July 09, 2004

The Minimum Wage and the EITC

In Slate, I read Steven Landsburg making one very good point (David Card and Alan Krueger's point) about the minimum wage:

The Sin of Wages: Ordinarily, studies with large sample sizes should be more convincing than studies with small sample sizes.... [But] the results of the large-scale studies were, by and large, neither more nor less significant than the results of the small-scale studies. That's screwy. Screwy enough to suggest that the studies being published couldn't possibly be a representative sample of the studies being conducted.... Even if minimum wages don't affect employment at all, about five out of every 100 studies will, for unavoidable statistical reasons, appear to show a significant effect.... But if the 95 studies that found no effect were deemed uninteresting and never got published, then all you'd see were the spurious five.... Even when the bulk of all research says one thing, the bulk of all published research can tell a very different and very misleading story....

Now that we've re-evaluated the evidence with all this in mind, here's what most labor economists believe: The minimum wage kills very few jobs, and the jobs it kills were lousy jobs anyway. It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers. In fact, the minimum wage is very good for unskilled workers. It transfers income to them...

But then I think he makes the wrong incidence argument:

Ordinarily, when we decide to transfer income to some group or another—whether it be the working poor, the unemployed, the victims of a flood, or the stockholders of American Airlines—we pay for the transfer out of general tax revenue. That has two advantages: It spreads the burden across all taxpayers, and it makes politicians accountable for their actions. It's easy to look up exactly how much the government gave American, and it's easy to look up exactly which senators voted for it. By contrast, the minimum wage places the entire burden on one small group: the employers of low-wage workers and, to some extent, their customers. Suppose you're a small entrepreneur with, say, 10 full-time minimum-wage workers. Then a 50 cent increase in the minimum wage is going to cost you about $10,000 a year. That's no different from a $10,000 tax increase. But the politicians who imposed the burden get to claim they never raised anybody's taxes.

I--and almost everybody else I've talked to--think this is dead wrong: the incidence of the minimum wage "tax" falls almost entirely upon the customers of firms that employ minimum-wage workers, and that's pretty much all of us. It's not as though the owners and managers of firms that employ minimum-wage workers have no other options. So I believe Landsburg is wrong: the burden of the minimum wage is broadly distributed across all taxpayers.

Landsburg goes on to write:

If you want to transfer income to the working poor, there are fairer and more honest ways to do it. The Earned Income Tax Credit, for example, accomplishes pretty much the same goals as the minimum wage but without concentrating the burden on a tiny minority. For that matter, the EITC also does a better job of helping the people you'd really want to help, as opposed to, say, middle-class teenagers working summer jobs. It's pretty hard to argue that a minimum-wage increase beats an EITC increase by any criterion.

Now I like the EITC. Come the Day of Wrath, my best pleading will be the role I played in 1993 in the Clinton administration in expanding the EITC. But the EITC is a program that uses the IRS to write lots of relatively small checks to tens of millions of relatively poor people who satisfy picky eligibility rules. This is not the IRS's comparative advantage. The IRS's comparative advantage is using random terror to elicit voluntary compliance with the tax code on the part of relatively rich people. The EITC is a good program, but it a costly program to administer, and it is administered imperfectly to say the least.

The minimum wage, on the other hand, is nearly self-enforcing: its administrative costs are nearly nil, for workers (legal workers, at least) have a very strong incentive to drop a dime on bosses who violate it. From a government-administrative and error-rate perspective, it's a very cost-effective program.

The right solution, of course, is balance: use the minimum wage as one part of your program of boosting the incomes of the working poor, and use the EITC as the other part. try not to push either one to the point where its drawbacks (disemployment on the one hand, and administrative error on the other) grow large. Balance things at the margin.

Posted by DeLong at July 9, 2004 09:44 AM | TrackBack | | Other weblogs commenting on this post
Comments

There are minimum wages in the EU, and they have been raised from time to time. Surely there is data to show the effects immediately after raising the minimum.( Minima wages for the latin purists)

Posted by: latibulum on July 9, 2004 09:55 AM

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Two points:

1) I'm not so sure that the costs of the minimum wage are equally distributed around the economy. Do you have data that shows this, or just a vague sense that "everybody" patronizes businesses that employ minimum wage workers? I'll grant that just about everybody eats at MacDonald's. But poor people spend a relatively larger share of their incomes there than do rich people, who can afford to eat at places that pay their cooks more than the minimum wage. Further, I imagine that residents of large, high cost of living cities don't bear as much burden as do residents of smaller, lower cost places. In New York, the market rate of even very low skill level labor is already above the minimum wage. Very few workers benefit from the minimum wage because they would make it or a higher wage regardless. In small town Kansas, on the other hand, the market rate on lots of labor is probably lower than the minimum wage, and so there are costs that locals bear.

2) The author of the Slate article makes a very good point about why the EITC is better than the minimum wage, a point which gets to the root of why I personally am very cool to the idea of the minimum wage in the first place. Namely, that under the guise of helping poor people we also transfer lots of money to teenagers. I imagine that a huge percentage of people getting the minimum wage are high schoolers using the money to buy CDs and clothes and such. The EITC only goes to genuinely poor families. Of course, we could get around that by having a lower minimum wage for people under age 18, though that too would have distortive effects on the labor market.

Posted by: sd on July 9, 2004 10:09 AM

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The IRS's comparative advantage is using random terror to elicit voluntary compliance with the tax code on the part of relatively rich people

Okay, that's just the funniest summary of the IRS I've ever heard. Largely because it's true.

Posted by: Nick Beaudrot on July 9, 2004 10:12 AM

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Wages are a business expense. Does Landsburg believe that when business expenses rise that prices the business charges don't rise correspondingly?

Posted by: Randy Paul on July 9, 2004 10:17 AM

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Funny how the same person can defend the minimum wage and promote offshoring.

Posted by: a on July 9, 2004 10:20 AM

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sd tags it.

The minimum wage is a bizarre concept from the word go, that doesn't really help the ostensibly targeted beneficiaries. To say that no job is worth less than X per hour is just to say that, by law, no employer can hire anyone to do only jobs worth less than X. Oh, except for illegal immigrants, which we need to supplement our labor pool because 'they do jobs that Americans won't do.' Ahem. Politicians can't wave a wand and determine what the value of labor is. I don't deserve a 'living wage' for counting grains of sand on the beach, because there is no demand for my services. You know what? It doesn't matter how many kids I have, either.

The minimum is first and foremost a political tool that is rolled out every election cycle to put a number on how much Donkeys care. It is always kept below prevailing wages because its proponents know that it is either useless (when less than prevailing wages) or harmful (when the current baseline of employment becomes less sustainable). I have yet to see the politician that cares enough to propose a $100/ hour minimum, though Nader comes close at times.

So who benefits from the minimum? Kids supported by their parents working summer jobs. And Democrat politicians who can play the Scrooge card yet again.

Posted by: Jason Ligon on July 9, 2004 11:05 AM

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I would question the idea that the minimum wage falls upon all of us. In certain industries it probably gets passed along in the form of higher prices to consumers, but in others it is almost completely absorbed by the business owner. Obviously this would depend on the elasticity of demand, but in general, the minimum wage is probably far more dmamaging to employees, employers, and consumers due to the distortion it creates in the economy.

Posted by: wtf on July 9, 2004 11:08 AM

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I'm not sure I buy the first point.

The story that 95% of studies agree with me but are not published because they are not interesting sounds like a stretch.

First, why would studies showing no impact of minimum wage be uninteresting?

Second (really rephrasing the first), this is a academia-wide problem, to the degree that it is a problem at all. It does not allow one to discount published minimum wage studies unless it allows one to discount all published studies.

*****

The IRS does write a lot of checks and does scrutinize accounts to make one-time-per year payments. I would think a change in the "tax code" to get "refunds" to the poor would be well inside of the IRS' major, if not core, competence.

Question for the floor: Who in government/the economy is best suited to write checks that transfer income/wealth?

The IRS?
State welfare offices?
Could writing checks for the poor be privatized?

Posted by: anon on July 9, 2004 11:09 AM

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"Question for the floor: Who in government/the economy is best suited to write checks that transfer income/wealth?"

How about business owners through something called a job?

Posted by: wtf on July 9, 2004 11:11 AM

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[[
So who benefits from the minimum? Kids supported by their parents working summer jobs. And Democrat politicians who can play the Scrooge card yet again.
]]

First its hard to argue that a minimum wage does help raise incomes for teenagers but does not do so for the poor.

More interesting to me: Republicans can take the "Scrooge Card" off the table by offering a more effective alternative.

They do not because, well they're Scrooges.

Tax credits for business that hire in high unemployment areas? Payroll tax refunds or exemptions below a certain salary? Anything that says "we oppose the minimum wage for effectiveness reasons, but we do not oppose trying to raise the living standards of those unfortunate enough to have parents who were not President of the United States"?

Republicans do all they can to make the Scrooge Cad work. It can't be surprising that Democrats use it.

Posted by: anon on July 9, 2004 11:24 AM

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Another question, at what *level* does a minimum wage effect jobs?

Surely at a minimum wage of $100 an hour there will be fewer jobs and there will be a negative impact on employers' revenues.

Extreme, yes, but there has to be a level at which undesirable effects occur.

To simply say that MW has no effect is reminicent of the Laffer curve. At what level do effects occur? Are we there yet? how much farther can we go? etc, etc.

This is relevant because most of the time I get involved in a minimum wage question it has to do with the effects of raising the MW above current levels.

Posted by: avedis on July 9, 2004 11:28 AM

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[[
How about business owners through something called a job?
]]

Great idea Mr. Scrooge.

But what happens if business owners with things called "jobs" leave workers poorer than we are willing to tolerate in our communities?

Do you have any ideas that are better than minimum wage or is your idea that we should be more tolerant of children going hungry even though their parents work?

Posted by: anon on July 9, 2004 11:29 AM

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"the incidence of the minimum wage "tax" falls almost entirely upon the customers of firms that employ minimum-wage workers"

I don't think so; I think it mostly comes out of the profits of minimum-wage employers.

First, please do remember that the USA has a lot of sub-minimum wage workers: undocumented aliens. I think it possible that, were the USA to adopt a "visit and work" immigration policy, the minimum wage would actually percolate up into prices.

As to the current market situation for on-the-books labor, I think there are four main categories of minimum-wage workers: people just entering or reentering the job market, people who are desperate and can't get anything better, and people who are psychologically disabled and can't get anything better. So there are a large number of minimum-wage employees who are in an extremely difficult negotiating position and unscrupulous employers will lower their wages as far as they can, dragging down the wages of the job-market entrants. Simple market microeconomics.

Posted by: Randolph Fritz on July 9, 2004 11:41 AM

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I have frequently said that the minimum wage simply hurts small employers. What we need is a bigger EITC, OR some sort of credit/cash transfer to businesses that alows them to pay a good basic LIVING wage when they don't have the income to do so otherwise. The benfits: small businesses, which create most new jobs, get a boost. More jobs are created, and more poor people have jobs, which makes them happy, and should theoretically make the hysterical rightwing anti-welfare twits happy. More small businesses survive, thrive, pay taxes, and are able to create even more new jobs. More people see that a small business can be successful, and a new explosion of entrepreneurship occurs. The vigorous free market takes off. (Don't quibble about the cost of this free market, because we are already subsidizing oligopolies all the time--see Ag Bizness and Oil Bizness etc, which we oughtn't do). The creation of new technologies and so forth flourishes. Everybody except those who seek to concentrate power and money in their own hands should be ecstatic.

No, i haven't worked out all the details. I am a big picture woman.

Posted by: Carol on July 9, 2004 11:45 AM

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"It's not as though the owners and managers of firms that employ minimum-wage workers have no other options. So I believe Landsburg is wrong: the burden of the minimum wage is broadly distributed across all taxpayers."

I am not clear as to what you believe those options might be, but I will waade in:

1) Pass on the cost increase through price hikes. As a business owener, I am always amazed when this argument is tossed off as if it is transparently obvious. It assumes people will simply pay more for the same good. Not true.

2) Become more productive to offset increased costs. This ultimately translates into less minimum wage jobs needed to do same amount of work and/or increased pay for the more productive, hence valuable, employee. Either way, fewer minimum wage jobs. But that assumes structural improvements to productivity, which may or may not be feasable for a minimum wage task.

3) Owner eats the cost increase (no price hike)and operates at a lower margin. If the firm is ultimately not profitable enough, it goes out of business altogether and all the jobs, minimum wage and othrwise, go with it.

Another effect - intended or unintended - of increases to the minimun wage that I see and experience: it tends to raise all other hourly wage scales as well. People in the higher scales are made "poorer" in relative terms if their wages do not also increase so as to maintain the differential with those below them. So over time a firm's toal hourly labor cost increases, not just a segment.

So "we all pay for it" sometimes; the business owner and ultimatley the laborer pays more.

Posted by: ndr on July 9, 2004 11:47 AM

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Surely, the employment effects of a statutory minimum wage are likely to depend on how high the wage is set in relation to the going median wage in the labour market concerned.

By that standard, the US minimum wage is set rather low as compared with minimum wages in several European countries: http://www.cerc.gouv.fr/rapports/summary-cserc6.PDF It is perhaps therefore unsurprising to learn that research studies in America have not discovered significant effects on employment. But it would be a huge jump to conclude that statutory minimum wages have no employment effects at all when set high relative to median wages.

A special worry in European countries where minimum wages have been set high relative to median wages is the effect on youth unemployment: http://www.ilo.org/public/english/employment/strat/download/etp26.pdf

Posted by: Bob on July 9, 2004 11:58 AM

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Ah, now that this illustrious forum has explicitly broached the question of "Who pays for subsidizing low wage work (in *practice*, not just in theory)?" and the attendent problem of administrative overhead to certain schemes of subsidizing low wage work more complex than the minimum wage, I finally see an opportunity to ask all you erudite people this question that's been on my mind:

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What about the idea of the government directly subsidizing low wage work (quite possibly with the subsidy going to employers, but maybe directly to employees) through a graduated scale of wage support that'd be applied across the board?
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[The idea of a graduated scale is necessary to ensure that more productive workers on the low-end of the productivity scale cans still be rewarded for higher productivity and not just lumped together with all low-productivity workers at the same minimum wage rate. For example, Matt Miller in his book The 2% Solution [1], updates a proposal by Columbia University economist Edmund Phelps [2] (who was a notable collaborator of venerable ol' Uncle Milt Friedman) to propose a program to ensure a living wage of $9/hour:

Employer Wage*__Gov't Subsidy**____Total Wage
_6.00_______________3.00____________9.00
_7.00_______________2.29____________9.29
_8.00_______________1.65____________9.65
_9.00_______________1.12___________10.12
10.00_______________0.71___________10.71
11.00_______________0.43___________11.43
12.00_______________0.24___________12.24
13.00_______________0.13___________13.13
14.00_______________0.06___________14.06
15.00_______________0.00___________15.00

*The employer wage ideally pays for the marginal product actually produced by the employee.

**The governemnt subsidy ideally compensates for the massive externality (e.g., increased crime, welfare dependency, consignment of inner city real estate to be ghettos, loss of hope and thus intermittent commitment to the workforce) caused by the fact that a large chunk of workers don't produce enough to be paid enough to eke out a humble-but-decent living.

Bibliography

[1] Matthew Miller, The 2% Solution: Fixing America's Problems in Ways Liberals and Conservatives Can Love (PublicAffairs 2003)

[2] Edmund S. Phelps, Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise (Harvard University Press 1997 and 1999)

(NB: Phelps apparently sponsors this website

http://www.webcaz.com/webreward/index.html

which seems to be under construction---for how long it's been under construction I don't know---that will eventually lovingly document every major argument and counterargument to his proposal, including similar proposals from other notable academic economists like Layard and Jackman, Fitoussi, and Dreze and Malinvaud.)

Posted by: Bill on July 9, 2004 11:59 AM

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It seems to me that, in the broad center, markets are very good at properly defining relations between the various economic factors, but near the edges they frequently fail.

Thus, at the top, there is no need to pay a CEO egregious multiples of the lowest wage in a corporation (CEO's will do the same work for far less money) so there could easily be a cap on maximum pay -

and

at the bottom, it is too easy for employers to take advantage of the inherent weaknesses of low-wage employees and thus a government-mandated mininum wage is necessary to keep these employees from being exploited.

If one accepts that a minimum wage is necessary to avoid exploitation, it seems to me that the only question is then: how much? And once that amount is established (to the satisfaction of a majority of the congress) the proper way to deal with increases is simply to index the minimum wage.

Posted by: Skip on July 9, 2004 12:01 PM

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Oh, I should mention that Matt Miller estimates the cost of the above living wage proposal would be $85 billion/year atop the current expenditure on the EITC. Of course, you might believe you're only correcting a $85 billion externality that was levied disproportionately on those who live in or near poor regions.

Miller is also in favor of automatic inflation indexing the proposal.

Posted by: Bill on July 9, 2004 12:05 PM

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When did paying your employees become a tax? Wouldn't the same be true for wage and hours laws? Workers compensation? What about paying rent? Is that a tax? I always thought taxes were paid to the government. The reason for the minimum wage, inmho, is that at the low income level, workers are not in the position to negotiate their wages. They are limited in how much they can spend for transportation (who cares if a burger flipping job in the suburbs pays a dollar an hour over minimum wage if it costs $5.00 in bus fare and two hours each way to get there)and cannot go for long without a job.

Posted by: chris on July 9, 2004 12:11 PM

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One factor worth mentioning in any minimum-wage discussion is the effect of supply, demand, and other power relationships (e.g. unions) on the job market.

Right now it's pretty obviously still an employer's market. Employers start off with intrinsically more options, flowing from this basic reality: if I have 20 employees and could put a 21st to work, I generally have much less need for that 21st employee than s/he has need of *one* job. To reverse that imbalance, a job market has to be good enough for prospective employees to risk turning down jobs they regard as good, in the hope of something even better. But job markets are rarely that good for very long.

(If we had - pipe dream ahead! - a workable system for people to make a full living, in a not-inordinate amount of time, out of a collection of fractional jobs, I propose that it would go a long way towards evening that imbalance. That good jobs, for almost all of us, come in whole-number increments is a much greater detriment to the job-seeker than the employer. But I digress.)

To add to this, of course, the employer frequently has literally a world of other labor options, from offshoring to hiring illegal immigrants. This has an obvious effect on the supply/demand relationship.

And finally, for the past decade or two, we've been living in a world where an astoundingly and increasingly large chunk of our society's wealth is sloshing around at the top. At the beginning of the Reagan administration, we were frequently told that "a rising tide lifts all boats." Now we know that isn't necessarily so; the only reliable way to spread that wealth down through the income brackets is to forcibly shake it down. There are two ways to do this - laws and unions (who depend on laws too, of course) - and unions haven't been much use in recent years, so that leaves us with laws.

What happens, in the world I've described, when the minimum wage is increased? Those employers who are part of that 'top' where all that money is sloshing around (including corporate employers) pretty much just fork over the extra dough to those who were making below the new minimum. That's all successful shakedown. The rest is a redistribution among all the rest of us, but mostly in a higher-to-lower direction. The occasional low-wage job is lost, but (if the last couple of minimum wage increases are any guide) far from enough to undo the overall gains in wealth among those working low-wage jobs.

IOW, it's free money, if one assigns minimal societal utility to having a lot of extra money sloshing around at the top that is making little difference in the lives of its owners. Which I do.

Posted by: RT on July 9, 2004 12:13 PM

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While I was writing the previous post, I got a news release saying that the Census Bureau had released a report entitled "Dynamics of Economic Well-Being: Movements in the United States Income Distribution: 1996-1999."
http://www.census.gov/prod/2004pubs/p70-95.pdf

I haven't had a chance to look at it, but it probably has some bearing on the discussion. Wasn't the last minimum wage increase in 1996?

Posted by: RT on July 9, 2004 12:17 PM

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Gee, the minimum wage in real dollars, and the minimum wage as a percentage of the poverty level, peaked in 1966.

That must explain the widespread unemployment and starvation in the mid 1960s.

I'd suggest indexing the minimum wage to a percentage the median (not mean) straight time hourly wage.

I'd suggest that be in the 40%-50% range, which gives you a rate of between $7 and $8/hour.

Posted by: Matthew Saroff on July 9, 2004 12:37 PM

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"for workers (legal workers, at least) have a very strong incentive to drop a dime on bosses who violate it."

Huh. I wonder how America's number of illegal workers would change if we made it so there were a very strong incentive for them to report minimum wage violations. Say, if we were to offer immigration amnesty for reporting wage violators...

Posted by: akp on July 9, 2004 12:41 PM

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In full agreement with Brad. Why do people stop at the first or second or third transaction, to decide in their argument where the incidence of the minimum wage will fall? Since we're in a system, it will eventually fall upon everyone, transfer mildly from upper to lower, and finally benefit society in a myriad of ways, prompted by enabling the human capital development of the poorest. It's either that, OR an increase in direct government transfers, which are motivationally worse. If there are certain disadvantages to certain small businesses, put go-arounds in the policy. But Wal-Mart can pay up.

Posted by: Lee A. on July 9, 2004 01:06 PM

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"IOW, it's free money, if one assigns minimal societal utility to having a lot of extra money sloshing around at the top that is making little difference in the lives of its owners. Which I do."

Yikes. That is refreshingly honest. All that money just 'sloshing around' out there not doing anything productive, eh?

anon:

"First its hard to argue that a minimum wage does help raise incomes for teenagers but does not do so for the poor."

Not really. All one has to do is look at who is actually paid the minimum wage. If you make the jump to a living wage, NOW you are talking about real help for the poor. Lets really help people here by legislating them into wealth. You scrooge you.

When the left uses the minimum wage to play the Scrooge card, they are saying that the people they make unemployed don't matter, the small businesses operating close to the line don't matter, what matters is the group getting the goodies. As long as you focus on those guys only, you can call the other team a scrooge.

Posted by: Jason Ligon on July 9, 2004 01:11 PM

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Miller's proposal would simply result in a lot of employeers paying their employees $6/hr, none paying between $6 and $15 and then employers paying raters above $15.

What would be the incentive for any employer to pay any amount between $6 and $15?

Posted by: pfc on July 9, 2004 01:13 PM

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Thanks, Bill. I hadn't plowed through enough stuff to find Phelps and Miller...actually i haven't been looking either.

But as you can see by the general tenor of the comments here, thinking this way is too much outside the box for most economics minded folks. Why it should be is anyone's guess.

I think this behavior is called institutionalism (now who might have discussed this at one time?) and paradigmatic shifts slowly, as old men die.

Posted by: Carol on July 9, 2004 01:22 PM

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Please ignore my previous comment. I misread the table.

I'll now go crawl under the desk. :-)

Posted by: pfc on July 9, 2004 01:49 PM

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A couple of points: Robert Goldfarb has an interesting article on selection bias in publishing empirical results (published I think around 2000 or shortly before) that supports the 'uninteresting result' hypothesis. It deals with empirical reversals and essentially asks the question what is a high-minded economist going to do when presented with radically conflicting empirical results by competent researchers?

The second point on the minimum wage. I'm not personally swayed by the crocodile tears shed for the people who 'lose their jobs'. The evidence on this is so weak it's laughable. It basically comes out of profits, and if you think the Mcmansions and mansions that those profits buy are productive investment, all the more power to you.

Finally, there's nothing wrong with the minimum wage that can't be cured by the kind of full employment we had in the late 90s. The minimum wage belongs to the large class of second- and third-best economic policies. We have to evaluate the policies for the world we live in, not the utopias of our imagination.

Posted by: knut wicksell on July 9, 2004 01:55 PM

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A couple of points: Robert Goldfarb has an interesting article on selection bias in publishing empirical results (published I think around 2000 or shortly before) that supports the 'uninteresting result' hypothesis. It deals with empirical reversals and essentially asks the question what is a high-minded economist going to do when presented with radically conflicting empirical results by competent researchers?

The second point on the minimum wage. I'm not personally swayed by the crocodile tears shed for the people who 'lose their jobs'. The evidence on this is so weak it's laughable. It basically comes out of profits, and if you think the Mcmansions and mansions that those profits buy are productive investment, all the more power to you.

Finally, there's nothing wrong with the minimum wage that can't be cured by the kind of full employment we had in the late 90s. The minimum wage belongs to the large class of second- and third-best economic policies. We have to evaluate the policies for the world we live in, not the utopias of our imagination.

Posted by: knut wicksell on July 9, 2004 01:56 PM

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"Surely at a minimum wage of $100 an hour there will be fewer jobs..."

Really? What about all the people hired at the stores where people shop?

Posted by: Dave Johnson on July 9, 2004 02:01 PM

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pfc ---

I don't think you misread the table at all.

In fact, what the table shows is an *enormous* effective marginal tax rate on wage increases off the minimum wage.

According to the table, an employee being paid $6/hr takes home $9, and an employee being paid $10/hr takes home $10.71. (I'm ignoring any taxes after that, of course.) An employer considering giving an employee a $4/hr raise knows that the employee will keeps less than half of that. Indeed, a minimum-wage employee who manages, through hard work and negotiation, to get a $1/hr raise, will only find his or her paycheck going up by 29 cents -- a 71% marginal tax rate! Talk about regressive...

No, I think you're right, pfc. Employers who have minimum wage employees that they value will find other ways to reward them than wage increases, so that they can get the maximum subisidy from the government, at least until they would otherwise be in the $10-$15/hour range.

Posted by: Alex R on July 9, 2004 03:03 PM

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"basically comes out of profits, and if you think the Mcmansions and mansions that those profits buy are productive investment, all the more power to you."

Yeah! And capital reinvestment, and R&D, if you think THOSE uses for profits are productive all the more power to you.

The only productive use of money is when joe sixpack buys stuff. But not at Walmart.

Posted by: Jason Ligon on July 9, 2004 03:43 PM

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When the minimum wage goes from $5.25 to $7.00- what happens to the guy making $6.25?

Anybody who supports any minimum wage has never busted his ass for 18 months to advance from $5.25 to $7.00-$8.00 on a wage scale.

Posted by: Scott on July 9, 2004 05:08 PM

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Something I don't understand - economists tell us that employment is determined by the Federal Reserve. If that's the case, how does the minimum wage destroy jobs? Can't the Fed just increase the money supply and get us back to whatever they consider full employment if some jobs are lost? And if I'm right about that, what's the point of the EIC? Why not just raise the minimum wage? Am I missing something?

Posted by: rps on July 9, 2004 05:18 PM

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Jason,
Why don't you go do something for a while after you post then check back after a suitable length of time ? When you post comments of such low quality that often your credibility is undermined.

Posted by: self on July 9, 2004 05:48 PM

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There's a standard trio of criticisms of the wage subsidy idea. Alex R brings up all 3 of them in his comment:

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1) Alex R's main criticism, I believe, is right on target:

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"Employers who have minimum wage employees that they value will find other ways to reward them than wage increases, so that they can get the maximum subisidy from the government, at least until they would otherwise be in the $10-$15/hour range."

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There's no doubt about it, government wage subsidies certainly tempt employers to move to schemes of nonpecuniary or "under-the-table" compensation such as health benefits, vacation or flex time, special parking spaces, or other perks. The only way to fight this is to force employers to itemize such compensation right along with wages. Of course, this entails major enforcement capabilities to make sure employers are significantly penalized when they don't do such itemizing. Phelps himself acknowledges this, and this puts the issue of administrative overhead that Brad brought up front and center.

(Of course, there'd also be the major temptation for the simple, blatant fraud where employers claim they have more employees on their payroll than they have and simply pocket the government subsidy for these fake employees. Audit and enforcement undoubtedly is a major issue.)

*****************************

2) The second criticism, I feel is factually correct, but is missing the proverbial forest for the trees by worrying too much about relative wages when we're talking about the part of the wage spectrum where absolute wages are on the barely-making-ends-meet level:

----------------

"In fact, what the table shows is an *enormous* effective marginal tax rate on wage increases off the minimum wage... Indeed, a minimum-wage employee who manages, through hard work and negotiation, to get a $1/hr raise, will only find his or her paycheck going up by 29 cents -- a 71% marginal tax rate! Talk about regressive..."

----------------

Yes, this is factually true. Indeed, it's impossible for the government to give a means-tested benefit that won't have some sort of regressive kick-in-the-pants as the government withdraws the benefit as the recipient earns more for himself or herself.

But isn't the government giving low-wage workers a much bigger kick-in-the-pants by continuing to act as if there's no significant burden to society caused by having people be paid wages much lower than that necessary to support a family with some rudimentary security and comfort?

To take Alex R's specific example comparing $6/hour and $7/hour wage earners:

Yes, it's undeniable the subsidy scheme in the table above means that Mr. $7/hour-Wage-Earner is rewarded with only $0.21/hour more than Mr. $6/hour-Wage Earner despite the fact that he's productive enough to maintain his employer's profit margin even when his employer pays him $1/hour more than Mr. $6/hour-Wage-Earner.

But aren't both Mr. $7/hour-Wage-Earner and Mr. $6/hour-Wage-Earner much happier in the world with the subsidy where they become Mr. $9.29/hour-Total-Income-Earner and Mr. $9/hour-Total-Income-Earner than in a world without the wage subsidy?!

(I grant the issue of absolute vs. relative wages is important concern in general when behavioral economists think about how people actually assign utility to different potential scenarios. But, again, when we're talking about the "barely-making-ends-meet" portion of the wage spectrum in absolute terms, I believe absolute wage concerns should take precedence over relative ones.)

*****************************

3) The third standard criticism (which Alex R, I think, only hits obliquely) is that probably the biggest temptation for employers will not be to commit the minor fraud of under-the-table compensation or the major fraud of claiming more employees on their payroll than they actually have (i.e., Criticism 1), but rather the wholly legal act of using the government's wage subsidies to keep their employees' total compensation constant while they cut their wages. After all, if Mr. Capitalist's employees are relatively happy, hard workers at $9/hour, then why the heck should Mr. Capitalist personally keep paying them $9/hour instead of just paying them $6/hour and letting Uncle Sam pick up the tab for the other $3/hour?

The reason Mr. Capitalist should (eventually) decide to continue paying $9/hour to his employees is that in general employers should eventually bid up wages to the value of what employees produce for them while giving them a certain acceptable profit margin set by the interplay between stockholder self-interest, employee bargaining power, and larger societal mores. Employees who gave their employers a certain profit margin when they were paid $9/hour before the subsidy now give their employers the same profit margin when they earn a total of ($9/hour + gov't subsidy). Therefore, employees should end up receiving the full gov't subsidy.

(Of course, while this is correct Economics 101, it might strike many as hopelessly naive. After all, many an econometrician is claiming that the massive productivity increases of the last 5 years or so have mainly gone into greater corporate profits and not into any significantly higher wage compensation... indeed, in a way unprecedented in the post-WWII era. I suppose the question is whether you think employees wiil maintain the same average political influence they've had in the post-WWII era, or whether this market democracy is about to get a heck of a lot more plutocratic.)

Posted by: Bill on July 9, 2004 07:20 PM

____

Wow. That Landsburg. Seven short observation:

(1) Is Landsburg really saying 95% of all studies have found the minimum wage to have no effect on employment -- and by so finding were deemed too "uninteresting" to publish, like Card & Krueger? If so, that ought to be easy enough to verify. Calling all studies!

(2) As a former hirer of minimum wage help, it was my definite impression that those who primarily bore the incidence of regulations that increased the cost of hiring them were those persons who didn't get hired as a result.

(3) It was also my definite impression that the benefit of a minimum wage hike to those I did hire was trivial. The minimum wage is a "learning" wage. Anyone hired who could do the job well enough to keep it got a wage hike to well over the minimum wage pretty quickly (about two months) anyway. So they only benefited for that short time. The unemployed lost indefinitely, if not permanently be being permanently set back.

(4)"the jobs it kills were lousy jobs anyway". Geeze, you university types can sure be elitists. Somebody wants a job but can't get it -- well, that's OK because to you it was a lousy job anyway. Why was that person so stupid as to want it?

But one should really remember the minimum wage is a *learning* wage. Few non-elitists are born knowing how to work in a workplace. A lot of people don't know in their teens and twenties. Literally, things like the importance of showing up on time. I didn't when I started, and I learned on a minimum wage job. Many non-elite people like me have to learn the rudiments of employment on the job.

Is this the elitist attitude towards education? "So you don't get a grammar school education when you should, who cares, that's a lousy level of education, you can't get a good job with that anyway."

(5) "the burden of the minimum wage is broadly distributed across all taxpayers" seems a rather non-obvious assumption -- and it is *certainly* dubious that it falls on taxpayers in proportion to their progressive tax rates. The bulk falls regressively through prices on the majority of people who pay a distinct minority of the total income tax bill.

(6) "It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers." Really? Here's some Fed economists who haven't gotten that message yet. http://www.clevelandfed.org/research/Com99/0201.pdf

They look at the consensus estimate that a 10% increase in the minimum wage reduces employment among teenagers by 2%, a 5:1 tradeoff that looks pretty good! *Except* even few teenagers are affected by the minimum wage -- only about 20% are, which makes the ratio 1:1, which is *not* good, and when you also count the transitory nature of the benefit versus the permanent nature of the loss (the raise would have come soon anyhow, but unemployment and loss of education may set one's career back forever) it is not good *at all*.

(7) "use the minimum wage... Balance things at the margin". Well, *that's* sure not very rigorous! Where's the margin? If we know it's $10/hour why aren't we pushing for that? If we don't know where it is, how do we know the margin wasn't at $4/hour?

Are we going just by what makes us feel good? What we'd like to be true?

"try not to push ... to the point where its drawbacks (disemployment.."

That is, if we keep changes small enough so we don't see ourselves doing any visible harm we will be free to imagine we are doing a lot of good! ;-)

Although clearly any person who believes that (a) a big minimum wage hike to like to $25 an hour would do a lot of net harm through disemployment, without also believing (b) a small minimum wage hike would do a small amount of net harm the same way, without (c) having objectively identified and rationally explained a "swing point" margin between the two wage levels where net harm turns to net benefit, is necessarily engaged in no more than wishful thinking at point (b).

Hey, I got it. I bet the margin point is revealed in those 95% of studies that Landsburg deduces were conducted but never published. Time for a meta-study! Let's see 'em!

Posted by: Jim Glass on July 9, 2004 08:39 PM

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Well, everybody here can talk all they want about EITC an minimum wage an stuff, but I'm not believin any of it until I hear what Giblets has to say about this. ("The EITC bows down to Giblets!") On that note, there's a unique violation of Godwin's Law goin on out there that you should take note of:

http://fafblog.blogspot.com/2004_07_04_fafblog_archive.html#108934806750461180

Posted by: Jonathan King on July 9, 2004 09:02 PM

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Over a long period of time (for a lot of this time I was poor by most standards, but generally making more than the minimum wage when employed) I have figured out that most things done to help the poor end up screwing them more.
The burden of taxes is borne by the poor almost exclusively. The people taxed wriggle and squirm and push their burden away, they do not care where it goes. The poor (who are poor in part because they are less capable of getting rid of burdens) end up carrying the most.
Minimum wages are even worse. If they are not effectively a tax, then they raise prices, which the poor are less able to pay. But that is not the worst of it. It lowers the cost of bigotry. Let me give an example. Suppose a guy with one arm and few skills has gotten pretty good at sweeping floors while volenteering at a nursing home, but now needs a job that pays something, to supplement his disability check. With no minimum wage, he can bargain with prospective employers, by offering to work for a little less to start with, and when the employer is convinced ol' one arm can do the job, then get paid more in line with his co-workers. With minimum wage in place, the employer has no incentive to hire ol' one arm.
So all of your using the government to help the poor crushes them instead.
Far better for you guys to go live with them, work with them, teach them, and try to keep the weight of the government (which the poor got to carry) as light as possible.

Posted by: James Stewart on July 9, 2004 09:44 PM

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Two points about those McMansions.
Who got paid to build them? Who is paid to mow the lawn?
And, poor people shouldn't have to live in small houses! Have your local government require that all new houses in your town be 3000 square feet or more. Set up a program to condemn and demolish houses less than 3000 square feet! This will really benefit the poor! They will not have to live in dinky dumps any more!

Posted by: James Stewart on July 9, 2004 09:51 PM

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I think the best arguments for a minimum wage arise from its 'efficency wage' nature (it's part of treating employees decently enough so they don't spit in the customers' food) and from non-economic arguments about class relations (is no-one concerned about the effects on social attitudes of kids growing up having cheap domestic servants?).

It is a poor anti-poverty instrument; given the efficiency with which non-employment creates poverty, and the inefficiency with which the min wage counters it (because much of the benefit goes to those living in households that have other wages), a rise in the minimum wage only has to cost relatively few jobs for it to worsen poverty.

The point one or two people made about the employment effects of increases in the (very low) US minimum wage not carrying over to the employment effects of (very high) European-level minimum wages is spot on. The empiric evidence for the first being miniscule and the second being substantial is now pretty strong.

Posted by: derrida derider on July 10, 2004 01:01 AM

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What about a simple Progressive Negative Income Tax with extremely low marginal tax rates at the bottom end and the initial credit fixed as a percentage of the national median income?

Oh my god I think I just solved Poverty!

Posted by: Dmytri Kleiner on July 10, 2004 03:31 AM

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Jim Glass--I am puzzled how the minimum wage can be only a very short term "training wage" and thus be of only minimal benefit to its recipients, and yet significantly reduce hiring of trainees. Why would an employer refuse to hire a trainee who will soon have a value far in excess of the minimum wage merely to avoid paying the (at current levels, very small) "subsidy" for the brief training period?

Posted by: sklein on July 10, 2004 07:20 AM

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Self:

Thanks for the input. Please tell me, what is an appropriate response to

a) the claim that money in the hands of people you don't like (the investment class, of all people) is 'sloshing around' doing nothing, so it is fine to take it and give it to people you do like.

b) that it is fine to call Elephants Scrooges even when the policy you are using harms some people to help others

c) that dirty, dirty profit all winds up in 'Mc Mansions' and doesn't go to productive investment of any kind, so clearly the best use of profit is to increase wages at the lowest levels.

My impression was that comments could be used to critique assertions like these. No?

Posted by: Jason Ligon on July 10, 2004 08:11 AM

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Despite its intriguing ode to Bonferroni, the article contains rudimentary economics errors on who bears the cost of minimum wages increases (obviously it is shared among firms and consumers while the article contends "the minimum wage places the entire burden on ... the employers of low-wage workers") and misconstrues the inherently beneficial voluntary choices inherent in capitalism ("If you contribute $6 an hour to your employer's bottom line, and if he's forced to pay you $7 an hour, you'll soon find yourself out on the street ... [but] [l]osing a lousy job might not be a whole lot worse than keeping it."). The article also makes a sweeping generalization about an academic consensus on the counterintuitive notion that raising minimum wages does not diminish labor demand, though I only know of Krueger's controversial study of the fast food industry to this effect.

Posted by: John on July 10, 2004 08:11 AM

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It's been over 20 years since my under grad BA in economics, and you mean to tell me we havn't figured this out yet?

This, ladys and gentlemen, is why there are more MBA's than graduate degrees in Economics which is unfortunate for us all, especially minimum wage workers.

Gees...

Posted by: Tom on July 10, 2004 10:10 AM

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A debate between the minimum wage and the EITC is nothing more than a debate between which is "good socialism" and which is "bad socialism." Many would prefer a different sort of debate.

Please see my blog for a post on this subject.

http://kipesquire.blogspot.com/2004/07/econ-101-moment.html

Posted by: KipEsquire on July 10, 2004 10:22 AM

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So who benefits from the minimum? Kids supported by their parents working summer jobs. And Democrat politicians who can play the Scrooge card yet again.


Less than 10% of the minimum-wage labor force are teenagers (16-19). Give me a break.

Posted by: Chris Wage on July 10, 2004 12:45 PM

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Chris:

http://www.bls.gov/cps/minwage2002.htm

Posted by: Jason Ligon on July 10, 2004 01:50 PM

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The most extreme, i.e. pro-business, estimates are that a 10% increase in the minimum wage leads to a 3% decrease in employment among effected workers, i.e. those making less than the new minimum. Hence, assuming the average effected worker makes 1.25 times the minimum, then, with a 50% increase in the minimum wage, 15 out of 100 workers would lose their jobs/income and 85 would gain a .25 increase in income. ((85 x .25) - (15 x 1.25)/ 125 = 2.5/125 = .02 - a 2% increase in net income for effected workers, hardly a momentous redistribution. The more relevant argument for an increased minimum wage/ wage floor is that it pushes up wage pressures up the wage scale ladder, (though effective union organizing would be better.) The argument against both low wages and wage subsidies is that they encourage low productivity methods, lowering incentives to improve productivity, and that they constitute a drag on the wage-scale ladder, pushing down wages of uneffected workers. Those arguments are of broader macro-economic significance than the direct effect of the minimum wage itself.

I might add that the condescenscion and lack of imagination of some commenters here with respect to the lives of low wage workers is quite striking. I especially liked the citation of a $100/hr. minimum wage. The reason Kant distinguished analytic judgments, by contrast to synthetic judgments, was not because he liked logical or semantic tautologies. Rather they function explicatively, with respect to incompatabilities, as when, e.g., someone were to talk of having sensations that they do not feel...

Posted by: john c. halasz on July 10, 2004 02:29 PM

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the other folk argument against a higher minimum wage us that it will be eaten by self inflicted inflation. what does the data say about that?

Posted by: anony on July 10, 2004 03:06 PM

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I agree that an increase in the minimum wage is better than alternative options (nothing). I favour a minimum wage increase for the political reason that the cost is off budget "If you want to transfer income to the working poor, there are fairer and more honest ways to do it."

You have (partly) handled "fairer" and as to honest, I'll be honest when this rotten war against poverty is over.

However you phrase the post as pure policy analysis -- what is the best policy not what is the best politically possible policy. This makes it hard to defend an increase in the minimum wage, because it has to be the very best policy reform.

I hereby challenge you to explain why an increase in the minimum wage is better than a payroll tax reform reducing the lowest tax rate so that full time (or less) minimum wage workers have the same take home pay as with a minimum wage increase and paying for it by removing the cap (and maybe shudder even making the top marginal payroll tax rate higher than the standard rate).


further argument at the link begging http://rjwaldmann.blogspot.com

Posted by: Robert Waldmann on July 10, 2004 07:15 PM

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Bill: direct subsidy of low wages

What would prevent the subsidy from being "priced in"? I.e. employers can probably figure out a scheme to replace all $10 jobs by $6 jobs, and shift most of the difference to government subsidy. Bingo!

In Germany, there was recently an "experiment" (I'm not willing to call it anything else) to give companies bonuses when hiring unemployed people (not job changers). This almost immediately led to a number of fraudulent schemes of bonus-skimming. A relative of mine was laid off and then hired back (I think by the company of an acquaintance or family member of the old proprietor) in order to fetch the bonus.

Posted by: cm on July 10, 2004 07:18 PM

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[First of all, before I reply to the concerns cm expresses in the comment above, let me just pose the following rhetorical question:

Why the heck am I posting such long comments here?! I have my own darn blog!

(shameless plug)

http://williamkaminsky.typepad.com

(shameless plug)

But since I'm too lazy to merge all my previous comments in this thread into one coherent whole and put 'em on my blog tonight, here goes my reply to cm...]

Cm, I assume you're speaking not of what I dubbed the "third standard criticism" in my last comment: namely, that employers will simply pocket some significant fraction of the wage subsidies and thus raise their profit margins rather than keeping their profit margins at the pre-subsidy levels and passing on the whole subsidy to their employees.

Rather, I assume your criticism is essentially this: Wage subsidies give a perverse advantage to low-productivity workers. To take an example even more extreme than yours: Why should an employer pay a high-productivity worker capable of producing, say, $18/hour when this employee completely unsubsidized? Couldn't the employer get just as much sellable product with three $6/hour workers, ones who'd be eligible for the maximum subsidy?

Here's Phelps's own answer to this criticism, which also takes on the specific fraud/gaming-the-system angle implied by this criticism.

******************
The usual apprehension about this approach [i.e., my wage subsidy proposal] is that it would give disadvantaged workers an unfair advantage over the less disadvantaged. Why employ two productive workers when it becomes cheaper to use five
unproductive workers to eke out the same output? But this way of thinking appears to be based on thinking in terms of a single firm for which the tax credits are uniquely available. In the economy as a whole, the wages of the less disadvantaged will sink only if their physical productivity sinks as a result of the influx of the more disadvantaged. And the entire workforce of
disadvantaged workers is too puny in productive power to be able to depress perceptibly the productivity of the less disadvantaged.

Of course, under this scheme firms would be motivated to represent as many of their employees as bottom-wage workers as is credible (to maximize the total tax credit) - just as firms paying payroll taxes would like to represent their wage bill as a payment to a few very high-wage employees (to minimize payment of the payroll tax). As with tax collection in general, an
enforcement mechanism is necessary to guard against fraud.

[Source: Edmund S. Phelps, Statement Before the National Commission on Economic Growth and Tax Reform (September 29, 1995), available online at http://www.columbia.edu/~esp2/taxcomm.pdf]
***************************

Posted by: Bill on July 10, 2004 11:34 PM

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Two points:

1. One of the main pro-minimum-wage arguments is that many firms act as monopsonists, so they will actually hire more people, not less. I wonder why this pint is completely ignored here.

2. A point made by Herb Gintis some time ago was that employment in minimum wage industries is usally so instable that lower employment with higher wages means essenialy that people have to work shorter for more money.

Posted by: Michael Greinecker on July 11, 2004 05:13 AM

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"The argument against both low wages and wage subsidies is that they encourage low productivity methods, lowering incentives to improve productivity, and that they constitute a drag on the wage-scale ladder, pushing down wages of uneffected workers."

What constitutes a 'low' wage for each job? You don't know, and neither does the government. Why would you want to artificially elevate the wage scale on jobs that represent relatively little in terms of productivity?

When the minimum is raised, the jobs that are worth only the previous wage get melded with other jobs until the output of the new job justifies the new minimum. You are, in addition to putting upward pressure on the wage scale, taxing specialization at the low end and increasing the amount of sweat that goes into those jobs by fiat.

"I might add that the condescenscion and lack of imagination of some commenters here with respect to the lives of low wage workers is quite striking. I especially liked the citation of a $100/hr. minimum wage."

The condescention is not directed at the lives of the low wage workers, but at those who pretend that they are not hurting some people to pay others. The $100/hour minimum wage serves as a challenge to many of the ideas floating around here. If you aren't hurting anyone in net, why not? I personally find the casual dismissal of an attack on the small employer condescending, but we all come at these questions with our own baggage.

Posted by: Jason Ligon on July 11, 2004 07:54 AM

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After reading thru the responses here, I'm aghast at just how little people know about econonomics. Okay, here goes:

1) A business's fudiciary responsibility is to have the fewest people on staff needed to perform the tasks needed to stay in business. As someone who has worked in fast food, I can tell you that a) profit margins are slim, and b) they cut labor to the razor bone as often as they can. If it is a rainy day, for example, and business is slow, and you show up for work and you're low man on the totem pole, they're just as likely to tell you "Sorry, no work for you today" and send you home. And BTW, this applies to upscale restaurants too. Most upscale restaurants don't even pay their waitresses minimum wage, expecting their waitresses to make most of their money via tips. The high food prices are going to pay for high overhead both for the fancy digs and the fancy food (do you know the shelf life of truffles? It ain't long!), not for high wages.

If the minimum wage gets hiked, they cannot somehow "absorb" the cost. Their margins are already razor slim. They cannot fire employees. They already have the fewest employees on staff needed to meet customer expectations for service. They *must* raise prices, otherwise they are out of business. And they do. The price of my Taco Bell benchmark meal goes up every time the minimum wage goes up, from $2.50 in 1985 to $5.50 today. And you know what? I still pay it.

2) Now, that raises the question of demand elasticity. If they raise prices, surely that will lower demand? But for most commodities created with minimum wage labor, demand is extremely inelastic within the range proposed for minimum wage hikes. Just as bread and milk continue selling at roughly the same pace even though, in my community at least, their price has roughly doubled over the past 10 years, I will buy the same number of tacos whether they are 39c apiece or 59c apiece. If the next minimum wage hike bumps the cost of tacos to 69c, I'll shrug and STILL buy the same number of tacos. They are still cheap, relative to the rest of the economy. Now, obviously, it is possible to hike the minimum wage out of this flat spot on this price-demand curve. But the relatively modest increases proposed for the minimum wage -- increases that don't even match inflation -- are nowhere near that level. In other words, a modest minimum wage hike is not going to spike demand, and thus is not going to cause people to get fired because demand fell off.

The worst thing that can be said about minimum wage hikes is that they tend to fuel inflation, as the effects bump up the fuel chain. Demand spikes because of the additional spending by the minimum wage workers (minimum wage workers typically spend 100% of their income), requiring more labor elsewhere, which in turn causes wages to go up, which in turn bumps up demand elsewhere. It's like you're throwing gasoline on the economy, and a far more effective way of doing so than tax cuts to rich people, because rich people are already spending as much as they're going to spend, the additional money just goes into investment (valuable in its own way, but right now we have excess capacity, a result of too much investment, rather than excess demand). But anyhow, the risk is that, as someone else mentioned, poor people end up the same relatively speaking after inflation ripples through the economy. They're making more, but everything they purchase costs more, so they're no better off. But that only happens if there is no economic surplus that needs siphoning off by increased demand. If there is an economic surplus of both goods and labor, the relative prices of things do not go up other than those goods and services provided by minimum wage labor. This is especially true since most of our manufactured products now come from the Far East or Mexico rather than from American factories, and thus will not have a significant increase in prices caused by a minimum wage hike.

In short, if Bush had wanted to ignite the economy in time for his election, he would have supported a minimum wage hike last year. After a short time of economic dislocation following such a hike, history shows that the economy takes off in the aftermath. Ideological arguments against the minimum wage just do not match the facts. As a factual penguin, I must go with what history shows me, not what some abstract argument on the part of ideologues says.

- Badtux the Factual Penguin

Posted by: BadTux on July 11, 2004 10:56 AM

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Bill: I cannot make sense of the response to my concern that you quote. Specifically, I reject the concept that the hourly pay is primarily a function of the productivity of the underlying "human resource". My point is not primarily that one $18 worker will be replaced by 3 $6 workers (to some extent that may happen, and of course productivity-enhancing measures or lack thereof are part of the picture), but that the employer(s) can get rid of their $18 workers and hire $6 workers instead, or even recycle the same people at lower pay by slightly reclassifying the jobs to avoid legal obstacles, or outsource the jobs to another firm that does the work for $6+markup. (And when the $18 workers are laid off, they may as well get the hint: "but I heard there are such-and-such subsidized $6 jobs where your profile could be a good fit"). And to the extent that the $6 jobs are subsidized upwards (although the gap to $18 is very large), there will be less resistance from the workers' side.

I consider everything that raises the living standard of workers a worthwhile experiment, but if such loopholes are not closed, it will be just a dead giveaway to unscrupulous businesspeople. And I did not just make a hypothetical objection, but indicated how similar subsidies failed
elsewhere (predictably).

I don't know how to exclude this windfall-taking effectively and in a hard to engineer around manner, that's why I asked.

Posted by: cm on July 11, 2004 11:22 AM

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Jason Ligon: What constitutes 'low' wage

Well, that's easy -- a wage that makes it difficult to attain or maintain a dignified living standard by "generally agreed principles". Mind you, we are not talking about luxury, but "adequate" shelter, food, medical care, and other basic amenities.

Of course that raises the immediate problem that there is no objective measure of what is dignified, adequate, etc. However I think there pretty much is a broad social consensus on at least the low end of those concepts.

Saying that there should not be a minimum wage as nobody can figure out what it is smacks of (1) a cheap argument, and (2) of social darwinism.

And yes, any raise at the bottom of the wage pyramid (either by a minimum wage or a welfare "bottom") will percolate up to some extent, as the inevitable price increases for low-end products & services lead to pressures on their consumer side, and higher wage earners call for their "equity". _But_ make no mistake, a worsening of the wage pyramid at the low end will also percolate up! Perhaps not as paycuts, but skipped or sub-par raises and bonuses.

Posted by: cm on July 11, 2004 12:23 PM

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cm:

So, if I hear you right, I could get a job counting grains of sand on the beach. There is no demand for my services at anything approaching the minimum wage. You are saying that what I produce in the way of economic value doesn't matter at all, what matters is my economic need?

There are two people who know the value of labor in a given situation, the person offering the position at a certain wage and the person accepting or refusing at that wage. This is the same way we know the value of an orange in the supermarket. You can't wave a wand and simply declare that all oranges are worth $100 each and expect everyone to go along with you.

As I mentioned above, when you declare that no job worth less than $10.00/ hour will exist, you simply force reorganization such that each formerly $5.00/hour job now produces $10.00 an hour in value. This may be done by reducing employees and doubling expectations, it may be done by offsetting costs through price increases or turning off the air conditioner, or it could instigate an investment in technology to obsolete the worker altogether.

Posted by: Jason Ligon on July 11, 2004 02:15 PM

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cm: I see your point. To the extent that there is roughly equal bargaining power between employers and employees (e.g., as there would be in an economy operating at full employment and with ample competition, more aggressive enforcement Fair Labor Standards Act, and a generally optimistic populace), employers will not be able to game a wage subsidy system by replacing high-wage labor was low-wage labor to any significant extent. To the extent that there is not (e.g., an economy coming out of recession, rampant gaming of the regulatory, anti-trust, and intellectual property protection system to win monopolies, laughable enforcement of tax fraud and SEC violation let alone the Fair Labor Standards Act, and a populace scared s#!*less by an ongoing war and the omnipresent threat of terrorism), then I fully concede your point: employers will be able to parlay their advantage in market power to claim the lion's share of any wage subsidy scheme.

Posted by: Bill on July 11, 2004 02:38 PM

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cm: Also, I concede your point that there's underlying moral/philosophical question: Do people deserve a wage based on what on average they produce per hour to their employer plus what on average they somehow "produce for society" by playing by the rules and being self-sufficient. Or do they deserve more? Or even if they don't deserve more, do we make it unlikely employees will be so paid by phrasing the question of proper wages in this way? (By this last question, I refer to the basic rule-of-thumb for life that you should aim higher than your desired target, since no matter what you do, life's going to knock you lower a couple notches... and often when you least expect it.)

I contend that even before we broach the second and third questions, we've already reached a serious gap between the moral ideal and practical reality. Specifically, I'd say that while it's plausible to
think our current economy operating at full employment and semi-competent enforcement of current regulations would lead to employees getting fully paid for what they produce for their particular companies, it's utterly implausible to think our current economy rewards what working people "produce for society". I believe this is a massive externality, and this is what wage subsidies would directly address.

But there's certainly is the question of whether there are significant market failures beyond this externality (be they on either traditional economic or more moral grounds). And here I certainly see that the question of coercion arises. How many workers are secure enough financially and emotionally that they can hold out until they get a deal they consider fair? Or is this exchange between employers and employees really not entirely a mutually consentual one?

Posted by: Bill on July 11, 2004 03:01 PM

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Jason Ligon:

I happened to be reading a book on philosophy and thus was thinking about Kant, so that's why I phrased the point about proper discursive norms that way, (though the sarcasm wasn't Kant's and was partly directed at some analytic philosophers.) But the discussion was about the *minimum* wage, and citing a $100/hr wage makes absolutely no point in such a discussion: were the entire nominally recorded output of the U.S. workforce/economy to be reduced to the form of an hourly wage, it would be around $40/hr. So a $100/hr minimum could only refer to a state of catastrophic hyperinflationary collapse.

Also, the point about all that talk of entrepreneurs and competition is that it is supposed to result in the efficient production of value-added. If an entrepreneur can only organize his business and profit on the basis of paying substandard wages, then he "deserves" to fail.

Another discursive error that occurred above was when some commenters tossed about the notion of the "marginal product" of labor, as if they knew what they were talking about and as if it were a unit measure. In the first place, what is the marginal product of the labor of a janitor or a stock analyst, assuming their labors are not directly charged for in a final product? The point is that virtually any product is the result of the combination of several labors, which can not be wholely distinguished in the product. Further the marginal product of labor can not be talked about in isolation from capital endowments and the returns to/value of capital. Thirdly, 3 workers, say, can have the same real output: the marginal product of the first is high, the second is half that, and the third is negligible. That is the basic application of the concept of the "marginal product of labor."

The price effect of higher wages will depend upon the wage component of final prices. That is typically thought to be highest in the restaurant business, but would vary across sectors and business models. The overall inflationary impact would depend, among other things, on the degree to which profit margins are maintained.

The 2% net redistributive effect of raising the minimum wage that I produced was based on the most "conservative", pro-business assumptions. In reality, the effect is probably slightly higher than that, but still small. Which is presumably why Prof. DeLong mentioned at the outset that low-wage policies should balance tax-based subsidies with wage increases.

When discussing matters of general social import, it is good not to be blinded by one's own reference group. That blindness did seem to infect the attitudes of many of the commenters above. It bears the faintest whiff of the old "happy Negros" argument.

Posted by: john c. halasz on July 11, 2004 03:05 PM

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Jason Ligon: free bargaining vs. minimum wage

john c. halasz already made some of my points, but let me add the following propositions:

(1) Assuming that counting of sand grains is not an activity that is useful or in demand, nobody will give you this job at any wage.

(2) The minimum wage (and other labor regulations, like the FLSA or OSHA) was not introduced to put a frivolous burden on businesses, but because of the realization that free bargaining of wages and working conditions did not work, in the sense that it would not lead to minimally acceptable conditions on the part of workers.

(3) Yes, if the minimum wage exceeds the net contribution of a group of workers (allowing for "reasonable and customary" profit & overhead cost), then this endeavour will not be profitable. As you indicate, automation, increasing efficiency of processes, debasing of the product, reorientation, or closing of the business will be the consequence. But this is where demand & supply on the side of the business/market interaction will kick in -- if the product of the business is in sufficient demand, there will be price leverage, and the business can either be made profitable, or the business will die out. And this holds not only for wages -- if property values, rents, or regulation-imposed costs increase in some area, low-yield businesses will be forced to cheaper areas (for several meanings of "cheap").


All of this is not to say that I think that minimum wages are the best solution to the problem. But in a situation where there is an oversupply of labor (and historically there has always and everywhere been), and if establishing a minimally acceptable standard of living strikes you as a worthwhile goal (apparently quite an assumption), you have to either put a bottom under the wage scale, or provide universal welfare benefits including basic housing, food, and healthcare. (And as you realized, a minimum wage will be an impediment to low-end job creation, so some sort of welfare will be needed anyway.)

Posted by: cm on July 11, 2004 08:46 PM

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To reinforce John Halasz's point about entrepeneurs organizing business and profit on the basis of paying substandard wages deserving to fail: They *WILL* fail. Period. It is absolutely, 100% impossible for a small entrepeneurial to compete with the Wal-marts and McDonalds of the world based upon low prices and low wages. These businesses are amongst the most heavily government-subsidized in the world and have enormous economies of scale. No entrepeneurial business can out-pilfer the public treasury like they can nor hold up their suppliers at veritable gunpoint like these megacorporations based upon vast scale, low wages and low prices do.

The best bet for an entrepeneurial business is to go after a new market where he can demand a higher price for his wares and where the megacorps, with their allergy to quality and service, cannot go.

It is interesting that it is entrepeneurs who are held up as being hurt by minimum wage hikes, when in fact minimum wage hikes hurt the Wal-Marts and Home Depots of the world much, much worse because those are businesses based upon poor quality, low prices, and low wages. Similarly, a single-payer health plan like Canada's would be a boon for entrepeneurs. IBM and Microsoft can strong-arm insurance companies to get good rates and service. A small startup cannot, they get reamed up the rear. It is clear that the current situation favors large employers over small ones and is anti-entrepeneurial. But nobody wants to tell you that. Instead, all you hear are lies about how it'd drive small businesses out of business -- when the real reason why Big Business fights single-payer plans tooth and nail is that it'd put small businesses on the same footing as IBM and Microsoft, at least insofar as health care benefits go, instead of the current situation, where my employer (a small startup) pays twice as much as Microsoft for inferior benefits.

In fact, it is interesting that all the propoganda about how the minimum wage and a single-payer health insurance system would hurt small business is exactly the opposite -- the reality is that these hurt LARGE businesses, which are based upon providing vast quantities of cheap goods using low-cost labor, while helping small businesses, which do not have the economies of scale needed to drive down the cost of labor and materials the way that Wal-mart does, and do not have the scale of an IBM or Microsoft needed to obtain affordable health insurance. If you trace the origin of the propoganda on these subjects, you'll find it originating with astroturf-roots "organizations" at are in fact paid mouthpieces of various large and wealthy corporations. Gosh, who woulda thunk it?!

- Badtux the Entrepeneurial Penguin

Posted by: BadTux on July 11, 2004 09:37 PM

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Since it is true that most food services run on a highly efficient level of labor already, a MW rise would probably reduce the amount of raises available to experienced personnel, rather than reducing the total number of employed persons. I imagine it must flatten the wage/experience curve, perhaps even reducing the rise in manager wages.


Posted by: Mr. Econotarian on July 11, 2004 09:38 PM

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Bill: who deserves what

I think at a high level the issue can be stated quite simply: Should the society and its state pursue a policy of making a good effort of providing/offering a minimally acceptable standard of living to all the population?

As I said before, this raises the non-trivial problem of agreeing on a broadly shared standard of what "minimally acceptable" means. But I would rather view this as a technicality, not a fundamental problem.

Also attaining this 100% through welfare and public housing appears to be close to impossible -- even in Germany where citizens below a certain (quite low) measure of wealth are entitled to relatively generous welfare, some apparently choose to live on the street for reasons that are beyond me. Landlords' willingness to accept people perhaps suspected of social, mental, or substance abuse problems is limited, and maybe homeless shelters have limited beds or restrictions that people don't want to accept -- limited space for belongings you can bring, drinking, smoking & drug policies, or whatever.

You say:

"Do people deserve a wage based on what on average they produce per hour to their employer plus what on average they somehow "produce for society" by playing by the rules and being self-sufficient."

From a "laws-of-nature", "Darwinist", or even "free enterprise" point of view, nobody "deserves" anything (except _me_ to make a shitload of money). I would phrase it in terms of whether the society should make an effort to ensure a minimal (and dignified) living standard for everybody. I'm not sure that putting the burden on individual employers, by a minimum wage or otherwise, is the proper approach, as it _is_ a tax on employment, discouraging such. Welfare, financed out of taxes suitably levied on everybody, and to restore "fairness", including every welfare-tax payer in the group of beneficiaries, subject to reasonable means-testing, would perhaps be more effective. The Social Darwinists will cry out, "why do I have to pay with the sweat of my brow for no-gooders, lazy bums, and drug addicts", not realizing that those are quite variable categories including single mothers, the old, the disabled, and perhaps one day themselves when their skills have become obsolete, they are suffering a condition rendering them unable to work in their profession, or their jobs have been offshored to greener pastures. Short of universal welfare, I don't see a better solution than a minimum wage (or perhaps the EITC, which is welfare in disguise, and also hidden behind the obstacle of having to prepare a tax return).

"... would lead to employees getting fully paid for what they produce for their particular companies ... "produce for society" ... externality ..."

If employees get "fully paid", nothing will be left for the proprietors. But perhaps you mean "fully paid" in a risk-adjusted sense, so that the proprietors get compensated above and beyond their risk before employees get "fully paid". Fortunately the economy is (ideally) not a zero-sum game, so splitting the surplus-value is possible. Also in many cases the surplus-value is larger than the company producing it can fully capture in profits, leading to a positive externality. And this uncaptured externality is precisely what facilitates and encourages progress.

"But there's certainly is the question of whether there are significant market failures beyond this externality ... [consensual transactions]"

A market, free or not, is always governed by supply and demand, and perceptions of supply and demand. In a market as complex as the labor market, where the exchanged "goods" are not commodities of known, standard, or readily determined qualities, and where the market is (1) not public, and (2) distributed in time and space, it is hard to know what supply and demand look like, and thus it is guided more by perceptions and psychology. As a consequence, the market may become "fragmented" and may fail to clear.

In large parts of the current labor market, and almost always in the "low-end" labor market, there is a perception (rightly or wrongly) of relative labor oversupply, biasing prices towards too low values, and creating an expectations gap on the skills & experience front. The result appears to be that companies cannot hire the people that they think they want (it is _so_ hard to find good people! and the salary expectations!), and people who fit the job descriptions don't get hired.

Posted by: cm on July 11, 2004 10:40 PM

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BadTux: "The best bet for an entrepeneurial business is to go after a new market where he can demand a higher price for his wares and where the megacorps, with their allergy to quality and service, cannot go."

There is a catch with that -- with increasing consolidation into the large mega-corporations that you describe, your small business is running out of the customer base that will pay the higher price. It is not only the low-wage earners who will not be able to afford your wares, but the middle-class customers saddled with mortgages and under price & wage pressure of _their_ products having to sell cheaper (either to the large corporations, or cash-strapped customers) who have to restrict their lifestyles as well. In other words, where _is_ the new market, other than selling expensive gizmos for the "rich" to show off their trendiness?

Not to be too negative, but what do you think?

Posted by: cm on July 11, 2004 10:52 PM

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cm:

"And this holds not only for wages -- if property values, rents, or regulation-imposed costs increase in some area, low-yield businesses will be forced to cheaper areas (for several meanings of "cheap")."

I'm not surprised to report that we disagree on the importance of this issue. The feeling here is that costs are costs, and if we drive businesses out of the market by imposing artificial costs, oh well, they deserved to go out of business anyway. Good businesses adapt to costs, right? I again roll out the $100/hour minimum wage. To make Mr. Halasz happy, I'll reduce it to his calculation for product / laborer / hour at $40.00. The point is, why not make the minimum as high as humanly possible? If the basis of the wage is not product but desert, and companies that can't pay $10.00 per hour for every job deserve to go out of business, and there is no downside to imposing the minimum, why not simply legislate everyone into wealth at $40/hour? Surely everyone deserves to be able to send their kids to Harvard, and companies that can't pay 'good' wages deserve to go out of business anyway.

As for the notion that you can't discuss marginal product because Marx tells us you shouldn't, or becuase capital inputs are also factors, or whathaveyou, my point is precisely that the price of labor is supposed to take care of that for you. I offer the orange to you for $100 dollars, you say 'No, thanks,' on the grounds that it simply isn't worth that to you. You counter with $.05 and I refuse because it cost me more than that to grow and ship my yummy fruit. The marginal cost of production is factored in, exactly as it is supposed to be, in our discussions. The further point is that a much worse analysis of marginal product is one where you pretend the price of labor is completely arbitrary, so you might as well make it high. The solution to an equation of multiple variables isn't to simply define the answer to be 1 on the grounds that the variables are difficult to look at in isolation.

Posted by: Jason Ligon on July 12, 2004 06:35 AM

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Jason Ligon: The purpose of the discussion is not to establish general agreement. Some positions are too far off.

Most people here appear to be very much in favor of free markets, but markets can and usually do have so-called "externalities", that is things not captured in a price measure; as the purpose of a market is to produce "optimal" prices, it can "optimize" only things expressed in the prices. If certain externalities go outside their desirable range, you have to "help" them by means which are either outside the market mechanism, or "interfere" with the price formation in an attempt to capture the externalities.

Minimum wages or other "wage bottoms" are "artificial costs" in your terminology, but are not substantially different from other costs imposed on businesses in the form of, for example, workplace safety, environmental and waste disposal, business conduct (antitrust, truth in advertising etc.), and other regulations. Or for that matter, the cost of having to pay office rent as the government protects property rights and so enables landlords to ask any rent they think they can gouge.

All of the former regulations have been introduced as a consequence of the observation that, to say it mildly, not all companies will comply with minimal codes of conduct by themselves. When people argue against imposing such regulations (in the US as well as elsewhere), I usually hear or sense the explicit or silent assumption that _you_ will not be the subject of wage squeezing, toxic waste will not be dumped on _your_ doorstep, _your_ hand will not be cut off by an unguarded machine part, etc., and the _really_ unstated assumption that there is another class of suckers who have to put up with this shit.

Sometimes the argument takes the form of "the well-informed citizens will bargain for favorable conditions, or choose to settle where smokestacks will not be built; if they fail to do so, it is their own fault (why didn't they pay attention in school, etc.)".

If you think misery can't hit you, good luck to you.

Posted by: cm on July 12, 2004 07:53 AM

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Why is minimum wage a federal issue? Can't states with higher costs of living, say, California, impose a higher minimum? And if there are plenty of teens or immigrants in some depressed area who are willing to work for $1.00 a day in, say, Texas, is it the business of the federal government to either say they can't -- or to drive labor into the black market?

And speaking of the black market, isn't at least one likely impact of raising the wage a reduction in FICA and income tax collected? Say my indifference point is to pay an employee, on-the-books legally in accord with minimum wage law, $6.00 /hr or illegally off-the-books in cash $5.00 an hour. The employee who takes the cash fails to pay his Social Security obligations, right? And makes himself ineligible for gov't help via the IRS EITC program too, right? Isn't this worth a study or two?

Posted by: Pouncer on July 12, 2004 11:05 AM

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Directly relating to RT's comments:
First of all, how can you morally justify your comments about top to bottom wealth redistribution? How is the concept any different from stealing a car from a dealership (for example)? If it is not different, I would ask you to consider if you really wish "society" to open that can of worms and the lawlessness which it releases (not that we haven't already).

Also if, for the sake of argument, we take the a priori assumption that this redistribution of wealth would be desirable, it seems that there would be more just ways to accomplish it. One possible means toward this end might be the abolishment of the limited liability corporation. The corporation basically lowers the risk of operating enterprises- this lowered risk translates into company property siphoned off toward those who can gain power in the organization. There is little check on such behavior since when the corporation finally buckles under the weight of the self-largesse of the principals and other power brokers the government enforces the protection of the corrupt individuals at the expense of creditors. Thus capitalists in modern society have great incentive to be greedy and corrupt and great *dis*incentive to live moderately.

Posted by: Micah on July 12, 2004 01:53 PM

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"Even if minimum wages don't affect employment at all, about five out of every 100 studies will, for unavoidable statistical reasons, appear to show a significant effect.... But if the 95 studies that found no effect were deemed uninteresting and never got published, then all you'd see were the spurious five...."

Is anyone really claiming that 95 out of 100 studies of the effect of minimum wages on employment show that raising minimum wages does NOT reduce employment?

http://ideas.repec.org/a/ucp/jlabec/v17y1999i1p1-22.html

"The Effects of Minimum Wages on Employment: Theory and Evidence from Britain"

"Recent work on the economic effects of minimum wages has stressed that the standard economic model, where increases in minimum wages depress employment, is not supported by empirical work in some labor markets."

That hardly sounds like a situation where 95 out of 100 studies show NO increase in unemployment. If that were so, why would the "standard economic model" be that "increases in minimum wages depress employment"?

In fact, if the "standard economic model" is that "increases in minimum wages depress employment" I would expect that studies that *confirm* the "standard economic model" would be the ones "deemed uninteresting."

Posted by: Mark Bahner on July 12, 2004 02:35 PM

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Jason Ligon:

The plain fact of the matter is that labor "markets" do not suffice to explain prevailing and variable wage rates. Further, supply and demand is not a self-sufficient explanation of economic value. Behind the ratios of exchange between products lie the costs of production and one of the points of economic thinking is to maximalize the aggregate real product by minimalizing the real costs of production. Distributive factors are also a part of this, as are the mix of conditions that conduce to the adoption of the maximally efficient techiques of production. For your style of argument to constitute a reductio, you would have to pay much more attention to the details of the real world, rather than deducing everything from the simplistic premises of libertarian absolutism. But just to make the simplest point, one wouldn't expect to sell a raw material input, say, oil, at below the cost of reproducing its production. Why then would one assume that labor does not have some minimal reproduction cost, which can be socially discerned, and why would one assume that expansion downward at the margins would not also have some real trade-offs for an economy as a whole? Economies are real systematic implicatures, not a sum of individual choices.

Posted by: john c. halasz on July 12, 2004 02:51 PM

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"But just to make the simplest point, one wouldn't expect to sell a raw material input, say, oil, at below the cost of reproducing its production."

True. This is factored into the minimum price at which oil will be sold, and is determined by the people paying that price.

"Why then would one assume that labor does not have some minimal reproduction cost,"

Of course it does. No one would build a skyscraper for free.

" which can be socially discerned,"

Here is where we have problems. Prices are carriers of information. Part of the information carried is the reproduction cost of a good. It is not necessary for each person to be able to ferret out this number from the price of a good retroactively, it is factored in anyway. What is the mechanism for socially discerning the reproduction cost of labor? Do we just ask people, "Excuse me, sir, would you like a higher wage?" What you are suggesting is that we socially determine what the reproduction cost of oil is. The refiners may scratch their heads when you socially determine that a process they know costs them $5.00 an hour can't POSSIBLY cost them that little, so everyone has to pay them more than the minimum they were willing to accept on their own.

"and why would one assume that expansion downward at the margins would not also have some real trade-offs for an economy as a whole?"

There are certainly trade offs to a price settling at equilibrium. Food trading at very low prices by golly means we have too much farming capacity. There are also tradeoffs to setting a price by decree, not the least of which is that the price doesn't convey information anymore. Throwing money at labor that is isn't exercising a comparative advantage is not beneficial in the long run. It is theft of opportuninty in other fields.

"Economies are real systematic implicatures, not a sum of individual choices."

Economies are a sum of individual choices when allowed to function. Occasionally, they are also tools of reward for political clout. We will disagree on which is the better way to look at them. The reality is, yes we can print more money and yes we can decree that labor is worth at least X regardless of value to the employer and yes we can take money from some people and give it to others. We are always doing these things with blinders on, and the motivations for doing them have less to do with the economy as systematic implicature and more to do with public choice considerations. We wreck the unseen so we can make a glossy election poster of the seen.

Posted by: Jason Ligon on July 13, 2004 12:33 PM

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Everyone seems to equate the increase in Minimum Wage with a similar increase in the cost of the product. By far it is not the major cost in Manufacturing. You need to look at Overhead which includes all of those legislated benefits (SS, Workmans Comp, Unemployment and other costs as well, healthcare, 401k, etc) and also Material Costs which by far is the biggest component. Of course some of these bennies may not be available for lower income workers. Actual Direct labor in a product is somewhere between 8 to 14% of the Cost of Manufacturing. Consider also what is the output of the Labor? 100pieces/hour?

Everyone leaps to the conclusion that an increase will be a burden without looking at how it breaks down in product cost. I can guarantee you, outsouring to Asia is not the result of actual direct labor costs. Look to you Overhead costs that support the infrastructure (social and otherwise) for the reason. For sure, these are not being installed in Asia beyond a doctor and nurse on staff, two meals a day, and transportation.

Posted by: run75441 on July 14, 2004 06:30 AM

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run75441: Don't forget the overhead imposed by those employees who are not very much participating in the productive process -- HR, lawyers, management layers, etc. They are not predominantly minimum wage, but a minimum wage hike will lead to a hike in their albor cost before long. (Note: I'm not saying they are useless or shouldn't be there, a common implication of the "overhead" argument.)

Also most of the material input contains labor cost.

I'm not a aware that anybody claimed a "similar" increased in product cost, but if an employer is faced with a prospective $X labor cost hike, they have to somehow work the amount into their balance sheet.

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