get a $6/hour job than be unemployed.
1.26.2007 11:00am
Angus:

What does this actually mean? It means that absent a minimum wage, Wal Mart could pay employees far far less than they currently do, effectively setting the wage at the true market clearing price where supply and demand for labor are in equilibrium. But wouldn't this be a detrimental outcome for societal welfare? No. With Wal Mart able to pay much less, they could open far more stores, hire many more of the unemployed, reduce prices to much lower levels and the benefits of an increase in REAL PURCHASING POWER would accrue to all Americans. Even those working for the much reduced wage would benefit from the lower real prices they would be paying.


This is pie-in-the-sky, ivory tower stuff. Becker and Posner can believe it and support it because they've already got theirs and don't have to worry about making ends meet. The idea that slashing workers' pay will actually help them is absurd. Full-time Wal-Mart employees making $120/week sans minimum wage might be able to buy some items at newly lowered Wal-Mart prices, but it won't magically lower the price of gas, rent, electricity, etc.

Eliminating the minimum wage would undoubtedly help the wealthy and middle class in terms of purchasing power. It might even have an aggregate benefit for the overall economy. But it would be a benefit gained from further shafting those already on the margins in favor of those already comfortable.
1.26.2007 11:03am
Ted Frank (www):
May I ask those who argue for a minimum wage increase and sneer at those who point out that its costs outweigh its benefits:

1) Would you disagree with a demand to raise the minimum wage to $50/hour?

2) If so, why?

3) Why do the reasons in response to Question #2 not apply to a demand to raise the minimum wage 40%?
1.26.2007 11:03am
J. F. Thomas (mail):
What works for InNOut may not work for WalMart.

I can't provide a direct counter-example to WalMart, but I can to Sam's Club, which of course would be Costco. Employees at Costco are paid better (most if not all of the stores are unionized), as are the managers. Yet it competes successfully with Sam's Club and certainly has much better customer satisfaction than Sam's.
1.26.2007 11:03am
John (mail):
Milton Friedman noted that if some one wasn't going to hire a person at $2/hour, then they probably still wouldn't hire them at $3/hour.

Duh.

So increasing the minimum wage will not increase employment.

The next question is, will it decrease employment? Well of course it will, perhaps to a minor extent, perhaps to a larger extent. You have only to look at the Samoa dispute on this issue (Samoa was exempt in some versions of the Bill because of the impact the rise in wages would have on its primary industry).

So the question for society is, will the loss of employment opportunities for X people, coupled with the higher prices the wage increase will impose on all people, outweigh the benefits Y minimum wage earners who are able to hold onto their jobs?

Becker and Posner basically answer this question by saying the benefits are vastly outweighed by the detriments.

The trouble is that the truth doesn't matter here. Minimum wage rises have been Democratic dogma for, let's see, forever. It doesn't matter whether they are good or bad, it's just a fact of nature that when Dems are in power the minimum wage will rise whether or not it is a good thing.

So American economy: just lie back and try to enjoy it.
1.26.2007 11:07am
Steve:
Would you disagree with a demand to raise the minimum wage to $50/hour?

Rather than respond to this inane argument, I'd rather wait and see if any supporters of the Becker-Posner thesis will denounce it as obviously silly.

There are plenty of good arguments to be made against raising the minimum wage, but absurd hypotheticals about raising it to $50/hour surely aren't among them.
1.26.2007 11:09am
rarango (mail):
Ted Frank: somehow I'm guessing we will find the conveniently ill-defined notion of a "living wage," wrapped up in any responses to your questions.
1.26.2007 11:11am
J. F. Thomas (mail):
Why would you hate to work for me?

Because you assume people are incompetent and unproductive and don't deserve more than the minimum wage.

Some people don't want to pay a premium for the additional quality of service that In-n-Out provides (and that they can provide through a higher wage).

People aren't paying a premium for the quality of service, In-N-Out prices are not higher than McDonalds or Burger King. The difference in the business model is that owners of the company share more of their revenues with their employees rather than keeping it for themselves or doling it out to stockholders (of which they have none since it is a family owned company).
1.26.2007 11:13am
DiverDan (mail):
Of course, Becker &Posner are absolutely right about the Minimum Wage, but since when has being right had any effect on economic policy in the United States? As long as the majority of voters (and Congresspersons, apparently) are economic illiterates, and prefer to credit anecdotal evidence (much of which is simply fictional) over sound economic theory, even when it is supported by solid research, we will suffer the effects of bad economic policy. Unions like higher minimum wages because it reduces price competition from lower skilled non-union workers; Wal-mart likes higher minimum wages because it reduces the ability of smaller competitors, who cannot compete with Wal-mart's volume purchasing and high-tech inventory control advantages, to compete on labor costs; populist politicians like trumpeting for a higher minimum wage so they can tell their electorate, usually the poor and ill-educated, that they are doing something to better their lives by sticking it to the greedy employers. And those who call for a higher minimum wage never bother to check the data on: (1) just who gets paid the minimum wage; and (2) how long do they earn the minimum wage. As to the first question, the overwhelming majority of minimum wage earners (over 85%) are either teenagers who are new entrants to the labor market and living in a home with household income well above the national median, or second wage earners in higher income households. As to the second question, these minimum wage earners rarely work for the minimum for more than 6-8 months; by then, the overwhelming majority have learned and demonstrated enough skills to earn a raise and be worth more than the minimum. The tiny minority who are stuck at a minimum wage for longer than 8 months are usually so devoid of skills or learning capacity that they are either fired or become discouraged and quit. The myth of the working poor barely getting by on minimum wage is just that - a myth. The effects of government mandated higher minimum wage are not limited to higher prices in the industries which employ low skilled workers; higher minimum wages also reduce the availability of entry level jobs, making entry into the labor market even harder for those just starting out.
1.26.2007 11:14am
jack (mail):
OK Steve... how about $13 / hour? That'd be San Francisco's minimum wage + 40%.
1.26.2007 11:16am
Steve:
So the question for society is, will the loss of employment opportunities for X people, coupled with the higher prices the wage increase will impose on all people, outweigh the benefits Y minimum wage earners who are able to hold onto their jobs?

Like most opponents of the minimum wage increase, you take into account the secondary drawbacks, but completely refuse to acknowledge the secondary benefits.

It stands to reason that when you put extra money in the pockets of people who spend virtually 100% of their income on consumption, it's going to be good for the economy. Those people will spend their extra money lots of places, including places that hire minimum-wage employees, thus augmenting their revenues and enabling them to expand operations and hire more employees.

I don't think we have the tools to quantify this effect, but it's certainly a factor so long as we're determined to consider all the other marginal impacts. Again, we see the conservative resistance to believing the economy can be stimulated at the bottom. Give extra money to the rich, and they'll open new factories and do wonderful things for everyone. Give extra money to the poor, and apparently it just goes down a rabbit hole. (The reality is, of course, all such "rabbit holes" are at the top.)
1.26.2007 11:17am
Jack S. (mail) (www):

If wages are so low as to be unlivable, workers can find another way to live.


such as? and I mean in the real world. Not one of infinite supply of jobs.


I believe, that a tax cut for the rich will help the poor and middle class a lot more than raising the minimum wage.


Yep, that's certainly been the case with the current round of cuts for the rich.
1.26.2007 11:18am
J. F. Thomas (mail):
So Beckner and Posner don't think there should be a minimum wage but we should extend the EITC. So rather than having companies pay their employees a reasonable wage, the taxpayers as a whole should subsidize the salaries of the poor for the benefit of WalMart. Of course, the EITC means that WalMart would be able to pay even lower wages because the government (i.e., us taxpayers) would ensure that WalMart workers would earn enough to get by. And since the trend is to tax earned income at higher rated than investment income, the burden of the increased EITC would fall on wage earners, not investors. So the end result would be that middle class taxpayers would actually be making the richest family on the face of the earth even richer. That makes a whole lot of economic sense.
1.26.2007 11:23am
Bryan DB:
I'm glad JF Thomas mentioned Costco, because it also goes with his In-N-Out example: Costco pays more than Sam's Club, yet has higher employee retention and more customer satisfaction. Yet the cost of the employees isn't passed along to the customers; it just lowers the ultimate profits passed along to the owners of the company. I'm trying to feel bad for them, until I realize the gross excesses of pay at the top of the corporate pyramid.
If Becker and Posner want to attack the economics of pay, they could start with people like Home Depot's Nardelli, who took home a $210 million *severance* package. At $9.50 per hour, you could pay 10,600 workers for a full year of full-time work. So tell me again why the drag on the economy is the minimum wage, and not the gross excesses of executives?
1.26.2007 11:24am
Steve:
As to the first question, the overwhelming majority of minimum wage earners (over 85%) are either teenagers who are new entrants to the labor market and living in a home with household income well above the national median, or second wage earners in higher income households.

It's always amusing seeing obviously false claims like this in the middle of posts which lament the economic ignorance of Americans.

Even the Heritage Foundation acknowledges that 20% of minimum wage earners live in households below the poverty line. Obviously, these are not "teenagers in a home with household income well above the national median," nor are they "second wage earners in higher income households." Good luck getting to 85% at this rate.
1.26.2007 11:25am
QED:
If the minimum hourly wage is raised by one cent, the effect on unemployment would be infinitesmal.

If we raise the minimum wage by fifty dollars, the effect would be massive unemployment.

The issue is precisely how much unemployment is an acceptable trade-off for increasing the hourly minimum. The problem is compounded by the difficulty in prognosticating.

In any event, if one's goal is to increase the income of poor people, the EIC is more efficient than the blunt force of a minimum wage.
1.26.2007 11:25am
3llen:
"Steve:

Rather than respond to this inane argument, I'd rather wait and see if any supporters of the Becker-Posner thesis will denounce it as obviously silly.

There are plenty of good arguments to be made against raising the minimum wage, but absurd hypotheticals about raising it to $50/hour surely aren't among them."

I think the point he was trying to make is that even proponents of raising the minimum wage would admit that, at some point, raising the minimum wage would be more harmful than helpful to the economy. The question is: where is that point? Would you support raising the minimum wage to $9/hour? $11? $15? $19? There was a movement in Massachusetts a few years ago to institute a law requiring that all employees be paid a "living wage", which I believe proponents calculated as being somewhere around $17/hour for a 40 hour per week job.

Higher minimum wage = higher unemployement = higher prices on goods bought by many low income people. I would like proponents of this minimum wage increase to either (1) refute this assertion, or (2) explain how the benefits of a higher minimum wage outweigh this increase, and if so, at what point (if any) the costs of a higher minimum wage start to outweight the benefits.
1.26.2007 11:28am
J. F. Thomas (mail):
The myth of the working poor barely getting by on minimum wage is just that - a myth. The effects of government mandated higher minimum wage are not limited to higher prices in the industries which employ low skilled workers; higher minimum wages also reduce the availability of entry level jobs, making entry into the labor market even harder for those just starting out.

So I don't get it. If the only people making minimum wage are extremely low-skilled workers who are probably incapable of holding down a job anyway and the high-school kids slinging burgers after school why on earth are you so adamantly opposed to raising it. By your logic it shouldn't matter at all if it goes up. McDonalds will still need high school kids and will raise the price of their burgers a nickel to compensate and maybe the hopelessly incompetent will find it harder to find a job, but so what, they were only going to keep the job for a few months anyway. The working poor are already making a lot more than the minimum wage so they won't be affected.
1.26.2007 11:33am
godfodder (mail):
I guess, like anything, a discussion of economics does not benefit from being politicized! Everyone accuses the other one of

Some of you seem to have tacitly accepted a mental model wherein workers are somehow "prisoners" of their employers. As if, were there not a minimum wage, employers would be free to pay peanuts to everyone.

Wages are set a whole lotta ways other than by government fiat. In other words, there are other market forces that would come into play if employers just decided to underpay employees. For starters, no one would work for them. Just that simple. And workers would bond together to form unions and workers guilds that would negotiate collectively with employers. Precisely the same way it happened in the past.

In fact, does anyone know, did the minimum wage destroy/damage unions? I mean the minimum wage is a kind of collective bargaining. If the government is going to do it for you, why do you need a union?

Also, doesn't the fact that there has been no minimum wage increase in 10+ years, and workers today are doing pretty good, suggest that the minimum wage is not all that important?
1.26.2007 11:38am
Ubertrout (mail) (www):
Generally speaking, Costco and In-and-Out Burger are fallacious counterexamples. Although Costco does compete with Sam's Club, the two have very different business models. Costco generally has a smaller variety of inventory but deeper discounts on it, whereas Sam's aspires more to be a big-box Wal-Mart. In-and-Out also aspires to be more of a "quality not quantity" establishment, earning itself an army of fans but comparatively small market penetration. I'm not criticizing either (given the choice I'd go to Costco, and definitely In-and-Out), but given that both make a conscious choice to focus on quality more generally, it's not surprising they pay higher wages...it assures a higher quality of employees and more applicants for positions. One could argue that if the minimum wage was raised these operations would need to raise their wages also, to continue to enjoy the beneficial effects of paying better wages than competitors.

Either way, these operations are simply counterexamples, and they prove nothing beyond the fact that not all businesses that pay more than the minimum wage will go bankrupt, a fairly obvious point. There are many decisions about where to allocate capital, and wages are one such area. The problem with a minimum wage is that it forces the market in a certain direction regarding wages, hurting both businesses that choose to pay as little as possible, as well as businesses like In-and-Out who choose to offer a more competitive wage in hopes of attracting better candidates. I recognize the counter-argument that 5.15 is disgraceful as a wage because it's not really enough to live on, and that's a good point, but it doesn't change the economic calculus of the minimum wage, and neither do single counterexamples that prove nothing.
1.26.2007 11:44am
Brian Church (mail):
Didn't we learn in the late 19th and early 20th century the results of unleashing pure, unfettered capitalism on lower and middle class workers? The idea that decreasing wages for the poor and putting that money into the pockets of CEOs will somehow make the plebes better off down the line is ridiculous. It may help the overall economy, but at the expense of further stratification of wealth. If that's what you're after fine, but don't pretend that $10 off the price of a flat screen TV is going to be a fair trade for the guy whose wages went from $5 to $2/hr.
1.26.2007 11:45am
Orielbean (mail):
The balance I can see in our economy is stimulating growth vs protecting one of the three class groups.

Giving the rich the tax cut is supposed to free up more capital for investment, which creates a higher volume in the economy, more jobs, etc. But at the same time, leaving the bottom people out to dry also hurts growth.

The middle-class of small biz owners and professionals are the group who drives true innovation, which gets copied and mass-produced by the big corps and conglomerates, and their services are consumed by the poor. Yet, when they prosper too much, they price out the poorest people and they stagnate the flow of ideas and innovation to protect their stable growth.

The poor people provide the consumption of goods/services and labor that the other two need to survive. Abe Lincoln said that without Labor, there is NO Capital. Walmart needs the blue-vesters to make their ginormous profits.

It seems to me that we make decisions on a sliding scale of who gets hurt more by the decision.

We can create volatility at any of the three levels (cutting wages/benefits for poor, increasing regulations on professional groups for middle, raising taxes or adding regulation to corporations for rich), and the other two class groups will benefit or enjoy stability of some sort.

Strong unions or professional groups will leverage thier power against the executive class to benefit their own class of people. What is the happy medium? Or is the happy medium found in a soup that continually gives each group their druthers on a cyclical basis?
1.26.2007 11:45am
poster child (mail):
It's amazing to me how many non-economists want to seriously debate Becker and Posner's position. Hell, it's not even Becker and Posner's position--it's just Econ 101. You can spin it and look for exceptions all you like, but you are not going to convince anyone with any background in the disclipline. Wages are simply prices for labor, which, like every other good, are ultimately determined by the interaction of supply and demand. If you set an artificially high price for labor, you will have excess supply (a/k/a "unemployment"). The funny thing is, the Democrats are pushing the higher minimum wage as a "favor" to the working poor, when they're the group that will be harmed the most by it. But hey, you'll sleep better at night because you've "done something" for the poor.
1.26.2007 11:48am
J. F. Thomas (mail):
Also, doesn't the fact that there has been no minimum wage increase in 10+ years, and workers today are doing pretty good, suggest that the minimum wage is not all that important?

What makes you believe that workers today are doing "pretty good"? Let's define worker as a family making around the median income ($46,000) in this country and compare their status to that of a worker of thirty years ago when the minimum wage was around $9.00 an hour in todays dollars. Are they more or less likely to have health insurance or a pension? How about the ability to pay for a college education for their children?
1.26.2007 11:49am
Mark Draughn (mail) (www):
"By your logic it shouldn't matter at all if it goes up. McDonalds will still need high school kids and will raise the price of their burgers a nickel to compensate and maybe the hopelessly incompetent will find it harder to find a job, but so what, they were only going to keep the job for a few months anyway."

It's unlikely that employers can pass the increased labor costs on to the customers. If McDonalds could increase burger costs by a nickel, they would already have done so to pocket the profit.

The second half of that sentence is pretty good, though. They may not be able to find jobs, but they were only crappy jobs anyway, so (for some people) it's no big loss.

"The working poor are already making a lot more than the minimum wage so they won't be affected."

That's also an argument for not raising the minimum wage.
1.26.2007 11:49am
rarango (mail):
On the earlier thread about politicizing science......could it be the democrats are politicizing science? Oh thats right--economics isnt a science (which is probably why its not recognized as a nobel prize recipeient..oh, wait)
1.26.2007 11:53am
Chris Fulmer:
The minimum wage is always $0 and is paid to those people without jobs. The question is whether it's worth a company's time and money to give that person a $5.15 hourly raise in exchange for that person undertaking new responsibilities. For some people, the answer is no, and the net result is that people whose labor might be worth, say $3 an hour, but not $5.15 do not get jobs. These people are typically: (1) young urban youth with no work experience, (2) ex-convicts, (3) mentally or physically disabled, (4) people with drug or alcohol problems or (5) elderly. Is it any wonder that these are the people stuck on the fringes of society?
1.26.2007 11:54am
Cato (mail):
The minimum wage should be changed to $500/hr so that everyone can be in the upper middle class!

If a little increase is good, a bigger one should be better.
1.26.2007 11:55am
Steve:
Hell, it's not even Becker and Posner's position--it's just Econ 101.

I have a lot more respect for the opinions of experts like Becker and Posner than I do for the zombies who stagger around claiming that Econ 101 explains all.

Yet again, people who have no problem perceiving all sorts of wonderful trickle-down benefits when you introduce more money at the top of the economy can see no benefit whatsoever when you introduce more money at the bottom. Will lower-income workers consume more if they make more money, thus increasing corporate revenues at the margins, thus stimulating growth and encouraging job creation? You'd surely never know it from the folks who stopped paying attention after Econ 101, figuring they now understood all the mysteries of the universe.
1.26.2007 11:58am
Steve:
It's unlikely that employers can pass the increased labor costs on to the customers. If McDonalds could increase burger costs by a nickel, they would already have done so to pocket the profit.

The fallacy here lies in not realizing that costs will be passed on to consumers on an industry-wide basis.
1.26.2007 12:00pm
Brian Church (mail):

The minimum wage should be changed to $500/hr so that everyone can be in the upper middle class!

If a little increase is good, a bigger one should be better.


Sure, just like if someone thinks that raising the speed limit from 55 to 65mph is a good idea, then they're obligated to believe that raising it to 500mph is a great idea. And if you want 2 slices of pizza instead of one, then you're a hypocrite if you refuse to eat 100 slices.

There's enough contention here already without adding ridiculous strawmen.
1.26.2007 12:01pm
d:
But this assumes that WalMart would pass all the savings from reduced wages on to its customers (theoretically its workers) rather than just boosting the price of its stock and the pay of its executives (who probably spend a relatively small percentage of their incomes at WalMart).

Market pressure will force them to pass the savings to consumers because all their competitors will have lower-priced inputs and can now price their goods closer to Walmart's. It's actually more fallacious of you to assume all the savings will be paid to executives.
1.26.2007 12:02pm
Rattan (mail):
The piece in WSJ lacks enough detail to support its handwaving analysis. While it is true that supply and demand rules, it is also true that lack of bargaining power and leverage works as well. The latter is sorely missing in the analysis. Without it all one can say is that the side of the coin being shined by Becker-Posner is shiny indeed.

There are many ways of improving the lot of all workers in the US. One strategy independent of EIC is below:

All of us need services like education, healthcare and some kind of insurance against a rainy day (limited unemployment benefits). These also happen to be the best services to centralize to mine savings resulting from imroved efficiency while ensuring that they are available to all.

Whiel centralizing, private providers should be allowed to step in (vouchers are fine) if they offer the services to all comers without restriction (no prexisting conditions, religous tests, etc.). Then, the efficiencies being mined are those of organization and delivery. Physicians should be able to decline to accept the rates and use alternative methods for charging patients. All insurance plans should be required to no screen out people for preexisting conditions, race, religion, gender etc. They can elect to be pricey but not discriminatory-- and no immunity from lawsuits.

Estimates suggest that in the case of health care about half of the expenditures are a waste, being directed to keeping people out of private plans. This saving is enough to pay for extension of health care to all. The government can pay the private providers on a pro rata basis, i.e., tax or other revenue earmarked for these expenditures based on the number of people served by the private plans. Thus, the government will be a provider of last resort.

This will put a useful benefit in the pocket of the poor, improve everyone's mobility to seek better opportunities, and is not enough to make people forgo work altogether and rely merely on a benefit fueled lifestyle. Further, having people pay a certain amount (a large copay) will provide an incentive to use medical care with care while reducing the cost of charity care.

Presently, charity care extends to all patients. The high end patients consume a lot of time, but the physicians cannot bill any of it (only procedures not advise, interviews, midnight responses or trips to the hospital by physicians) are billable, in effect charity care as the liability of the physician stays the same. Lower end patients pay even less. This perverse reality is effectively the result of monopoly pricing (HMOs etc. are monopolies), but for the limited benefit of private individuals and with no consideration of quality. (disclosure: my wife is a physician who provides generous dollops of charity care to the well-heeled who think nothing of paging her at odd times.)

Of course, if we decide to stop subsidizing stock and bond investors with the ongoing tax holiday from Medicare and Social Security taxes, probably the crisis on those fronts would be tackled as well. It is the broad tax exemption and extraordinarily low tax rates for people earning income in the form of Capital Gains that is increasing the cost of providing these necessary service on the rest of us. Ending the tax holiday (these vacationers also use SS and Medicare) will also ease the burden on the poor by making their taxes reasonable. It seems, we will not need bandaids like EICs for anyone then.
1.26.2007 12:02pm
J. F. Thomas (mail):
it's just Econ 101.

And that's the problem--it's just Econ 101. Like Psych 101, people who take Econ 101 are the most dangerous people around, because it makes economics sound so simple. It's basic supply and demand. Of course a high school graduate applying at WalMart has equal bargaining power with corporate headquarters in Bentonville and every job interview involves a back and forth where there is a heated negotiation where offers and counter-offers are considered and lawyers pore over every detail of the employment contract. Finally there is a meeting of the minds, the contract is written and Lee Scott personally flies down from Bentonville to sign each and every employment contract and congratulate the new employee for the difficult but fair and equal negotiations. The new employee, with his unique compensation package, proudly puts on his blue vest and stands at the door and welcomes each new customer, knowing he has done his best to get the best possible compensation package and is on equal footing with his employer.

Oh wait, you mean it doesn't work that way in the real world? But that's how Econ 101 says it should work.
1.26.2007 12:05pm
Adeez (mail):
I can't help myself, I must go off-topic a bit in order to make a broader point.

(1) Economic disparity is increasing in this country, which means the middle class is getting squeezed.

(2) A strong middle class and less wealth inequality is a societal good.

(3) Contrary to the famous line, greed is bad.

(4) Corporations have too much power over our government, which means fewer and fewer people are advancing their interests over more and more of the citizenry.

(5) The minimum wage was substantially higher a few decades ago, and the U.S. economy is still the world's strongest.

If those who argue against the minimum wage can agree with the above premises, then please explain what is the best means of making things better. Pure capitalism is as effective as poor Marxism: they both sound great on paper, but quickly deteriorate once introduced to the real world, with real flawed human beings, who do not always act rationally or in their best interests.
1.26.2007 12:05pm
mkellerm (mail):
It is funny how economic theorists tend to be the ones convinced that raising the minimum wage will increase unemployment (because that is what their models tell them, and their models can't be wrong), while empirical economists (the ones who look at actual data) are much less concerned. It is too bad that we don't actually follow Friedman's advice to judge models by the accuracy of their predictions.
1.26.2007 12:06pm
Orielbean (mail):
To the union comment : Adjusting the wage up or down didn't really hit the unions in such a negative manner. They usually have a very comprehensive set of ways that they work for the worker. They procure jobs; they negotiate terms with an employer to improve work safety or overtime allowances. They arbitrate differences, provide disability protections, legal representation, etc, and not from an adversarial point of view of employer vs employee.

To wit : they still go to bat on lots of issues.

They are not as strong as they used to be, as many companies learned over the years (from the examples provided by the strong unions and workers' parties and NOT from big business) that toning down the adversarial portion and providing competitive benefits is worth the admin, the cost, the hassle, and the potential for risk or abuse.

Stockholders responded accordingly and didn't ding those companies who take care of employees vs the stockholders in the long run. It is its own reward - fewer work comp claims, disability, employee theft, book of business theft, lower turnover, and general loyalty.

They provide health insurance, pensions, and savings plans. Those three things alone are enough to keep them around - there are still companies that are very hesitant to offer competitive benefits to the lower rung of society. It is a very expensive thing to do, and if your employee doesn't feel the bond of loyalty to you like the unions usually inspire or maintain, then the employee holds a lot of power over the pursestrings of the employer.

The real question to ask to improve the lives of the poorest - and this is one I don't see many economists asking - What are the things that the person needs to survive and produce? It isn't just a dollar amount, as the costs of those different goods and services like cars and healthcare change dramatically and are always out of the full scope of current economic theory.

If I know that the person should have an opportunity to save a percentage of income for retirement, should have a threshold of protection for catastrophic healthcare issues, should have the chance to purchase or rent the car or home for a percentage of income - that is what we need to work for.

It is like that anecdote for being generous to the homeless person. That person might not have the tools needed to budget for his own needs, so he'll blow the 20 bucks on booze instead of a blanket or haircut for a job interview. If he is in need, show him how to fill a loan application, how to dress for an interview. Teach him how to fish. Don't throw the fish at him once a month and hope he shuts up or pray he can educate himself by himself.

This takes the current nannystate we have now and focuses it in a different direction. Now, we simply qualify incomes and pay cash out directly. Food stamps and low-rate loan initiatives are things that I see being more effective in solving the many different and disparate problems of poverty, rather than just getting your check each month. Having job-seek initiatives are the most important leg of support, otherwise you get the cadillac welfare queen nightmare scenario of no motiviation required for survival.
1.26.2007 12:06pm
d:
Oh wait, you mean it doesn't work that way in the real world? But that's how Econ 101 says it should work.

Econ 101 says no such thing.
1.26.2007 12:06pm
Jeff S.:
Rattan,

You wrote:

"Estimates suggest that in the case of health care about half of the expenditures are a waste, being directed to keeping people out of private plans."

Slightly off the topic, I know, but can you provide credible back-up for this claim?
1.26.2007 12:08pm
Justin (mail):
Don't you think that what is essentially an empirical question can be answered, you know, empirically?

http://www.epinet.org/content.cfm/briefingpapers_bp150
1.26.2007 12:13pm
d:
(1) Economic disparity is increasing in this country, which means the middle class is getting squeezed.

(2) A strong middle class and less wealth inequality is a societal good.

Wealth inequality is not inherently a societal "bad". What truly matters is the purchasing power of the lower class and the qualify of life they are able to attain. For example, someone in the lower middle class who can afford a house, car, and various luxury items like a television shouldn't care that his neighbor is now 100 times richer, all things being equal. (Though I do understand that costs of good will increase, but we've already assumed the middle class person can afford a quality lifestyle).

(5) The minimum wage was substantially higher a few decades ago, and the U.S. economy is still the world's strongest.

I'm fairly certain nobody is arguing that the minimum wage has had a deleterious effect on the US Economy. Most economists only argue that the minimum wage does not have the positive effect on the poor that many people think it does and in fact, has a negative effect.

If those who argue against the minimum wage can agree with the above premises, then please explain what is the best means of making things better.

As far as socialist programs go, the minimum wage is a very poor way of redistributing wealth. It would be much better if there were government-funded programs for the poor to increase the value of their labor, such as trade school.
1.26.2007 12:14pm
J. F. Thomas (mail):
Econ 101 says no such thing.

Of course it does. One of the assumptions you make in Econ 101 is equality of bargaining power. Supply and Demand (as taught in Econ 101) only works when you have perfect knowledge marketplace, have equality of bargaining power, and all kinds of other assumptions to simplify the concepts so that they are almost worthless when they are applied to the real world.

My example, while admittedly extreme, is one of equality of bargaining power, a basic assumption of Econ 101. It is implied in the examples you learn.
1.26.2007 12:16pm
Mark Draughn (mail) (www):
The fallacy here lies in not realizing that costs will be passed on to consumers on an industry-wide basis.

That will happen if McDonalds is only competing against Burker King and Wendy's and other fast-food places, and if those places pay minimum wage, and if minimum-wage labor is a similar fraction of the cost of a burger. But if all the fast food places raise their prices and more people start brown-bagging their lunches, employment will decline across the industry.

(Actually, I think you'd be hard-pressed to find a McDonalds that only pays minimum...)
1.26.2007 12:17pm
Francis (mail):
1. JF Thomas's earlier point about the EITC needs to be repeated. Those who propose expanding the EITC are suggesting that the owners of WalMart should be subsidized by the American taxpayers.

2. The problem with applying Econ 101 to the labor market is that Econ 101 doesn't apply to the lower end of the labor market. Remember when the instructor drew the supply / demand curves and said "this is a MODEL"?

what are the elasticities at the lower end? And providing an incentive, through raising labor costs, to develop alternative methods of doing work that currently can only demand minimum wage might actually be a good thing. Or do we want to return to cotton being picked by hand in the deep south because there are people who will do it for free so long as room and board is provided?

anyone remember the Phillips curve -- the relationship between unemployment and interest rates. Too low unemployment causes a wage/price spiral (in theory), so our federal government cools the economy, by raising interest rates, whenever the labor market gets too tight.

so some level of unemployment is structurally built in to our economy. that means that there is always [ALWAYS] downward pressure on wages at the low end.

those who believe in no minimum wage believe either (a) in a return to indentured servitude or (b) that the taxpayers (through the EITC or its equivalent) should subsidize low-end employers.
1.26.2007 12:19pm
sk (mail):
How is the minimum wage, and arguments for and against it, different from any other legally required benefit?

In other words, would the argument against the minimum wage also apply to the law requiring a maximum of 40 hours per week? The law requiring matching social security investment by companies? The law requiring Family Leave (and if they are laws) vacation, sick leave, OSHA, etc etc etc?

In other words, while it may be economics 101, isn't the argument against the minimum wage the same argument against all legal controls or protections on employer behavior.

Similarly, arguments FOR the minimum wage are similar to arguments FOR maximum hours worked laws, employee protection laws, retirment fund laws, etc etc.

So, arguments AGAINST minimum wage laws are simply arguments for a maximally efficient system, with no protection for the worker (120 hours in the coal mine, no health requirements, no retirement, no employer protection laws from sexual harassment, no fair labor laws, etc).

And arguments FOR minimum wage laws are simply arguments for protection of workers, with no concerns for economic efficiency (resulting in a bloated, inefficient system which ultimately hurts everybody).

Thus, here in the real world, the system will be somewhere in between these two extremes-some attention to efficiency, some appreciation for human protection.

And, in this real world, the pro-minimum wage arguments win (I say this as a personally pretty conservative guy). Because real world economic arguments accept that neither extreme in efficiency nor extreme in human protection are reasonable ways to run the economy-a political compromise between the two is (inevitably) going to win out.

You're going to tell me that minimum wage laws shouldn't exist because they aren't maximally efficient? My response is, no kidding. Neither is OSHA-neither are sexual harassment laws. If you want to say that the specific value being proposed for the minimum wage shouldn't exist because it's too high? My response is, tell me why-what level should the minimum wage be? What's the political, argued compromise that should exist?

Sk
1.26.2007 12:22pm
SeaDrive (mail):
The problem with the economic analysis is that the minimum wage is not an economic issue, it's a political issue. It's a way for Congress to quantify the notion of treating people with dignity.
1.26.2007 12:25pm
Jeff S.:
"Those who propose expanding the EITC are suggesting that the owners of WalMart should be subsidized by the American taxpayers."

Nonsense. If a minimum hourly wage is good public policy, it should be subsidized by the taxpayers generally, not by any one business or its customers.
1.26.2007 12:27pm
josh:
A friend who owns his own small business once told me that if the fed govt lowered his taxes, he would be able to hire another employee; if the govt raised the minimum wage, he would have to fire an employee.

He told me this from his cell phone in his Lexus SUV on a Friday afternoon as he drove to play golf at his private country club.

I don't think challenging Posner/Becker's pronouncements of what certainly will happen as a result of changes in minimum wage laws necessary means we throw out all aspects of microeconomics. However, I do think it plausible to ponder the notion that the theories don't always predict free market behavior as neatly as the died-in-the-wool economist would have us believe. Certainly a Cass Sunstein would have something to say about the pitfalls of overeliance (not non-reliance) on economic theory to predict behavior.

Obviously, no one would approach business for anything other than a profit. But it seems erroneous to me to argue that the minimum wage law will with certainty erode those profits to a degree to have the absolute effects on employment that Posner/Becker predict. It also seems plausible that business, such as my friend's, could simply reduce their profits. It's obviously a matter of choice (add/fire employee, versus joining exlusive country club), but shouldn't that factor into the analysis?
1.26.2007 12:29pm
d:
One of the assumptions you make in Econ 101 is equality of bargaining power.

You'll have to define what you mean by "equality of bargaining power", then. Econ 101 certainly doesn't assume (or, at least I hope it doesn't) both parties have equal leverage.
My example, while admittedly extreme, is one of equality of bargaining power

That doesn't mean it's the only way (or even a sensible way) to project bargaining power. Econ 101 in no way assumes the laborer will engage in contract negotiation in such a fashion. The most common case is that a laborer has multiple opportunities from various competing employers and the wage will reflect that. And if he doesn't have many opportunities, the likely explanation is that the minimum wage has priced him out of the market.
1.26.2007 12:29pm
Mark Draughn (mail) (www):
It is funny how economic theorists tend to be the ones convinced that raising the minimum wage will increase unemployment (because that is what their models tell them, and their models can't be wrong), while empirical economists (the ones who look at actual data) are much less concerned.

Great point. The theory says there should be unemployment, but attempts to measure it have had poor results. It seems like we can get away with small increases in the minimum wage without hurting employment.

Perhaps inefficiencies in the market discourage employers from cutting employment when the minimum wage is increased. Or maybe inefficiencies prevent employees from bargaining effectively so employers can pay "below market". As long as the minimum wage is below the market clearing price, it doesn't affect employment.
1.26.2007 12:34pm
Jeff S.:
Why don't those who dismiss economic theory regarding the minimum wage have the guts to support a government-mandated living wage and a cap on executive compensation? This would begin to separate those who have an actual concern for low-wage workers from those who merely resent people who have high incomes or great wealth and hate Walmart or McDonald's.
1.26.2007 12:35pm
BobNSF (mail):
The article points out that raising the minimum wage will hurt the working poor by making fast food more expensive.

1) Eating fast food on a regular basis isn't good for you.

2) People who earn the minimum wage can't afford to eat fast food, except for the occassional special occasion.

Do you people pay any attention to the poor?
1.26.2007 12:38pm
Elliot Reed:
One of the assumptions you make in Econ 101 is equality of bargaining power. Supply and Demand (as taught in Econ 101) only works when you have perfect knowledge marketplace, have equality of bargaining power, and all kinds of other assumptions to simplify the concepts so that they are almost worthless when they are applied to the real world.
Did you even take Econ 101? Econ 101 markets don't involve bargaining at all, much less some assumption about "bargaining power." The firm (or worker) in a competitive Econ 101 marketplace is faced with prices (or wages) that it has no power to affect. The monopolist/monopsonist can set their own price but not in a way that involves "bargaining." Similarly with the oligopolists, monopolistic competitors, etc. Bargaining is a complicated game theory problem and as far as I know nobody has anything remotely like a good model of it.

I have no interest in defending the Econ 101 models as good models of more or less anything. (My favorite is the "labor/leisure choice" model of worker behavior, in which the worker gets paid by the hour and has total freedom to set the number of hours they work. Who the hell does that describe?) But if you want to criticize Econ 101 you should know what you're talking about.
1.26.2007 12:44pm
J. F. Thomas (mail):
You'll have to define what you mean by "equality of bargaining power", then. Econ 101 certainly doesn't assume (or, at least I hope it doesn't) both parties have equal leverage.

My point was, with an obviously over the top, hyperbolic and exaggerated example, that Econ 101 assumes a perfect market where all the players are on equal footing and have perfect knowledge. Sheesh, you people take things much too literally.

Econ 101 is an introductory course in economics and is meant to introduce basic concepts. You should never apply its concepts to the real world. That's why they don't hand out economics degrees just for passing Econ 101. Saying that the minimum wage is bad because Econ 101 says so is just a bad argument.
1.26.2007 12:46pm
J. F. Thomas (mail):
But if you want to criticize Econ 101 you should know what you're talking about.

I'm not criticizing Econ 101. I'm criticizing those who think the concepts learned in Econ 101 should the be all and end all of economic policy.
1.26.2007 12:50pm
Bob R (mail):
This discussion is shot through with so many basic errors in logic that the basic errors in economics are almost not noticeable. I'll take on the last attempt at comedy.
(1) Economic disparity is increasing in this country, which means the middle class is getting squeezed.
Why does disparity "squeeze" anyone? Are you arguing that the economy is a zero sum game? You can try to argue that that middle class is materially worse off than it was two decades ago (though you'd have a tough time doing that when the biggest problems facing the middle class are how to fight the obesity epidemic and where to put the flat screen TV) but I don't see how you are going to argue that their problems are caused by Bill Gates being too rich.

(2) A strong middle class and less wealth inequality is a societal good.
Less social inequality is a societal good. Less poverty is a societal good. Take care of those two and I don't give a fig about wealth inequality.

(3) Contrary to the famous line, greed is bad.
Envy is bad as well. Why do we have an entire political class that indulges in this vice and proclaim themselves virtuous?

(4) Corporations have too much power over our government, which means fewer and fewer people are advancing their interests over more and more of the citizenry.
Along with every other rent seeking special interest group. McCain and Feingold did a pretty good job on the speech part of the first amendment. Maybe they can take a crack at the right to petition.

(5) The minimum wage was substantially higher a few decades ago, and the U.S. economy is still the world's strongest.
I have no idea what you are trying to say here. It sounds like you are trying to argue for a minimum wage by saying that our economy is strong because our minimum wage is so low.
1.26.2007 12:53pm
Elliot Reed:
I'm not criticizing Econ 101. I'm criticizing those who think the concepts learned in Econ 101 should the be all and end all of economic policy.
They're not even that far. Usually the instructor gives a lecture about how efficiency isn't necessarily everything, you might trade off efficiency to get more equality, etc. But none of the people who think Econ 101 should be everything remember that lecture.
1.26.2007 12:53pm
d:

Econ 101 assumes a perfect market where all the players are on equal footing

No, it doesn't. At least, Econ 101 doesn't assume everyone has the same amount of ability to price their labor. Obviously, someone with a technical degree has a lot more leverage than someone who doesn't have any skills.

What exactly do you mean by "equal footing"?
1.26.2007 12:54pm
Elliot Reed:
I just want to reiterate my point: there's no assumption about "bargaining power" or any such thing in econ 101, because bargaining is too complicated for econ 101.
1.26.2007 12:55pm
liberty (mail) (www):
So, arguments AGAINST minimum wage laws are simply arguments for a maximally efficient system, with no protection for the worker (120 hours in the coal mine, no health requirements, no retirement, no employer protection laws from sexual harassment, no fair labor laws, etc). - sk

Except that without minimum wage and work laws, we don't see 120 hours in the coal mine (or at least we only see a very limited set of industries that have such harsh conditions and they tend to pay well for the level of skill or only hire illegal immigrants). Why? Because in an efficient economy we have high productivity and very robust competition; and with high productivity and output and high employment, competition forces wages (and work conditions) up. In order for employers to fill their positions, they must offer a good deal to workers.

So, we need not settle on something in-the-middle. We can let the market set the wages and working conditions, and allow it to be efficient. The government need not play any role.
1.26.2007 12:57pm
Don't bother me with facts:
Amen to Sk, and to the fact that, um, maybe we should look a little bit to empirics here...

Also, has anyone responded to Steve's point about the failure of minimum wage opponents to consider the stimulating effect of a subsidy at the bottom? That seemed important, yet has been completely ignored by all the confident posters here. Maybe I just missed that response.
1.26.2007 1:02pm
A.C.:
This whole debate is beside the point in many areas of the country -- starting wages are already well above minimum in booming areas with lots of employers. Employees can't bargain with Wal-Mart as such, but they can work somewhere else that pays somewhat more. Employers end up competing with each other for workers, the same way they compete against each other for real estate, and so the price goes up. The proposed increase would have very little effect in such areas, except perhaps for a few VERY marginal employees. A much bigger increase could cause problems, as some people have noticed, but the one that's on the table can probably be absorbed.

But what about those remote parts of the country where Wal-Mart gets thousands of applications? Can we say the same there? Maybe stores in remote areas don't get the kind of traffic that allows higher wages. On the other hand, that means the employees in those stores are probably doing a lot less work per hour. Stores can compensate by having fewer people on shift, of course, but odds are they will still have enough different jobs, located in different parts of the store, that no employee is working at the kind of intensity people have to use in busier markets.

SHOULD employees in the two locations earn the same? It doesn't make sense to me, because all the cost falls in the place that has the fewest economic options in the first place. Maybe only a few people actually get fired in such places, but others could end up working shorter hours. Some businesses might close entirely, and others might have to close a lot earlier in the evening.

Ultimately, there have to be more economic options in some of these places. Or people have to leave them for other parts of the country. The latter happens all the time, but I would like to see some efforts to encourage more businesses to locate in rural America. It might be a viable alternative to moving businesses overseas.
1.26.2007 1:11pm
liberty (mail) (www):
"Also, has anyone responded to Steve's point about the failure of minimum wage opponents to consider the stimulating effect of a subsidy at the bottom?"

A decent model or empirical analysis should be able to capture any stimulating effect of the higher income of those who are paid more, but would also capture the lack of income for those laid off, the lower income for those with reduced hours, the higher cost of living due to inflationary effect, etc etc.
1.26.2007 1:12pm
liberty (mail) (www):
"This whole debate is beside the point in many areas of the country -- starting wages are already well above minimum in booming areas with lots of employers. Employees can't bargain with Wal-Mart as such, but they can work somewhere else that pays somewhat more."

Wal-Mart pays way more than minimum wage. They pay a starting unskilled salary of $9.50/hr on average, higher in higher cost cost areas. They tend to pay quite a bit more than small businesses in the same area.
1.26.2007 1:14pm
r78:

Some people, however, simply don't have the skills to get a $9.50/hour job. I'd rather that they be able to get a $6/hour job than be unemployed.

The $950 an hour jobs at In and Out (taking orders, putting them in a register, making hamburgers and french fries) are not any different than the $6/hour jobs at McDonalds.
1.26.2007 1:14pm
Bob R (mail):

The article points out that raising the minimum wage will hurt the working poor by making fast food more expensive.

1) Eating fast food on a regular basis isn't good for you.

2) People who earn the minimum wage can't afford to eat fast food, except for the occassional special occasion.

Do you people pay any attention to the poor?

I actually pay a fair amount of attention to the poor. Do you? You claim they don't patronize fast food joints very often. What businesses do they patronize? What wages do those businesses pay? The current minimum wage is so low that few businesses around here pay it. But its pretty common among businesses that cater to the working poor. Becker and Posner are right that the poor would feel the brunt of the effect both on their pocketbooks and on the businesses they patronize. I'm willing to listen to any rational argument that the gains by those whose wages were raised would offset the negative effects caused by losses of jobs and loss of businesses in poor areas. But most of the attacks are ad hominem.
1.26.2007 1:17pm
Jonathan H. Adler (mail) (www):
I agree with those commentators who argue that it is important to consider the available empirical evidence. The bulk of this evidence shows, however, that the minimum wage generally has those effects that economic theory would predict (although the effects are often quite small). Among other things, increasing the minimum wage increases wages for some low-wage workers, while reducing low-wage employment. More importantly, the evidence shows that insofar as the minium wage redistributes wealth, it causes redistribution within the lower economic strata, and does not redistribute wealth from the wealthy or middle class to the poor.

A recent summary of the empirical evidence can be found on Greg Mankiw's blog here.

For summaries of other recent empirical work, see:
http://ideas.repec.org/a/oup/ecinqu/v40y2002i3p315-333.html
http://ideas.repec.org/p/fip/fedcwp/0412.html
http://www.nber.org/papers/w10656

I also discussed some of the evidence in this op-ed length piece on the proposed Ohio minimum wage hike here.

JHA
1.26.2007 1:20pm
Bret (mail):

The $950 an hour jobs at In and Out (taking orders, putting them in a register, making hamburgers and french fries) are not any different than the $6/hour jobs at McDonalds.


That's actually untrue. In N Out jobs require you to do a lot more in a short period of time. Since nothing is frozen everything has to be made by hand. Burgers have to actually be cooked on a grill, potatoes have to be sliced and fried, etc etc ... And In N Out establishments are generally busier than your average McDonald's. Go by an In N Out during the lunchtime or dinnertime rush and compare. In fact, the In N out next to my house limited employees to 4 hour work shifts because they were so intense.
1.26.2007 1:22pm
jt (mail):
(1) To the person who complained about his "friend", the small business owner, complaining about having to fire someone if they raise the minimum wage. I would argue that you are not taking into account the sheer difficulty of starting your own business. You may argue that business owners should always forego that lexus or country club membership in order to avoid firing someone.

Certainly you're not arguing that running a business and working at one (in this case, for minimum wage) are the same level of difficulty? I would argue that there are a great many small business owners out there, that, if forced to give up their lexus or country club membership to keep some staff around, might decide that the whole operation wasn't worth their time and just close up shop. It's much easier to work for someone else anyway.

(2) I have a couple of questions that I invite any pro-minimum wage advocate to address:

A. Do you dispute the fact that there are some people seeking jobs that are simply not worth the minimum wage?

B. If not, do you dispute the fact that the government cannot force a company to make a job available or hire someone for a position?

C. If not, would you dispute that if a worker provides $4/hour of benefit to a firm, that it would be against the company's interest to hire that person at $6/hour?

D. If not, would you dispute the fact that if the government can't force a company to hire someone, and the company cannot find someone worth hiring, then they won't hire anyone?

E. Finally, given that you have made it this far, how could you argue that raising the minimum wage could possibly help those who simply aren't worth minimum wage?
1.26.2007 1:22pm
Mark Field (mail):
I sure do love reading these religion threads.
1.26.2007 1:24pm
Bob R (mail):

How is the minimum wage, and arguments for and against it, different from any other legally required benefit?

Because the arguments against the minimum wage argue that it actually hurts the people it purports to help - in the very way it is supposed to be helping. (Unless, of course, the purpose of minimum wage laws is to make liberals feel good about themselves, or to convince the poor that it is in their interest to vote for the Democrats.) I don't know anyone who argues that OSHA laws cause more injuries. I don't know anyone who argues that family leave laws cause people to spend less time with sick relatives. But Becker and Posner are arguing that minimum wage laws make the working poor poorer.
1.26.2007 1:31pm
Ken Arromdee:
Fine. Raising the minimum wage means a company has greater costs, and economics dictates that the company has to cut costs somewhere--perhaps in some way which is disadvantageous to the workers.

But by how much?

All the theoretical arguments about the economic effects of raising the minimum wage don't exclude the possibility that the curve is relatively flat. Perhaps a company would be willing to hire a million workers at $6, and only willing to hire 999999 workers at $9.50. Perhaps the curve is so flat that it takes a much larger increase before even one worker will get fired.

So in the end, these theoretic arguments prove nothing useful unless you have some idea how large the effect of raising the minimum wage is, something which the theory won't tell you.
1.26.2007 1:34pm
J. F. Thomas (mail):
They pay a starting unskilled salary of $9.50/hr on average, higher in higher cost cost areas. They tend to pay quite a bit more than small businesses in the same area.

That is their average pay for associates, not starting pay.

there's no assumption about "bargaining power" or any such thing in econ 101, because bargaining is too complicated for econ 101.

Like I said, you took my example much too literally while overlooking the broader point--which you are actually making for me in this statement.

Except that without minimum wage and work laws, we don't see 120 hours in the coal mine (or at least we only see a very limited set of industries that have such harsh conditions and they tend to pay well for the level of skill or only hire illegal immigrants). Why? Because in an efficient economy we have high productivity and very robust competition; and with high productivity and output and high employment, competition forces wages (and work conditions) up.

Oh really, or is it because workers fought and often died to secure a right to decent working conditions and the right to organize? We were shocked last year when 50 coalminers died in this country while thousands die each year in China. Do you really think that it was competition alone that accounts for the safer mine conditions in this company. Because a little examination of labor history will clearly show you that the mine owners spent a hell of a lot of time, effort and money doing every thing they could to stymie efforts to institute safer working conditions and frustrate unionization, including hiring private armies to bust unions.
1.26.2007 1:35pm
msmith (mail):
1997-2000, after 1996 and 1997 min. wage increase,

About 2 million net new retail payrolls.

2001-present

(-118,000) net new retail payrolls. BLS numbers. Easily Googled.

Same time frames, 10.2 million payrolls vs. 3.7 million total payrolls. The idea that the Republicans delaying that minimum wage Senate bill is out of concern for anything but yet more business welfare is simply delusional.

And since we had a Nobel economist start off the thread, check out 2004 Nobel economist, ASU's Ed Prescott, Nobel prize paper on the "puzzling" way-above-trend labor "supply" 1996-2000. The paper is available on the web, a neoclassical economics "puzzle", says Prescott. Two economists, three opinions, as usual.

The whole thing is a joke, with the benefit that Americans can see the Republicans at work, Republicans who originally tried to tie the minimum wage increase to repeal of the estate tax profess their great concern for the minimum wagers and potential job losses. Surprising that trained lawyers, normally somewhat skeptical, so easily accept the "evidence" of economists, especially after the last six years. For real amusement see Bush's 2001 budget speech.
1.26.2007 1:38pm
Spartacus (www):
Raising the minimum wage will also increase hiring of illegal immigrants, so that employers can avoid paying the min. If we mandated and enforced min wages for illegals, then they (illegals) would cease to be such attractive employees for many employers. Similarly if we eliminated the min wage.
1.26.2007 1:46pm
Bob R (mail):
Hey, I've got an idea. Why doesn't the huge majority of economists who believe that minimum wage laws cause net harm to the working poor say that there is an "overwhelming scientific consensus" in favor of this argument. They can call any scientists who disagree with them "skeptics." Politicians who favor the minimum wage would be "anti-science." TV commentators with degrees in economics could propose that other commentator who publicly disagreed with the anti minimum wage consensus be stripped of professional credential....Naaah. That would never work.
1.26.2007 1:46pm
liberty (mail) (www):
"That is their average pay for associates, not starting pay."
True. Do you know their starting pay? Most associates don't stay at Wal-Mart long, and those who do move out of the associate position (become managers) within a few years or less. So, I don't think that they start very low or that it matters much if they do (considering you must get a raise pretty fast in order for them to achive that average associate pay).

They also provide non-trivial benefits.


"Do you really think that it was competition alone that accounts for the safer mine conditions in this company. Because a little examination of labor history will clearly show you that the mine owners spent a hell of a lot of time, effort and money doing every thing they could to stymie efforts to institute safer working conditions and frustrate unionization, including hiring private armies to bust unions."

Yes, I do. All that labor unions and laws can do is make short-term gains and tradeoffs. Only higher productivity can actually change the underlying situation and achive long-term real wage increases and real changes in working conditions. With our economy, no company could offer the wages or conditions you see in China - nobody would work for them, not even illegal Mexicans - because they could do better. And no number of laws and restrictions would make the wages and working conditions in China as good as what we have here - no company would choose to locate there, they could not be profitable.
1.26.2007 1:47pm
Angus:

Actually, I think you'd be hard-pressed to find a McDonalds that only pays minimum...


As an aside, the ones around my area (a college town) all start employees at $5.15/hr. The first raise opportunity comes at 3 months, when employees sometimes get raised to $5.50/hr, where they stay for a long time.
1.26.2007 1:53pm
sk (mail):
"How is the minimum wage, and arguments for and against it, different from any other legally required benefit?


Because the arguments against the minimum wage argue that it actually hurts the people it purports to help - in the very way it is supposed to be helping."

I don't buy it. Raising minimum wage has a certain cost to it (I agree). That cost will cause some businesses to not hire some people (I agree). Those people not hired will then be forced into unemployment or crime (I agree).

But logically, that should be true of EVERY additional cost to doing business. Obligatory retirement benefits (social security) have a certain cost, that will cause some businesses to not hire some people, who will then be forced into unemployment or crime. OSHA has costs (of enforcement, for purchasing additional, safer equipment, for inspections, etc), which will cause some businesses to not hire some people, who will then be forced into unemployment or crime. If any obligatory burden (unemployment insurance, OSHA, retirement benefits, minimum wage) can be quantified as to its cost (and in theory, they all could), then that cost could cause a reduction in employment (and thus, the forcing of some people into unemployment or crime). Sure, OSHA doesn't cause people to have more accidents, and social security doesn't cause more people to retire destitute, but they, and all other benefits, including the minimum wage, cost businesses money, and thus they all cause some people to be unemployed or become criminals (or, alternately, none of them do).

(2) I have a couple of questions (obviously, borrowed from a thread, above) that I invite any pro-worker safety regulation advocate to address (for this example, assume I'm speaking about laws against exposing workers to carcinogens in the workplace):

A. Do you dispute the fact that there are some people seeking jobs that are simply not worth the minimum wage+the costs of guaranteeing worker safety?

B. If not, do you dispute the fact that the government cannot force a company to make a job available or hire someone for a position?

C. If not, would you dispute that if a worker provides $4/hour of benefit to a firm, that it would be against the company's interest to hire that person at $4/hour+ the costs of maximizing worker safety?

D. If not, would you dispute the fact that if the government can't force a company to hire someone, and the company cannot find someone worth hiring, then they won't hire anyone?

E. Finally, given that you have made it this far, how could you argue that protecting worker safety could possibly help those who simply aren't worth minimum wage+the costs of guaranteeing worker safety?

Sk
1.26.2007 1:54pm
Jeff S.:
msmith:

If I'm looking at the same BLS stats you are, the increase 1997-2000 is 1,088,800 retail payroll jobs. Not that it matters. Are you saying that the number of those jobs increased during this period because of the '96 and '97 minimum wage hikes?
1.26.2007 2:02pm
msmith (mail):
What the heck, keeping in mind Mr. Prescott is very much of the of the low tax supply-sider persuasion.

Oct 1, 1996 $4.75 for all covered, nonexempt workers
Sep 1, 1997 $5.15 for all covered, nonexempt workers

And Mr. Prescott's great economic puzzle.

http://nobelprize.org/

Edward C. Prescott's
2004 Nobel Prize in Economic Sciences Address

C. A Business Cycle Puzzle
An economic boom in the United States began with an expansion relative to trend in early 1996 and continued to the fourth quarter of 1999. Then, a contraction set in and continued until the third quarter to 2001. At the peak, detrended GDP per working-age person was 4 percent above trend and labor supply 6 percent above average.

None of the obvious candidates for the high labor supply were operating.

There was no war with temporarily high public consumption that was debt financed;

tax rates were not low;

TFP measured in the standard way was not high relative to trend;

and there was no monetary surprise that would give rise to high labor supply. This is why I say this boom is a puzzle for the neoclassical growth model.

Why did people supply so much labor in this boom period?..


Mr. Prescott speculates something was not being measured correctly and that possibly accounts for the incredible boom, including for all types of jobs, post the 1996 and 1997 min. wage increases. Beware the economists, and really, if you want a good laugh, read Mr. Bush's budget speech from 2001, and the forecasts of his economists. Only off by about 6 trillion dollars, so far.
1.26.2007 2:02pm
Bruce Hayden (mail) (www):
Here are what I see as possibilities for a business paying the minimum wage and having it raised on them:
1. They can lay off those workers whose marginal utility is below the new minimum wage. The result is fewer low end workers working.
2. They can keep prices the same and absorb the price increase of their labor. However, this means a reduction in profits, and, thus, incentive to run the business, etc. As a result, it also results in fewer low end workers.
3. They can push up their prices to cover their increased labor costs. But this only works if everyone does the same, and even then, supply/demand would result in lower sales. If some competitors don't do the same, this would result in somewhat lowered sales.

Nevertheless, this later is the scenerio that seems to be used most often by those supporting minimum wage increases. The problem though is that those price increases are paid for by someone. Posters above tried to neatly get around this problem by supposing that those benefitting from the wage increases are more efficient at turning over their paychecks and thus more efficient users of capital.

But why should that be? After all, if those paying the wage increases through higher prices were middle class, the excess they didn't spend would be invested - in more businesses, etc. Indeed, we get into the negative economic affects of progressive taxation here - it is justified on very similar grounds, and it too doesn't work that way.

Besides, why wouldn't the lower classes be paying for the minimum wage goods and services? I sure see a lot of poor people in fast food joints, and they usually pay more than the minimum wage.
1.26.2007 2:03pm
J. F. Thomas (mail):
That's actually untrue. In N Out jobs require you to do a lot more in a short period of time.

Oh, now high wages are bad for employees and bad for business. You've turned my counter-example on its head. In-N-Out employees have to work harder than their compatriots over at Burger King or McDonald's. And what's more, because they work harder and deliver a superior product, their restaurants are busier, leading to an even more hectic work schedule! That's no way to run a business--or something like that. Yet the employees still refuse to quit their jobs and appear to be a lot happier than your average McDonald's employee.

Man, this econ 101 stuff is getting really complicated.
1.26.2007 2:04pm
DiverDan (mail):
OK, so Steve is right about my 85% number IF one assumes that the Heritage Foundation numbers are accurate. However, the Heritage Foundation tables were derived from statistics compiled by the Bureau of Labor Statistics, which can be found here -- www.bls.gov/cps/minwage2005.htm -- and there are several problems with those statistics. The biggest problem is that these statistics include ONLY payroll income, and include all persons on payrolls at $5.15 and UNDER - thus including all persons subject to an exemption from Minimum Wage (approximately 1.4 million of the 1.9 million total cited in the Heritage Foundation statistics). Now approximately 75% of minimum wage earners are in the Service industries, and the largest partion are in the food service and hospitality industry, which can claim an exemption for service workers who can expect that gratuities will bring their wages over the federal minimum wage. Thus, the BLS statistics include not only those flipping burgers at McDonalds and Burger King for $5.15 per hour, but also the Waitresses at Las Vegas Casinos, New York Restaurants, and Miami Resorts who are paid a wage below $5.00 per hour, but might bring home $40,000 a year or more in tips. All that aside, even if you accept the BLS Statistics and the Heritage Foundation analysis, 53% of minimum wage earners are 24 or less, 2/3 are part time workers, only 19.5 % are at or below the poverty line (counting ONLY wage income, of course, so this number includes those Las Vegas Casino waitresses bringing home $40K or more a year in tips), and the average household income for all is nearly $50K a year - about $15K a year better than the household whose sole earner is a public school teacher. None of this undercuts my conclusion, which is the same conclusion reached by the Heritage Foundation -- higher minimum wages do nothing to reduce the poverty rate.
1.26.2007 2:06pm
logicnazi (mail) (www):
You know it's not at all clear that encouraging capital investment is a bad effect, even for the poor. I think there is a good argument that many buisnesses are too slow to mechanize and replace old ways of doing things with machines. If the minimum wage encourages this sort of mechanization, and thus increases in productivity, it may even help the poor in the long run.

Still this isn't the sort of thing one can just figure out a priori.
1.26.2007 2:10pm
jt (mail):
Sure, i'll bite:

(2) I have a couple of questions (obviously, borrowed from a thread, above) that I invite any pro-worker safety regulation advocate to address (for this example, assume I'm speaking about laws against exposing workers to carcinogens in the workplace):

A. Do you dispute the fact that there are some people seeking jobs that are simply not worth the minimum wage+the costs of guaranteeing worker safety?

I don't dispute that.

B. If not, do you dispute the fact that the government cannot force a company to make a job available or hire someone for a position?

I don't dispute that.

C. If not, would you dispute that if a worker provides $4/hour of benefit to a firm, that it would be against the company's interest to hire that person at $4/hour+ the costs of maximizing worker safety?

I don't dispute that.

D. If not, would you dispute the fact that if the government can't force a company to hire someone, and the company cannot find someone worth hiring, then they won't hire anyone?

I don't dispute that.

E. Finally, given that you have made it this far, how could you argue that protecting worker safety could possibly help those who simply aren't worth minimum wage+the costs of guaranteeing worker safety?

This is where your cute imitation of my argument breaks down. I'm not arguing that. And if you had read what you wrote, you would realize how absurd it sounds.

Protecting worker safety couldn't possibly help those who aren't worth hiring because they won't have a job. Further, I would even argue that an unsafe job is better than none at all, but that's just me.
1.26.2007 2:12pm
Angus:

Yes, I do. All that labor unions and laws can do is make short-term gains and tradeoffs. Only higher productivity can actually change the underlying situation and achive long-term real wage increases and real changes in working conditions.


Except that historically, it was the involvement of government that finally ended the bloodbath in American workplaces in the late 19th and early 20th centuries.
1.26.2007 2:13pm
J. F. Thomas (mail):
Here are what I see as possibilities for a business paying the minimum wage and having it raised on them

Why is 3) the most likely result, especially under the current economic conditions. The right is constantly touting the wonderful economy and pointing to the record corporate profits over the last few years. Data also indicates that wage growth has been incredibly flat in relation to profits. Rather than automatically assuming that an increase in the minimum wage would cause an increase in prices, why not assume that there is sufficient fat in corporate profits that corporations would be willing to take a little hit on their bottom lines. Certainly CEOs could live with a million or two dollars less a year. It's not like deferring a new Italian-built yacht, buying their daughter a Ferrari instead of a Lambhorghini for her sixteenth birthday, or a few pounds of Beluga caviar is going to hurt the U.S. economy.
1.26.2007 2:14pm
Jeff S.:
msmith:

What the heck indeed. If smart guys like you and Mr. Prescott can only posit the question, not answer it, then of course the appropriate response is to throw in some gratuitous, smug non-sequiturs about Republicans and Bush.
1.26.2007 2:16pm
Spartacus (www):
InNOut, union busting: What ever happened to good old fashioned libertarianism? Of course employers should not be allowed to use force to bust unions, any more than unions shoudl be allowed to use force to bust "scabs." Laborers should be free to unionsize, and emplyeres should be free to fire them. In N Out should be free to offer high wages, and Wal Mart should be free to offer low ones. In N Out and union busting have nothing to do with why min wage laws wrong--they are coercive, and invoke force to protect one persons benefit at the expense of another.
1.26.2007 2:17pm
Bruce Hayden (mail) (www):
Another falacy that we so often see about the minimum wage is that it is not a living wage. Well, maybe not. But few are trying to live on it. The vast majority of those earning the minimum wage are either just entering the job market (and most often still living at home, etc.), and/or are recent immigrants (esp. illegal immigrants by one estimation making up approximately 1/4 of those earning the minimum wage).

I will admit earning the minimum wage at one point in life - when I was 16. By the time I was 17, I had a "union" summer job that paid a couple dollars above that. And that is where I pretty much stood, a couple dollars above the minimum wage until I settled down a couple years after my undergraduate degree. But note that even when I was unskilled and hadn't graduated from high school yet, I was earning above the MW.

People may start their work lives at the minimum wage. But the vast majority of them, even in burger flipping jobs, shortly move above that. And, realistically, most leave those buger flipping jobs ultimately for slightly higher paying jobs. For example, I often eat at Burger King, and have watched a succession of employees move to the neighboring Safeway. And, some of those that Safeway has picked up over the years are borderline retarded (or whatever the current politically correct term is these days). And yet they were earning probably twice the minimum wage before it was raised in this state this year.

So, if you are pushing the minimum wage increase based on a livable wage, then please give me verifiable figures as to what percentage of those who would supposedly benefit are the primary breadwinner in a multi-person household and are doing so legally. All the figures I have seen indicate that this number is miniscule in comparison with all the young singles not living alone and illegal aliens working at that wage.
1.26.2007 2:17pm
J. F. Thomas (mail):
Further, I would even argue that an unsafe job is better than none at all, but that's just me.

Are you seriously contending that worker safety laws are somehow counterproductive?
1.26.2007 2:19pm
J. F. Thomas (mail):
Yes, I do. All that labor unions and laws can do is make short-term gains and tradeoffs.

Then you are shockingly ignorant about the history of organized labor and the role it played in the getting safety and labor standards (e.g., overtime, minimum wage, worker's comp) laws implemented in this and other countries.
1.26.2007 2:26pm
Bob R (mail):

....But logically, that should be true of EVERY additional cost to doing business.

O.K., I agree with that. Then the difference is that with the minimum wage the costs and benefits of the regulation are more directly comparable, so the calculations of economists have less uncertainty. We don't have to trust them to put a price on an injury or an intangible benefit like the security of knowing my parents will have a pension.

So it's not that the arguments are different in kind. It's that a different calculation provides a different answer. A minimum wage very probably does more harm than good. OSHA laws probably do more good than harm. I'm simply more confident about the calculations that lead to the conclusion about the minimum wage.
1.26.2007 2:27pm
Steve:
For those who view it as some sort of revelation that most minimum wage jobs are part-time and/or transitory, here's the little secret of which you're not aware. The reason why this is true is that the vast majority of full-time, long-term positions at this level of the economy are unionized (or at least have their wages set by reference to union wages elsewhere). If people who argue against the minimum wage were simultaneously in favor of broader unionization, I could probably get behind that, because I'm a fan of market solutions. Politically, though, those two viewpoints never seem to go together.

In effect, what we do with the minimum wage is we take a broad class of jobs that are not readily susceptible to unionization (because, for example, it's hard to organize people who only stay in their jobs for a few months), and award them a pay benefit along the lines of what an actual union would negotiate for them. It's kludgy, and I make no bones about that fact, but in large part it really just fills an unavoidable hole in the collective bargaining model.
1.26.2007 2:29pm
Bruce Hayden (mail) (www):
Why is 3) the most likely result, especially under the current economic conditions. The right is constantly touting the wonderful economy and pointing to the record corporate profits over the last few years. Data also indicates that wage growth has been incredibly flat in relation to profits. Rather than automatically assuming that an increase in the minimum wage would cause an increase in prices, why not assume that there is sufficient fat in corporate profits that corporations would be willing to take a little hit on their bottom lines. Certainly CEOs could live with a million or two dollars less a year. It's not like deferring a new Italian-built yacht, buying their daughter a Ferrari instead of a Lambhorghini for her sixteenth birthday, or a few pounds of Beluga caviar is going to hurt the U.S. economy.
Because those aren't the companies paying minimum wage. You are presupposing that "corporations" (and employers) are a homogeneous grouping. They aren't. Microsoft, Intel, IBM, GM, GE, etc. typically don't just pay minimum wage to any of their employees. The small car wash down at the corner does - but its owner isn't making those obscene profits that the big boys are.

What must be remembered is that most of the employers paying the minimum wage are marginal. If they weren't, they would have grown large enough that they could and would pay above minimum wage in order to attract better employees.

The other thing that you seem to be ignoring is that corporate profits are how a corporation attracts financing. No profits = noone investing, and noone investing = no growth. It is also those profits that allow for expansion, which translates into more jobs. Without profits, companies can't buy the buildings and equipment, and hire the employees, they need to grow.
1.26.2007 2:30pm
Jeff S.:
J. F. Thomas,
you wrote: "...why not assume that there is sufficient fat in corporate profits that corporations would be willing to take a little hit on their bottom lines".

Why not just limit corporate profits to a certain amount and mandate that anything above that amount be distributed back to the wages of the workers, especially the poor ones? Face it, corporate executives are innately evil and rapacious and the mandate will level the playing field. I'd go even further. Take Exxon-Mobil's excess profits and distribute them into a fund to supplement the wages of the poor regardless of where they work.

In the years in which the greed of corporate executives is so great that it impairs their business judgment and the corporations lose money, make the executives disgorge previous years' salaries and bonuses to the workers.

This system could easily be implemented by smart and caring government workers.
1.26.2007 2:31pm
J. F. Thomas (mail):
Laborers should be free to unionsize, and emplyeres should be free to fire them.

Why should a labor contract be treated differently than any other contract? An employer should be no more free to fire his employees for unionizing than you should be able to fire a housepainter you contracted to paint your house if you found out that he used union labor.
1.26.2007 2:31pm
J. F. Thomas (mail):
Why not just limit corporate profits to a certain amount and mandate that anything above that amount be distributed back to the wages of the workers, especially the poor ones?

Sounds good to me.
1.26.2007 2:33pm
Centrist:
It's not surprising that Mankiw would link to evidence that supports the thesis that the best way to improve the lot of low wage-earners is to increase the wealth of the rich, rather than to increase their incomes directly. There are plenty of other economists on the other side of the ideological spectrum who challenge those findings.

As someone insightful once said, "Statistics and numbers are just like prisoners -- if you torture them enough, they'll tell you whatever story you want to hear."
1.26.2007 2:34pm
Truth Seeker:
In fact, the In N out next to my house limited employees to 4 hour work shifts because they were so intense.

Ahhhh! So, In N Out pays workers 4 hours at $9.50 ($38.00 a day) instead of 8 hours at $5.15 (41.20 a day)! They only need the employees during the busy lunch and dinner hours anyway. And they get unlimited free publicity for being so generous and socially reposnsible!

BRILLIANT!!! Absolutely brilliant way to pay less in wages and look good and get rich. Greed is even better when no one notices!
1.26.2007 2:34pm
liberty (mail) (www):
"Except that historically, it was the involvement of government that finally ended the bloodbath in American workplaces in the late 19th and early 20th centuries."

Which "bloodbath" would that be? And lets see some evidence that it wasn't productivity and gradual change over time. And try to dispute what I actually said rather than just making a broad claim about history supporting you.

Similarly, J. F. Thomas, rather than calling me ignorant, why not dispute my claims and provide evidence that the role of unions was not just a push for an immediate change that could only affect short term conditions, and that productivity was not the major mover of wages and conditions. What is your economic evidence that laws can replace output as a long term solution to low wages? Where is your empirical evidence that if laws allowed 12 hour work days that most Americans would work that long for a minimum wage (although there are many exempt industries where that is allowed, and yet Americans don't). And where is your support that if those laws were changed in China that workers there would suddenly be treated like workers here (although there are some laws and in fact workers are flocking to black market jobs where the laws don't apply)?
1.26.2007 2:41pm
Steve:
BRILLIANT!!! Absolutely brilliant way to pay less in wages and look good and get rich. Greed is even better when no one notices!

For the record, I'd be thrilled to have my pay cut by 10% if my workday got cut in half, as would every other worker in America. You really seem to think you're on to something, though.
1.26.2007 2:42pm
jt (mail):
Further, I would even argue that an unsafe job is better than none at all, but that's just me.

Are you seriously contending that worker safety laws are somehow counterproductive?


My argument is limited to the assertion that worker safety laws hurt some people by making it more expensive to hire them than they are worth. As a result, those people have no job. And in my opinion, an unsafe job is better than none at all.

So yes, I would argue, in some circumstances, worker safety laws are counterproductive.
1.26.2007 2:42pm
J. F. Thomas (mail):
Microsoft, Intel, IBM, GM, GE, etc. typically don't just pay minimum wage to any of their employees.

Well no, a lot of them pay their employees (or contracted employees) sub-minimum wages by shifting manufacturing and even high level technical work overseas. While we may be talking about the mom and pop car wash, we are also talking about the McDonald's, Burger Kings, WalMarts, and other large retailers and chain restaurants of the world. And last I checked, many of them were making money hand over fist and would comfortably fit into the scenario I described.
1.26.2007 2:43pm
liberty (mail) (www):
"The reason why this is true is that the vast majority of full-time, long-term positions at this level of the economy are unionized (or at least have their wages set by reference to union wages elsewhere).'

Fewer than 15% of American jobs are unionized and the reason that minimum wage jobs are transitory is because most employers quickly give those people a raise -- because the minimum wage is way below equilibrium for most every job, including non-skilled work. Nobody at that entry-level should unionize because its not good for them -- its much better to be able to negotiate one-on-one.

I also don't know what you mean by supporting unionization - that is not a political issue, it is decided company-by-company and worker-by-worker. I don't want to join a union, but you can.
1.26.2007 2:45pm
A. Zarkov (mail):
J. F. Thomas:

"I hear the Beckners and Posners and oh-so-wise economists of the world deride the minimum wage and tell us how companies just can't afford to pay more than the minimum wage, …"

If we look a little closer at a company like McDonald's Corporation, we will be the increase in minimum is significant for them.

MCDonald's is a publicly traded company with ticker symbol MCD. From either Yahoo or Google you can learn that MCD has 447,000 employees and has annual pretax income for the year 2005 of $3.70160 billion (from the income statement). That works out to $8,281 per employee. I'm going to use 2,300 hours as a working year for MCD employees. That means an average wage increase of $3.36 per hour wipes out all of MCD's pretax income, remembering that MCD has to pay about 7% FICA tax on the increase. According to Yahoo finance (Google doesn't give this for some reason) MCD has a return on assets of 9.8%. Actually the right number to use is return on tangible capital, but we'll use ROA as a crude guideline.

I don't know the average wage for MCD employees, but let's say they pay about $5.50 per hour on average. That means an increase in the minimum wage to $7.25 would increase MCD's labor cost by $1.87 per hour (remember that FICA). That's 56% of MCD's pretax income, which reduces their ROA to 4.3% per year—less than the current risk free return of about 5.5%. I suspect the return on tangible assets would be even lower. Therefore unless MCD can raise prices they will not deploy additional capital opening new restaurants because they could do much better simply buying T-Bills. Now lots of businesses operate with a ROA less than the risk free rate, but they at least have a potential to increase revenues sometime in the future. MCS is never going to come up with a "breakthrough burger." They don't have long-term viability as a business unless they have a return on capital in excess of the risk free rate.

Now In-And-Out is not a publicly traded corporation so we don't have any reliable information on their finances. Nevertheless I find it hard to believe that they produce a better product at the same price while paying their employees much more. Why don't they put McDonald's out of business? They will certainly be able to do that if the minimum wage goes up to $7.25.
1.26.2007 2:47pm
liberty (mail) (www):
"Why should a labor contract be treated differently than any other contract? An employer should be no more free to fire his employees for unionizing than you should be able to fire a housepainter you contracted to paint your house if you found out that he used union labor."

... which I can do if the contract says I can fire at-will.

At-will employment is part of a free economy. If you sign a contract that says you can't quit and they can't fire you, then they can't fire you for unionizing. Good, enjoy. If you sign an at-will contract, then they can fire you and you can quit. Good, enjoy. If I hire a contractor to paint my house and the contract says I can fire him in the middle (and presumably pay for what he'd done) then I can fire him for whatever reason (including that he hired union labor if I thought that it was inefficient, etc).

I would not want to run a company where I could not fire my employees easily. Nor does anyone else, thats why business sucks in France.
1.26.2007 2:49pm
Bob R (mail):
J.F. Thomas-
If you don't know what the word "counterexample" means, you are best advised not to use it around a lot of people who do. A counterexample proves a logical implication false by showing an example of a situation where the hypothesis of the implication is true and the conclusion is false. In N Out is an example of a successful fast food restaurant that pays high wages. Where does Posner or anyone else say that such a thing is impossible? How does the success of In N Out prove that people at McDonald's (or a million Mon and Pop stores that pay minimum wage) won't lose their jobs if the minimum wage is increased? Do you seriously want to argue that from its investors standpoint In N Out is less efficient than fast food joints paying the minimum wage? That it is pouring more money out in wages for every hamburger they serve?
1.26.2007 2:51pm
J. F. Thomas (mail):
I'm going to use 2,300 hours as a working year for MCD employees.

Right there you are seriously off track, since the vast majority of MCD employees are part-timers. You would have to find the number of FTEs to get a reasonable estimate of cost per employee.
1.26.2007 2:51pm
Jeff S.:
JF Thomas,

Since you brought up the ultra-trite example of the "mom and pop car wash" (at least this time it wasn't the food bank or the soup kitchen), I want to make sure that you are not in favor (as you are with the greedy corporations) of limiting its profits to a certain level. I know I'm not. The owners of the mom and pop car wash by me are just scraping by.
1.26.2007 2:52pm
Steve:
I also don't know what you mean by supporting unionization - that is not a political issue, it is decided company-by-company and worker-by-worker.

"Supporting unionization" means government endorsement of the right of collective bargaining, something you are clearly against. If precluding employers from firing employees who organize means a languid economy, you have to square that with the fact that in reality America's economy leads the world.
1.26.2007 2:56pm
Jeff S.:
A. Zarkov,

All your calculations of Mcdonald's finances for 2005 don't matter to JF Thomas, except one: $3.70160 billion in pretax earnings. That's way too much. I was going to say McD's should be allowed $1B, but reconsidered after realizing that's an obscene amount of money, evidence of "hand over fist" profits. Give me a reason why $25 million isn't plenty. Do you know how many lifetimes a minimum wage earner would have to work to make that much money?
1.26.2007 2:59pm
J. F. Thomas (mail):
Since you brought up the ultra-trite example of the "mom and pop car wash"

I didn't, Bruce Hayden did. And figure the second part out by yourself.

In N Out is an example of a successful fast food restaurant that pays high wages. Where does Posner or anyone else say that such a thing is impossible?

Well gee, I don't know. By saying this?

An increase in the minimum wage raises the costs of fast foods and other goods produced with large inputs of unskilled labor.


The example of In-N-Out proves that a business can successfully compete and thrive in the ultra-competitive fast food industry while paying much higher than market wages, providing a counterexample to Posner's assertion (that a raise in the minimum wage to $2.25--and not even immediately--less than what In-N-Out is already paying would necessarily raise the cost of fast food). I would say my example is a classic "counterexample."
1.26.2007 3:09pm
liberty (mail) (www):
"Supporting unionization" means government endorsement of the right of collective bargaining, something you are clearly against.

No, I am in favor of right to organize and collectively bargain, and right (it being legal) is government "endorsement" => they don't make it illegal.

If precluding employers from firing employees who organize means a languid economy, you have to square that with the fact that in reality America's economy leads the world.

And most employers can fire workers who organize. People hate that - for example that Wal-Mart won't hire union workers. But its legal. Its illegal in Sweden - compare the difference in economic productivity.
1.26.2007 3:13pm
David Chesler (mail) (www):
I'd like to hear the free-market answer to the race-to-the-bottom objection.

I tend to be free-market and against the minimum wage and other such restrictions. I believe that the vast majority of the people who are not earning a living wage are also not trying to live on that wage (e.g. teenagers) although I have heard from a retired employee of an old-line New York business information company that "We had employees whose pay went up whenever they raised the minimum wage!"

Towards the end of Econ 101 they teach about substitute goods.

Suppose there are two and only two non-franchise burger joints in town. The cost of any other lunch, or the cost of driving to another burger joint, means the competition is pretty much between the two. The owner of the Chum Bucket says "If I raise my prices to be more than those at the Krusty Krab, the demand elasticity will mean that my profits will drop considerably when so many of my customers switch to the Krusty Krab. I operate on a low margin already, so I can't afford to raise my employees' wages or spend money on workplace improvements and still stay in business. If I could collude with Mr. Krabs and we both agreed to raise the wages we pay and otherwise be nicer to our employees, we could both raise our prices and the balance of power would be maintained. I want the minimum wage to be increased so that my competitor will be forced to raise his prices, which will allow me to raise my prices, which will allow me to pay my employees more. Otherwise I have to pay my employees less. They still choose to work here because nobody else will pay them more."

How isn't a rise in the minimum wage a win for everybody (except for the consumers, some of whose consumer surplus is lost when the price of burgers go up)?

The same can be said of safety measures, Saturday (or even Sunday) closings, and so forth. Generally collusion and cartel-making is bad (because oligopolies charge the consumer more for the same goods or give him fewer goods for the same price) but a 40-hour work week and so forth are generally considered good things. (And they may have positive externalities -- it is good to be brought up in a family where the parents have the weekend off, etc.)

The same race-to-the-bottom argument has been made about two-earner households (which also goes to the middle class squeeze meme.) In that situation it goes "It used to be that only the men worked, and they earned enough to support the family. Then women entered the workforce in large numbers, but they were willing to work for less, and this drove wages down, to the point that a family has to have both parents working in order to have it as good as a single-wage-earner family had it before two-income families were so commonplace."
1.26.2007 3:14pm
J. F. Thomas (mail):
If I hire a contractor to paint my house and the contract says I can fire him in the middle (and presumably pay for what he'd done) then I can fire him for whatever reason (including that he hired union labor if I thought that it was inefficient, etc).

Yeah, try that next time you hire a contractor. Tell him you want an at-will contract and want the right to fire him at any time during the job for any reason or no reason at all. See how far you get.

The contract simply won't say that.
1.26.2007 3:15pm
Bpbatista (mail):
Here in Ohio there is already anectodotal evidence that the state's recently increased minimum wage is resulting in layoffs and/or reduced hours for minimum wage workers. Unless Congress also repeals the law of supply and demand, raising the minimum wage will cost jobs. The only question is how many. A 40% rise would suggest a significant increase.
1.26.2007 3:17pm
Bpbatista (mail):
Here in Ohio there is already anectodotal evidence that the state's recently increased minimum wage is resulting in layoffs and/or reduced hours for minimum wage workers. Unless Congress also repeals the law of supply and demand, raising the minimum wage will cost jobs. The only question is how many. A 40% rise would suggest a significant increase.
1.26.2007 3:17pm
Jeff S.:
"Yeah, try that next time you hire a contractor. Tell him you want an at-will contract and want the right to fire him at any time during the job for any reason or no reason at all. See how far you get."

"The contract simply won't say that".

JF, this is the business I'm in and such contracts with contractors are very common. Far and away the majority of them have such a clause.
1.26.2007 3:30pm
Truth Seeker:
For the record, I'd be thrilled to have my pay cut by 10% if my workday got cut in half, as would every other worker in America. You really seem to think you're on to something, though.

Oh sure, you, most likely middle or upper class, could take that 4 hours and read Chaucer, take a class in transgender studies, picket a nonunion shop, or even play video games. But a bona fide poor person would be stuck with 4 hours in which to spend money he doesn't have, probably on cigarettes, lottery tickets, and possibly liquor since we are told the 4 hours was intensive work. (yeah I know these are stereotypes, but all stereotypes are based on truth and are only offensive to the minority that don't fit the stereotype.)
1.26.2007 3:34pm
Dick Schweitzer (mail):
It is politically unpalatable, but "wages," the exchanges of "services for services" (per Bastiat), are "prices."
Prices are the signaling systems for the such exchanges, freely conducted and arranged - essential in a free economy and for a free society. To disrupt the signalling system, by political action, goes way beyond "economic" effects that seem to concern all here. Wage &Price Controls? No! Why not? Why then wage controls - which is what minimum wages are.
1.26.2007 3:34pm
tsotha:
How many businesses really pay minimum wage? As an employer where I live if you don't offer at least $8.50/hr or so nobody will swing by your business to pick up an application. Evenn in relatively poor rural areas I think the market-set minimum is really around $7.50.

Seems like the proposed increase is really more of a political gesture than anything else. It won't have much affect on either unemployment or the people at the bottom.
1.26.2007 3:34pm
mkellerm (mail):

A recent summary of the empirical evidence can be found on Greg Mankiw's blog here.


Well, if we are looking at economists blogging about the empirical evidence, we might as well look at DeLong's take here. And are there any citations to recent work on which David Neumark is not a co-author?
1.26.2007 3:39pm
Jim Copland (www):
There is so much silliness and economic illiteracy on this board that it's probably foolish to reply. But the repeated use of the In-N-Out burger example is mind-boggling. In-N-Out burger was founded in 1948, just 8 years after McDonald's. It has a bit over 200 stores, versus over 31,000 for McDonald's. Is it profitable for the owners? I'd guess so. But they haven't been able to grow the business even close to as fast as McDonald's. They don't franchise stores, for one thing, whereas a McDonald's franchise costs upwards of $200,000 for the franchisee.

These are very different business models, but one thing is clear: the McDonalds model is a high-growth model, drawing financing for the creation of over 31,000 restaurants and hundreds of thousands of jobs over 60-odd years; whereas In-N-Out's business model hasn't come close to offering that growth potential over virtually the same time span. Don't the facts actually make this example support, rather than undercut, Posner and Becker's argument? If we mandate that only the In-N-Out and not the McDonald's model can exist, we certainly aren't doing those whose best work opportunities lie at McDonald's any favors.
1.26.2007 3:46pm
liberty (mail) (www):
"How isn't a rise in the minimum wage a win for everybody" - DC

Firms pay as little as they can based on competition and chanrge a price as low as they can based on competiton. But the pressure goes into related industries, especially on the labor side. This means both that workers can find work in other non-skilled industries, and that a minimum wage will affect industries that don't (like those two burger guys) have such easy ability to raise prices and still compete-- remember that different sizes and kinds of firms have different costs. So, a minimum wage is acapble of putting out of biz the little guys, while big guys can eat the costs in one area and cut hours and workers in another, etc. It would end up helping some workers, hurting others who lose their job, and putting small firms out of biz.

So, even if in your example the min wage would have been fine for those two, it would not be nec and it could hurt a lot of people if it affected more than those two firms.

J. F. Thomas,

I'm not sure how most short term contracts are written, but any contract that lasts a year or more is often written so that if known variables change, there is a way out for either party. Rental contracts, employment contracts, supply contracts, etc each have an at-will component or a loophole or out for either party in case price or circumstance changes. You may have to pay a penalty (like with renting) but you can get out.

If a supplier changes the ingredients in the product, that provides a loophole for the buyer to get out of the contract. If the contractor or employee changes his circumstance (by hiring union labor or by reducing the quality of his work) or the industry changes, there needs to be an out for the employer, just as if the job environement changes, or the workers personal circumstance changes, he can quit.
1.26.2007 3:48pm
Bob R (mail):
Oh, I see. The counterexample was to the price argument. I can't wait to come out west to get one of those In N Out double cheeseburgers from their dollar menu. But I guess I can't. In N Out competes at the "premium" level - more expensive, not with the low price menu. They provide fewer services (no sit down). This is exactly what Becker and Posner are warning against - not a counter example to their warning. "Let them eat In N Out." Nice going Marie.
1.26.2007 3:49pm
Steve:
And most employers can fire workers who organize. People hate that - for example that Wal-Mart won't hire union workers. But its legal.

You seem to be of the belief that we actually reside in your libertarian fantasyland. In reality, firing workers for engaging in union activities has been illegal in this country since 1935.
1.26.2007 3:53pm
Angus:

Which "bloodbath" would that be? And lets see some evidence that it wasn't productivity and gradual change over time. And try to dispute what I actually said rather than just making a broad claim about history supporting you.


According to some sources, from 1880-1900, there were an average of 35,000 workers killed per year on the job in the U.S. due to unsafe working conditions.

Here is an article about the government effort to change that:
Link

In short, the fatality rate was high because of productivity gains. Companies introduced new machines, but without much liability for worker injuries, and absent any legal requirements for work conditions, businesses found it more cost effective to replace killed and injured employees with fresh healthy ones rather than try to prevent accidents in the first place.
1.26.2007 3:57pm
A. Zarkov (mail):
J. F. Thomas:

"Right there you are seriously off track, since the vast majority of MCD employees are part-timers. You would have to find the number of FTEs to get a reasonable estimate of cost per employee."

What makes you think that 447,000 is not the number of FTEs? Do you have what you believe is the correct figure for MCDs labor costs? Do you really think that MCD makes much more than $8,281 per employee per year? If you know the correct figure then give it to us.

How is it you know anything about the finances of In-And-Out since they are a private company? Why not compare two similar companies where you have data like say Costco and Sam's Club?
1.26.2007 3:58pm
Jeff S.:
Bob R.,

I haven't been to every In N Out, but the ones I have been to all have sit down.
1.26.2007 3:59pm
Justin (mail):
"A recent summary of the empirical evidence can be found on Greg Mankiw's blog here."

Posting to Mankiw's proffer of the Neumark study as "a recent summary of the empirical evidence" is downright deceptive. That study is hotly contested, as it attempts to rebut the Alan Kruerger study, and has received more than its share of criticism. Surely, in any event, one study is not the "recent summary of the empirical evidence," in any event.
1.26.2007 4:03pm
Bob R (mail):
My mistake about the sit down. Misread their web site.
1.26.2007 4:13pm
Justin (mail):
Note: I should point out the study I linked to above refutes Neumark, as does analysis of the two studies by Joseph Stiglitz.
1.26.2007 4:15pm
josh:
JT said "Certainly you're not arguing that running a business and working at one (in this case, for minimum wage) are the same level of difficulty? I would argue that there are a great many small business owners out there, that, if forced to give up their lexus or country club membership to keep some staff around, might decide that the whole operation wasn't worth their time and just close up shop. It's much easier to work for someone else anyway. "

Perhaps I wasn't clear. I wasn't comparing the small business owner and the employee. I was noting the choices businesses make that affect employment decisions separate and apart from the Econ 101 information discussed so much in this thread.

My example of the friend with the Lexus and the country club is not a snark at the difficulty of owning a business or the decision to seek profit. It was only to question whether the level of profit for a private business owner is or should be a factor in analyzing the economic effects of a minimum wage law and attempting to predict its outcomes beforehand.

You argue that some small business owners "if forced to give up their lexus or country club membership to keep some staff around, might decide that the whole operation wasn't worth their time and just close up shop. It's much easier to work for someone else anyway." I would agree only to the extent that the corrolary is true too. Some businesses might not, thus contradicting the Posner/Becker prediction of what will happen. That doesn't hurt the "Econ 101" supply/demand curve, though. It just amplifies the demand side for labor. A business whose demand for labor is higher (willing to forgo more profit) might not encounter the results Posner/Becker predict.

As to the question of whether "It's much easier to work for someone else anyway," I'm not sure I'd agree. I suppose it would depend on your definition of easy or hard. Most small business owners I know gripe about the hours and risk, but would never give up the prospect of being their own boss. For them, the "more difficult" aspect of owning a business is far more rewarding and thus "easier."
1.26.2007 4:22pm
JK:
Posner includes the primary flaw to his argument right in that excerpt. He admits that there are situations were workers are worth more to a company then they are currently paid. He then slips in a "factual" statement there are more people who are worth just what they are paid (thus causing unemployment and a rise in price). If the economy in fact has widespread situations were workers contribute more to companies then they are paid, and few situations were workers are paid exactly what they would in a perfect market, then a rise in the minimum wage will have a significant income redistributing effect and a minimal unemployment/price effect.

In reality all minimum wage increases will have both a redistributing effect (forcing companies to pay workers closer to their actual worth), and some unemployment and price effects (through the mechanism that Posner explains). There are plenty of reasons why structural aspects of our economy might be allowing companies to pay lower then their worth, based on bargaining power, information, oligarchies, etc. A big problem with the Friedman view of economics is that they tend to think we are a lot closer to a perfectly competitive market then we in fact are.
1.26.2007 4:28pm
J. F. Thomas (mail):
I'm not sure how most short term contracts are written, but any contract that lasts a year or more is often written so that if known variables change, there is a way out for either party. Rental contracts, employment contracts, supply contracts, etc each have an at-will component or a loophole or out for either party in case price or circumstance changes. You may have to pay a penalty (like with renting) but you can get out.

Where are the lawyers on this blog? That is not an at will contract. An at will contract, which most employment contracts are in this country, means that if you go into work tomorrow your boss can fire you and doesn't have to give you a reason why. If you hire someone to paint your house or fix your plumbing and he is halfway through the job and you just decide on a whim that you don't want him to finish the job and tell him to leave ("just get out, you're finished, I don't have to tell you why, I just don't want you around here anymore"), he can and will sue you for the cost of the entire job. If you tell the judge, "I just didn't feel like having the job finished" or even "I just decided I didn't like him personally", you are going to lose. You can't cancel a contract for reasons completely unrelated to performance and expect not to pay a penalty.

If you want to have a free labor market without government interference then at the very least we should shift the traditional relationship to require that an employer be required to have a work-related reason to terminate employment. I don't know why libertarians would object to this.
1.26.2007 4:38pm
J. F. Thomas (mail):
JF, this is the business I'm in and such contracts with contractors are very common. Far and away the majority of them have such a clause.

You are simply full of crap. Putting an at will clause into a contract renders it meaningless. You must live in some bizarro contracting world. Do you seriously expect me to believe that a contractor would sign on to a job where his contract says he can be kicked off the job for any reason or none at all with no notice and no recourse?
1.26.2007 4:44pm
J. F. Thomas (mail):
What makes you think that 447,000 is not the number of FTEs?

Because you (or whoever) stated McDonalds has 447,000 employees, and everyone knows most people who work at McDonalds are not full time.
1.26.2007 4:48pm
Clayton E. Cramer (mail) (www):
Raising the minimum wage can either drive up prices, reduce profits, or force the employer to find ways to reduce costs to compensate (such as reducing workforce, improving efficiency, pressuring suppliers to lower costs) or some combination of the above. You can't really say for sure what the net effect will be without examining how competitive the market for a particular business is.

It is true that Wal-Mart supports raising the minimum wage. They have a lot of scrappy little competition still, businesses that don't have Wal-Mart's economies of scale, and can't afford a small reduction in profitability. Once again, the Democrats are screeching about the evil of Wal-Mart and how it is destroying the little guys--and then working with Wal-Mart on a policy that will destroy the little guys. No surprise, as usual.

It is certainly true that few minimum wage earners today will still be earning it in three years. It is also true that minimum wage earners are often teenagers who require so much supervision and guidance that employers lose money hirig them at $5.15 per hour. The hope is that within a few months, they will learn enough in the way of job skills to be worth their minimum wage and then some. Some don't, and get fired in their first month or two. (My wife went through that experience at 18. My son, ditto.)

It is not a strawman argument to ask, "Why not raise the minimum wage to $50 per hour?" If there is a problem with this--if the net effect would not be beneficial--please explain why. I think you will be impressed how rapidly your argument for the new minimum wage increase becomes, "Well, it won't disemploy a lot of people, so it's okay."

There are a lot of people who are really struggling to get by in America because of low wages. But what causes their wages to be so low? Competition from recent immigrants for unskilled jobs. This is the reason that in the late 19th century, those concerned about the poor regarded unlimited immigration as a disaster. Each new wave of immigrants allowed employers to lower wages, and to pit one ethnic group against another.

If you "progressive" sorts really cared about the working poor, you would be working to cut off the unlimited immigration of unskilled workers who can be made to shut up and stop complaining with the threat of calling INS. This is one of the great absurdities of today: the alliance of progressives who want open borders with business interests who want open borders. The victims are the teenagers and uneducated U.S. citizens and legal residents who compete for jobs with illegals.
1.26.2007 4:57pm
A.C.:
For those of you in love with the early days of unionization, remember that some workers were excluded. Women and minorities weren't allowed in some, which kept the labor market artificially tight in those industries. This same two-tier thinking applies when unions permit younger workers to be hired on less advantageous terms than their elders were.

Sharply limiting immigration might have the same effect today. At the moment, we don't even seem to have the national border as way to divide workers into the in-group and the out-group.
1.26.2007 4:58pm
Steve:
If you hire someone to paint your house or fix your plumbing and he is halfway through the job and you just decide on a whim that you don't want him to finish the job and tell him to leave ("just get out, you're finished, I don't have to tell you why, I just don't want you around here anymore"), he can and will sue you for the cost of the entire job.

Well, right, and that's the difference between hiring a worker and contracting to have a specific task performed. How did we get off on this contractor tangent, anyway?
1.26.2007 4:59pm
Clayton E. Cramer (mail) (www):

For those of you in love with the early days of unionization, remember that some workers were excluded. Women and minorities weren't allowed in some, which kept the labor market artificially tight in those industries.
Indeed, some of the Supreme Court decisions that liberals love so much discriminated against women and children with respect to hours they were allowed to work as a way of encouraging employers to remove these low-wage alternatives from the workforce.

It was the Depression, and I can certainly understand why progressive sorts believed that disemploying some for the benefit of primary breadwinners was good social policy. (Just like firing women at the end of World War II to create jobs for returning veterans was good social policy.) But today, progressives aren't prepared to support such a policy with respect to those who have illegally entered the U.S., and who are using false IDs to get jobs.
1.26.2007 5:08pm
Steve:
It is not a strawman argument to ask, "Why not raise the minimum wage to $50 per hour?"

Hee hee! Of course it's not. You've got us all at our wit's end with that devastating sortie.
1.26.2007 5:11pm
Clayton E. Cramer (mail) (www):


It is not a strawman argument to ask, "Why not raise the minimum wage to $50 per hour?"


Hee hee! Of course it's not. You've got us all at our wit's end with that devastating sortie.
Then respond. If raising the minimum wage is a good thing, why raise it to $7.25 per hour, but not $9.50 or $10.50? Why not $12.50?

There is clearly some level at which you consider this a ridiculous idea--somewhere between $7.25 per hour and $50 per hour. What is that level, and why is one of these increases a good idea that will help the poor, and another is not? You clearly think that $50 per hour is absurd. Why? You have thought this far ahead, right?
1.26.2007 5:28pm
Gaius Obvious (mail):
All of these arguments assume that the US labor supply is a closed system. It's not. There is a large number of illegal workers here who are here because there is a demand for sub-minimum wage laborers. That demand will rise with an increase in the minimum wage. Take farm labor as an example. Unlike most other nations, our children get 12 weeks off in the summer originally set up to help harvest crops. When I was a child I worked stringing tobacco for 40 cents an hour. I worked for a few days, got enough money for some toys and candy and was happy. Some of my cousins worked longer and harder picking tobacco for higher wages. Now all of that work is done by migrant labor from Mexico, most working for cash off the books at far less than minimum wage. Same if you want a new deck or patio built. Construction companies are going to be even more demanding of illegal labor than they are now. Some of those that currently pay minimum wage to legal laborers will move to obtain illegals laborers so that they can continue with their tight profit margins at current wage levels rather than accept reduced profits to meet an increased minimum wage cost.
1.26.2007 5:37pm
Gaius Obvious (mail):
Do laborers in Yazoo City Mississippi where a nice three-bedroom house goes for $50,000 need a minimum wage rate equal to that of laborers in Santa Cruz California where that same house is hard to find at ten times that cost?
1.26.2007 5:44pm
Clayton E. Cramer (mail) (www):
Concerning income equality, Tyler Cowen has an article here in the New York Times pointing out that much of the apparent increase in income inequality is a function of improving levels of education (which tends to advantage the educated relative to the uneducated) and increasing age of the population.

I don't buy his argument for why increasing age increases inequality. Old people tend to be wealthier than young people simply because they have had time to accumulate wealth, and child rearing is expensive.
1.26.2007 5:46pm
Clayton E. Cramer (mail) (www):

Do laborers in Yazoo City Mississippi where a nice three-bedroom house goes for $50,000 need a minimum wage rate equal to that of laborers in Santa Cruz California where that same house is hard to find at ten times that cost?
No, but by forcing workers in Red States out of work, Democrats figure that they can improve their changes of electing Democrats from those states.
1.26.2007 5:47pm
JK:
Clayton,
You note that one of the effects of the minimum wage can be to "reduce profits." Isn't this an admission that a minimum wage increase can be an effective means of increasing a worker's wage that would otherwise be below their value to the company? The "profit" (I assume you mean that term in the economic, not business sense) that is being reduced is the value that a company is getting from its workers beyond what they are paid.

I agree that the extent to which this will happen, opposed to increased unemployment and prices, will depend on the structure of the market. This is why it would not be beneficial to increase the minimum wage to $50/hour, because you will be getting more unemployment/price increases compared to redistribution.
1.26.2007 5:50pm
Justin (mail):
Clayton, the answer to "why $7.25, but not $50" should be obvious to any intellectual conservative whose read Kirk. One has empirical testing and is a smaller, more acceptable step than the other.

You might as well ask of a conservative who thinks taxes should be cut in order to maintain tax revenue and increase overal growth, why not 0%?

There are certain assumptions in the political arena that we're talking about what happens at moderate change? What would happen if the minimum wage went up to $50? We don't know. There would probably be some short term chaos, certainly, but the long term effects are not obviously knowable. But we can see towards European and State experiments that a minium wage of $10 or ever $15 would not have a destructive impact. Even socialist nations like Denmark, which combine a minimum wage over $15 American with a large social net and a tax rate that goes up to 80%, don't appear to be doing miserable - indeed, Denmark is nipping at our heels in terms of per capita GDP, has a higher life expectency, and whose people are doing measurably better in every welfare aspect over the first four economic quintiles, and comparably well through the first half of the fifth quintile.
1.26.2007 5:54pm
Steve:
Then respond.

No, I was serious. There's no good answer to this devastating question of why we don't raise the minimum wage to $50/hour. Don't be fooled by the fact that it was already addressed multiple times above. Your hypothetical has carried the day.
1.26.2007 5:54pm
Justin (mail):
"No, but by forcing workers in Red States out of work, Democrats figure that they can improve their changes of electing Democrats from those states."

Yes, you've figured out our strategy. And it almost worked.
1.26.2007 5:55pm
Justin (mail):
Jonathan, you should probably fully disclose that your only "empirical" source on your arguments is David Neumark, and thus all you've proven is that David Neumark (whose methodology has been subject to significant criticism) can regularly find a negative impact of minimum wage laws.
1.26.2007 5:59pm
Jeff S.:
"You are simply full of crap. Putting an at will clause into a contract renders it meaningless. You must live in some bizarro contracting world. Do you seriously expect me to believe that a contractor would sign on to a job where his contract says he can be kicked off the job for any reason or none at all with no notice and no recourse?"

It doesn't render it meaningless and I don't live in some bizarro contracting world. Most contracts with subcontractors we hire allow us to replace them for pretty much any reason. We don't have to cite performance to replace them. Notice is required. Of course, the subs are paid for the work they've done. The reason for this type of contract is to allow us to swiftly replace subs and avoid conflict with them after they are gone. Why do they agree to it? In practice, subs aren't often replaced.

In unionized commercial construction what I've described is far less common.
1.26.2007 6:00pm
liberty (mail) (www):
liberty: And most employers can fire workers who organize. People hate that - for example that Wal-Mart won't hire union workers. But its legal.

Steve: You seem to be of the belief that we actually reside in your libertarian fantasyland. In reality, firing workers for engaging in union activities has been illegal in this country since 1935.

Note that I carefully avoided saying that its legal to discriminate against union employees and so forth. Even under the NLRB its legal to fire for economic reasons - so if unions bargain too high, the company can fire all of them and start over. Thats fair. I would prefer no such act, but at least firms can choose never to hire union employees at all (as Wal-Mart and Jet Blue do) or they can hire non-union workers during strikes and so forth and refuse to concede to unions, make layoffs of union employees after agreeing to higher salaries and so forth. In stronger-labor countries like Sweden, they would have none of that freedom.

Despite the NLRB, we are a weakly regulated country in terms of organized labor. I am all in favor of workers having the *right* to organiz, and they do. I am against government regulation of bargaining, and we are much closer to my position on that than bargaining-dominated countries like Sweden with 85% unionization and tight controls.
1.26.2007 6:01pm
liberty (mail) (www):
"indeed, Denmark is nipping at our heels in terms of per capita GDP, has a higher life expectency, and whose people are doing measurably better in every welfare aspect over the first four economic quintiles, and comparably well through the first half of the fifth quintile."

Show me your evidence, because the empirical evidence I have seen shows no such thing. I am more familiar with Sweden than Denmark, but I would be astonished to learn that the bottom 4 quintiles are similar at all in purchasing power between the US and Denmark (they are not even very close with Canada and they are always the closest). In Sweden, their top quintile barely reaches our third.
1.26.2007 6:15pm
Jonathan H. Adler (mail) (www):
Justin --

No need, because there are other studies as well, including those by Vedder &Galloway, Evan and MacPherson, Bazen and Marimoutou (2002), Lang &Kahn (1998), and others. And as found in the last survey of opinions of economists on various issues, only one in four disagreed with the statement "minimum wages increase unemployment among young and unskilled workers." While the effect on unemployment may be small unless the miniumum wage is increased dramatically, only a small percentage of economists believe otherwise. Moreover, there is little evidence the minimum wage does anything to address poverty rates, and some evidence it does more harm than good.

JHA
1.26.2007 6:23pm
liberty (mail) (www):
Granted, my last quintile comparison that included net income data converted with PPP across OECD countries in the five quintiles compared 1985 data (that was the last year the LIS had data for all the countries) but it had Denmark doing about the same as Sweden. Only the first quintile faired as well or better than the US. After that they fall easily a quintile behind us (their third quintile looks like our second, their fourth and fifth look like our third).

Anyone that manages to climb out of that bottom quintile is destined to remain below what would be in third quintile and probably stagnate in our second quintile -- they are what we consider "poor".

Please provide a more recent quintile comparison if you have one.
1.26.2007 6:34pm
mkellerm (mail):
Unless you are a hyper-Bayesian (such that almost all of the weight is on the prior), I fail to see what a survey of economists adds to our empirical understanding of the effects of raising the minimum wage.
1.26.2007 6:37pm
Justin (mail):
The first non-Neumark study you cite simply states that there's no substantial decrease in the percentage of people in poverty as a result of minimum wage increases. While I'm sure that's a highly disputed position, it's at least worth noting that within his study range, everyone making anywhere near the minimum wage would still be impovereshed under the utilized standards both before and after the increase, and his study does not appear to take into account relative differences amongst the working poor.

The second article makes the (surely non-controversial) point that most minimum-wage earners tend to be young and uneducated, and that most young and uneducated people don't stay young and uneducated forever, and as a consequence most people advance from the minimum wage pretty quickly. This study entirely ignores the OPPOSITE issue that the first studied ignored - the effect of minimum wage increases on the wages of other low-skilled workers who make above the (before and after) minimum wage.

So for on-point issues about the drawbacks to the minimum wage, we're still stuck on Neumark, unless you want to find links to at least summaries of those other studies.
1.26.2007 6:50pm
Corruption Information:
GNP Data

I can't find anything online equivalent to the study I read while I lived in Copenhagen, but I think if you take those GNP numbers, and then use this inequality information, the results are well established:

Inequality data
1.26.2007 6:58pm
Justin (mail):
I'm sorry, I cannot seem to find a study that breaks down Danish (post-redistribution) income by quintile, if someone can help me, I would appreciate it.
1.26.2007 7:03pm
Jonathan H. Adler (mail) (www):
Justin --

Here's one of theose two studies:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=423340

Some of Kahn's work, along with many other minimum wage studies, are listed and summarized by Heritage here:
http://www.heritage.org/Research/Labor/minimumwage.cfm

More studies are listed here by the Employment Policies Institute:
http://www.epionline.org/study_list.cfm?group=mw

JHA
1.26.2007 7:41pm
Justin (mail):
The Bazen piece, just reading the abstract, is on its face results oriented. They were troubled by Krueger and Card's findings, and then tried to find a way to get around them, and then used alternative modeling to attempt to find a way to keep their desired position.

Epionline has been accused of being *very* results oriented.

And Heritage makes no bones about its interests. I'm not citing to dailykos here, and while I realize that the great finances of Industry have their advantages, I don't think its too much to ask to keep the boundaries of research, at least when dealing with admittedly conflicting information at a superficial level, to academic sources who, while may be biased, are not expressly funded for a particular result?
1.26.2007 8:05pm
Jonathan H. Adler (mail) (www):
Justin --

The Heritage link is to a listing of academic studies.

Also, if you want to dismiss the Employment Policy Institute studies because of their interests, you should also dismiss any work sponsored by the Economic Policy Institute and labor-funded organizations. (And why is SourceWatch (aka the Center for Media and Democracy) considered to be an unbiased source of information?)

In any event, I think it's better to look at the methodology and replicability of the studies.

JHA
1.26.2007 8:26pm
liberty (mail) (www):
"The Bazen piece, just reading the abstract, is on its face results oriented. They were troubled by Krueger and Card's findings, and then tried to find a way to get around them, and then used alternative modeling to attempt to find a way to keep their desired position."

Its quite common for economists to "reply" to each other's work. Many economists have relooked at the minimum wage and prior empirical studies on it since the Card and Krueger study and critically examined their study and many have found their methods lacking. They used phone interviews, for Christ's sake.
1.26.2007 8:32pm
Cornellian (mail):
I've often seen the argument that raising the minimum wage is a bad idea because it will hurt poor people by causing more unemployment. I wonder why the people who make that argument don't seem to have the courage of their convictions though - if they really believed that, why aren't they out there advocating a complete abolition of any minimum wage?
1.26.2007 8:56pm
Steve:
Some of them are!
1.26.2007 9:15pm
tsotha:
I don't know about anyone else, but I'm all for abolishing the minimum wage.
1.26.2007 9:18pm
A. Zarkov (mail):
J.F. Thomas:

"Because you (or whoever) stated McDonalds has 447,000 employees, and everyone knows most people who work at McDonalds are not full time."

I think you're nitpicking. The substance of my argument remains unchanged even if 447,00 does not represent FTEs. Suppose half the people at MCD work half time. That raises the revenue per FTE to $11,041. Then a pay increase of $4.49 per hour instead of $3.36 wipes out all of MCD's pretax income. An increase in minimum wage to $7.25 now reduces MCD's ROA to 5.7% instead of 4.3%, or about the risk free rate of return. Why would anyone invest in a risky asset with the same rate of return as a riskless asset? They wouldn't.

MCD has about 30,000 restaurants worldwide. If they stay open 12 hours per day and have 10 employees per restaurant then we get 450,000 FTEs, which is about the original number. If they average 8 employees per restaurant then we get 360,000 FTEs which is close to the 335,000 you get assuming half the employees work half the time. Therefore my two examples provide a reasonable bracket to reality.

An increase in the minimum wage to $7.25 is going to have a significant impact on low wage service industries like McDonald's. Today I had a simple plain hamburger at a small restaurant near my house with no extras and it cost $5.25. There's a good quality restaurant nearby that serves a range-fed beef burger with one side (no salad and no drink) for about $15.00. These are the kind of prices you will pay with small operations with well-paid-full-time employees.
1.27.2007 12:32am
Randy R. (mail):
So Posner and his ilk say that if the min. wage is raised, then businesses will be forced to lay off some workers to compensate for the higher wages.

Sounds logical, but in the real world, that's not true. The business will still have the same amount of work to do, so it will either have to squeeze more work out of each remaining worker (ie., increase productivity) or allow some tasks to not be done, or done on time. Usually, the latter is not possible, if the company wishes to stay competitive. Forcing more productivity is possible, I suppose, but most businesses already force our as much productivity as possible.

So my vote is that most businesses will simply suck it up and pass the higher costs on to the public. But it won't increase unemployment very much at all.
1.27.2007 12:35am
Randy R. (mail):
So Posner and his ilk say that if the min. wage is raised, then businesses will be forced to lay off some workers to compensate for the higher wages.

Sounds logical, but in the real world, that's not true. The business will still have the same amount of work to do, so it will either have to squeeze more work out of each remaining worker (ie., increase productivity) or allow some tasks to not be done, or done on time. Usually, the latter is not possible, if the company wishes to stay competitive. Forcing more productivity is possible, I suppose, but most businesses already force our as much productivity as possible.

So my vote is that most businesses will simply suck it up and pass the higher costs on to the public. But it won't increase unemployment very much at all.
1.27.2007 12:35am
Alex650 (mail):
What I don't understand is how, after spending the last 30 minutes of my life reading all these posts (sad, I know), I haven't see anyone actually address the "why not raise it to $50/hr" argument except by calling it names. The point of the argument is not to suggest that we <i>should </i> do this, as in some sort of petulant "well if you want one slice of pizza I'll give you 10,000!" (as someone up there wrote, I think). The point is that in order to argue against raising the minimum wage to $50 you have to accept that, like eating pizza, there is a cost to doing so, and at some point for some reason the cost outweighs the benefit.

What the supporters of a minimum wage hike don't seem to acknowledge is that there is a cost to raising the minimum wage --- it <i></i>might<i></i> cause <i></i>some<i></i> unemployment. This doesn't mean that we shouldn't do it --- eliminating income inequality, for example, might make the endevor worthwhile. But the $50/hr is a serious argument, and deserves to be taken seriously: do supporters of increasing the minimum wage believe that there is <i></i>some<i></i> cost associated with doing so in terms of employment, and, if not, why not raise it to $50/hr? If so, then what is the offsetting benefit?
1.27.2007 12:39am
SG:
Randy R:
Forcing more productivity is possible, I suppose, but most businesses already force our as much productivity as possible.


I don't think this is true. There are plenty of opportunities for more productivity. For example, don't most McDs (and fast food restaurants in general) have customers pour their own drinks? How dificult would it be to put in a self-ordering kiosk (like supemarkets are doing for checkouts)? At what labor cost does it make sense to automate burger flipping or the deep frier? I'd bet that with judicious use of technology you could reduce the staff needed to run a McDs to 2-3 people/shift.

Every unskilled worker is at risk of being automated out of a job (it's practically the definition of unskilled labor). And once that happens, those jobs never come back.
1.27.2007 2:13am
A. Zarkov (mail):
"So my vote is that most businesses will simply suck it up and pass the higher costs on to the public. But it won't increase unemployment very much at all."

It depends on the nature of the business and the elasticity of demand for the product the business produces. Some businesses simply can't pass on an increase in costs because the higher price actually reduces revenues since people buy a lot less of the product.

Then there is the matter of return on investment. Even if some of the higher costs can be passed to the consumers, the net ROI might not be enough to justify further expansion. For example, McDonald's restaurants might not close any restaurants, but they would not open new ones.
1.27.2007 5:45am
tsotha:
That's my problem with the idea that people who run small businesses will take the new costs from profit if they're unable to pass them along to consumers. If business owners don't feel they're making enough money to compensate for risk and the extra hours, they'll shut the business down and work for someone else. I know people who've done it. If I owned a sandwich shop and the new minimum cut my income from $60k to $40k that shop's gonna be shuttered the next day, and all my workers are getting pink slips.
1.27.2007 3:08pm
David M. Nieporent (www):
Sounds logical, but in the real world, that's not true. The business will still have the same amount of work to do, so it will either have to squeeze more work out of each remaining worker (ie., increase productivity) or allow some tasks to not be done, or done on time. Usually, the latter is not possible, if the company wishes to stay competitive. Forcing more productivity is possible, I suppose, but most businesses already force our as much productivity as possible.
What you don't understand is that as the workers get more expensive, it becomes economical to replace them with entities not subject to the minimum wage. Like machines. (e.g. ATMs instead of bank tellers.) Or non-local people (e.g. call centers in states with lower minimum wages, or in Bangalore.) Or customers. (e.g. self-service.)

Oh, and you also miss that if they raise their prices, they won't have the "same amount of work to do." They'll have less work to do because they have lower sales.
1.27.2007 4:27pm
David M. Nieporent (www):
A series of JFThomas funnies:
Of course it does. One of the assumptions you make in Econ 101 is equality of bargaining power.
No, it isn't. That has nothing to do with it.
Supply and Demand (as taught in Econ 101) only works when you have perfect knowledge marketplace, have equality of bargaining power,
Not only is that simply wrong (Why is it that people who deride "Econ 101" statements are invariably people who don't know Econ 101?), but the criticism wouldn't even be valid if it were true. There's no big disparity in information and bargaining power with minimum wage employees. Companies that pay minimum wage are not GM and IBM and Walmart. They're the local grocery store or McDonalds franchisee or diner.

Why should a labor contract be treated differently than any other contract? An employer should be no more free to fire his employees for unionizing than you should be able to fire a housepainter you contracted to paint your house if you found out that he used union labor.
A labor contract, of course, should not be treated differently than any other contract. Very few people in the United States are contract employees, however. (If they were, they wouldn't be unionizing at all.) They're simply at will employees.

If I hire a contractor to paint my house and the contract says I can fire him in the middle (and presumably pay for what he'd done) then I can fire him for whatever reason (including that he hired union labor if I thought that it was inefficient, etc).

Yeah, try that next time you hire a contractor. Tell him you want an at-will contract and want the right to fire him at any time during the job for any reason or no reason at all. See how far you get.

The contract simply won't say that.
It also won't say he can quit in the middle of the job because he doesn't feel like doing it anymore. I'm guessing you don't think employees should be bound to their employers for fixed periods, with no rights to quit. Why are you confused about the difference between employees and contractors?

If you want to have a free labor market without government interference then at the very least we should shift the traditional relationship to require that an employer be required to have a work-related reason to terminate employment. I don't know why libertarians would object to this.
Is this a parody? Do you actually "not know why libertarians would object to this"? Hint: the word "require" in your sentence. Hint: who is doing the requiring? Hint: the government. Hint: that's not "without government interference."

Hint: Libertarians think people should bargain for the terms of their employment. Which means people can set whatever terms they're willing to accept. No "requiring" going on.
1.27.2007 4:30pm
A. Zarkov (mail):
While I think an increase in the minimum wage will have a severe impact on McDonald's restaurants, I don't want to give the impression that I'm positive either about their food or their corporate policies. I think their buildings are ugly and blight the landscape. Their libel suit against critics in Britain (where the burden of proof is on the defendant) was shameful. More importantly, in my opinion, their food is unhealthy and promotes obesity. I would only too happy to see them go out of business. But I want them to go out of business as the result of a choice on the part of consumers and not from government policy driven by zealots with bogus ideas about economics. If we have a problem with too many people not earning enough money to live decently then let's address that directly instead of trying to revise the law of supply and demand.
1.27.2007 7:13pm
J. F. Thomas (mail):
While I think an increase in the minimum wage will have a severe impact on McDonald's restaurants

Why? I can see some validity to Becker's and Posner's arguments when it comes to small businesses, those that are operating at the margins, but the chain restaurants and big retailers--get serious. I doubt it will cause many layoffs because they have computer programs to optimize their schedules to ensure they don't have more employees than they need (isn't that part of the rise in productivity over the last few years). So they'll manage by passing on the additional costs onto their customers by raising prices (it'll be the $1.10 menu instead of the $1.00 menu--actually since softdrinks are almost pure profit, raising the cost of drinks immediately covers almost all additional costs), reducing costs in other areas, or maybe even (heaven forbid) lowering their profits and dividends and raises for executives and upper management.
1.28.2007 10:23am
josh:
Tsotha said:

"If I owned a sandwich shop and the new minimum cut my income from $60k to $40k that shop's gonna be shuttered the next day, and all my workers are getting pink slips."

What if the new minimum wage cut the income at your sandwish shop from $1 million to $900,000? Same result?
1.28.2007 4:17pm
Dick Schweitzer (mail):
One of the most interesting observations made, amidst all the blather, was to the effect that there is a a "sub-minimum" wage level of employment. That could perhaps be expanded to a "non-minimum" (exempted) wage level of employment.

That concept is probably congruent with the perception that there are (and will be) "jobs out there that Americans don't want to do." What goes unsaid with that phrase is that not enough people are willing to do those jobs (under the specific conditions) at the wages on offer. So, the labor supply for that work is now being drawn from other sources ("illegals," and, perhaps just as extensively, working "off the books," and barter)[check with the IRS on those matters].

Imposing or raising a minimum wage would seem naturally to cause an increase in the "Sub and Non-minimum" categories, that should in turn attract (and sustain) more "illegals" and off the books arrangments.

Has anyone seen any attempts to plumb those areas?
1.29.2007 2:04pm
JosephSlater (mail):
I'll add my agreement to pretty much everything Steve and J.F. Thomas have said above, and just add the following.

Liberty:

It's clearly illegal for any employer to refuse to hire pro-union workers for jobs covered by the NLRA, and while it is legal to use replacement workers in the case of economic strikers, it's illegal to use attitudes towards unions in determining whom to hire as replacements or which strikers to rehire. Indeed the Supreme Court has held (properly, IMHO) that it's improper to assume that replacement workers are anti-union.

More broadly, I'll say again that the knee-jerk reactions, and content-free antipathy of some libertarians to unions never ceases to amaze me.

Quick question: In the 20th century, the countries that did the best economically (and for that matter, socially and politically) were:

(a) the countries that legally protected the right to organize free trade unions; or

(b) the countries that did not?

Feel free to ask the same question about minimum wage laws, worker health and safety laws, and all that other stuff that libertarians claim will ruin economies.

I know, I know, if only some country would try REAL libertarianism, it would just be the bestest country ever -- kind of like some folks used to argue it would be if some country would try REAL communism.
1.29.2007 4:05pm
David M. Nieporent (www):
Joseph:

Quick question: in the 20th century, the countries that did the best economically (and for that matter, socially and politically) were:

(a) mostly white-run; or
(b) mostly black-run?

Correlation is not causation.
1.29.2007 6:35pm
JosephSlater (mail):
David M. N.:

Of course correlation is not causation. But unions have an obvious impact on the economy (as well as politics), in a way that skin color, eye color, etc., do not.

Further, I was responding to folks who argued that unions and laws giving workers various rights were actively BAD for the economy. It's incumbent on folks making that absurd argument to at least try to explain why it pretty much always turns out that countries with such laws do better. Or is it, in your view, just some big, consistently repeated coincidence?
1.30.2007 9:57am
Dick Schweitzer (mail):
Thanks to Alan Reynolds at CATO, we have been directed to:

The Statistical Abstract of the U.S., which you can access via google (if you are serious in your interest and not just venting). On that site scroll down to Labor Force, employment and earnings. Click. then on page produced click on 634.

AND indeed there is a measured employment below minimum wage, by classifications of workers.

Mr. Reynolds did an excellent piece on this a week or so ago.

He also reviewed the effects on the "less than minimum (exempt)" categories under state wage laws and their exemptions.

So, we can expect to see a rise in minimum wage press the supply of workers down into the below min category, creating more supply than jobs in those levels. Interesting?
1.30.2007 3:09pm