Minimum Insight

Paul Krugman argues that:

  1. Hiking the minimum wage has little or no adverse effect on employment
  2. and therefore

  3. A minimum-wage increase would help low-paid workers, with few adverse side effects

.

In other words, Krugman, not for the first time, is peddling the sort of claptrap that few of us would accept from a college freshman.

The first point — that hiking the minimum wage has little effect on employment — is an empirical one. Not all smart observers agree with Krugman’s reading of the data, but many do — so for the sake of argument, let’s assume he’s right about that.

The question now is: How the hell do you get from point 1 to point 2? Answer: Only by forgetting the most basic principle of economics, which is that things have to add up. If the minimum wage has no effect on employment, then it’s basically a pure transfer of resources. Which means that the costs and the benefits are equal. The only way there can be “few adverse side effects” —- i.e. few costs — is if there are few benefits. Our job as economists is to make sure people understand such things.

Once you’ve stipulated that the minimum wage is a pure transfer, the next step is to ask: Who does the transfer come from? Another part of our job as economists is to make sure people take that step. In this particular case, it’s going to come largely (through higher prices) from the patrons of the (mostly highly competitive) establishments that employ a lot of minimum wage workers. (That’s because, under competition, price is driven down to marginal cost, but no lower — so if the quantity served remains fixed per Krugman’s point 1, an increase in marginal cost must be fully reflected in the price.)

Now the next step is to ask: Why this particular transfer? Another part of our job as economists is to make sure people take that step too. The minimum wage takes from the (mostly) relatively poor people who buy a lot of fast food and gives to the (mostly) relatively poor people who serve it. When I go into McDonald’s in the morning, most of the customers strike me as less well off than the nice lady who serves me my Egg McMuffin. Why does Krugman want to take money from their pockets and put it into hers? And as for me — if my breakfast is going to cost me an extra dime every morning, then much as I like that nice lady, I’d far prefer that dime be sent to a starving child in Africa.

And if I do want to transfer a dime to the nice lady, I don’t need minimum wage legislation to enable it. That’s what tip jars are for.

It’s easy to say “Look how good it would be if Group A had more income.” But to jump from there to “It would be good to transfer funds from Group B to Group A” — without every asking whether those funds might better come from Group C, D or E, and without ever asking whether they might better be directed toward Group F, G, or H —- that’s a leap I’d expect to see from only two kinds of people, namely the thoughtless and those who are out to bamboozle them.

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105 Responses to “Minimum Insight”


  1. 1 1 Joe
  2. 2 2 suckmydictum

    @1

    I think you and Landsburg both know the McDonald’s example was anecdotal and meant as an example to drive home the point.

    Secondly, all you hear in the news these days is how the middle class is under attack. Your first link suggests McDonald’s patrons are disproportionally middle class, so how is it better that higher costs of McDonald’s patronage are passed onto them instead of the very poor?

  3. 3 3 Ed

    @1

    Allow Mcdonalds to be paid for with Food Stamps and that’ll change in heartbeat.

  4. 4 4 Jimmy

    You’re being even more disingenuous than you accuse Krugman of being.

    There is obviously another source of the transfer of resources besides flowing from the relatively low income customers to the relatively low income employees… That is, there could be a transfer of resources from the relatively high income McDonald’s franchise owners to the relatively low income employees. If this is the case, this would seem to be an unambiguously good thing given the marginal utility of income is undoubtedly higher for the workers than for the owners.

    Surely, at least some of the burden of higher wages is going to fall on the owners as much as the customers? What am I missing from Econ 101?

  5. 5 5 Econ_Student

    @Jimmy, if a company that employs large numbers of minimum wage workers and enjoys high profit margins, wouldn’t they pay their employees more if they wanted to? Forcing them to pay employees higher wages wouldn’t necessarily convince them to lower profit margins. They’d probably pass the cost onto the customer, wouldn’t they? This is assuming they determine they wouldn’t lose a significant number of customers.

  6. 6 6 Neil

    I do not advocate raising the minimum wage but, just to stir things a bit, there is the efficiency wage argument. In response to a higher minimum wage, employers work their employees harder and employees are willing to work harder because the cost of losing the job is higher. So there is no transfer, just less on-the-job leisure.

  7. 7 7 suckmydictum

    @jimmy

    Owners are the ones who set the prices of burgers and adjust to changing economic margins, like the changes that occur when a minimum wage is hiked. That’s what you’re missing from Econ 101.

  8. 8 8 David Wallin

    r/5 Neil: It would seem to me that I could offer my minimum wage employees a higher-than-minimum rate and accomplish the same thing. Well, except that they might fear losing their job more since the best, paid option is less than I pay. If my firm is better off, why wouldn’t I do that? Of course, firms do that. So, there must be some reason the minimum-wage-paying firm decides it is not their advantage to pay above minimum and work them harder.

  9. 9 9 Jimmy

    @econ_student (and my vulgar friend)… you’re missing a subtle (?) point… if the owner could raise prices, she would have done so already. Presumably, she is already price constrained or our super-rational profit maximizing owner would have raised the price of burgers long ago to earn more profits.

    So the owner has two options… raise the price of burgers and/or lower her profit margin. Presumably, the burden of the increase in wages will fall partially in both domains, depending on the price elasticity of burgers. That is, if she knows that even a small price increase in burgers will drive all her customers away, she’s going to “eat” the wage increase through lower profits.

  10. 10 10 Jay

    @Jimmy 8

    Let’s accept that the owner may be forced to take a haircut in profits. I believe this is safe since I don’t think franchise owners set their own prices (completely that is, I think McDonald’s corporate office may have at least some say).

    Wouldn’t this result in an equilibrium of (a) More use of automation resulting in less, albeit better payed, employees or (b) less franchise owners opening new or maintaining current restaurants due to the now smaller margins resulting in less total employees.

    I believe the debate is therefore whether either one of these new results is a net good, my personal bias says no.

  11. 11 11 Roger

    Maybe the higher wages will result in reduced govt costs for food stamps and other services.

  12. 12 12 Jimmy

    @Jay… your equilibria exist only in the fictional world of rational profit-maximizing actors engaged in perfectly competitive markets. That’s a useful simplifying assumption in Econ 1 but it’s not the world we live in.

    Krugman observes — and Landsburg seems to concede — that those equilibria don’t really obtain. What we actually observe in the real world is that wages get nudged up for the lowest income earners among us and there is no discernible effect on employment. That seems like a good outcome to me, even if it comes at the cost of the franchise owners profit margins being slightly trimmed. Again, the income the owners are forced to part with has lower marginal utility to them than the income that is gained by the workers. It is not complicated.

    As Krugman points out, this is one of the few econ debates that is easily testable and the results don’t comport with Landsburg’s rants and tip jar suggestions. But I’m guessing that Landsburg is opposed to a progressive income tax scheme also.

  13. 13 13 Don Boudreaux

    Jimmy,

    You assert that the effects revealed by the empirical analyses of minimum-wage legislation “don’t comport” with the claims of economists who, unlike Krugman, argue that that legislation diminishes the employment options of low-skilled workers. Yet to make such an assertion requires that you ignore the many empirical studies that DO find such negative consequences.

    See, for example, this paper from earlier this year by David Neumark, J.M. Ian Salas, and William Wascher:
    http://www.nber.org/papers/w18681

    (There are many, many more studies that reach conclusions similar to those reached by Neumark, Salas, and Wascher.)

    It’s misleading of you (and Krugman) to suggest that the empirical studies of the consequences of minimum-wage legislation has settled the matter in favor of those who champion such legislation. It has not – not by a long-shot.

  14. 14 14 Anonym NYC

    @jimmy #8,

    Here’s something you may be missing:

    Although it’s unclear what you mean by “price constrained”, if you mean “even a small price increase in burgers will drive all her customers away”, then that would be unrealistic, given that demand for a particular restaurant’s burgers is not perfectly elastic (even aside from the fact that all direct competitors will face the same type of increase in variable costs). The demand curve is downward sloping, and a price increase will reduce quantity demanded, and the net result of a price increase could be either an increase or a decrease in profit (depending on the increase in margin per unit relative to the change in quantity demanded).

    If, on the other hand, you are acknowledging the above when you say “So the owner has two options… raise the price of burgers and/or lower her profit margin. Presumably, the burden of the increase in wages will fall partially in both domains, depending on the price elasticity of burgers”, what you are implying is that, although some margin will be sacrificed, price will also be increased (to adjust to the new profit-maximizing equilibrium of price and quantity demanded), which will reduce demand due to price elasticity. This reduced demand for burgers implies a reduced demand for workers to cook and serve the burgers, which means fewer workers.

    I realize Landsburg is accepting — just arguendo — Krugman’s premise that there is no negative effect on employment, but per my explanation above, unless I’m missing something, this premise would require (at least) either an unrealistic assumption of perfect price elasticity of demand (meaning any price increase would necessarily lower profits, so the cost increase would come entirely out of margin), or (I suppose) perfect inelasticity of demand (suppliers would pass on the cost entirely in the form of price increase, but demand would not decrease).

    By contrast, the realistic assumption of a downward sloping demand curve implies some price increase and some decrease in demand and thus lower employment.

    It may be that the magnitude of decrease in unemployment is small/negligible, but that is a case to be made.

  15. 15 15 Henri Hein

    There is another point which Krugman misses. Even though a minimum-wage hike may help those earning the minimum wage, it hurts the prospects of minimum-wage job-seekers. They now have to raise their value (say, from $7/hr to $10/hr, to use Krugman’s numbers) in order to gain employment. Since the job-seekers are worse off than the already-employed, I think supporting the minimum wage is downright mean.

    Though I loved reading, in a Krugman column, that we cannot know the effects of the Obama stimulus just from examining the US economy ex post. I might quote him on that.

  16. 16 16 Don Boudreaux

    Following-up my previous comment, notice that in this survey (out of U. Chicago-Booth), a plurality of economists agree that raising the minimum wage to $9 per hour “would make it noticeably harder for low-skilled workers to find employment.”

    http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_br0IEq5a9E77NMV

    Of course, this fact doesn’t necessarily mean that the empirical studies, however they might be weighted, support the standard textbook argument against minimum-wage legislation. But this fact DOES seem to strongly suggest that the empirical analyses of the employment consequences of minimum-wage legislation do not support the conclusion that such legislation has no, or only minimal, effects on the abilities of low-skilled workers to find jobs.

    (Curiously – at least to me – the responses to second question reveal that economists are far too willing to ignore the plight of people who remain unemployed because of minimum-wage legislation. Some peculiar value judgments seem to be in play here – value judgments that likely do not generalize over other, similar scenarios.)

  17. 17 17 Anonym NYC

    Henri #15,

    I think if one accepts (arguendo or otherwise) Krugman’s premise that there is no negative effect on employment — or even just on current employees — the implication is that a mandated increase in wage doesn’t affect how many people employers decide to employ, and this applies to both current and prospective employees. The premise implies that the relationship between price they must pay and the value of the labor to the employer is irrelevant to this decision.

    Granted, current employees generally provide greater value due to their training/experience with the employer (and the employer knowing their strengths/weaknesses, etc., and thus how to best utilize them), and with current employees there is no need to incur costs involved in selecting/hiring new people, but I think that is not key here.

  18. 18 18 Neil

    David Wallin@8

    Yes, of course, the firms are forced to use a plan they don’t want to use voluntarily, so it must raise their costs somewhat. But my point is that not all of the wage increase has to be a transfer, if the efficiency wage theory applies.

  19. 19 19 henri hein

    @AnonymNC #17,

    I thought about this myself after I posted. I don’t entirely agree. I think the argument is, based on some studies, that burger chains do not immediately lay off any measurable amount of workers when the minimum wage increases. That says nothing about their propensity for hiring more workers after the hike. Since the argument is empirical, I can’t help wondering how much more difficult it is to measure the rate of hiring, as opposed to measuring an immediate drop in employment (within that class of employees).

    (For the record, I also note Don Boudreaux’s comments: the studies in question are far from conclusive.)

    In addition, it may be that burger chains are willing to hire at the same rate as before, but the nature of the pool is going to change. To wit, there are more workers worth at least $7/hr than there are workers worth at least $10/hr. Those currently worth $7/hr-$9/hr have to upgrade their skills to be employable after the hike. Since those are the most disadvantaged of all the workers, that is the effect I consider it unconscionable to ignore, regardless how small that group is.

  20. 20 20 iceman

    17 – is that a premise or assuming the conclusion?

    18 – agreed the question is whether efficiency wage theory applies *here*; the fact that employers have not voluntarily adopted the practice provides first-cut evidence that there is little motivational impact on these particular workers so little offsetting gain (so perhaps the burden is on those who would prove they don’t understand their business).

  21. 21 21 iceman

    Clicked on the link to “a lot of evidence” that is “overwhelmingly positive”, half-hoping to have to rethink the whole issue…alas it’s a piece from 2010 that naturally starts with Card-Krueger, then refers to Neumark-Wascher (opposing view), then an as-of-then-unpublished study (Dube-Lester-Reich), then another opposing view (Mulligan). Maybe PK assumes most people don’t bother to click?

    Since Card-Krueger always seems to be the fountainhead, Jay #10 hit on the horizon issue that has always seemed a fundamental design issue (i.e. beyond phone surveys): over time do higher min wages lead to automated fryers, esp. if owners are price-constrained? I am glad if we’re at least moving beyond Card-Krueger as the base proof.

    Another ‘real-world-y’ consideration – how does it impact the desired redistributive patterns if much of the political support comes from unions who see a hike as raising their reference floor for bargaining?

  22. 22 22 Anonym NYC

    To add to my #14 and apropos of one of Jay’s points in #10, if one assumes perfect price elasticity of demand such that suppliers don’t raise price in response to an increase in variable costs (because they’d lose all demand), the lower margins means lower expected ROI at the same risk level, presumably causing lower investment and reducing supply at that (maintained) price, thereby reducing equilibrium quantity and employment as Jay points out.

    I assume graphically this means the supply curve shifts up (or “backward” toward lower quantities, if one prefers)intersecting the flat demand curve at a lower quantity.

  23. 23 23 Max

    The last paragraph of this post is widely applicable to our policy debates. There’s no economic reason why the source of funds for a given initiative has to come from the same realm of political policy as its beneficiaries. Both the collection of funds (taxation) and the distribution of those funds have incentive effects that ought to be understood.

    Let’s assume that society has decided it’s worthwhile to help the poor purchase health insurance. Who we tax to pay for it is an entirely separate matter, isn’t it? Why tax the healthy to buy insurance for those who can’t afford it, as ACA effectively does? Why not tax the rich, our usual go-to cash fountains? (Ideally, the tax should be on something that we actually want to disincentivize, not on earning money, but the point is that there’s no particular reason money has to come from the health sector at all.)

  24. 24 24 Daniel

    @Don Bourdeaux 16,

    Lol, in that same link a plurality of economists actually agree with raising the minimum wage because effects on employment are sufficiently small, supporting Krugman’s argument.

  25. 25 25 Daniel

    Right, so Krugman probably believes in a partial monopsonistic story, making it possible to raise wages, not decrease employment and not raise prices while most of the loss comes from decreased profits to the firm. Not a totally outlandish model in labor economics.

  26. 26 26 Mike H

    Suppose raising the minimum wage has no effect on employment.

    Doesn’t this mean that the demand for minimum wage employees is independent of the price?

    Now, you’ve stated that the extra cost of the staff will largely fall on buyers of hamburgers (and the outputs of other minimu-wage jobs). This assumes that the demand for burgers or service in Walmart is also independent of the price.

    Do you have any evidence for this?

  27. 27 27 Steve Landsburg

    Mike H:

    Suppose raising the minimum wage has no effect on employment.

    Doesn’t this mean that the demand for minimum wage employees is independent of the price?

    Now, you’ve stated that the extra cost of the staff will largely fall on buyers of hamburgers (and the outputs of other minimu-wage jobs). This assumes that the demand for burgers or service in Walmart is also independent of the price.

    Do you have any evidence for this?

    I have something better than evidence. I have logic.

    If employment doesn’t change, and if profits don’t change (as they can’t in a competitive industry) then quantity can’t change. So the demand curve for output must be vertical. Since we’ve granted for the sake of argument that employment doesn’t change, we’re done.

  28. 28 28 Steve Landsburg

    Jimmy:

    There is obviously another source of the transfer of resources besides flowing from the relatively low income customers to the relatively low income employees… That is, there could be a transfer of resources from the relatively high income McDonald’s franchise owners to the relatively low income employees.

    If you disagree with the presumption that, e.g. the fast food industry is (for all practical purposes) perfectly competitive, then by all means offer your evidence. But given that presumption, your “obvious” other source is obviously not a potential other source at all.

    In view of the fact that I was entirely up front about pointing to the importance of competition, I think your accusation of disingenuousness is quite far off the mark.

  29. 29 29 Keshav Srinivasan

    Steve, what is your evidence for “the presumption that, e.g. the fast food industry is (for all practical purposes) perfectly competitive”?

  30. 30 30 Jimmy

    Steve-

    I’m agnostic on whether the fast food industry is perfectly competitive but I don’t see how that question answers whether a wage increase could be a transfer from the owner to the worker, instead of a transfer from the customer to the worker.

    Seems to me that in any marketplace — perfectly competitive or not — the question of whether the wage increase could be passed on to the customers is dependent on their cross elasticity of demand for goods outside of the industry. That is, if the price of burgers was highly cross-elastic and any price increase would cause the customers to flee and no longer eat fast food, then that would suggest that the owner is going to shoulder most of the burden of the wage increase. He has no ability to raise prices and burden his customers with his increased cost.

    Regardless of the presumptive competitiveness and demand elasticity, I think it defies logic that the owner would not shoulder some burden of the wage increase. That was the reason for my accusation of disingenuousness.

  31. 31 31 Pat
  32. 32 32 Keshav Srinivasan

    @Jimmy You’re right, if we have perfect competition, then a single company may not be able to raise their prices. But if all companies suddenly faced the same increase in costs, then they’d all have to increase their prices, and to a first approximation that wouldn’t cause a customer to go from one store to another.

  33. 33 33 Keshav Srinivasan

    @Pat The fact that there are a large number of competitors doesn’t necessarily imply that we close to perfect competition, does it?

  34. 34 34 Steve Landsburg

    Jimmy:

    Regardless of the presumptive competitiveness and demand elasticity, I think it defies logic that the owner would not shoulder some burden of the wage increase. That was the reason for my accusation of disingenuousness.

    You can look in any intermediate level economics textbook to find the proof that in a perfectly competitive industry, all cost increases are passed on to the consumer in the long run.

    If you weren’t aware of that argument, that’s a perfectly understandable case of ignorance. We can’t all be experts in everything.

    But this does mean that whatever argument convinced you otherwise must be mistaken. That’s also perfectly understandable. We all mistakes every day.

    Of course, if you were invoking logic *without* having an argument in mind, that would be a case not of a mistake but of dishonesty. But I certainly wouldn’t want to presume you’d been dishonest, so I take it that you had some argument in mind.

    If you want to share that argument, I’ll be happy to help you find the error.

  35. 35 35 Steve Landsburg

    Pat: Thank you for answering Keshav!

  36. 36 36 Daniel

    @ Pat:

    http://en.wikipedia.org/wiki/Perfect_competition

    You’ve satisfied part 1 of the many conditions for perfect competition. (I realize that this is Wikipedia and there’s general back an forth about how many of these are actually necessary but it’s certainly more than just many buyers and many sellers).

    Can you satisfy the other ones. Or better yet can we come up with the profit margin – opportunity cost for the industry (note this should be 0 if the industry is perfectly competitive).

  37. 37 37 khodge

    It has always annoyed me that the fast food industry is the standard for minimum wage. I first came across the Card Krueger study in a book on econometrics written by Krueger and my immediate impression was: That makes a lot of sense; let’s attack the fast food industry which may be capable of increasing the minimum wage and let’s totally ignore all of the real small businesses that do not have the backing of a nation-wide marketing program.

  38. 38 38 Anonym NYC

    @Steve and Pat re: perfect competition, as a marketing guy (and I mean not only promotion but also product line strategy and other elements of the marketing mix) I feel compelled to say that the assumption of perfect competition ignores substantial differentiation of offerings by suppliers and resulting consumer preferences among suppliers. It assumes consumers see no significant difference between whatever they like to buy at McDonald’s (and buying at McDonalds generally) vs. something at Burger King, or for that matter something from Panda Express.

    I’m not addressing matters of degree and the extent to which it affects the questions being discussed, except to say that I think the differentiation is significant enough that it may be a mistake here to overlook it and assume perfect competition.

  39. 39 39 dan

    “And if I do want to transfer a dime to the nice lady, I don’t need minimum wage legislation to enable it. That’s what tip jars are for.”

    Following the logic and the assumptions of the post, this too would not work. Employers would reduce the wages by the expected amount of tips. There’s also the uncertainty or variation around expected amount of tips. Some of the risk could be shifted on to the worker making them worse of then before.

  40. 40 40 Jimbino

    If there were no minimum wage, raising it to $1 would have virtually no effect on employment. Not until the minimum exceeded the wage at which the least-skilled worker will leave welfare and take a job will the minimum wage have any effect on employment.

    It appears to me that employment rate maxes out at a minimum wage of $0 and first stays flat and then drops as the minimum wage increases.

    If I make a graph of employment rate vs increasing minimum wage from $0 to $100, what I expect to get is a monotonically decreasing curve with a flat spot at the top before it begins to decrease. I fail to see how Krugman’s argument can be taken seriously, unless he’s talking about the special case where the minimum wage effect starts out flat. Is Krugman arguing that there are other places along the curve where the minimum-wage effect is flat (or perhaps of positive affect on employment)?

  41. 41 41 Jay

    @Keshav 32

    Even if all fast food restaurants faced the exact same price increases, they’d now be competing with non-fast food restaurants one price level up from them for customers and presumably would see a drop in demand. This is the same logic brought up by Henri #15 in respect to wage level (which is often not brought up in the debate but is a great point).

  42. 42 42 Anonym NYC

    Just a note re: scenarios:

    So far I’ve just seen scenarios of the cost increase reflected entirely in price increase, entirely in lower margins, or some split between them.

    Another scenario could be to maintain price and margin (or have less of a price increase and/or less of a margin decrease) by reducing other costs. Presumably this would mean reducing quality in some way. (If such cost reductions wouldn’t reduce quality in some way — i.e., if there were no adverse effects offsetting the positive effect of lower costs, presumably these businesses would have adopted those measures anyway.)

    In this scenario, consumers lose by paying the same price for an inferior “product” (product, service, “experience”, etc.).

  43. 43 43 RJ

    Following the logic and the assumptions of the post, this too would not work. Employers would reduce the wages by the expected amount of tips.

    Bingo…

    I also can’t help but point out, Dr. Landsburg, that you wrote about this in the Armchair Economist (Indifference principle I believe). In the long-run, people who are tipped are not better off.

  44. 44 44 Pat

    Using the wikipedia criteria

    1 There are large number of buyers and sellers.
    2 There are no entry or exit barriers.
    3 There is perfect mobility of the factors, i.e. buyers can easily switch from one seller to the other.
    4 The products are homogeneous.

    I challenge any of you to find an industry that’s more competitive than fast food. Fast food meets all 4 criteria as much as any industry can.

  45. 45 45 nobody.really

    Summarizing many of the critiques raised above:

    1. Hiking the minimum wage has little or no adverse effect on employment
    and therefore
    2. A minimum-wage increase would help low-paid workers, with few adverse side effects.
    How the hell do you get from point 1 to point 2?

    It’s not clear to me that Krugman gets from 1. to 2.; rather, he cites studies which he says support both 1. and 2. In short, to Krugman this isn’t a question of philosophy; it’s a question of evidence.

    [According to Krugman, a minimum wage hike results in] basically a pure transfer of resources. Which means that the costs and the benefits are equal. The only way there can be “few adverse side effects” —- i.e. few costs — is if there are few benefits. Our job as economists is to make sure people understand such things.

    Thank goodness I’m not an economist: I have no idea how I could make someone understand that pure (involuntary) wealth transfers cannot generate large social benefits. The widespread adoption of progressive tax codes suggests a world-wide dearth of understanding on this point.

    Who does the transfer come from? Another part of our job as economists is to make sure people take that step.

    Fair enough.

    In this particular case, it’s going to come largely (through higher prices) from the patrons of the (mostly highly competitive) establishments that employ a lot of minimum wage workers. (That’s because, under competition, price is driven down to marginal cost, but no lower — so if the quantity served remains fixed per Krugman’s point 1, an increase in marginal cost must be fully reflected in the price.)

    I don’t know how highly competitive these firms are, or how that competition influences price in this context. Lots of evidence suggests that many prices are “sticky.” A firm that relies on a Dollar Menu may be reluctant to raise the price of certain items above $1; a firm that sell $5 FootLongs may be reluctant to raise the price of certain footlongs above $5; etc.

    Moreover, as others observed, we need to consider cross-elasticities of demand. Firms that rely heavily on minimum-wage labor may compete with firms that do not. (Ironically, I wouldn’t be surprised if a minimum wage hike helped McDonalds’, with its highly automated business model, compete against other food vendors that rely more heavily on hired labor in lieu of automation.)

    Why this particular transfer? Another part of our job as economists is to make sure people take that step too.

    For what it’s worth, Krugman briefly touches on the relative merits of a minimum wage hike vs. increasing the earned income tax credit, before concluding that there are merits in increasing both.

    And Krugman also notes that some policies are harder to adopt than others. In other words, arguments that seem inexplicable within the framework of classical economics may seem perfectly rational within a framework that acknowledges additional constraints. There may be more things in heav’n and earth than are dreamt of in a classical economist’s philosophy.

    The minimum wage takes from the (mostly) relatively poor people who buy a lot of fast food and gives to the (mostly) relatively poor people who serve it. When I go into McDonald’s in the morning, most of the customers strike me as less well off than the nice lady who serves me my Egg McMuffin. Why does Krugman want to take money from their pockets and put it into hers?

    I share Landsburg’s view that the effect of a minimum wage hike on alleviating poverty depends on which segments of society bear the burden of this wage hike “tax.” But, as others have noted, this is an empirical question, and the data at hands makes it far from clear that this burden falls on the lower rungs of the economic ladder.

    Indeed, consider the evidence at hand: We know that Landsburg is not near the bottom of the income distribution, and we know that Landsburg goes to McDonald’s. Thus, even if a minimum-wage-inspired price increase has the effect of simply stirring the pot of money already held by people in the bottom quintile, it may ALSO have the effect of transferring SOME more money out of Landsburg’s pockets and into the bottom quintile. In other words, the fact that a policy may generate some neutral effects does not mean that it cannot also produce desired effects; the aggregate consequence may be beneficial.

    Moreover, the challenge with criticizing any brief post for being facile is that you almost inevitably expose yourself to the same criticism.

    As others remarked, it’s facile to complain about the consequences of the minimum wage abstracted from considerations of other social safety net programs. Arguably a higher minimum wage tends to 1) bolster the income of the poor, and perhaps increase the taxes they pay, 2) reduce the earnings of their employers, and thus the taxes they pay, 3) reduce other forms of social safety net spending. That is, a minimum wage is a substitute for government spending/borrowing.

    But maybe not. Imagine that Landsburg is correct and an increase in the minimum wage increases prices borne by people earning the minimum wage. Many social safety net programs have Cost Of Living Adjustments (COLAs) – adjustments that would be triggered by the increased price levels caused by the minimum wage. Thus, the net effect may be to trigger increased wages AND increased social safety net expenditures. If the social safety net expenditures are financed through progressive taxation, the net effect may be progressive.

    Etc., etc.

    And finally:

    And as for me — if my breakfast is going to cost me an extra dime every morning, then much as I like that nice lady, I’d far prefer that dime be sent to a starving child in Africa.

    And if I do want to transfer a dime to the nice lady, I don’t need minimum wage legislation to enable it. That’s what tip jars are for.

    And that’s fine – but this isn’t a critique of the policy; it’s merely a statement about having a different policy preference.

    True, Krugman did not get into all of these nuances. But I can’t conclude that he refrained from doing so out of thoughtlessness or malice.

  46. 46 46 Patrick R. Sullivan

    Homogeneous products (eat one burger, you’ve not eaten them all, but close),low barriers to entry, numerous competitors (even sack lunches made at home)…. I’ve always said that fast food is about as close as you get to textbook perfect competition. Anyone know of another industry that comes closer?

    Anyway, if the investors ate the whole minimum wage increase that would just give them incentives to look elsewhere for returns on their capital. How does that help the low-skill workers?

  47. 47 47 Floccina

    @Jimmy
    In the short run the owners will pay (as Steve has said elsewhere) but in the long run the customers pay, but even in the short run why would you want that set of rich people to pay rather than all rich people?

    To others Steve’s example leaves out a lot of complication like: it is not important that most/all McDonald’s customers just that some are poor so part of the transfer still comes from the poor.

    I cannot believe that higher minimum wages have no effect on employment so I think that debate should include what Steve said but also a debate about if it is better to gave say 9 people employed at $10/hour or 10 people employed at $7/hour.

    A higher minimum wage might also push more employers to pay (illegally in cash.)

  48. 48 48 Daniel

    @ Patrick R. Sullivan and Pat,

    The only one I might argue with is homogenous products. They need to be homogenous products in the eyes of the consumer, not in our inclinations. I believe that to a certain extent there is brand monopoly over the consumers between fast food restaurants. How much so, I have no idea, but I know a few people that swear the Big Mac is better than the Whopper and vice versa.

  49. 49 49 Anonym NYC

    [I wrote this before seeing Daniel's 48, but I'm concurring with his comment.]

    As follow-up to folks arguing that the fast food is so close to perfect competition, I’ll add that, although I’m not a heavy user of fast food (maybe once/month) and I’m probably less price-sensitive than the average heavy fast-food user (and may have a stronger preference), I know that I’d choose McDonald’s over Wendy’s or Burger King every time based on my strong preference for the former’s hamburgers and fish sandwich. I don’t know what the price differentials are for the closest offerings from those other two suppliers, nor for that matter do I recall what McDonald’s prices are for those items, but even if the prices increased substantially, I’m not switching to either of the other two, not even some of the time.

    The point is that, although I may not be typical in terms of degree of preference, I think assumption of homogenous (or even nearly homogenous) products across even burger suppliers is at least very questionable. And of course burger chains aren’t just differentiated from other burger chains, but also (to an even greater extent) from other types of fast food.

  50. 50 50 Pat

    Daniel,

    If we’re going to be picky enough to consider the Big Mac and the Big King non-homogenous then I don’t think there’s much point to the conversation. I am all ears for an argument that McDonalds has some monopsony power due to the deliciousness of a Big Mac but I haven’t heard it yet.

    That said, Big Macs are great.

  51. 51 51 Daniel

    @ Pat,

    They don’t need to be non-homogenous, other than by preferences. They could be the exact same burger, but if some people *believe* that one is inherently better than the other, than you don’t have exactly homogenous goods.

  52. 52 52 iceman

    45 – “Thank goodness I’m not an economist: I have no idea how I could make someone understand that pure (involuntary) wealth transfers cannot generate large social benefits. The widespread adoption of progressive tax codes suggests a world-wide dearth of understanding on this point.”

    To me the only thing for which this provides prima facia evidence is that involuntary wealth transfers generate large *political* benefits to populists.

  53. 53 53 nobody.really

    Thank goodness I’m not an economist: I have no idea how I could make someone understand that pure (involuntary) wealth transfers cannot generate large social benefits. The widespread adoption of progressive tax codes suggests a world-wide dearth of understanding on this point.

    To me the only thing for which this provides prima facia evidence is that involuntary wealth transfers generate large *political* benefits to populists.

    Seriously, do people really think wealth transfers can’t produce social benefit? For example, was the Marshall Plan really a complete fiasco?

    I can imagine that Austrian economists embrace this view. But they are a distinct minority even among economists. I’m surprised to see Landsburg toss off this idea as if it were self-evident.

  54. 54 54 Daniel

    @iceman,

    http://en.wikipedia.org/wiki/Mincome

    Net benefits to society from transfer, from an experimental perspective.

  55. 55 55 Pat

    Daniel,

    You’re saying perfect competition doesn’t exist when consumers are able to rank products. This seems like a get out of jail free card for any silly regulation. Something like, “Your lame economics 101 assumes perfect competition when it is clearly not the case in the real world hence price controls don’t create shortages.”

  56. 56 56 Keshav Srinivasan

    @Pat Arguing that fast food is closer than other industries to meeting the four conditions of perfect competition is not the same as saying that they’re very close to meeting those four conditions.

  57. 57 57 Phil

    Hmmm, how about this?

    Raising the minimum wage raises the cost to producers. The highest-labor-cost producers are affected the most. They go out of business. Customers are forced to move to lower-cost producers, like McDonald’s. This raises demand for Big Macs, and McDonald’s can raise the price. That’s consistent with any change — positive, negative, or zero — in McDonald’s employment.

    The minimum wage causes a drop in employment, but you’d never see it by looking only at McDonald’s, or other low-cost producers.

    This seems like the same logic as … “if you ban discount stores, employment at Nordstrom’s will increase.”

  58. 58 58 Sy

    A number of commenters here seem to be hung up on the definition of perfect competition. In economics perfect competition is an abstraction, as is the assumption of frictionless motion thought experiments are in mechanics. It is the same error that a person would have made if they said all experiments to prove Newton’s laws of motion were useless since there was clearly friction present.

    Perfect competition and highly competitive markets are not one and the same thing, though understanding the former can enlighten the latter. When microeconomists talk about competitive markets we are not generally talking about perfect completion. In fact, what we’re really talking about is competition at the margin. For example, even though a Big Mac is not the same as a Whopper, you can be sure McDonald’s and Burger King are keeping close track of each other’s prices and products. All companies try to differentiate their products from their competitors at the same time as they create products that will eat into the others market share. They are keenly aware that customers’ have choices and changes in product quality or price can adversely affect their business. My point here is that even though perfectly competitive markets are very rare, highly competitive markets are not.

  59. 59 59 Sy

    @ Anonym NYC, 49 & Daniel 51

    It doesn’t matter if you, or I, have particular preferences for one company’s product over another. The appropriate question is: at the margin, how many people will change their behavior due to a change in product or price. The products or their prices don’t have to be the exact same for that to happen. For example, there’s corner near my home where there’s a Chevron, a 76 and an Arco station very close to one another. Usually, the Chevron has the highest price, 76 is a few cents cheaper and Arco is 10 or more cheaper than Chevron. The market believes that Chevron gas is a little higher quality than the 76, and significantly higher quality than the Arco. A couple of years ago I noticed that the Chevron price was more than 20 cents cheaper than the other Chevrons and Shells (usually very closely priced with Chevrons) within a couple of miles radius. I immediately filled up at the Chevron station, and while there asked the manager/owner why their prices were so low. His answer was, the Arco next to him had reduced his prices significantly and he needed to also to not lose business. Looking across the street, the 76 had similarly brought down its prices. The net affect being the relative price differences remained pretty close to usual. I should point out for those not familiar with the West Coast brands, Arco is always and everywhere 10 to 15 cents cheaper than neighboring Chevron or Shell. That is the market reflecting difference in quality, i.e. product differentiation. Yet the brands are still highly competitive.

  60. 60 60 Sy

    I should have added to my last comment that I have a strong preference for Chevron and very strong negative preference for Arco. Even a 50c difference in price between the two would not get me to buy from Arco. Clearly, at the margin there are enough people who would switch even with a small difference to compel the Chevron and 76 owners to reduce their prices.

  61. 61 61 Maureen

    The assumption that fast food franchisees make lots of money (and therefore should transfer some – if not all- of that to their workers is flawed. I read an article somewhere that a McDonalds franchisee nets about $150,000 a year which sounds like a lot until you realize that amount of investment and risk that they take to purchase the franchise and run it probably a 2 or 3 million dollar investment overall. AND then you have to staff it for 24/7 in many locations – that is not an easy job. So I would expect that the owner might be taking home about $25/hour for his work (70 hours/week times 52 weeks divided by $150,000). THAT is not a good return on investment. Increase the wages (which in all workplaces are usually the largest part of the expenses) and that $24/hour drops to about $10/hour really quick.

    The bigger issue that I have is the assumption that somehow minimum wage is the start and end to a career. Minimum wage is a start, but if it is seen as an end, then we can revise a bunch of government budget items that will no longer be needed – starting first with money for the k-12 education system and the post secondary education systems. If unskilled labour is all that, as a society, we are willing to support with higher and higher minimum/living wages, then no one needs to graduate high school and we can stop at Grade 10 (or even maybe Grade 8). We can shrink that whole system down and get rid of vast amounts of government departments and the costs that go with them.

    In both Canada and the US the opportunities are endless to gain additional education and training (no not in worthless degrees such as medieval gender studies!), but in getting real skills and knowledge that employers are demanding (and for which there are jobs that pay way more than minimum wage). The difference is that minimum wage earners have to actually be prepared to commit time and effort into achieving that training. I have worked with too many people at the lower end of the income scale and they have unicorn dreams, but never make any move to fulfill them, but are angry that somehow they are being deprived of something.

  62. 62 62 iceman

    53/54 — I’m not sure anyone was saying redistribution *can’t* possibly have social benefits. But the idea that the min wage has no (significant) effect on employment – which was granted for argument’s sake – just says contrary to the standard criticism it doesn’t on net actually hurt the group it seeks to help. I was suggesting if you want to actually argue for positive externalities IMO you’ll have to do better than simply observe that most governments impose progressive tax schedules, since there just might be some political incentives driving that.

    BTW the Marshall Plan seems wildly off mark since our interest predominately involved national security…unless you’re suggesting minimum wage workers are about to revolt? In which case perhaps a better policy would be to educate people that all inequality is not equal, i.e. in a market economy it’s much less likely that some are wealthier because they took something from you, and much more likely that they became wealthy by conceiving of things that actually improved your life as well. (Please no rants about mortgage-backed derivatives here.) That might also have a positive externality of encouraging people not to live their lives filled with misplaced resentment. (Hat tip to Maureen)

    At least Daniel provides a link to something that is more…well I’m not sure exactly.

  63. 63 63 David

    This Macroeconomics textbook states that the majority of economists agree that a sufficiently high minimum wage leads to structural unemployment:

    http://books.google.com/books?id=dpTBdNGGrtUC&pg=PA210#v=onepage&q&f=false

  64. 64 64 Nonsi Las

    And if I do want to transfer a dime to the nice lady, I don’t need minimum wage legislation to enable it. That’s what tip jars are for.

    Er, tipping her that dime may not actually transfer a dime to her, given the theory of tax/cost incidence:

    http://econlog.econlib.org/archives/2013/08/what_if_tipping_1.html

    Over the long term, the practice of tipping could (and likely would) make the workers bid down their wages (just as how waiters have to be paid less in salary than non-tipped jobs because they know they’ll also get money from tips), meaning that the tip is incident on the owner, not the worker.

  65. 65 65 Scott H.

    Steve. Playing devil’s advocate here…

    So what then? The poor and middle class are paying the poor. Sure, it may be ignorant. But it’s hard to see where moral hazard or conflict of interest may corrupt this process much further. To the extent the poor and middle class vote for the representatives that would enact this legislation, it is entirely self inflicted, and not the case of a minority at the mercy of tyrannical majority — the usual situation when the rich are forced to pay.

  66. 66 66 ONS

    “If the minimum wage has no effect on employment, then it’s basically a pure transfer of resources. Which means that the costs and the benefits are equal.”

    I think what Dr. Landsburg is saying here is that in any pure transfer of resources from A to B, the net benefit is zero. (Or the marginal cost to A of losing resources equals the marginal benefit to B of gaining resources).

    Someone correct me if I’m misinterpreting, but it seems like that’s what Dr. Landsburg was saying.

    If so, this is wrong. This is so wrong it’s hard for me to believe no-one else on this post has picked up on it.

    I have 1000 batteries and 1 flashlight. Dr Landsburg has 0 batteries and 1 flashlight. It’s dark and the power is out. If there is a “pure transfer of resources” here — I give Dr. Landsburg one battery — then I now have 999 and he has 1. However, we can both use our flashlight in the dark. The marginal cost to me of losing the 1000th freaking battery is freaking low. The marginal benefit to Dr. Landsburg of now having a functional flashlight in the dark is way freaking higher.

    So, I guess, if you’re trying to “catch” Paul Krugman making some elementary error, be sure not to make one yourself?

  67. 67 67 Steve Landsburg

    ONS: You are confusing a pure transfer with a reallocation of resources.

  68. 68 68 Steve Landsburg

    Scott H:

    So what then?

    The great moral outrage here is not the minimum wage; it is Paul Krugman using his position to diminish the public’s understanding of basic economic insights. That’s a tragedy.

  69. 69 69 Mike H

    @Steve #27 I have something better than evidence. I have logic.

    Ouch! Do you really mean that?? If you are talking about the real world, logic is not better than evidence. Insert identical spheres joke here.

    If employment doesn’t change, and if profits don’t change (as they can’t in a competitive industry) then quantity can’t change. So the demand curve for output must be vertical. Since we’ve granted for the sake of argument that employment doesn’t change, we’re done.

    You may have logic, but you may also have a flawed premise. That’s why your logic and conclusions must be tested against evidence.

    Please humor me – what’s the argument that shows that profits can’t change in a competitive industry when input costs rise? And does this argument still hold when there are changes to the macroeconomy that shift the demand curve, for example, minimum-wage workers having more money to spend?

  70. 70 70 Xan

    @Mike H #69
    It’s ok if the premise is flawed. It’s Krugman’s premise.

  71. 71 71 Steve Landsburg

    Mike H:

    Please humor me – what’s the argument that shows that profits can’t change in a competitive industry when input costs rise?

    In a competitive industry, profits are already driven down to the point where capital earns no more than it can in any other competitive industry. Therefore if input costs rise in Industry A, profits in Industry A are driven below profits in Industries B, C, and D, which causes capital to flow from A to B, C, and so on up to Z, which reduces output in Industry A, which drives up the price of output in industry A. The outbound flow of capital continues until profits are re-equalized across industries, which (since profits in B, C and Z are essentially unchanged, each of them having acquired only a small share of the capital flowing out of A) cannot happen until profits in A are restored to their original level — i.e. until the price of A’s output rises by enough to completely cover the rise in input costs.

  72. 72 72 suckmydictum

    @ scott h

    I would argue the instance of moral hazard is a straightforward one: princeton professors and their diligent readers are unlikely to become unemployed if we hike the minimum wage as they prefer. However, if we accept the conclusions of this thread, and the minimum wage is really only is the middle class and poor paying the poor, it becomes essential to ensure that the employment prospects of low wage workers aren’t being harmed by a policy advocated by the rich and powerful.

  73. 73 73 Al V.

    My challenge with this fascinating discussion is that most posters seem to be arguing that the effect will be A, B, or C. I would argue that the effect will be A, B, and C.

    Raising the minimum wage raises the costs to businesses. There are multiple ways they could respond, and multiple ways their customers could respond. The question is, how will those responses be distributed.

    Some businesses will raise prices. This presumably will cause them to lose some business, depending on the level of competition. On 82nd Street in Jackson Heights, New York, there is a Subway, Burger King, MacDonalds, and Taco Bell within a block of each other. I would suspect that owners will make every effort to minimize their price increases, for fear of losing business to the local competitors. To avoid price increases they will probably seek ways to either cut other costs, or to increase productivity and reduce staff.

    In Marietta, SC, there is a Burger King. That’s it. The nearest competitor is 6 miles away. I suspect that the owner would have less fear in a nominal price increase, as customers’ only options are to drive 6 miles to Travelers Rest (to a Burger King owned by the same person), or to eat at home.

    So, let’s tally up the effects:
    - some businesses and employees will be unaffected, as the local minimum wage is already above the national base.
    - some minimum wage employees will lose their jobs.
    - some minimum wage employees will gain new skills as their employers seek to improve productivity.
    - some businesses will lose income as their customer businesses seek to trim costs in other ways (buy a cheaper brand of floor cleaner, for example)
    - some businesses will increase prices and lose some business to competitors; for example, as the price difference between Taco Bell and Chipotle is reduced, some customers will shift some purchases from Taco Bell to Chipotle.
    - some businesses will reduce profits.
    - other businesses will raises wages to keep keep/attract employees where there is more competition from minimum wage employers. Per Iceman #21, this is happening in Brasil as the minimum wage is raised, other wages that are indexed to the minimum are increasing, driving inflation.
    - outlays for SNAP will reduce as less people qualify.

    My point is that ALL of these things will happen, with different distributions across different industries and regions.

  74. 74 74 Al V.

    Per Sy, #58, 59, and 60, in the Southeast there is a gas station chain named QuikTrip. QT has the lowest prices in most areas, and pays the highest wages, with the lowest wages being 50% above minimum.

    How do they do it? Gas is a loss leader. They keep fuel prices low to attract business, but make their income off of the mini-marts. They pay higher prices to have more productive employees. They also allow local store managers more discretion in what they stock and in prices, recognizing that there is local variation in what people want to purchase. For example, in the Upstate of South Carolina, QuikTrip stores may stock varieties of Moon Pies not available in other areas, because Moon Pies are very popular in that area. Personally, I don’t like banana Moon Pies, but apparently somebody does.

  75. 75 75 ONS

    “ONS: You are confusing a pure transfer with a reallocation of resources.”

    What’s the difference?

  76. 76 76 nobody.really

    Please humor me – what’s the argument that shows that profits can’t change in a competitive industry when input costs rise?

    In a competitive industry, profits are already driven down to the point where capital earns no more than it can in any other competitive industry. Therefore if input costs rise in Industry A, profits in Industry A are driven below profits in Industries B, C, and D, which causes capital to flow from A to B, C, and so on up to Z, which reduces output in Industry A, which drives up the price of output in industry A. The outbound flow of capital continues until profits are re-equalized across industries, which (since profits in B, C and Z are essentially unchanged, each of them having acquired only a small share of the capital flowing out of A) cannot happen until profits in A are restored to their original level — i.e. until the price of A’s output rises by enough to completely cover the rise in input costs.

    I share this understanding of equilibrium. So perhaps just a semantic distinction, but I’d summarize this explanation as saying, “Aggregate social profits MUST decline when input prices rise in real terms [absent some wacky substitution effects].”

    We start at equilibrium. Then input prices rise in Industry A. Now some marginally profitable transaction isn’t profitable anymore, and inframarginal transactions are now less profitable than they used to be. This is honest-to-goodness lost profit, such as occurred during the oil supply shocks brought on by OPEC in the 1970s. Yes, the losses will be somewhat offset by capital flowing away from Industry A and into other industries. Those other industries will become more profitable in the aggregate, but presumably not sufficiently more profitable to offset the loss incurred in Industry A; otherwise, capital would have already reallocated itself to those other industries. That is, we’d violate the assumption that we were starting at equilibrium.

    I sense Landsburg is making the still-more-stylized assumption that there are infinitely many other industries of infinite size, such that the expected value of any society-wide loss of profit would be the limit as X -> 0 from above. I characterize that number as inevitably positive; Landsburg might characterize the number as barely distinguishable from 0; we’d both be right.

    As I say, perhaps just a semantic distinction.

  77. 77 77 GfromGermany

    People who are interested in evidence might consult Walter Williams and Thomas Sowell about past experiences with minimum wage increases.
    As for micro theory of perfect competition, it is a tragedy that Armen Alchian is dead and his textbook is so difficult to come by.

  78. 78 78 iceman

    75 – I believe 67 is distinguishing between financial resources and real resources (a common theme on this blog).

  79. 79 79 Mike H

    @Steve #71

    So this argument explicitly assumes that the supply of available capital does not change. I would argue that if a large chuck of the workforce found themselves with more money at the end of each month, this assumption is violated.

    In any case, during the argument, you state …which reduces output in Industry A…

    It is hard to see how A’s output would drop without also causing a drop in their demand for their inputs (in this case, minimum wage staff).

    Since we are assuming that raising the minimum wage does not affect demand for minimum wage employees, you can stop the argument there and say “this is a contradiction”, and reject one of your assumptions – either the empirical one that raising the minimum wage does not affect demand for minimum wage employees, or the counterintuitive one that raising the minimum wage does not affect the supply of capital.

    I’d vote for rejecting the latter – unless there are empirical studies to the contrary…

  80. 80 80 Draco

    I think the best argument against a minimum wage law is that it uses the force of government to prevent an otherwise willing man performing a job for less than the minimum hourly wage. What right does anyone have to tell a man that he cannot work for another man for a wage mutually agreed upon? No right at all, obviously.

    It’s really worth pointing this out, even though it’s nothing but the other side of the coin that’s always pointed out by those whose hearts bleed for the poor and the downtrodden. Yes, you are restricting the ability of the bloodsucking capitalist to “exploit” labor, but that’s not all you are restricting. But then, the bleeding heart elitists usually know that the poor and the downtrodden don’t (can’t?) know what’s best for them – so “we” need to have a compliant and wise government step in on their behalf.

    I believe Steve made this point (probably better than I have) in one of his books.

  81. 81 81 nobody.really

    What right does anyone have to tell a man that he cannot work for another man for a wage mutually agreed upon? No right at all, obviously.

    No one has such a right obviously; the ability to perceive that right takes discernment. Trekking off-topic: What is this word “right” you speak of, Kemosabe?

    My brother and I, we each sought to maximize our autonomy. Parting ways, we each join the tribe we thought would help us achieve this end.

    My brother’s tribe embraced the view that tribal members had the “right” to engage in any voluntary transaction they wished.

    In contrast, my tribe forbad many transactions unless they were deemed to contribute to the tribe. In particular, many transactions would be forbidden until the parties to the transaction would make a contribution to the tribe’s treasury.

    In time, our tribes went to war. The “rights” embraced by my brother’s tribe came to naught, because his tribe lacked sufficient resources with which to defend those rights. Not that it mattered to my brother; he had died long ago in the waves of infectious disease that would spread throughout his tribe via voluntary interactions. His tribe lacked both the legal framework to limit such interactions, and the financial resources to fund public health programs that might have helped mitigate the problems. But at least they had their “rights.”

  82. 82 82 Steve Landsburg

    ONS:

    “ONS: You are confusing a pure transfer with a reallocation of resources.”

    What’s the difference?

    One is a movement *along* the Pareto frontier; the other is a movement *toward* the Pareto frontier.

    If you have ten flashlights and I have ten batteries, then a reallocation can leave us each with 5 flashlights, 5 batteries, and better lighting. A pure transfer takes two of your battery-equipped flashlights and gives them to me. My gain is exactly equal to your loss.

    In many situations, we don’t worry about reallocations, because we assume the market will take care of them. We don’t need the government to tell us to trade batteries for flashlights, because we’re going to discover that trade on our own.

    The minimum wage — given Krugman’s assumptions about elasticities — amounts to a pure transfer from one group to another. One group is made wealthier to exactly the same extent that another is made poorer.

  83. 83 83 nobody.really

    What’s the difference?

    One is a movement *along* the Pareto frontier; the other is a movement *toward* the Pareto frontier.

    If you have ten flashlights and I have ten batteries, then a reallocation can leave us each with 5 flashlights, 5 batteries, and better lighting. A pure transfer takes two of your battery-equipped flashlights and gives them to me. My gain is exactly equal to your loss.

    I suspect Landsburg means to say that, in the absence of voluntary transactions and assuming we do not have (or do not recognize) any other means of making a judgment, we lack sufficient information to determine whether a transfer results in a movement toward the Pareto frontier.

    Voluntary trade makes people better off not because it necessarily results in more stuff, but because it tends to result in stuff ending up in the hands of the people who value it more highly.

    But, of course, pure transfers can achieve that outcome, too, moving something out of the hands of someone who values it less and into the hands of someone who values it more. We just lack a systemic way to KNOW when it achieves this outcome. I may not know if the transfer made the world better. But that’s different than saying I know the transfer did NOT make the world better.

    And sometimes you might get a pretty good idea, even in the absence of voluntary transactions. When I’m incarcerated for life, please feel free to eat the perishable food in my fridge. (Ok, maybe that example doesn’t illustrate my point, now that I’m volunteering my food. But before you read this message, it did.)

    (Somehow, the more I write, the weaker my argument becomes….)

  84. 84 84 Chicago Methods

    Pretty much Sy from #58 – 60 nailed it spot on with regards to the existence of perfect competition. It is the physics equivalent to the study of motion in frictionless space. Does it “commonly” exist? No, but we can extract valuable information from it regarding competitive industries at the margin.

    It’s the same reason why Von Neumann/Morgenstern formulated the results of a highly impractical game of Poker.

  85. 85 85 iceman

    81 – Yes a little discernment…#80 did not say “what right do you have to tax me for the common defense or preventing the spread of communicable disease?” Rather seems fair to ask where is the public good or negative externality in restricting this particular exchange of labor for value? Because someone else asserts a “right” to do the job for more? That does sound like a pure transfer.

    Mike H – but in order to interpret “evidence” don’t you require a logically consistent theory?

  86. 86 86 Ken B

    @83: If you read closely you will see implicit in Steve’s abbreviated explanation that the transfer takes place once the voluntary exchanges have taken us to the pareto frontier. That is why the transfer is of battery loaded flashlights. This is a fair assumption. In a competitive market we’re alreay at the pareto frontier, so the *best* a transfer can do given a good market is move us along it. It can also drag us inward, making things worse.
    (There is no free lunch, but wasted lunches are perfectly possible.)

  87. 87 87 Draco

    @nobody.really #81

    “Natural law and natural rights follow from the nature of man and the world. We have the right to defend ourselves and our property, because of the kind of animals that we are. True law derives from this right, not from the arbitrary power of the omnipotent state.

    Natural law has objective, external existence. It follows from the evolutionary stable strategy for the use of force that is natural for humans and similar animals. The ability to make moral judgments, the capacity to know good and evil, has immediate evolutionary benefits: just as the capacity to perceive three dimensionally tells me when I am standing on the edge of a cliff, so the capacity to know good and evil tells me if my companions are liable to cut my throat. It evolved in the same way, for the same straightforward and uncomplicated reasons, as our ability to throw rocks accurately.”

    http://jim.com/rights.html

    In short, this has all been argued before, successfully (to my mind).

  88. 88 88 GabbyD

    ” The minimum wage takes from the (mostly) relatively poor people who buy a lot of fast food and gives to the (mostly) relatively poor people who serve it.”

    Why is this necessarily the case, esp if you assume no large employment effects. Wouldnt it be true that there would be no output effects, prices and sales would be unchanged, so it would be a transfer to labor from capital owners (and other inputs)?

  89. 89 89 henri hein

    @Mike H,

    “So this argument explicitly assumes that the supply of available capital does not change. I would argue that if a large chuck of the workforce found themselves with more money at the end of each month, this assumption is violated”

    I don’t understand how you think this could be the case. Capital is not generated out of nothing. Transferring capital from one group to another does not change the total amount of capital.

  90. 90 90 Ken B

    @ Mike H 79
    You’re confusing an empirical result with a logical postulate. Further your misconstruing the empirical claim made. No one has presented any evidence that within any single industry raising the minimum wage does not have an effect on the demand for labor within industry A. the claim is that within the entire economy it does not have a significant effect. this could be the result of changes in industry A affecting industry B, or industry A being small. In any case this is only an empirical result and all it means is the change is smaller than we can measure. You cannot call “stop period” Unless you give an argument that the indicated change would necessarily be larger than the empirical limit.

    Also read comment 89. Moving your lawn mower to my garage does not increase the supply of lawnmowers.

  91. 91 91 Travis Allison

    @Steve #71. By profits, do you mean ‘return on capital’ or do you mean ‘total dollar profits’?

    I think that the return on capital would have to be equal for all industries of equal risk. But the total dollar profits will vary depending on the size of the industry. Since capital leaves industry A, total dollar profits will decline but the return on capital will eventually return to its previous level.

  92. 92 92 David O. Cushman

    I do think that Steve’s explanation in #71 overlooked the assumption made earlier that the demand for output is constant with respect to price. Mike H in #79 noticed that, but it doesn’t change the conclusion that, in the long run, profits won’t change in industry A despite the rise in labor cost. If I were to revise #71, I would first say that the rise in costs would indeed provide an incentive for firms and capital to leave industry A. What comes next would depend on the dynamic assumptions, that is, the assumed responses to disequilibrium. For example, we could assume that at first some firms and capital do leave and output does fall. At that point the demand for output exceeds supply and price rises until firms and capital are attracted back to industry A, restoring output. This particular dynamic story requires price adjustment to be less than instantaneous, because otherwise the price would rise indefinitely high when any capital left the industry. At any rate, long-run equilibrium is restored when price has settled at the point where the level of profits once again gives firms and capital no incentive to enter or leave the industry. This level of profits is the original one.

  93. 93 93 iceman

    82 is interesting. But some are saying a pure transfer can still transfer net happiness e.g. you have two battery-equipped flashlights and I have none. As nobody.really says, just because we can’t prove it systemically doesn’t rule it out (though unsure where that leaves us in terms of policy relevance). So still wondering if the distinction between financial and real resources also comes into play here? Shifting pieces of paper seems like a weaker case, e.g. if greater marginal utility of a dollar derives from higher MPC which (given no increase in stock of real resources) bids up prices = less likelihood of net societal benefit as a general proposition (not just in liquidity traps).

  94. 94 94 nobody.really

    [S]ome are saying a pure transfer can still transfer net happiness e.g. you have two battery-equipped flashlights and I have none. As nobody.really says, just because we can’t prove it systemically doesn’t rule it out (though unsure where that leaves us in terms of policy relevance). So still wondering if the distinction between financial and real resources also comes into play here? Shifting pieces of paper seems like a weaker case….

    Can we identify some people we think might derive greater satisfaction from a marginal dollar than other people? Different people recognize different arguments.

    Observe people’s behavior as they grow wealthier. In the US, there is almost no correlation between people who have phone service and wealth (a continuous variable), but there is a correlation with poverty (a discrete variable). (The correlation is clearer if you exclude people who are incarcerated, and the Amish.) When the abjectly poor get resources, one of the first things they do is get a phone.

    Rich people have phones, too. Some also have a second yacht. But pretty much none of them save up for the second yacht by eliminating their phone service. This suggests that the satisfaction they get from that second yacht is less than the satisfaction they get from having telecommunications.

    Thus, while making inter-subjective comparisons is fraught with conceptual hazards, many people conclude the welfare created by promoting universal phone service exceeds the welfare created by promoting yacht collecting. If we can devise a policy that promotes phone service, it may well be worth it – even if it takes resources away from yacht collecting. And even if the people getting the new phone service are not the same people being impeded from buying the second yacht.

    Now consider demand for electricity. Now consider demand for life-saving medical interventions. Etc.

    If you consider enough of these examples, you may be tempted to conclude that poor people derive greater satisfaction from a marginal dollar than rich people; some go so far as to suggest a diminishing marginal return on consumption/diminishing marginal utility generally.

    This intellectual framework supports my preferences for social safety net programs finance by progressive taxation. I imagine that it underlies other people’s support for these programs, too, though I haven’t made a study of it.

    [I]f greater marginal utility of a dollar derives from higher MPC which (given no increase in stock of real resources) bids up prices = less likelihood of net societal benefit as a general proposition (not just in liquidity traps).

    Ok, then look at the flip side: Let’s drain resources from people with a higher marginal propensity to consume (a/k/a poor people). Now there’s lower demand for food – people are simply starving instead – and thus lower prices. Can we conclude there’s no societal harm?

    No. Give poor people resources. Yes, this will increase demand for all kinds of things for which there is little demand today – where “demand” means “desire AND ABILITY to purchase.” Yes, the increased demand will drive up prices. Yes, that will offset some of the benefits of the wealth transfer in the short run. But it may also induce an increased supply of things poorer people want to consume in the longer run. Thus, maybe people in the developing world would increase demand for anti-malarial drugs. Maybe MERC & Pfizer would divert some of their research & development budgets away from the lucrative world of erectile dysfunction and toward anti-malarials. I suspect this is a policy most people could live with (even if, as a result, fewer people are born.)

  95. 95 95 Jizelle Morea

    <<<>>>>>

    There is a typo in this.

    It should read -

    without “ever” asking whether those funds might

  96. 96 96 Jeffrey

    Suppose one believes all of the following:

    1. Raising minimum wages has a minimal effect on unemployment. (Thus, the money comes from lower corporate profits and/or high prices.)
    2. Most or all of the deadweight losses caused by minimum wage laws come by means of increased unemployment.
    3. Reducing the wealth gap is an advantage.

    If all these are true, then we have the advantage of increased wealth equality weighed against minimal losses of efficiency. Therefore, if you are against minimum wage laws, you have to disagree with at least one of points 1-3.

    This also suggests a rephrasing of Krugman’s point into something reasonable:

    “So a minimum-wage increase would help low-paid workers by X dollars at the expense of X dollars coming out of a mix of the poor, middle class, and rich, and with few adverse side effects beyond the obvious.”

  97. 97 97 iceman

    94 – I think few dispute there is diminishing marginal utility of wealth from consumption, or that giving more resources to the poor (if wisely constructed) is often the right thing to do. I just don’t see that either consideration necessarily implies a *net* societal economic gain from re-spreading it around, as some are suggesting, since this involves potential longer-term effects on investment & growth as well as prices. (Probing this last consideration made me recall something about, say, taxing a dead man?)

    96 – #1 certainly has drawn scrutiny here esp. involving longer-run consequences of automation etc. #2 not sure. #3 to me should “obviously” depend on how you reduce the gap; stronger growth is clearly good — and good even if it increases the gap? I think Martin Feldstein has it right – we should focus on a poverty problem not income inequality.

  98. 98 98 Advo

    I’m really surprised that this thread is all about re-allocation, and completely ignores the really interesting points of minimum wage research.
    The fact that the minimum wage has so little effect on unemployment must mean that the actual unit labor costs incurred by business rise only very little.
    So where does the money come from?
    It appears that the single greatest factor is reduction of employee turnover. Increases in the minimum wage are known to cause a sharp decline in employee turnover. People are just far more motivated (and financially able) to maintain employment if you pay them more.
    To the extent that the cost of a minimum wage hike is offset by lower training costs and improved labor productivity due to a more experienced workforce, it is a “free lunch”.

    In other word, the minimum wage is not only re-allocating, it is also creating wealth.

    http://www.cepr.net/documents/publications/min-wage-2013-02.pdf

  99. 99 99 iceman

    Again if it’s truly a free lunch is there some reason business owners can’t figure that out? Some theory as to why they can’t act unilaterally to get the competitive process to a better equilibrium?

  100. 100 100 Common Sense

    I’d suggest your point about “where is the money coming from” could be given a slightly different spin. The minimum wage hurts the poor who see prices rise, and it is actually a favor to many in the 1% even though people don’t realize it.

    *If* the government is going to be involved in helping the poor (which is a separate debate), then it is better for the funds to come from the general tax pool. In essence a government forced minimum wage is equivalent to a tax on those willing to hire low skilled employees, which is merely given directly to the employees rather than passing through government’s hands first. That tax then doesn’t fall much on those that mostly employ high wage lawyers, financial experts, engineers, etc.

    It doesn’t fall much on those that use robots instead of cheap labor. Such a tax falls less on big companies with economies of scale than it would on small mom and pop stores that may not be able to pay as much since they pay higher wholesale prices for what they sell. It hurts new businesses trying to start to compete with those big companies (who might pay low wages at first while getting customers and later reward their employees with more pay), so it helps protect existing companies from competition. Higher minimum wage helps the automation companies sell products to replace humans. A higher wage usually means less percentage difference between the wage needed for someone with higher skill, and companies will feel more pressure to hire more productive workers rather than giving entry level workers a chance.

    It seems more appropriate *if* the government is going to help the poor to do so using the progressive tax system instead of an approach that impacts higher income people less.

    People don’t seem to ask “if a $15 minimum wage would be better, why not a $1500 minimum wage and make everyone wealthy?”. Obviously it wouldn’t, the flaws are just more obvious if you use a high figure like that, but the flaws exist even with the lower figure. Prices would rise, people would be laid off, companies would turn to automation instead, they buy more foreign products, etc. Higher retail prices hurt the poor more than the well off that spend a lower fraction of their incomes on consumption (most of it is invested) and who care less about higher prices for some goods.

    Of course government isn’t the best way to help the poor. Charities do a better job of helping people to get out of poverty since they compete for your money and therefore can’t waste the limited funds they have, and need to show they are doing a good job to get more ( just as consumer electronics companies compete to produce better products to get your money). A tax credit for charity rather than a deduction would let people give to charities that worked instead of government programs that don’t and lead to far more competition, and more consumer reports style comparisons of causes to help deal with the far larger charity sector that would arise. Government bureaucrats have incentive to see people remain in poverty so they keep their jobs. Government agencies get more money if they do a poor job solving whatever problem they were created to address.

  101. 101 101 Advo

    @Iceman:
    Why business owners don’t take advantage of this on their own initiative?
    Two reasons:

    1. Because the positive effects of a wage increase only part of the cost of the wage increase (i.e. you pay 1 dollar in higher wages to get 30 cents in turnover reduction and increased productivity); and

    2. Because additional wage costs are very visible and easy to quantify whereas costs from decreased turnover and higher productivity are not. Perhaps the biggest cause for stupid behavior of business owners are such hard costs vs. soft cost issues.

  102. 102 102 iceman

    101 – #1 sounds like bad investment in the micro (and at macro level we’ve said it’s a transfer). #2 – McDonalds doesn’t understand its business? C’mon. Perhaps they understand your #1 perfectly well. A good economist (truth-seeker?) doesn’t observe behavior they don’t understand and jump straight to “stupidity”.

  103. 103 103 Advo

    Iceman,

    I have a lot of experience in dealing with large companies, both through my work and through the people I know. The amount of obvious stupidity that’s going on there is absolutely mind-boggling.
    Often it’s rational from a micro-perspective, though.
    Just consider how corporations are managed. They’re managed by PEOPLE, based on NUMBERS. As a manager/executive, it’s easy to make an argument based on numbers. And if you take some action, and the numbers turn out to be on your side, it’s fine. If the numbers go against you, it’s bad for you.
    If you can’t quantify your success, you’re a failure.
    “Soft” factors which are difficult to quantify are just so much blabla when you’re an executive trying your colleagues and superiors to go along with your idea (or to not fire you).

    Most corporate stupidity is the result of perfectly rational individual behavior.

  104. 104 104 iceman

    I have no doubt all of that is true. However in this case it seems we’re talking not about hard-to-supervise behaviors etc., but things that can be quantified quite easily — the output and profit that results from different corporate pay policies.

  105. 105 105 Advo

    It’s not so easy to quantify.
    The cost of training new recruits, yes.
    But the cost of lower productivity is a lot more fuzzy, even in the case of a business such as McDonalds.
    You can of course test how fast a McDonald’s worker with 5 years experience makes burgers vs. someone with 1 year’s experience.
    And you can measure how many ingredients they tend to waste. And how many customers the employee at the cash counters serve.
    Well, I guess you’re right – in the case of McDonald’s low-level worker productivity can be measured much better than in many other lines of business.

  1. 1 Some Links
  2. 2 Some Links - Unofficial Network
  3. 3 Streetwise Professor » Obama Believes Demand Curves Slope Up, or Economic Perpetual Motion Machines
  4. 4 A $15 Minimum Wage is Not Going to Help You » EppsNet: Notes from the Golden Orange
  5. 5 Potpourri
  6. 6 Potpourri - Unofficial Network
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