Thoughts on the Minimum Wage

The usual case against the minimum wage has three components:

  1. Minimum wages reduce employment among unskilled workers.
  2. Therefore minimum wages are bad for unskilled workers.
  3. Therefore minimum wages are bad policy.

The problems with this case are that

  1. Minimum wages might not reduce employment very much.
  2. Even if they do, that doesn’t make them bad for unskilled workers.
  3. Therefore we cannot conclude (via this route) that minimum wages are bad policy.

Minimum wages are bad policy, though — but for entirely different reasons.

I’ll get to those reasons shortly, but first let’s examine the traditional argument a little more closely. I’ll number my paragraphs to make it easier for commenters to respond.

1. A variety of researchers have reached a variety of conclusions about the employment effects of the minimum wage. Among the most careful and thoughtful of those researchers are David Neumark and William Wascher, who in their recent book on the subject, conclude that minimum wages “reduce employment opportunities for less-skilled workers and tend to reduce their earnings; they are not an effective means of reducing poverty; and they appear to have adverse longer-term effects on wages and earnings, in part by reducing the acquisition of human capital.”

2. Thus, in particular, when Paul Krugman tells you that “there just isn’t any evidence that raising the minimum wage near current levels would reduce employment”, he is, not for the first time (and not even for the first time this week) being dishonest — though this time is a little different, since he’s now relying more on his readers’ ignorance than their stupidity.

3. That having been said, Bob Murphy has just made a good prima facie case for a substantial effect on teen unemployment by observing that of the 19 states with higher-than-federal minimum wages, six are among the top-ten for teen unemployment, while only one is among the bottom ten. I calculate the probability that this could have happened by chance at just a hair under 1%. Of course, one can imagine explanations other than “minimum wages cause unemployment” (maybe unemployment causes states to raise their minimum wages?) but it’s hard to imagine one more plausible than the obvious.

4. Sometimes, unsophisticated observers will point out that the last time the minimum wage went up, the local McDonald’s was not observed to lay off any workers. This of course ignores the question of how rapidly McDonald’s will hire new workers, and the even more important questions of how many McDonald’s there will be in the long run, and how they’ll eventually adjust their production methods so fewer workers are needed.

5. All of that having been said, there are honest and competent researchers who have gotten results different from Neumark and Wachsler’s, so I don’t think we can say we know that minimum wages substantially affect employment (though I know where I’d place my bets).

6. And anyway: Even if minimum wages do substantially reduce employment among teenagers and/or other unskilled workers, it does not follow that teenagers and unskilled workers should oppose the minimum wage. If the minimum wage kills jobs, it kills minimum wage jobs, which is to say that it kills jobs nobody wants very much anyway. To put this another way: If you’re currently making $8.50 an hour, and if a $9 minimum wage comes packaged with a 10% chance you’ll lose your job, that’s a gamble you might happily accept. The upside is an extra 50 cents an hour, and the downside is unemployment — which isn’t much worse than working this lousy job.

7. If you want to know whether the minimum wage is bad for unskilled workers, then, the right thought experiment is to imagine yourself as a slightly-below-minimum wage worker who is well-informed about how the minimum wage affects your employment prospects, and ask yourself whether you’d still welcome an increase. I don’t know what the outcome of that thought experiment would be.

8. Therefore, the argument at the top of this blog post is not a good argument against the minimum wage.

9. But minimum wages are still bad policy, for another reason. Namely: If we’re going to transfer income to low-wage workers, it’s both fundamentally unfair and politically unwise to put the entire burden of that transfer on a relatively small segment of the population (namely the owners and customers of businesses that employ a lot of low-wage workers). The right thing, given that we’re going to make this transfer, is to fund it as broadly as possible — say through an increase in the Earned Income Tax Credit, which comes out of general tax revenues.

10. I used the phrase “fundamentally unfair and politically unwise”. I’ll expand on both points, starting with fairness. When we collectively want a whole lot of 18-year olds to form an army, do we put the entire burden of that desire on people who happen to be 18 years old, by conscripting them at zero wage? Or do we think it’s fairer for those of us who enjoy the protections of that army to bear the cost through the tax system? When we collectively want to convert farmland to parkland, do we put the entire burden of that desire on people who happen to own farms, by taking their land without compensation? Or do we think it’s fairer for potential park-goers to pay for that land through the tax system? When we collectively want to raise the wages of unskilled workers, should we put the entire burden of that desire on those who happen to employ unskilled workers? Or is it fairer for those who have collectively made this decision to share the burden?

12. Here’s, to me, the main point: The owner of your local McDonald’s employs, say, 6 low-skilled workers, who are (at least slightly) better off because he’s there to employ them. What have you done for low-skilled workers lately? Let’s suppose your best answer is “nothing”. Then, if we’re going to try to do something additional for low-wage workers, shouldn’t it be your turn, rather than the McDonald guy’s turn, to make a contribution?

13. An analogy: Some people voluntarily go out on Sundays and pick up trash in the park. If we collectively decide that we need more trash pickup, do we turn to the people who have been doing this by choice and demand that they do more? Or do we decide that maybe the rest of us should pitch in as well (either by getting out there ourselves or paying others to)? Some people voluntarily pay wages to unskilled workers. If we collectively decide that we need more wages paid to unskilled workers, should we turn to the people who have been paying wages by choice and demand that they pay more? Or should we decide that maybe the rest of us should pitch in as well (say via the Earned Income Tax Credit)?

14. Fairness tells me that the cost of a widely-supported program should not be dumped on a small segment of society, and moreover that it especially should not be dumped on that small segment of society that has already helped to alleviate the perceived problem (i.e. those who have already been providing jobs for unskilled workers) — just as the burden of increased park cleanup should not fall on a small segment of society and especially not on those who have been contributing to cleanup all along. Political wisdom tells me the same thing. It’s very easy to support programs that other people will have to pay for. But voters, like everyone else, should bear the costs of their own decisions. Letting people vote for expensive programs that “somebody else” will finance is a good recipe for getting people to vote irresponsibly.

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101 Responses to “Thoughts on the Minimum Wage”


  1. 1 1 David Pinto

    I wonder what would happen if the minimum wage was lowered. The conventional wisdom is that it’s better to look for a new job while you are still working. If lowering the minimum wage brought chronically unemployed people into the work force, it should make it easier for them to find a better job. Do you know if it’s true that for future success, any job is better than no job?

  2. 2 2 Todd

    Steve,

    Do you have in mind a means of spreading this cost among the taxpayers? Perhaps I’m not being very creative, but it seems to me this would be problematic.

    If the plan is to increase the minimum wage by taxing the voters and subsidizing low-wage workers up to a certain point, then wouldn’t that create an incentive for businesses to pay low-wage workers as little as possible and let the taxpayer pick up the slack?

  3. 3 3 Jonathan Kariv

    Point 3: I get the probability of this as being 0.005973693 (about just under 0.6% not “just” under 1%).

    My calculation was [(19C6)*(31C4)/(50C10)]*[(13C1)*(27C6)/(40C10)]. Yes I realize this might be the most tangential point ever.

    Also why put the focus on top and bottom 10 as opposed to top and bottom k for some other k (bob mentions 5). I’d be inclined to use a rank test if we need to go to non-parametics here. Also why are we using a non-parametric test in this analysis?

  4. 4 4 Rob Rawlings

    On #9:

    It is not true that a minimum wage puts the entire burden on “the owners and customers of businesses that employ a lot of low-wage workers)”

    While burger owners may see a drop in profits and customers a rise in prices as a result of the increase in minimum wage the tab for unemployment benefits paid for those workers who lose their jobs will be paid for by transfer payment from the general population.

    I agree with your overall point though that directly subsidizing the wages of the low-paid looks like a better way of addressing low-wages than minimum wage laws. However these transfers payments will come partially at the expense of greater investment in capital that would have eventually raised productivity and real wages for the lowest paid section of workers. So in the long-term the best way to address the wages of the lowest paid is to let the market do its job.

  5. 5 5 Pat T

    “The upside is an extra 50 cents an hour, and the downside is unemployment — which isn’t much worse than working this lousy job.”

    Easy for you to say! I think you’re taking a very short-sighted view. Lousy jobs are so much better than unemployment for people with low skills. They might not have fancy degrees or credentials to signal their value to future employers. Working hard at a lousy jobs is an excellent way to signal their worth and too many people would lose that.

  6. 6 6 Fonzy Shazam

    This is a great post. My first instinct on this issue being brought up in the SOTU was to ignore it because I felt it was a political ploy hoping to bring distraction. But thinking more about it, there are two reasons it should be discussed: One, it is a bad idea, and we must fight the good fight until this kind of nonsense no longer is a political option. Two, I believe Obama’s political strategy is to bring up an emotional issue in which the common man feels aligned with Obama at first blush. Through this demagoguery, he strengthens his public-opinion standing heading into the debt ceiling/sequestration debate. Rather than avoid this battle, I think the better position is to engage so as to put Obama on the defensive. Not that I’ve got high hopes about what the Republicans will put together as an alternative to Obama’s narrative, but a division of power here is better than a monopoly.

  7. 7 7 Thomas Purzycki

    I don’t really understand where you are coming from in paragraph 6. Even if raising the minimum wage only kills jobs that most people don’t want very much to begin with, wouldn’t standard assumptions about the supply curve imply that most people actually working those jobs prefer them to unemployment? If you’d happily gamble for a $0.50 raise vs 10% chance of losing your job, then why haven’t you asked for a raise yourself? At lease if you asked yourself, there is the chance your employer would say no and not fire you.

  8. 8 8 Fonzy Shazam

    Pat T,

    There is no doubt that working hard at lousy jobs is a great character builder and perhaps a good signally mechanism. But to consider the value of the lousy job at an additional $.50 per hour, you need to consider the best alternative, which is a rather generous unemployment regime.

    Now when you say, “Too many people would lose that,” what exactly do you mean? An increase in the minimum wage doesn’t INCREASE the availability of minimum wage jobs. If you’re concerned about minimum wage-level employees losing the option of working hard at minimum wage jobs, you should probably be against an increase in the minimum wage.

  9. 9 9 Bill

    Thanks for the paragraph numbering. Let’s look at number 13.

    Employing cheap labor is analagous to picking up trash, apparently.

    “Some people voluntarily pay wages to unskilled workers”. You make it sound like charity, but it almost always isn’t. A truer formulation would be “Some businesses require unskilled work, so the owners hire workers (sometimes unskilled, sometimes not) at the market rate, regardless of whether this is a living wage.”

  10. 10 10 Jonathan Kariv

    and what I calculated is the probability of exactly 6 in the top 10 and 1 in the bottum 10. Not that (more appropriate) calculation of a result “at least that extreme”. I withdraw that part of the last comment.

  11. 11 11 Jon

    Point 10 makes no sense. Army, litter collection, park land are all public goods. That’s why we pay for them through tax. McDonald’s product is not a public good, that’s why we don’t subsidise it (except for the ways in which we do… but that’s a different argument, perhaps?).

  12. 12 12 Nefarious Newt

    Here’s the flaw in this argument about minimum wages being a poor idea: it assumes — at some level — that employers would do the right thing and pay lower-skilled employees a decent, livable wage. Let’s suppose, for the sake of argument, that tomorrow we abolished the minimum wage at every level, with the proviso that employers could not suddenly reduce hourly wages for their current employees.

    I think the basic premise is that employers would employ more people if they didn’t have to pay them a certain amount, and on its face, that certainly makes sense. Now, we’ve done just that, removing the restriction.

    What would happen, based on what we know of sociology, social psychology, and human nature?

    I posit that many an employer would see this as an opportunity to increase their profit margin and lower their operating costs. New people could be hired at a much lower rate — say $4.50 an hour instead of $9.00 an hour — and people currently working at a higher rate could eventually be replaced by lower rate workers.

    It also occurs to me that there is really no incentive to hire new people. Think of it this way: a business needs X amount of workers to operate. In the current environment, they already operate in or around X. If they are at X when we make this change, there’s really no incentive to go to X+1, X+2, X+3… etc., just because they can now hire cheaper help.

    You also have to look at it from the standpoint of the worker. Even a low-skilled worker is not going to want to do manual, repetitive, boring labor if the end result is a minuscule paycheck every week that does not meet their monthly household needs. Even now, the minimum wage does not keep pace with inflation; what would a lower skilled worked think of making half as much? Frankly, I think that makes illegal but much more highly-paying positions seem even better, don’t you?

    I believe it was Thomas Paine who said that we need laws and government because people, given the opportunity, will not always do what is right. Even the most pious among us seem loathe to actually help the poor in substantive ways where it requires they give up some of their “hard-earned” money. I, as a computer programmer, work hard for my high salary, but not nearly as hard as the sanitation worked or teacher or the McDonald’s employee does for theirs, by comparison.

    I should also note that I DO support the institutions that are required to provide a minimum wage via my patronage. If I buy food at McDonald’s, my money is going to subsidize the wages of their employees. If they are having a hard time paying their employees, then then they need to raise prices on their products, cut their profit margin, or learn to become more efficient.

    While you do have good points, I find the analysis too simplistic. We are talking about people, here, and their ability to live in something less akin to squalor. The minimum wage is a necessary evil, until we raise the value of people and stop raising the value of money.

  13. 13 13 Pat T

    Fonzy

    Of course an increase in the minimum wage doesn’t increase the availability of minimum wage jobs. I think an increase in the minimum wage decreases the availability of minimum wage jobs which is why I think that too many people would lose the opportunity to work at a minimum wage job.

    I’m against the existence of a minimum wage in the first place much less an increase in the minimum wage we already have.

    My point here was just that someone who desperately needs any job who doesn’t want live on the public dole might not consider any job to be “lousy”.

  14. 14 14 Seth

    Re: #5 — What am I missing? If the old and new minimum wage is well below the going market rate for unskilled labor, I shouldn’t expect the change to have much effect on jobs, should I?

    That seems like something I learned in Econ 101, but I haven’t seen that mentioned in the last few days in the blog post flurry on this topic.

  15. 15 15 Suckmydictum

    Nice post. Is there a weakness in your analogy given that minimum wage employers depend upon minimum wage workers for their livelihood but Sunday trash pickers do not depend on their trash picking for a livelihood? It would seem pretty ridiculous to ask voluntary trash pickers to do more, but it seems even more ridiculous to ask more of minimum wage employers to pay more when they aren’t employing out of charity but for their meat and cheese.

    Another analogy might be if it were decided a town needed a better staffed public school, asking teachers already teaching there to teach more classes for the same wage while demanding no extra money from the tax payers who fund the school.

  16. 16 16 Steve Landsburg

    Jon:

    Army, litter collection, park land are all public goods. That’s why we pay for them through tax. McDonald’s product is not a public good, that’s why we don’t subsidise it

    You’ve missed the point. Those who support the minimum wage take the position (in effect) that increasing the incomes of low-wage workers is a public good. You might disagree with that, but if we accept it for the sake of argument, then those incomes should be broadly subsidized for exactly the same reasons that litter and parkland should be.

  17. 17 17 Pablo Velez

    Most of the literature regarding minimum wages that I have read deals with the developed world, where most people earn more than the minimum wage, and where the informal job market is small or non existant.

    The minimum wage discussion enters a whole new level when looked at from the perspective of a developing country where a large percentage of the population earns the minimum wage or less. It is in these markets where the nefarious consequences of the minimum wage can be seen more clearly – high structural unemployment, and very large (>50%!) informality.

  18. 18 18 Phil

    I too, have a small problem with #6. Why assume that those jobs are “lousy”? When I was a teenager, I had minimum wage friends who loved their job. (And, there was a separate minimum wage for teenagers, so they were being paid even less.)

    Maybe what you could assume is that the employees who lose their jobs at a minimum wage increase are the worst of the bunch, meaning they probably didn’t like their jobs that much anyway? (I bet there’s a high correlation between proficiency and satisfaction.)

    I agree with your main point, that the tradeoff between wage hike and the probability of getting fired might still be worth it. But wouldn’t that be for any job? If government offered to enforce a 10% wage increase in my own job, but with a 10% chance of getting fired, it might be to my benefit, if I didn’t like my job much anyway, or knew I was underpaid and would probably find a job at the new wage, regardless.

  19. 19 19 Justin

    Krugman disagrees that the EITC is a substitute for the minimum wage in the post you link to, claiming they work best when used together. I didn’t really follow his argument (because he didn’t really give much of an argument- he mostly just stated his conclusion), but I was wondering what you think about this claim. It seems like you’ll disagree, but does he have a valid argument here?

  20. 20 20 Jack

    It’s interesting that you bring up the context of the earned income tax credit for those earning minimum wage. Many of the people that earn minimum wage are not eligible for the credit. If you don’t have a child, the IRS rules are:

    If you do not have a qualifying child, you must:

    be age 25 but under 65 at the end of the year,
    live in the United States for more than half the year, and
    not qualify as a dependent of another person.

    It’s an interesting exclusion.

  21. 21 21 Ken B

    @9: And what do you do for them?

    It seems to me that if I offer you a job at wage X, whatever X is, I have increased your options. I hav e done something for you, whatever my motive. A critic who stands idly by calling me names for not offering 2X, while not offering even X/2 himself, is doing less for you than I am. So if the law wants to reward you at the expense of others, why my expense rather than also at the critic’s expense?

  22. 22 22 Michael

    One other unintended result of this hike is being overlooked. There is an increase in the opportunity cost of obtaining higher education. Whether or not this is positive can be debated, but it does run in direct conflict to the administrations stance on the subject.

  23. 23 23 Ken B

    @Steve: Isn’t this a particular form of the argument Milton Friedman made (and that I have long supported) that the best way to implement a welfare state is mostly through a negative tax, as that messes up incentives and price signals less than other approaches, and is tied directly to the stated goal of transfering from wealthy to poor?

  24. 24 24 Brandon Berg

    Regarding point 14, I think a big part of the problem is that supporters of the minimum wage view the employers of unskilled labor as part of the problem, rather than as part of the solution. Support for the minimum wage is largely predicated upon the childish left-wing fantasy that the reason low-wage workers earn low wages is not that they have low marginal productivity, but that employers are exploiting them by greedily refusing to pay them the higher wages that they’ve rightfully earned. It’s a vestige of the labor theory of value, I suppose.

  25. 25 25 Dilip

    Jared Bernstein also had two posts on this topic, here and here.

    Any thoughts?

  26. 26 26 Daniel

    Hi Steve,

    Can you please address the instance in which minimum wage can increase employment, (e.g. what do you think about minimum wage as a response to monopsony?). In these cases a minimum wage can create more overall surplus (consumer + producer), increase employment, and increase production. Do you think that this effect is minor in comparison to the downward pressure on low-skilled employment in instances where equilibrium wages are actually below the minimum wage?

    http://www.tutor2u.net/economics/content/topics/poverty/minwage_monopsony.htm

  27. 27 27 Brandon Berg

    Daniel:
    Which minimum wage employers are monopsonists? I can’t think of many. It seems to me that the low end of the labor market is pretty competitive on both sides.

  28. 28 28 James Kahn

    Generally agree, but for two points: the burden is not just on the businesses, but also their customers, as part of the response will be to raise prices. Second, you give short shrift to the human capital issue. Businesses now have trouble providing unpaid or low pay internships whose main purpose is to give young people experience and training (and who may prefer this to a paid job). The burden of proof is now on businesses to show they aren’t making money from them, so they’ve cut back.

  29. 29 29 Laszlo

    Two things:

    The blogosphere finally caught up the research of Jesse Rothstein on incidence of the EITC and the related work of Lee and Saez on a normative theory of minimum wages keeping the subsidy in the hands of the workers. (Though in the EITC’s case it still hurts the non-eligible [childless] poor, by the way.)
    See http://elsa.berkeley.edu/~saez/lee-saezJpubE12minwage.pdf

    You could also get a kick out of the reason’s of the Hungarian government raising the minimum wage to painfully high levels: That this is the only way they could tax a bit high-earning evaders who declare minimum wages… (By the way, taxing the minimum wage is clearly contradictory, Pareto-dominated in the Lee-Saez world…)

  30. 30 30 GregS

    Good stuff. But I think that casting minimum wage workers into unemployment is worse than you imply. A minimum wage job earns the worker more than just the wages. It earns you an OPTION to work a higher-paying job in the future, which effectively purchases an option to work at the next higher tier, and so on. My main concern is that the minimum wage blocks this cycle. Does your argument (point 6) discount the value of this option? My argument isn’t a novel argument. In fact, the quote by David Neumark and William Wascher alludes to it with the part about “reducing the acquisition of human capital.”

  31. 31 31 RichardR

    An old economics joke I heard about the problems measuring GDP goes like this: a rich man marries his maid. Before he paid her $10,000 a year and a got a clean house. Now he pays her nothing and still has a clean house.

    If the government introduced a tax credit the man could re-employ his wife and pay her $10,000 a year which will be increased to $12,000 by the tax credit.

    I think the idea of a tax credit or negative income tax is great in theory but in reality would be abused and is therefore bad policy.

  32. 32 32 Xan

    I disagree that the employment/efficiency effects can’t also fuel a powerful argument against the minimum wage: Different minimum wage workers will have different opinions on the desirability of the risk of unemployment vs. the benefit of a higher wage. The minimum wage law would a) hurt the ones who prefer not to take the risk, and b) help the ones who prefer to take the risk. Presumably, type-b workers would only prefer to take the risk because charitable and government support mitigates the worst effects of being unemployed (death, for example). What that means is, even if there are no type-a workers, the minimum wage law is harmful because society shoulders the burden of additional unemployed people who consume without producing. (This assumes that the effect on unemployment is substantial, which, in our current circumstances, appears to be true.)

  33. 33 33 Daniel

    @Brandon Berg,

    I’m not really sure if there are many, but I’ve seen this argument in several intermediate microeconomics textbooks so I was wondering if Steve had any perspective on the matter. I think it could apply in towns that are predominantly controlled by a single employer (I don’t have any clear examples, although some people argue that Walmart functions this way in some communities (does Walmart usually pay around the minimum wage?)

  34. 34 34 Xan

    Just found a typo: In paragraph 5, affect, not effect.

  35. 35 35 Alan Gunn

    I don’t have current info, but six plus years ago I saw a study claiming that the median household income of households with a minimum-wage worker was about $60,000. The people who earn the minimum wage are mostly teenagers working their first jobs, and the higher the minimum wage gets, the more likely it becomes that these teenagers are from middle-class families.

  36. 36 36 Xan

    I have a question for anyone who, unlike myself, knows how to competently critique the numbers in an economics study:

    In the paper by John Schmitt the Krugman cites, where he claims overwhelming evidence that minimum wage raises do not substantially affect unemployment, I find this: “When they produced standard statistical analyses of the kind used in much of the research since the mid-1990s on teen employment, the three economists found results similar to those found in that earlier research (a 10 percent increase in the minimum wage reduces teen employment slightly more than 1 percent) But, once they controlled for different regional trends, the estimated employment effects of the minimum wage disappeared, turning slightly positive, but not statistically significantly different from zero (Schmitt 9).”

    I was curious what these “regional trends” could be. I found this explanation: “The three economists demonstrated that overall employment trends vary substantially across region, with overall employment generally growing rapidly in parts of the country where minimum wages are low (the South, for example) and growing more slowly in parts of the country where minimum wages tend to be higher (the Northeast, for example). Since no researchers (even the harshest critics of the minimum wage) believe that minimum wage levels prevailing in the United States have had any impact on the overall level of employment, failure to control for these underlying differences in regional employment trends, Dube, Lester, and Reich argued, can bias statistical analyses of the minimum wage. Standard statistical analyses that do not control for this “spatial correlation” in the minimum wage will attribute the better employment performance in low minimum-wage states to the lower minimum wage, rather than to whatever the real cause is that is driving the faster overall job growth in these states (good weather, for example) (Schmitt 8).”

    To me, the “good weather” hypothesis is laughable. It seems more likely that this is an easy way to mathematically bury the correlation between higher minimum wage and lower employment. It’s like saying, “when we account for the fact that minimum wages are higher in areas that have higher minimum wages, we find a correlation between unemployment and being located in a high-minimum-wage-area, but no correlation between unemployment and high minimum wages.”

    But I never enrolled in an econometrics course before switching my major from economics, so I confess that I don’t have enough know-how to be certain that my gut is right on this one. Is this an example of a dishonest researcher, an honest oversight, or me not understanding something fundamental about how to do empirical research? Or, is there a plausible explanation for a geographic interpretation of why those areas have better employment (location of natural resources, etc.?)

  37. 37 37 Xan

    *that* Krugman cites. Sorry for the typo.

  38. 38 38 Patrick R. Sullivan

    Since this came up on The Money Illusion, I’ll repeat it here. Australia has a minimum wage of over $15/hr, but an unemployment rate of 5.5%.

    To which I say; not so fast. First, Australia has several minimum wages. The one for the youngest teen-agers is only $7/hr, but increases as the teens age. And, the teen-age unemployment rate is three times as high as the nation’s as a whole. Even with the lower minimums.

    Next, Australia is in a 20 year economic boom (in large part because of huge exports of iron ore and other minerals to China). Their last recession was 1990-91. Yet, they have an unemployment rate as high as the average of the W. Bush years!

    We’ve had unemployment rates below 5% recently. 4% during the dot com boom, and 4-1/2% prior to the bursting of the RE bubble. So, for anyone thinking of bringing up Australia’s high minimum wage rate…think again.

  39. 39 39 Daniel

    Patrick R. Sullivan,

    Would the same logic apply to Switzerland’s UR rate despite the fact that they have a $21 minimum wage? Is it the financial sector propping them up in this case?

  40. 40 40 Ken

    Newt,

    Here’s the flaw in this argument about minimum wages being a poor idea: it assumes — at some level — that employers would do the right thing and pay lower-skilled employees a decent, livable wage.

    Here’s the flaw with your argument: the standard argument against minimum wage assumes no such thing. Steven has never made this argument and I have yet to hear/read anyone make this argument. Employers are expected only to pay workers what they produce at the margin. That’s it.

  41. 41 41 Matthew

    From a practical perspective, I think the most obvious problem with your proposal is that the timing of the cash flow doesn’t help the minimum wage employee that much. Poor people need money today to eat. A check that arrives at the end of the year when they file their taxes doesn’t put that big of a dent in their problems.

  42. 42 42 Daniel

    Ken,

    I agree with you, except there are cases when employers pay their employees less than what they produce at the margin like monopsony, and I still think this should bear some consideration rather than relying solely on the competitive labor market example for our policies. Whether monopsony happens often enough for it to matter I’m not entirely sure, but I also know that equilibrium wages are higher than the minimum wage in even most unskilled labor markets, so we should at least weigh the ability of monopsonies to give less than the employees production at the margin against cases where competitive labor markets have equilibrium wages below the minimum wage.

  43. 43 43 Tobias

    _If_ the reason the minimum wage doesn’t decrease employment is that firms have some monopsony power, then isn’t imposing the minimum wage merely the mending of a market failure? And if it’s monopsony power we’re dealing with, then the fact that the minimum wage diverts resources away from the monopsonist and only the monopsonist isn’t a problem, it’s the whole point.

    I would fully agree with your line of argument if the market for low-skilled labor was, in fact, perfectly competitive. But you seem at least to be entertaining the possibility that minimum wages do not kill jobs and therefore that this market cannot be perfectly competitive. How is this consistent with the last bit of your post?

  44. 44 44 Ken

    Daniel,

    I agree with you, except there are cases when employers pay their employees less than what they produce at the margin like monopsony

    I wish you’d give an example of the low skilled/low wage monopsony. As I’m sure you are aware, a monopsony is when there is only one buyer with many producers competing for sale with this single buyer. As I’m sure you’re further aware, no such monopsony exists for low skilled/low wage workers, as the buyers of low skilled/low wage workers is nearly every company in existence, and so fails when discussing the minimum wage as a way to increase the income of this group of workers.

    Please, let’s stay in the realm of what actually occurs, rather than remedy situation which remain only theoretical. Certainly, actual problems are far more deserving of our attention, rather than theoretical. Wouldn’t you agree?

  45. 45 45 Mike H

    @Matthew #41 Just as tax can be taken out of salary on a PAYG basis (so you don’t get a massive bill at the year end), so a tax offset or negative tax rate could be paid on a monthly or weekly basis, either through the employer or through a government office.

    Re : Patrick #38 Now I know why eating out here is so expensive compared with Malaysia.

    Re : Steve #0 I, too, don’t follow the logic in Steve’s point 6 “it kills minimum wage jobs, which is to say that it kills jobs nobody wants very much anyway.” While *some* people in minimum wage jobs are at the margin – and therefore don’t want them very much, surely not everyone will be at the margin. For example, if all employers were at the margin, then any rise in the minimum wage would kill all minimum wage jobs. Likewise, if all employees were at the margin, any fall in the minimum wage would cause all of them to quit – but surely nobody believes that.

    The reality is that there are some payers for whom that extra 50c/hour makes it just not worthwhile to keep that staff member on, but many who would happily pay $9 or $10 or $15 or $20… but don’t, because they can get people to work for $8.50. And conversely, there are some workers for whom $8.50/hr is just barely worth it, and think of quitting every day – but there are others who would happily work for $7/hr, or $6, or $3, or free, or even pay for the chance to beef up their CV… but don’t, because they can find employers paying $8.50/hr.

    If a policy kills minimum wage jobs, those at the margin won’t care much. However, others will care a great deal indeed. Likewise, if a policy kills a $200,000/yr job, well, maybe the guy was about to quit anyway… but maybe not.

  46. 46 46 David Youngberg

    Patrick R. Sullivan’s point on Australia suggests it is a very bad idea to treat U.S. states as identical entities. There are many reasons for differences in unemployment in different states.

    I don’t follow #7. If I keep my job, and I should have some idea how good of a worker I am, then I can negotiate a higher wage on my own. If I lose my job, I’m not only unemployed, I could be unemployed for a while which permanently harms my future employment prospects. Increasing the minimum wage seems like a strictly worse option.

  47. 47 47 John

    @Matthew #41

    I could be wrong, but I believe there is a way to get your earned income tax credit throughout the year

  48. 48 48 Daniel

    Hi Ken,

    I’m not sure that the concerns are entirely theoretical. I haven’t studied this extensively but there are papers that argue that in some areas of the country Wal-Mart takes on a monopsony role in some respect. Maybe this paper is naive, I’m not really sure, but I can’t really reconcile why there’s no consensus about national minimum wage given a competitive low wage market with an equilibrium below the minimum wage.

    http://ageconsearch.umn.edu/bitstream/6219/2/469304.pdf

  49. 49 49 Daniel

    @Ken,

    Don’t get me wrong I like the simplicity and the distribution of costs associated with a negative tax like the EITC, but I just want to make sure that there isn’t also some case to be made for a minimum wage as I haven’t seen very compelling evidence that it’s an especially harmful policy. If there’s no practical purpose and it can only do harm than I think it’s best to do away with it, I just don’t know why Robert Frank among others would include monopsony as it relates to minimum wage in their intermediate micro book if there might not be some practical applications to it. If there are some instances where a minimum wage would increase total surplus, than I think it best to weigh these benefits against the potential harm.

  50. 50 50 Ken

    Daniel,

    I haven’t seen very compelling evidence that it’s an especially harmful policy

    I take a very dim view of statements like this. First and foremost, in a free society, it is necessary for the government to show that the deprivation of liberty will really cause good, not feebly state it may not be especially harmful. Second, if there is in fact harm to be caused, that harm falls on those the minimum wage laws were designed to help.

    If you are going to tell someone, like an inner city uneducated black teen-ager, that despite the fact that no one will hire him at $7.25/hour, he shouldn’t be allowed to get a job unless he can earn $9/hour, you should have strong evidence in your favor to say that he will indeed benefit from this deprivation of liberty.

    As for your example of Walmart in certain areas, I don’t low wage/low skilled workers are subject to a monopsony. I have lived all over the US, even rural parts of the mid-west and have found no shortage of low skill/low wage opportunities for work. Secondly, I can’t think of anywhere in the country that isn’t more than a short drive to a place with lots more opportunity than simply Walmart. And yes, I do think it’s a person’s responsibility and burden to look outside his immediate city to look for work, particularly if there is better paying work easily had relatively near by. I have moved from coast to coast for a job and for new jobs. Starting in Maryland, then moving to Illinois, then Texas, and finally back to Maryland. I think that you have too narrowly defined monopsony so as to make it seem that there is no competition for labor, when in fact there is, and a lot of it. How geographically restrictive would you have to be for your case for monopsony to be made? While it’s not easy to move, it certainly isn’t difficult. Mostly, it’s just inconvenient.

    The flip side to your case is of course the recognition that those employed by Walmart may not have work at all if not for Walmart, as well as the low priced goods that Walmart provides. I really do believe that Walmart is a greater force for good in alleviating low earners than any government program, including the minimum wage. I am cheerful that Walmart provides job opportunities to those who may otherwise not have it.

  51. 51 51 Daniel

    Hi Ken,

    My point wasn’t to say that Walmart has done bad but rather to suggest that it may satisfy the monopsony argument in some instances. I think that Walmart’s done a lot of good, but like I said I haven’t studied the literature extensively, so I was just wondering if Steve knew more about monopsony and the minimum wage, I wasn’t advocating for the minimum wage or against it. I think I prefer negative taxes to supplement low wage workers income’s at equilibrium but I also don’t want to dismiss arguments that are taken somewhat seriously by the likes of micro theorists I hold in high respect (such as Robert Frank).

    In regards to your geographical question, not really sure how they defined level of geography in that particular instance but I would also suggest that low wage workers may have more trouble than others locating areas that are in need of their unskilled labor in the event they live in an area with a monopsonistic employer.

  52. 52 52 Ken

    Daniel,

    Thank you for the clarification.

    Also, I must disagree with your last statement. Presumably people who earn less have less, making moving very easy, hence making it easier to find work. At the time in my life when I made less than $8,000 a year (I earned between $8k and $18k for most of my 20′s and much less the year after losing one of my jobs, having no income for the next year and eating up all my savings), I had every incentive to look where I could and took jobs here they were offered. Moving was pretty straight forward as I possessed very little.

    If you’re saying these people just don’t know how to find work, I fail to see how a minimum wage law helps with that or why this would even be suggested as a solution for this problem.

  53. 53 53 Mike H

    Steve’s point 9 If we’re going to transfer income to low-wage workers … the right thing… [is] through an increase in the Earned Income Tax Credit.

    Now, we know that when the government charges a tax, the economic burden of the tax may not fall on those on whom the government placed the legal burden. For example, a tax imposed on land owners might just raise the rent they charge.

    Surely the same thing applies to negative taxes such as the EITC?

    So, how sure can we be that raising the EITC would subsidise low-income earners more than it would subsidise Walmart and MacDonalds shareholders?

  54. 54 54 Patrick R. Sullivan

    According to Beata Javorcik and Yue Li, far from monopsony
    Wal-Martising makes for better wages all around
    ;

    ————-quote———–
    An alternative exercise focusing on eight Romanian regions suggests that the presence of a foreign chain in a region raises the productivity of the supplying industries by 3.8% to 4.7%.

    We further decompose the aggregate productivity in the supplying industries, following Olley and Pakes (1996) and Pavcnik (2002). The decomposition indicates that the boost to performance is driven by both intra-firm improvements and inter-firm reallocation. Both changes are found to be associated with the expansion of foreign chains.

    Overall, our results suggest that the opening of the retail sector to foreign investment may stimulate productivity growth and improve allocation efficiency in manufacturing industries and thus provide another piece of evidence in favour of services liberalisation.
    ————-endquote————–

    Pretty much textbook econ.

  55. 55 55 Harold

    I can think of only two reasons to desire a minimum wage:
    1) The market is working efficiently, but the public good would be served if the wages were higher than the minimum.
    2) The market is not working efficiently, so imposing a minimum wage restores things to the result an efficient market would have arrived at. As Tobias (43) said – imposing the costs on the employer might then be the whole point.

    Taking (2) first, how could the market not be working efficiently? Well, the Govt itself could be to blame. In London, the Govt pays significant amounts of housing benefits because rents are very high. In central London, employers take on cleaning staff at low wages. The only way they can get people to work for such low wages is because the Govt. is subsidising their housing, so in effect the Govt is subsidising the employer. Ignoring for a moment the effect of housing benefit on rents, there are two possible solutions – remove housing benefit, then everyone will move out of London unless wages substantially rise, or impose a minimum wage. Whilst removal of housing benefit may be the better market solution, it is politically rather difficult.

    How else might the market not be working efficiently? We accept that were monopsonies to exist, they could depress wages below the efficient level. Employers can all know what income people need to survive, and offer this as a minimum. The fact that such a pay level could easily be common knowledge could allow employers to effectively act as a cartel, without any direct communication between them. Thus all employers could be a de-facto monopsony.

    As Ken said, “Employers are expected only to pay workers what they produce at the margin.” So if employers can somehow pay workers less than this, the there is justification for intervention.

    So if you as a policy maker think any of the above is happening, then perhapos a minimum wage is a suitable policy.

    If you think the market works, but individuals should have more money than a certain minimum, then it would seem a system of tax credits would be a better solution. However, I am not sure why wages would not just drop to allow for the tax credit, as they have done to allow for housing benefit.

  56. 56 56 Bob Murphy

    I get what you’re doing here Steve, trying to be thoughtful, accurate, interesting, fair, yada yada yada. I retract nothing! I am circling the wagons around the supply and demand curve I taught in the 3rd week of micro principles. That was the only thing I believed in all semester.

  57. 57 57 Ken B

    It must be a blue moon, because I agree with Bob Murphy not Steve Landsburg. I mean I agree with all Steve’s constructive arguments above, all the other reasons why a minimum wage is bad policy. But I don’t agree with the implicit claim that prices somehow don’t work with labor. The data Steve cites is all about trying to measure the size of any presumed effect. Bob’s argument, sharpened by Steve in a comment over there, is about the certainty of the effect. And if the effect is certain it hurts lots of people we cannot identify to benefit a few we can.

  58. 58 58 Ken B

    To console myself for being on Bob’s side — and please no-one suggest a bet! — a random act of music http://www.youtube.com/watch?v=08zuWbYo1ho

  59. 59 59 Patrick R. Sullivan

    To the question about Switzerland; they don’t have a nationwide minimum
    and have a 3.3% unemployment rate
    .

  60. 60 60 Ken B

    59 raises a point I have been struggling to make precise. In some sense I think the damage a minimum wage does can be cumulative. Those who would start at $5 and learn to be worth $8 don’t get the chance. So when the wage is raised from 6 to 9 they are not part of the measured effect. They don’t show up in your regressions. But they would, absent to $6 wage being too high already. Phantom losses of non-existent jobs, but I think they should matter.

  61. 61 61 Will A

    Regarding Point #9:

    Using Lotteries to fund education is basically a tax on the lower wage earners, but given a choice between:
    - Increasing tax rates to fund eduction
    - Specifying government programs to cut to fund education
    - Supporting Lotteries

    The wise politician supports lotteries.

  62. 62 62 AndrewC

    Unemployment is used by governments (on behalf of the capitalists who are their real constituents) to exert downward pressure on wages, including the wages of those at the bottom. Putting aside the fact that this despicable policy is deeply undemocratic (considerable effort is made to hide it), it is clear that a minimum wage interferes with the sociopathic logic of neoliberalism.
    If non-labour costs go up then central banks will respond by raising interest rates in order to raise unemployment and thereby force real wages down to preserve profit margins. As British labour economist Steve Nickell said in September 2011:

    “now, for example, we can have real wages falling as they are at today without any great difficulty. Real wages, of necessity, have to fall again because of the huge rise in oil prices”

  63. 63 63 Ken

    Harold,

    So if employers can somehow pay workers less than this, the there is justification for intervention.

    This is certainly no justification. And further, just how would you compute a workers marginal output/worth in any particular industry at any particular time? Are you somehow in possession of knowledge others or not?

    This is simply another case of government worship, thinking that a benevolent dictator, first can have this knowledge (which we know he cannot), and second that ceding such power to a government official is at all desirable. After all, we all know that evil men inevitably inhabit all official offices, which will make null and void any benefits you think you’ve gained by giving up your personal liberty to be ruled by others.

  64. 64 64 Ken B

    @Will A: Lotteries might also be described as a tax on the willing. But that just highlights the fact it’s not really a tax.

  65. 65 65 Floccina

    KenB state lotteries are a tax because it is illegal to start your own and so they charge above market rate. That amount above market rate is a tax.

  66. 66 66 Martin-2

    Point 6: “If the minimum wage kills jobs, it kills minimum wage jobs, which is to say that it kills jobs nobody wants very much anyway”

    Minimum wage jobs are not on the margin in this sense. Jobs with market rates of 1-7$ an hour are pushed into this category, so I would expect a high fraction of these workers to be getting a sweet deal. I for one earn 8$ an hour (the Massachusetts minimum) to sit in an office and do my homework with occasional job-related interruptions.

    Besides, it’s not obvious to me why low paying jobs would be more on the margin than high paying jobs (why people would be more indifferent to having them). Is the work done by high earners under-supplied? Do high earners generally pay their dues when they’re young through higher education, and their current incomes include compensation for this past effort?

  67. 67 67 Daniel

    Patrick,

    Thanks for the link to that interesting article.

  68. 68 68 Zachary Shrier

    I’d just like to mention that I’ve just finished reading through the above 67 comments, and I’m authentically amazed by the high level of discourse that Steve has cultivated on his blog. Even beyond the erudition of some of my fellow readers, I don’t think I read one expletive, attempt to dehumanize another commentator, or random anti-Israel rant. This makes The Big Questions a nearly unique corner of the internet.

  69. 69 69 Mike H

    @Patrick #38 & #59 Just as correlation does not imply causation, so three data points do not imply correlation.

    Can you at least collect data on minimum wages vs unemployment for all countries, or all OECD countries, pre- and post- GFC if possible… then plot a nice graph and post a link here? Then we’d see what correlation, if any, exists, and could wonder about causation.

  70. 70 70 Harold

    Ken (63): My words were imprecise -I meant that there is some justification for intervention. The costs and benefits would still need to be weighed, but clearly there are potential gains. If such a situation were to occur, then there would be potential gains from intervention.

    More generally, we can speculate on what effects minimum wages have on employment, but we have access to research so we don’t have to.
    Doucouliagos and Stanley (2009) conducted a meta-study analysing 64 studies of minimum wage effects. The statistically strongest results all clustered around zero effect. They say: “Even under generous assumptions about what might constitute ‘best practice’ in this area of research, little or no evidence of an adverse employment effect remains in the empirical research record.”
    http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2011_4.pdf
    The link is to the working paper, but it was published in a journal but behind a pay wall.

    This is examining publication bias, so may be controversial. However, the picture is far from an empirical endorsment of the predicted association between minimum wage and employment. Instead of denying this, the reasons should be looked for, surely?

  71. 71 71 Ken B

    @Floccina: Yes, I agree the grant of monopoly is like a tax, to the extent of the overage compared to a market.

  72. 72 72 David Peterson

    So then would it possibly be a better idea for opponents of the policy to frame this argument in terms of the minimum wage increasing inequality?

  73. 73 73 Ken B

    @72: Some have. David R. Henderson has made exactly this argument on his blog. It shows up also in discussions of the exemption for unpaid internships. Kids from rich families can afford to take them, but poor kids often cannot. But if the internship did not need to be a special case, if it could be offered with a low wage, some of the poor could manage it. So the law benefits the children of the rich at the expense of the children of the poor.

  74. 74 74 Ken

    Harold,

    I meant that there is some justification for intervention.

    I disagree. Since we do in fact live in a free society of made up of free men and women (supposedly anyway), with a government that is supposed to serve its citizens, all of them, justification for intervention must be based on clear and unambiguous data, not the mixed results we have now. The entire purpose of a free society is so that citizens can act, associate, and engage in contracts free from government coercion. For the government to act (engage in coercion), first, it must have that authorization from the constitution, of which there are only 17 powers. Secondly, that action must be taken only if it will do a clear good, not based on the notion it might only do a little bit of harm.

    I am very wary of government deciding how I can act, determining what types of contracts I can and cannot enter into and on what conditions. I see much of the current economic situation as a direct result of politicians “doing something”. Policy X,enacted to solver problem A, causes problem B, which often times is worse than A, so politicians enact policy Y, which causes problem C, and so on. Politicians almost never think, well let’s get rid of policy X. This ratcheting effect has huge implications over time, as we are now dealing with the consequences of this hubris. I am between jobs right now, and without health insurance, because of the stupid labor policies politicians have forced upon me. By tying my health insurance to my job, I lost it as soon as I resigned. There are literally thousands of problems caused by the government, which result in far more damage than if these politicians had done nothing at all. But even more than that, all of these regulations are based on the idea that I am not a free man, nor are my employers; that I am a subject to a rulers who think they know what’s best for me better than I do. We are presumed to be at the mercy of some overlord to determine how and when we shall work.

    Encouraging minimum wage laws, when there is no economic justification for them (mixed results are not economic justification), and there is strong political reasons not to support them (reducing the liberty of free men) just seems to be asking for real trouble.

  75. 75 75 Harold

    Ken. Are you sure about the purpose of a free society?

    I think you have missed my point. You say “Employers are expected only to pay workers what they produce at the margin”.

    If they are not, then they are not doing what is expected of them. I interpret what is expected of them as what they ought to do. If they are not doing what they ought to do, then there is an argument for action.

    You make valid points that there are also costs to this action. It may be that these costs are greater than the benefits, in which case we would not take the action, or it may not be. However, we cannot decide on the best course of action without analysisng the costs and the benefits.

    Your argument seems to be that there are costs to Govt action, so therefore we must not take that action. This makes no sense without also measuring the gains. My original case defines a situation where there could be gains in an economic sense according to your stated ideal. If you want to define desirable outcomes some other way, then you may do so, but you will have abandoned the economic arguments and are now arguing from a position of dogma.

  76. 76 76 Krishnan

    I must say that THIS explanation of the effect of minimum wage makes sense – … and the solution is indeed rational … using earned income credit (or some such).

    By imposing the costs of the the minimum wage on small businesses, we are in effect making if difficult for such businesses to grow and become bigger –

    I saw this link on gregmankiw.blogspot.com – http://www.slate.com/articles/arts/everyday_economics/2004/07/the_sin_of_wages.html – perhaps the clearest explanation of how “studies” can be used to mislead …

    I can see clearly now – Only Mathematicians should become Economists!

  77. 77 77 Al V.

    @Ken 44, As a general rule there are not many monopsonies in the U.S. However, there are certainly some specific local examples. There are plenty of towns in the southeast where a single company dominates the employment opportunities, and thus has a near-monopsony in that community. The level of control over local wages has decreased a great deal since the Great Depression, thanks to the growth in paved roads and the increase in mobility of small town populations.

  78. 78 78 Al V.

    @Ken 74, You raise one of my favorite topics. Any government action has unintended consequences, and too often portions of our economy becomes dependent on the existence of those unintended consequences. That is something I would love some economist (hint, hint) to take up in a book.

    This discussion here is one obvious example: the effect of minimum wage laws on unemployment, but there are many others. My personal favorite is the impact of the mortgage interest tax deduction on housing prices, and the fact that many industries (real estate brokers, mortgage issuers) are now dependent on that deduction.

    However, almost every action taken by a government has large or small side effects. Is it possible to anticipate those side effects? I would guess it is, yet certainly governments show little evidence of attempting to anticipate those effects, whether for good or ill; or to adjust for the effects once apparent.

  79. 79 79 Harold

    Krishnan 76. The link in my post 70 is a follow up which concludes the same as that discussed in the Slate article – publication bias has been skewing the results.

    The paper Krugman cites says the reason why minimum wage has little effect on employment is because adjustments are made as follows: reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners; and small price increases.

    Reductions in turnover may be a good thing – I think minimum wage jobs tend to have very high turnovers. Improvements in organisational efficiency are presumably a good thing. The first two adjustments seem to occur with little or no cost. Reductions in wages of higher earners – presumably this has a very similar effect of a tax, higher earners pay the price either way. Very small price increases- also similar effect of a tax – the cost is spread over all consumers.

    If this analysis is correct, how would a tax credit actually be better than a minimum wage?

  80. 80 80 Ken B

    @Al V 78: All of Public Choice theory! A great book by Rauch is The End Of Government, on just this.

  81. 81 81 Ken Arromdee

    Some people voluntarily go out on Sundays and pick up trash in the park. If we collectively decide that we need more trash pickup, do we turn to the people who have been doing this by choice and demand that they do more? Or do we decide that maybe the rest of us should pitch in as well (either by getting out there ourselves or paying others to)? Some people voluntarily pay wages to unskilled workers. If we collectively decide that we need more wages paid to unskilled workers, should we turn to the people who have been paying wages by choice and demand that they pay more?

    The difference is that people who employ workers do so because they expect to gain overall from the transaction, while people who donate their labor to such causes as picking up trash don’t expect to gain anything. Charging people who are directly acting with the goal of benefiting others is not (as fairness is normally interpreted) considered as fair as charging people who are acting out of selfishness and who only benefit others because in a properly functioning market selfishness also benefits others.

  82. 82 82 Andrew

    The difference is that people who employ workers do so because they expect to gain overall from the transaction, while people who donate their labor to such causes as picking up trash don’t expect to gain anything.

    I think I am going to cry.

  83. 83 83 Ken Arromdee

    Why are you crying? The only thing I can think of is that you want to point out that the people volunteering to pick up trash get satisfaction out of it, and therefore it’s not literally true that they don’t gain anything. However, this gain of satisfaction is not a transfer; nobody has to give it up in order for the trash pickers to get it. Such gains don’t count the same as transfers when it comes to “fairness”.

  84. 84 84 Harold

    Ken Arromdee, Andrew, I refer you to comment 16.

    I am interested if anyone has opinions about my earlier point (79). Steve seems to acknowledge that minimum wage does not increase unemployment (or at least is not proven to). This means the cost must go somewhere else. The post assumes that this cost goes to the employer, but in fact it is then passed on to others. Eventually, the cost is recovered in efficiency savings and reduced turnover (good things) and the rest is spread over consumers and higher earners. That sounds like a pretty good way to distribute the cost, and does not involve the complications of a tax credit.

    Another point that I don’t think has been answered, if we give a tax credit, why won’t employers just drop their wages?

  85. 85 85 Suckmydictum

    @84

    The employers are paying taxes to support the tax credit just like everyone else. Would their dropping wages not be offset in their paying higher taxes to support the increased credit?

  86. 86 86 Harold

    @85. Dropping wages would offset their loss, but would defeat the purpose of the tax credit.

  87. 87 87 Suckmydictum

    @86

    Yes, dropped wages would defeat the purpose of the tax credit at first glance. But if the wages were dropped and low skilled workers’ income was where it was before the tax credit, wouldn’t more tax money be collected and allocated for distribution to low skill workers under an earned tax credit policy? The entire point of this seems to be to redistribute wealth from employers to low skilled employees. Employers couldn’t get away from that by dropping wages because they would just be paying more in taxes to support the tax credit. Does this make sense?

  88. 88 88 iceman

    Re: #9, Ed Glaeser made the same point earlier this week about the EITC being a more efficient and fair way to help people. So it seems regardless of your view on the pros and cons of minimum wage, why not support something that’s even better? (Glaeser’s) answer – politically it keeps the cost off the govt’s books. I call it charity on the cheap.

    Talk about “living wage” is another attempt to pretend corporations are charities. Let corporations do what they are designed to do — help allocate resources effectively by producing things people want — and allow people (including business owners) to be charitable in their private lives as their consciences dictate (subject to a social safety net if you prefer).

  89. 89 89 Ken Arromdee

    Harold: I don’t think comment 16 applies here. I was disputing a specific argument–namely, a statement about fairness that implied that something that is not considered fair for volunteers should not be considered fair for employees. I pointed out that common conceptions of fairness do not treat volunteers and employees equivalently.

  90. 90 90 Aodhan

    “If the minimum wage kills jobs, it kills minimum wage jobs, which is to say that it kills jobs nobody wants very much anyway.”

    Fair enough. But one should not only consider the desirability of entry-level jobs right now but also the desirability of what they are liable to lead to in future.

    Specifically, entry-level jobs are liable to increase the probability of obtaining a higher-paying job later, because the entry-level jobs are liable to provide the worker with the opportunity to build character, skills, experiences, and reputation, which can traded later for a higher wage. Not invariably, of course, but often, especially when they can shop around.

    Legally preventing people from getting on the bottom rung of an escalator, on the grounds that they should not have to start out so far from the top rung, is no way to help them ascend.

  91. 91 91 Ken B

    “If the minimum wage kills jobs, it kills minimum wage jobs, which is to say that it kills jobs nobody wants very much anyway.”

    Interesting argument. I guess it would no big deal then if we banned sex with old people. Still someone must want them, or you wouldn’t need to change the law to eliminate them. It’s a puzzle.

  92. 92 92 Henri Hein

    @58:

    Poor Bob.

  93. 93 93 Harold

    Ken Arromdee: Apologies, I had mis-read your point.

  94. 94 94 Xan

    Anyone seen Krugman’s latest? Apparently, now, labor demand curves DO slope downward. Spain’s wages are too high, which is causing “incredibly high unemployment.”

    http://krugman.blogs.nytimes.com/2013/02/25/a-tale-of-two-adjustments/

  95. 95 95 Suckmydictum
  96. 96 96 Adam

    #12: I could imagine someone on the left arguing that the McDonald’s owner makes a lot of money off of the work of her unskilled workers and makes sufficient profits to pay them more. The only reason she doesn’t is because there are other unskilled unemployed individuals who would happily replace them.

    I would like to respond with something about supply and demand and the returns to education (i.e., the low skilled people should invest in gaining skills), but this doesn’t seem adequate to the underlying normative assumption that we have an obligation to give more to these low paid workers.

    How would you respond?

  97. 97 97 Steve Landsburg

    Adam:

    I could imagine someone on the left arguing that the McDonald’s owner makes a lot of money off of the work of her unskilled workers and makes sufficient profits to pay them more. The only reason she doesn’t is because there are other unskilled unemployed individuals who would happily replace them…..How would you respond?

    I would respond that it is absolutely ridiculous to think that McDonald’s is the only employer of unskilled labor, that it is in fact in the very nature of unskilled labor that it is transferable across industries, and therefore that the wages of unskilled labor are necessarily, via the forces of competition, set equal to the marginal product of unskilled labor, for reasons explained in every elementary economics textbook.

    And I would reiterate that if you’re suggesting that small business owners, by virtue of the fact that they are (perhaps) richer than unskilled workers should therefore transfer additional income to unskilled workers, then the same logic should apply to *anybody* who’se richer than unskilled workers, not just to small business owners.

    In other words, your only argument for placing the full burden of this transfer on McDonald’s owners (and their customers) is that you think they can afford it. Well, lots of other people can afford it too, so why doesn’t your argument apply just as well to them?

  98. 98 98 Ken B

    I endorse every word of 97 but I can tell you it won’t satisfy Adam and many who have asked me similar questions, because Steve has not addressed the propriety of the employer profiting from employing the labor of the unskilled. The rejoinder to Steve will be, others may be richer, but they are not exploiting the inskilled the way the employer is. I think this a totally misdirected riposte, but I think market boosters like Steve (and me!) do owe a sensible response.

  99. 99 99 Steve Landsburg

    Ken B:

    The rejoinder to Steve will be, others may be richer, but they are not exploiting the inskilled the way the employer is. I think this a totally misdirected riposte, but I think market boosters like Steve (and me!) do owe a sensible response.

    The sensible response is that there is no monopsony power in the market for unskilled labor and hence no potential for exploitation.

  100. 100 100 Ken B

    @99: Ahhh, that is a good answer. I’m glad I asked.

  101. 101 101 iceman

    I tried to touch on the propriety issue with my second comment in #88 as well

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