Mark J. Perry alerts us to a great quote from P.J. O’Rourke:
“The free market is not an ideology or a creed or something we’re supposed to take on faith, it’s a measurement. It’s a bathroom scale. I may hate what I see when I step on the bathroom scale, but I can’t pass a law saying I weigh 160 pounds. Authoritarian governments think they can pass that law—a law to change the measurement of things.”
Perry then compares this to a minimum wage law:
A teenager with no work experience steps on a “bathroom scale” that accurately and truthfully measures the market value of unskilled labor, and the scale says “$5.00 per hour.” Politicians pass minimum wage legislation to rig the “bathroom scale” of labor value to instead produce an inaccurate, false inflated reading of “$7.25 per hour.” And they then seem puzzled that more than one out of every four teenagers who is looking for a job is unable to find one, but that’s what happens when you “rig” the “bathroom scale.”
As part of my adventure in health care a couple of weeks ago, I had a rather unpleasant encounter with the scale at the doctor’s office. To think that I could achieve my fitness goals by lobbying my Congressman to pass a law would be absurd. Instead, I’ve changed my diet and exercise habits. In particular, I’ve relied on some advice I first heard from Jeff Tucker: no shower until I’ve done thirty push-ups. I’ve been happy with the results after two weeks, and it’s a nice binding constraint.
Recent heat and humidity offer a similar analogy. It has been really, really hot in Memphis and in other parts of the country. People have suffered as a result. A politician who claimed that he was going to fight a war on heat by passing a “maximum temperature law”–or by switching temperature readings to celsius so that the numbers are smaller–would be laughed at. And yet that same politician who claims that he is helping the poor by passing minimum wage laws, price-gouging statutes, rent control, and other forms of interference with market prices is lauded as a compassionate hero of the downtrodden.
You can’t change heat, humidity, or people’s weight by passing laws. You also can’t change people’s productivity by passing laws. “Make it so” is great campaign rhetoric but it’s lousy economics. In a grocery store a few years ago, I saw someone wearing a t-shirt that reads “Stop Plate Tectonics.” A shirt reading “Stop Supply and Demand” would make just as much sense.
{ 77 comments }
Either the “$5.00 per hour” and the “$7.25 per hour” are numbers of a non-free market. How can we know then that the real number i.e. the number of a free market, should be “$5.00 per hour” or “$7.25 per hour”, or “$10.00 per hour” ?
Which one is the right reading ?
The scale giving $5.00/hr is the number given by the free market, as the free market is what does the calculation. For another person, that number will not necessarily be $5.00/hr.
Where do we find this free market ?
An hourly wage is just the price of one hour’s worth of labor. Like all prices they are determined by the market based on supply and demand. In the example, no one person decides the correct price. The hypothetical unskilled teenager probably would like to make $50/hour, but no one in the marketplace would be willing to pay him that much, at least not if they intended to profit from such an exchange. $5.00 represents the best wage/price he is able to reliably receive in the market for one hour of his unskilled labor at that time.
But the market is not free i.e. the bathroom scale is itself inaccurate and false.
So the “$5.00 per hour” is as
inaccurate and false than the “$7.25 per hour”.
The labor market is not free because of the intervention of the State — even before it imposed minimum-wage laws, Teddy Roosevelt decided, in his infinite wisdom (just ask him!) that the desert didn’t need to bloom any more than it already had, thankyouverymuch (thus endeth homesteading as an alternative to working for someone else), and long before that, the Crown made land grants to colonial proprietors in the hundreds of thousands of acres, far more than they would have been able to acquire and hold on their own resources. See Albert Jay Nock’s Our Enemy, the State for a more thorough description of these phenomena than I am able to provide at the moment. You’ll be better able to evaluate the argument on the merits if you read it direct from Nock; I’m not sure I can do it full justice.
Re: Gerry Flaychy,
Irrelevant. That’s not the point.
That’s not the point. The point is that the employer and employee should freely determine the wage rate. There are people who could be willing to work for $5.00 and others that would only work the same job for $7.50 – it is up to the employer to accept either offer from potential employees.
HAve you ever mowed grass when you were a kid? Did you negotiate a rate with the customer? If you did that freely, that is, without the State imposing the rate from above, you participated in a free market of grass-mowing kids.
No, tbe bathroom scale is accurate – it is the guy saying “The scale SHOULD read $7.50″ who’s being inaccurate.
The first question is: are we in a free market economy or in a non-free market economy ?
Which is equivalent to ask: is the bathroom scale well calibrated or not ?
This is the first point.
To help clear this point, here is what is a ‘free market’ according to Ludwig von Mises:
http://mises.org/daily/2979#part3
Gerry:
What are you trying to argue? That because we are not in a free market, that another intervention is called for to correct the prior intervention? Mises talked about that as well. The fact is that further intervention into a market that is already hampered in an attempt to correct the previous intervention will most likely just introduce all new problems that legislators will feel compelled to try to fix with still more intervention.
If that is not what you are arguing, then I don’t see the relevance. Please enlighten us.
I am just arguing that, contrary to what it is wrote in the article, the “$5.00 per hour” is as inaccurate and false than the “$7.25 per hour”, and that it is so because the market is not free i.e. the bathroom scale is itself inaccurate and false.
I just don’t agree with this part of the article; I say it; and I say why I don’t: that’s all !
Re: Gerry Flaychy,
All markets are free as long as people are free to choose. Even with an imposed minimum wage, employer choice indicates the TRUE cost of employment, in the form of UNemployment. The true cost of something will always manifest itself in monetary or non-monetary ways, there’s no way to get around that: Economic laws cannot be broken.For instance, when the Nixonean government imposed price controls on gasoline, the true cost of gasoline reflected itself in mile-long lines, because sellers were still free to stop selling their gasoline. The moment people are NOT allowed to freely choose, as when they end up in the Killing Fields, then you won’t have a market of any kind.
It is calibrated, as people are still free to choose. The phenomenon you would see is someone yelling at you "The Scale says $7.50! Don’t mind what it says in the dial, mind what I tell you!” The problem thus is not with the scale but with the jerk who’s yelling at you.
What Ludwig von Mises refers to is an unhampered market, which is the most efficient there can be (and I mean in the real economic sense, not the neo-classical perfect-competition nonsense.)
Your definition of a free market appears to me very different from the Mises’ definition. As I understand the Mises one, as soon as there is an interference of factors foreign to the market, the market is no more free. The word free is about the functionning of the market, not about the free choice of people inside the market.
When, for example, the governmental authorities make interventions with interest rates, and they do it since a long time, these rates don’t move freely anymore, they move under constraints foreign to the market, but we are still free to chose between the rates offered on the market, except that these rates are different that they would be without those interventions i.e. the bathroom scale has been discalibrated; the numbers appearing in the window are ‘false’.
Re: Gerry Flaychey,
Mises is refering to economic efficiency.
Gerry, the people ARE the market.
Wages are not interest rates.
1- People alone are not the market. To have a market you also need things like goods, services, exchanges, prices, wages, interest rates, money.
2- Wages too have constraints, not only interest rates. The idea in the example also apply to wages.
3- People act in the market, make choices. There could be more or less constraints in the market when they make their choices but they still make choices, even if they are not necessary conscious of these constraints.
http://mises.org/easier/M.asp
What happens when you negotiate mowing someone’s lawn, and then realize that you also have to buy the lawnmower and the gasoline from the same person. As conservative as I am, I’m tired of the idea of “corporate responsibility” and “trickle-down” economics… one only has to look at the current Mott’s strike in NY to see executives giving themselves million dollar pay increases during a time of record profits while demanding pay decreases from their employees to see the effects of corporate greed and the NEED for minimum wages to protect people.
We’re so quick to assume helping the poor will lead to the extremes of communism and socialism, but we never look internally at our current system to see how the extremes of corporate greed corrupt the free market system. Labor is not a free market, because the “goods” can be easily manipulated.
Armand, I think you are misunderstanding something. You seem to think that this blog is against helping the poor. On the contrary, it is saying that minimum wage laws are ineffective for helping the poor. In fact, they make it worse for the poor because they lead to higher rates of unemployment. If someone is willing to work for $5.00 and a business is willing to pay that person $5.00 to work, that transaction should be allowed to take place. As it is, the business is only allowed to pay that person $7.50 (or whatever min. wage is) or more. If they are not willing to hire that worker at the higher wage, then that worker will be unemployed. $0.00 is worse than $5.00. They are more impoverished than they would otherwise be.
That’s not to say that greed, corruption, and manipulation are not a part of our current economic structure. Perhaps there ought to be intervention in some capacity. But the way to help the poor is not to preclude them from employment. It is to raise productivity. For instance, if some technology was developed that made it much cheaper and easier to produce food, fewer people would go hungry, regardless of minimum wage. Technological advances and increased productivity are the answer to these types of societal problems, not monetary interference. “A rising tide raises all ships” even if the ships at the top are greedy and corrupt.
>A politician who claimed that he was going to fight a war on heat by passing a “maximum temperature law”– …
Well, they’re trying the best they can with “global warming”
In 2008, the official unemployment rate in USA was 5.8% and is now at 9.5%: is it due to changes in minimum wage laws ?
What is the effect of this raise on unskilled teenagers who are looking for a job ?
Why this obsession towards minimum wage laws ?
Gerry, I’m not entirely sure what you are saying but if you are advocating the minimum wage because the free market system isn’t in place and therefore wages should be higher with a proper system, I think you are going down the wrong route in wanting this to be forced through minimum wage law.
I’d agree that the results of the Federal Reserve system are to take from some and give to others (take from productive sectors and give to the government, or government subsidized industries like housing, or banks because of the way that the printing system works.) What I wouldn’t agree with is that we can fix that system by adding price controls.
The more regulated the system becomes the more difficulty we will have getting out of this mess, because it becomes significantly more difficult to place blame for the things in the proper places.
In the last two – three years, the official unemployment rate in USA almost doubles, and I don’t think it is because of minimum wage laws.
Thus when somebody says that minimum wage laws create unemployment, I have difficulty to agree with him. How can we prove that ?
Also, there was unemployment long before minimum wage laws, and unemployment was constantly varying, as todays.
And what about increases in productivity bringing lay off ? And outsourcing ? And changes in what is produced, bringing here and there businesses to close ?
Perhaps a change in some wage rates could influence some other prices, but other prices are also changing, with or without minimum wage laws, and cost of life is always increasing, but how can we be so sure that a change in minimum wage rates will cause a raise in unemployment ?
Conversely, if a change in the price of a wage brings unemployment, then a change in another price of something else should also brings unemployment, and with all the changes happening we should all now be unemployed !
Re: Gerry Flaychey,
The overall unemployment rate is not because of the minimum wage laws. However, the teen unemployment rate of 25% (average), and especially among black Americans, is directly due to the minimum wage laws. The minimum wage imposes a barrier of entry for the unskilled and undereducated minorities – on purpose.
So in other words, consider someone who smokes four packs of cigarettes per day gets hit by a bus and is killed. Since that person didn’t die of cancer, smoking isn’t really bad for you.
Or to more accurately fit your analogy, since that person didn’t die of cancer, we should make a law mandating smoking four packs of cigarettes per day.
“Why this obsession towards minimum wage laws ?”
I can’t speak for everyone, but I like talking about minimum wage laws with economic control-freaks because it’s one of their most sacred of sacred cows. Statists spend so much time and energy patting themselves on the back and crowing endlessly about how necessary this price floor is, how much they are helping poor people, how it’s one simple example of how necessary their strong-arm economic control tactics are, when in reality it’s all a vicious lie.
Everything about the minimum wage is wrong. It’s immoral, illegal, ineffective, and actively harmful. The people who promote it are criminals, and should be treated as criminals.
I anxiously await the day when people will become enlightened enough to look back on this kind of grotesque infringement of our basic economic liberty with the same disgust we now view slavery.
That’s what’s so devious about minimum wages. Increasing the minimum wage unambiguously harms people, even the politicians supporting minimum wage will admit it causes job losses. However, what is typically trotted out are unemployment numbers and GDP figures, neither of which will shift in any perceptible manner due to the change. The reason for this is because of who is being displaced.
Because of the low wages and identity of the wage earner, the volume of those put out of work and the size of their salary will not show any shifts in the official numbers. In a $14 trillion GDP, if 500k people are no longer working at $6.25/hour becuase it was increased to $7.25, that’s a GDP loss of $3,125,000. Clearly, this number is so tiny in comparison to $14,000,000,000,000 that it doesn’t even show up as a rounding error. The GDP declined by 0.000022% and the unemployment rate increased by 0.003%. Neither of these show up anywhere on the radar, the numbers are too small and are just rounded away in official statistics.
However, the reality is that there are now a half-million people no longer able to support themselves entirely because of the minimum wage hike. It’s because of the small numbers that politicians can get away with it because no one is able to perceive the impact. The official numbers didn’t show any decline, so it is assumed the policy was harmless.
Further, minimum wage increases create long term structural unemployment. While it doesn’t do much in the near-term, the ill-effects compound over time. Low-wage employment is frequently a means of obtaining market experience. It’s not uncommon for the minimum wage employee to make his way to a management position in a few years. Further, such employment is used as a means to pay for education for self-improvement.
By increasing the minimum wage, an ever increasing portion of the population that doesn’t enjoy being born in a family with a pre-existing capital accumulation base and/or simple natural talent is now shut-off from important experience and educational opportunities. Without gaining the experience or education, employers are unable to justify higher wages. As such, a larger portion of the population is now unable to increase their productivity and contribute more to the economic pool.
This structural failure then starts to erode future generations as children are born to these parents that never had the opportunity to better themselves by being priced right out of the larbor market. Their kids will not have access to the schools and experiences necessary for them to better themselves in life and, by the time they are born, the minimum wage has been increased even further, making it even harder to justify employment.
What minimum wage does is contribute to the ever expanding poverty class of the nation. The ill effects aren’t seen today, but will manifest themselves through the destruction of future potential. Minimum wage is the real life example of what Bastiat meant by the seen and unseen.
Actually, it’s absurd to say that the price-setting capacity of a market has an absolute nature in the same respect as:
-the amount of kinetic energy in a substance’s particles
-the force exerted when gravity accelerates a body into a scale.
The impressive technical language I use is not why those measures are absolute–they are properties of a universe that existed long before we got here and added sentience to the mix. Economists would be wrong to overlook the “social” before their “science” so quickly that they forget this.
I don’t care if we have a de facto free market or not. But I can guarantee you that we won’t end up with sound policy if we are so cocksure in our knowledge that we use economics to border on ridiculing anyone’s sentiments against social injustice.
Ridicule should be saved for people who really ask for it, to be sure. But I don’t acknowledge that a wage lower than someone’s preferred wage floor constitutes social injustice, unless the condition exists as a result of aggressive force or fraud. The only social justice is found in liberty; the term is content-free otherwise.
“Actually, it’s absurd to say that the price-setting capacity of a market has an absolute nature in the same respect as:
-the amount of kinetic energy in a substance’s particles
-the force exerted when gravity accelerates a body into a scale.”
It is with respect to the consequences certain actions will have… and there’s no social “injustice” involved with this or that price of labour.
I buy that the argument is meant as a way of reinforcing theory on “certain actions” such as price controls, but I really don’t think that this post is criticizing “Make it so” thinking as much as “Make it OTHER than so” strategy which seeks to violate what the author considers the absolute sanctity of market-driven pricing. This is the kind of danger I’m talking about–starting with the premise that “deadweight loss” is literally the opposite of an absolute truth, and steamrolling over emotion and communal sensibilities.
I shouldn’t have used a word like “injustice” on this blog, apparently, but I think the reaction to my use of the word is an adequate demonstration of what I’m talking about. After all, if free-market advocates have exclusive access to the ENTIRE concept of justice, anyone who is at all dissatisfied with social inequality has to kneel at the altar of one definition of liberty for their word choice to be acceptable.
The adequate demonstration is that you don’t stop with “social injustice,” Joshua. You then provide another meaningless, modified noun, “communal sensibilities.”
By the way, come to think of it, shame on the “progressive” leftists who support the minimum wage as it stands. On average, it’s equivalent to about $16K per year for a forty-hour week. $16K per year!
How much do Senators and Reps make? Shame on them.
There is no such thing as social inequality. It’s merely a construct of envious people who want more in life and wish to get it through institutionalized theft instead of increased effort and self-improvement.
Bravo – precisely explained in two sentences!
“what the author considers the absolute sanctity of market-driven pricing”
There’s your problem, right there, Mr McLaurin.
Freedom of pricing is not a matter of “sanctity.” There is nothing sacred about market prices. They simply are what they are. They reflect economic reality.
Only market prices can convey market information. This conclusion should be self-evident.
Non-market prices, therefore, can convey only non-market information. For example, wages that are manipulated by the State by force convey political information — they reflect political reality, not economic reality.
In case you hadn’t noticed, it is the State that treats political reality as “sacred.” It tolerates no opposition. It permits no disagreement. It asserts that it has the monopolistic power to use force anywhere in its territory, and it always decides in its own favor in the end (which, of course, is the point of asserting a coercion-monopoly in the first place). It uses force to bring political reality into existence — in this case, it decrees, “Thou shalt not pay anyone less than $X per hour, even if that means not employing him at all.”
The market has to tiptoe around the sanctity of the State’s political pricing. Anyone who defies the absolute sanctity of politically-driven pricing will quickly learn how the State treats heretics.
Re: Joshua McLaurin,
The above physical quantities are not absolute either – they depend on their relative speed and distance.
I hear constantly that, “Increased taxes lower incentive to produce”. Taxes decrease the rewards of our production.
I’ll agree that this idea is true and ask why it is different to expect someone to be productive at minimum wage, or a wage that is “market value” for labor, if it is less than necessary to have a relatively satisfying, comfortable life?
Minimum wage is a coerced arrangement (at the behest of minimum wage labor) , splitting the total cost of labor between employer, Government, and employee. The prospect of unemployment is a powerful motivator and is used regularly as a “strong-arm economic control tactic”.
Temporary can be a long time for unskilled workers that find themselves in this position…and then I read the proponents of the free market with it’s wonderful income mobility and economic liberty, advocating for the dismantling of public education. Why?
“I’ll agree that this idea is true and ask why it is different to expect someone to be productive at minimum wage, or a wage that is “market value” for labor, if it is less than necessary to have a relatively satisfying, comfortable life?”
If either party is unsatisfied with a certain job at a certain rate, then either party is free to leave. The fact that, absent a minimum-wage law, such a job exists and the position is filled kind of answers your hypothetical.
“Temporary can be a long time for unskilled workers that find themselves in this position…and then I read the proponents of the free market with it’s wonderful income mobility and economic liberty, advocating for the dismantling of public education. Why?”
Because it doesn’t work very effectively. Why is it that we keep pouring more money into public education, but we are still unsatisfied with the results? Because aspects like government-controlled learning, mandatory testing, and compulsory education are antithetical to actual learning. As for income mobility, you would be hard-pressed to prove that public education is necessary for income mobility to happen, as opposed to personal attributes like hard work and intelligence.
I may agree with you if so much of our manufacturing weren’t moving out of the country. As ineffective as public education may be, it is still better than what many would have otherwise. Education is much more important now than it was 50 years ago.
Intelligence is very different from knowledge. We have a knowledge based rather than manufacturing based economy. Future employment in manufacturing seems to be moving toward a global market, and third world wages.
I assume you are advocating for private education as opposed to public, not just making your way in the world without any education? (which I concede is most definitely possible)
I would also agree with you more if many, otherwise intelligent, highschoolers were not inclined to pursue careers as rockstars and shift managers at McDonald’s. 18 year olds are not the world’s best decision makers, and fail miserably at preparing for future contingencies. You don’t typically end up at Mc Ds or Wal-Mart out of choice, but lack of. I think this alone is the REAL reason that Conservatives wish to dismantle public education. You either end up with too many people with better alternatives or too many people demanding higher wages, assuming we all took advantage of our opportunities. (which we don’t)
I just happen to think we shouldn’t shit all over people that miss out on opportunity to our own benefit.
” hear constantly that, “Increased taxes lower incentive to produce”. Taxes decrease the rewards of our production.”
You forget the temporal aspect of employment and the fact that almost no one works for money. For each extra hour worked, we expect greater rewards. Employment is trading our time and expertise for a reward. Since our time is limited (24 hours in a day, 7 days a week, etc), we tend to expect to increase our wages for each additional hour requested in that 24 hour day. We tend to cease working when the cost we’ve subconsciously set exceeds the wage being offered. We want to use those wages for something, and that’s what the rest of our day is for. If our time was a set value, then all of us would work two full time jobs in a day, go home, sleep, then start again and never take weekends off because it’s more money.
By increasing the taxes, the potential maximum reward is reduced. Becuase of the reward reduction, we chose to work less as the wages no longer satisfy the value we’ve set on those extra labor hours.
“I’ll agree that this idea is true and ask why it is different to expect someone to be productive at minimum wage, or a wage that is “market value” for labor, if it is less than necessary to have a relatively satisfying, comfortable life?”
Because there is more than one party engaged in the transaction. Flip it around, why should a business owner be expected to pay more for labor than what he is getting for that labor?
If the minimum wage is set at $7.25, to provide for a satisfying and comfortable life as you call it, that means the employee has to generate in excess of $7.25 of value to the organization. Without that excess value, the organization simply will not hire that individual or release the individual already employed and increase the responsibility of another employee to justify the increased wages. The reality is, in your zeal to demand a comfortable life, you’ve managed to make his life even less comfortable and less satisfying as he is now out of work.
“Flip it around, why should a business owner be expected to pay more for labor than what he is getting for that labor?”
Because you are generally receiving more than you pay for. The temporal value to consumers of services provided by minimum wage labor is being shouldered by workers that subsidize their own low wage with Federal assistance.
My argument is that convenience has to be “paid” for by someone. Taxation, redistributed to low income families, aids those that cannot temporally manage a family utilizing a single or multiple minimum wage income. Therefore, all beneficiaries of our Democratically chosen arrangement has a price to pay. Minimum wage and the overstated complacency caused by welfare programs are a gift to America. Altruism and unionization could rectify the conflict of interests nicely, but probably at a higher cost. And yes, personal drive.
Individuals that have worked hard to build personal wealth are understandably angered by feeling that they are paying an unfair share of taxes. I’m here to tell you that minimum wage workers don’t particularly like taking on an unfair share of economic hardship to watch the rest of America enjoy AND bitch about living in the world’s most prosperous nation.
I don’t think anyone here would claim that markets in the US are free, but that isn’t relevant to the “make it so” legislative attitude discussed in the original post, or to the theory of price controls.
Art Carden:
You’re wrong wrong when you state that productivity can’t be changed by passing laws; it most certainly can–just not in the direction that the law-passers want.
I’m going to go out on a limb and assume you’re not an economics graduate, mainly because, as you’ve said, removing the minimum wage seems to be counter to everything economists know. I’m not sure what type of economists you’ve discussed with, but apparently they haven’t been able to make a compelling case for you, so I’ll take a stab at it.
The minimum wage really only has a major effect on unskilled work (it also serves as a floor to base the wages of skilled work on, but it’s much less instructive in that sense, especially once you get into wages >3xMinimum), beyond unskilled work the market essentially sets the wage. Minimum wage is essentially in place to create a minimum standard of living (i.e. If citizen X works full time, citizen X should be able to have enough money to pay for rent, food, etc). When you take away the minimum wage, things change, and market forces begin to set wages. In the initial aftermath of the dissolution of minimum wage, the average wage would fall, though not massively (Any single company that sets the wages for their working force lower than what is required to live would experience an exodus of workers). Minimum wages would likely find an equilibrium somewhere around what the workers would need for a barebones lifestyle (which is perfectly fine, a job shouldn’t technically guarantee anything more than enough money to live). The problem though, is as wages fall, the purchasing power of the lower/lower-middle class would fall massively, and the lower/lower-middle class are serviced primarily by low skilled workers. Therefore the number of low skilled jobs would drop, increasing demand for jobs and prompting desperate individuals to take jobs at an even lower wage, further perpetuating the cycle. As this is happening the children of this generation of workers would have essentially no means of escape from the cycle since higher education would likely be far out of the range of what anyone could afford with a significantly lower minimum wage. We would be in a situation where supply of unskilled workers would shoot up, and demand for them would decrease, causing wages to plummet. By removing minimum wage we would essentially destroy the middle class and impoverish large swaths of our population to enrich the upper echelon further. This would eventually hurt the employers (who now have less people to consume their goods), but due to globalization they’ll still be able to export goods to places like Canada and the UK that have minimum wages and ample consumers, minimizing any damage caused by the loss of American consumers.
Does this situation sound familiar to you at all?
This is essentially the state of a majority of third and second world countries, without minimum wages employees are subject to the whims of market forces which force wages down and perpetuate a cycle of poverty.
The free market may be dynamic, but we still need some regulation to make sure that the dynamic market is having a net positive impact on the economy and the population. The problem is distinguishing between good regulation and bad regulation The failure of the american market isn’t a failure of regulations, it’s a failure to identify/fix bad regulation and to place good regulations on markets that had run out of control and threatened to destroy us.
I hope I’ve presented a better argument than some of the “economists” you seem to begrudge.
What a bizarre man you are. What you’ve just tried to tell me is that the only reason I’m making $80k/year is because government set a minimum wage. My $38.46/hour isn’t there becuase Washington just mandated a $7.25 minimum. The minimum wage can vanish completely tomorrow and those currently employed will not have to worry one whit about reduced earning potential. The wage anyone is currently enjoying is there becuase that’s how much they’re actually producing. Making it legal for someone to sell their wages at what they’re worth when they’re below the set floor doesn’t make life worse off for the rest of us.
Also, the average wage declines with minimum wage increases. The only reason you think it goes up is because the calculations conveniently forget to add the $0 for those people who aren’t being hired at all because the wage is too high. Nothing drags an average down faster than 0.
Maybe I didn’t explain myself well enough. Any wage significantly higher than the Minimum wage is likely that way because there is a greater demand for that skill set than there is supply, in that case we can leave the free market to be and it’ll usually find an appropriate value for the wage (in your case this is $38.46/hour). Even if there was no minimum wage, those wages would remain relatively unchanged.
People making minimum (or near minimum) wage are usually unskilled laborers, in which case there is a greater supply than there is demand for them. If you take away minimum wage, their wages are negatively affected. The chain reaction of lowering the earning/spending potential of a large portion of the American people may have short term gains for companies but the results would be devastating for the country in the long run (see my first post, we need those $10/hour earners to spend in order to keep the economy going, their wage dropping wouldn’t affect you immediately, but 15-20 years down the line you might be out of a job because of the weaker economy caused by their reduced ability to spend). Cheap labor doesn’t create a stable economic market, there is a reason China and India are attempting to diversify and build an internal consumer base as quickly as possible.
Also, you’ve made quite a few claims about the minimum wage driving unemployment; do you have any hard data to back this up or is it just your personal inference?
Tailsnake; do price floors increase or decrease demand for a product?
This is basic economics. A price floor causes oversupply, and some product goes unsold. In the case of a minimum wage, that product is labor, and the price floor is the minimum wage.
A minimum wage increases unemployment for exactly the same reason that a minimum price for bread would decrease the amount of bread sold.
Re: Tailsnake,
Here’s a secret for you:
Nobody is entitled to receive a specific wage from an employer, just like your grocer is not entitled to YOUR money when you buy tomatoes – you pay what you’re willing to pay or go to someone else.
Why should the employer not enjoy such freedom? Just tell me why. What makes an employer different from any consumer? Is he a slave?
When demanding evidence, it’s wise to first present your own. Where is your evidence that raising a minimum wage increases the overall prosperity? If so, why don’t we mandate $100/hour since that would clearly make us all fabulously wealthy.
http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748704761004575096150953378366.html
There is a wonderful chart there showing a fairly unambiguous relationship between unemployment rates and minimum wage levels.
http://www.seattlepi.com/opinion/153901_unemploy26.html
A more localized study of Washington State, one of the few states that sets minimum wage levels above the Federal level. Also note the date, 2003, right in the middle of the massive economic bubble. A great quote:
“Oregon, Washington and Alaska are among the five states with the highest unemployment rates. It is perhaps no coincidence that these three states have the highest state minimum wages in the nation.”
Further, as you come off as someone who puts stock in a Nobel Prize winner’s voice:
“Nobel Prize-winning economist Gary Becker’s observation: ‘A higher minimum will further reduce the employment opportunities of workers with few skills.’ ”
So, I’ve provided you evidence. Now provide yours that counters mine.
Re: Tailsnake,
I’m going out on a limb and assume you’re not much of a logician, Tailsnake – you’re begging the question.
What makes you think the minimum wage achieves the living standard? What makes you think that the minimum wage is meant for that? Who is this “citizen X” and what makes you think such overstated simplification represents any individual person?
“The problem though, is as wages fall, the purchasing power of the lower/lower-middle class would fall massively, and the lower/lower-middle class are serviced primarily by low skilled workers. Therefore the number of low skilled jobs would drop, increasing demand for jobs and prompting desperate individuals to take jobs at an even lower wage, further perpetuating the cycle. ”
Totally wrong. In average the wages could fall a little bit – right – and even if the wages would plump drastically, this would be irrelevant. The only thing that ist really relevant is that more goods are produced and wealth will no longer be transferred from productive to non-working people. With declining wages, the costs of producing goods will decline, too. In real terms everyone will be able to afford more goods which are now cheaper and wealth will rise in real terms.
The problem with this argument is that the market isn’t “free” by any stretch of the words. And it probably never has been truly free.
If one were to assume that people take a job and work because they need the money to survive, then the market has already been distorted by so-called “welfare” additions to their wages by things like food stamps, medicaid and section 8 housing. Thus people are willing to work for less in nominal hourly wages than they would be if such welfare additions were not added in.
California was well aware of this when it tried very hard to discourage Walmart from opening more stores, becaue it realized that every job at Walmart cost the State an extra $5200 in Medi-Cal payments, because the Walmart wages were so low, and had no healthcare benefits.
So, in effect, Walmart was able to exernalize some of its production costs of labor by putting part of the cost of a livable wage on to the State of California.
This same externalization of production costs occurs when, for instance, companies pollute the environment in some way, or reduce available resources.
So minimum wage laws could be realistically seen therefore as ways of lessening the externalization of labor costs, in the same way as regulation of pollution and resource degradation is used to prevent externalization of production costs.
Mises’ theories therefore only work if we as a society are happy to see poor working people living in slum tenements, and their children dying from malnutrition and lack of medecine.
I have no doubt that many people here would be happy to see a return to those times, but I somehow doubt that they would be a successful election strategy.
Wal-Mart pays its employees on average $3 more than the minimum wage. If Wal-Mart’s wage structure is so horrible, why aren’t politicians trying to set the minimum somewhere above what Wal-Mart pays?
The reality is you don’t know what you’re talking about. Wal-Mart has dramatically improved the lives of people all over the globe. Somehow trying to tell me a formerly unemployed person is now costing MORE in medical subsidy is insane. Wal-Mart employees aren’t formerly displaced high wage earners. They’ve always been low wage earners. Wal-Mart just provided them with employment where none existed before.
‘ Wal-Mart employees aren’t formerly displaced high wage earners. They’ve always been low wage earners. Wal-Mart just provided them with employment where none existed before.”
Not exactly, Sir. In many cases, yes, WalMart did replace higher paying retail stores.
This is not a critcism of WalMart, though. These are just the facts.
I was merely pointing out that minimum wage laws reduce the amount that governments pay out in supplementary benefits to the working poor.
Now assuming that we as a society have decided that there is a “minimum standard of living” that a rich society such as ours has decided that EACH ONE of our citizens (who is able and willing to contribute to by working) deserves, then there is an argument that CAN be made that employers should have to pay enough to workers to earn that standard of living, so that government subisidies would not be needed.
So here, economic theory has to bump up against politics and sociology. Milton Friedman found that out when he tried to spread his own Chicago School economics theories. They only seemed to work in highly repressive and brutal dictatorships. And when he tried to urge Maggie Thatcher to fully implement those policies she replied “But you don’t understand Dear Miltie. This is not Chile. Here, the people won’t stand for it!”
Actually, I think Maggie Thatcher preferred Hayek, and is on the record for holding up a copy of The Constitution of Liberty at a Conservative Party event and declaring “This is what we believe”. Which is testament to the Lady’s impeccable tastes.
I think you’re also referring to a letter from the Iron Lady to Hayek, which I read as a reference by Thatcher to the brutal repression of the Left by Pinochet being unacceptable in Britain. This seems quite clear to me, but it doesn’t stop many on the Left shamelessly using the correspondence to implicate Hayek in the atrocities of Pinochet’s regime. Here’s a link to a page on the awful Naomi Klein’s (surely one of the shallowest thinkers to ever step in a puddle) website which extracts the text http://www.naomiklein.org/shock-doctrine/resources/part3/chapter6/thatcher-hayek
I suggest you have another think about your third paragraph (rich societies are able to mandate a minimum standard of living and should do so). The argument against such policies is that they undermine the processes of production that produced the wealth to start with. It’s as if to say “Ok, the hard work is done, we’re rich now, so now we can throw away the institutions that made us rich.” It doesn’t make any sense. It’s killing the goose that lays the golden egg! Government subsidies should never be paid because the resulting malinvestments produce an inefficient capital structure that limits society’s ability to produce a surplus. There’s lots of material on this website that you should be able to find easily if you’re interested in exploring this line of thinking.
jimmywitz,
“I have no doubt that many people here would be happy to see a return to those times, but I somehow doubt that they[sic] would be a successful election strategy.”
The first clause is a rather bold assumption, which you will likely change if you stick around and read what is actually said in the articles and by the posters here.
The second clause indicates that you do, in fact, see where the problem lies, in the common election strategies.
Re: jimmywitz,
Yet you write: “Mises’ theories therefore only work if we as a society are happy to see poor working people living in slum tenements, and their children dying from malnutrition and lack of med[i]cine.”
I don’t understand what the “problem” is, then. If, from your viewpoint, the market is not free, then it should mean that it is a good thing, otherwise people would be living in these precarious conditions.
One thing does not follow the other. One could work to obtain money for necessities even if there were no market distortions.
So without the welfare costs, people would be willing to work for higher wages?
So if California did not offer Medi-Cal, you think the wage level would be higher?
What? You said above that, sans the welfare costs, people would work for MORE, not less. That implies employers would have to offer MORE, not less. I don’t then understand how you can conclude that minimum wage laws are needed. Going by your argumentation, all that would be needed is to phase-out welfare costs, not impose price controls.
Where did you get this from? How could you conclude this, if you just said that people would only be willing to work for MORE if the market was free?
“Thus people are willing to work for less in nominal hourly wages than they would be if such welfare additions were not added in.”
YOUR WORDS.
@ Old Mexican.
I am sorry, Sir. I am not making my argument very clear here, so I ask respectfully for your forbearance.
I am sure that, given no other option, people will work for almost anything to avoid literally starving to death, or see their children starve, and die from lack of medicine. Some, i am sure though, have found that low wages make it not very encouraging to move from being local “pharmaceutical consultants” to a more productice (and socially acceptable) line of work.
But, without government intervention to bolster low wages with welfare programs, we would almost certainly return to the kind of living conditions so eloquently described by writers like Dickens and Upton Sinclair.
Thus, my argument has been that society as a whole has deemed such poverty to be morally unacceptable and has taken whatever steps it can to alleviate those conditions. This is does through taxation. But, if “living wage” laws are passed, then the need for such taxation is reduced, while businesses and their customers take on those costs.
And, going on from that, just as there are laws requiring businesses to pay the costs of their own pollution, or spend sufficiently to prevent such pollution, then there is an argument to be made that in order to employ someone, you must pay enough so that society as a whole does not have to cover the rest of the costs of their employment in subsidies for food, shelter and medicine.
But, either way, there is some implicit distortion in the market. Either the government enforces a living wage law, or it makes up the difference via taxation.
Why do you assume that we would have terrible living conditions without the minimum wage? You haven’t provided any facts, or any theory, to support that position.
Let me suggest another possibility; if businesses are required to pay a wage, “living” or not, which is greater than the value of an employee’s labor, they simply won’t employ them. Marginal laborers, poor people who would otherwise have had SOMETHING, however little, are deprived of the pittance they might have received by minimum wage laws, and left to starve.
How could you be so heartless?
@ Jgiles:
I dunno, I guess i studied too much economic history and not enough theory. Maybe I shouldn’t have spent so much time reading those old rascals Upton Sinclair and Charles Dickens as well. Maybe you’re right, and there is no reason whatsoever to assume that the poor don’t need any protection.
Tell you what, we should do an experiment, and if conditions do revert to pre New Deal Etc. legislation, and lots of of kids and old people starve to death like they used to, then will you concede that you were wrong?
And anyway, maybe those poor “marginal workers” should be glad of any pittance they get, no matter how small their value as workers and human beings is to the market place.
Oh my, economics gets a whole lot easier when you don’t have to deal with such pesky things like politics and electorates and morality doesn’t it?
You’re still not listening. I’m saying that the minimum wage is ACTIVELY HARMFUL to the interests of the poor.
If someone’s labor is less valuable than the money they’d be paid in wages, they won’t get hired. Period. Minimum wages, if they are to do anything at all, MUST be above market-clearing rate; which means, inevitably, that there is a group of people who can’t earn minimum wage, and thus get fired (or not hired) when a minimum wage is in place.
That group is comprised of unskilled laborers and the very, very poor. They are the ones hurt by a minimum wage. No-one else.
What, are you going to try and require that everyone be given a job? Good luck. You’ll need a few million bureaucrats, a few million policemen, and a few million spies , plus some way of counteracting the corruption and inefficiency of your monstrously oppressive police state.
If we were to repeal the minimum wage right now, and keep it repealed, I would predict that average wages would immediately begin climbing, and continue to climb, slowly but steadily, because removing the minimum wage would basically put a lot of marginal workers into the labor pool and make it possible for many businesses to be a little more efficient. Thus more productivity, thus expansion, thus the need for more labor, thus higher wages.
Maybe an example would help him understand your point?
If a job is profitable at $5 an hour but unprofitable at $6 an hour, what will happen if the minimum wage is raised to $6 an hour?
Simple. The job will no longer exist.
Now think about all those jobs that used to exist in the past but seem to have disappeared. For example, when I took my car to be filled up with petrol there would be someone to meet me at the pump, ask me what I wanted, and then put petrol in the car. Furthermore that person would check my oil and wash my windscreen for me. This doesn’t happen any more. All petrol stations are self-serve. What happened?
The minimum wage is what happened. The State made it illegal for people to work that job at a profitable rate. Once it became clear that hiring someone to perform that job would lose money for the petrol station, the job was abandoned in favour of self-service. Who lost out?
- The poor and inexperienced who are now unemployed.
- The consumer who lost a service they were voluntarily willing to pay for.
The argument that these workers would now get paid more is fallacious. If an individual is working for $5 an hour, then it’s pretty clear that they couldn’t do any better than that. If they could have had a better job, they would have already been working at it.
Thus it is clear that the minimum wage does little more than hurt the poorest people in society.
Re: Jimmywitz,
And thus you think that pricing them out of the market helps them, instead of hindering them, right? I thought so… you are so nice a person, sugar covered with honey.
The argument should work the other way as well – why not place price controls so grocers do not have to compete and those miserable misers we call “consumers” buy tomatoes at a price the grocers find will maintain their standard of living? Or do you want pauper grocers?
This is a slippery slope fallacy. Also, you said above that without the welfare programs, people would then be encouraged to ask for HIGHER wages, so why keep the welfare programs?
“Thus people are willing to work for less in nominal hourly wages than they would be if such welfare additions were not added in.”
YOUR WORDS, not mine. This would tell me that, without welfare, people would be ASKING for higher wages instead of settling down for less.
There is some implicit distorsion in human sexuality as well – either you’re raped or you’re assaulted, and both are just as justifiable as the government imposing price controls or taxes – that is, they are neither. [This is what we call a False Dichotomy, Jimmy...]
This “living wage” is just a canard. Only an individual KNOWS what he needs to sustain him or herself, and thus will negotiate or shop around for an appropiate wage. Person A may want a higher wage than person B, but if you set the minimum wage at the level Person A wants, then you push Person B out of the market. That’s the bottom line, no matter how much you want to justify the “good intentions” behind the Minimum Wage; we’re talking ECONOMICS here, not intentions.
“And thus you think that pricing them out of the market helps them, instead of hindering them, right? I thought so… you are so nice a person, sugar covered with honey.”
You know, that’s not fair, nor is it what I said. I took great pains to point out that, to some extent, society had ALREADY made a decision regarding the morality of poverty by offering additions to low wages in the form of housing, food and medical subsidies.
The minimum wage therefore is a way to get employers to make up some of that amount as well. If one increased minimum wage levels up to what society terms a “living wage” then society would not need to subsidize those poor families at all.
So, i am not sure what you are arguing here. Are you saying that minimum wage laws are not good economics and that all the amount to be made up should be in government subsidies, or are you saying that there should be neither minimum wage NOR government subsidies?
And if you ARE proposing the latter, what hope do you think you would have of having a democratically elected government adopt such a policy?
And please, I would appreciate a little less of the sarcasm. I am trying to make a serious point here, and while it might be at odds with the prevailing conventional wisdom on this board, it deserves seriousl consideration, because it does involve public policy. And such policy, in a democracy, needs a certain amount of public support if it is going to be enacted.
By the way, do you know who first coined the phrase “conventional wisdom”?. Yes, it was your very good friend, John Kenneth Galbraith. Don’tcha miss him already?
Re: Jimmywitz,
Nice cop-out. “It’s not me, it’s society.”
What do you mean therefore? Even if what you said above, that society somehow “decided” that poverty was immoral (an interesting notion, as it begs the question), that does not mean that minimum wage laws serve the purpose you indicate. That’s a non-sequitur.
Minimum wage laws are price controls and subsidies are forced redistribution of property, both being IMMORAL as one hinders freedom and the other is thievery. So what do YOU think I favor?
In that case, why bother defend minimum wage laws if these are to exist by fiat regardless? You can just say “They are because the government can.”
You’re not being serious, Jimmy, not with that argumentation [basically, might makes right]. Don’t fool yourself.
jimmywitz,
For the record, this site does support the complete elimination of welfare (when based on coercion and force, that is, not the type freely provided by people who choose to do so) and the elimination of all government determined mimimum wages.
If you want to understand why, you should look around on this site for some articles on the perverse incentives that welfare programs create… just search “welfare” and pick an article that sounds interesting.
I used to think the same way you did, that anyone supporting the elimination of government run social programs was selfish and that only the rich would benefit. By reading and thinking about the arguments, however, I have since come to realize that despite the best of intentions government programs almost universally cause a net harm to the people they are intended to help. With less government interference in the market EVERYONE would be better off.
I hope you stick around and inform yourself for long enough to see though the initial bias most people have against the arguments on this site. Try Economics in One Lesson for some accessible, thought provoking reading.
Best of luck to you.
jimmywitz,
A few questions: What is “society?” Is it distinct from an aggregation of individuals? If so, how? How does “society” determine values? How is this different from a collection individuals making their own personal decisions? How does “society” act? How is this different from the aggregate actions of individuals? If “society” truly wants something, why is the coercive instrument of the State necessary to enact it?
On the minimum wage and poverty, here’s the positive economics: an effective minimum wage causes unemployment. If you want unemployment, a minimum wage will provide it; if you do not want unemployment, then a minimum wage is a poor (no pun intended) way to achieve your goal. Government subsidies encourage, relative to circumstances without the subsidy, whatever is subsidized. So subsidies to the poor encourage poverty, leading to more of it than would exist in the absence of the subsidies. If you want more poverty, subsidizing it will be effective; if you do not want poverty, subsidizing it would be ineffective. I’m fairly sure Old Mexican does not want more unemployment or poverty, so he opposes both the minimum wage and subsidies to the poor. However, neither he nor anyone with half a brain thinks this is ever going to be implemented–it’s just too good a gig for the politicians!
Re: Jimmywitz,
By the way, you did use the pronoun “I” when exposing your premise:
“I am sure that, given no other option, people will work for almost anything to avoid literally starving to death, or see their children starve, and die from lack of medicine.”
That’s what my reply was meant for.
By the way, it is clear you accept what “society” has “decided” without even question it. Are you THAT gullible?
Weight is a fact, agreed. But perhaps in isolation, weight is an inaccurate indicator of health?
Just sayin’.
This post confuses me. What is it addressing and who is its intended target?
Don’t worry about this individual. The posts are nothing more than attempting to discredit the entire idea by pointing out irrelevant minutia that aren’t 100% perfectly correct.
When I saw this comment at first, Murray, I was sure you were talking about the noise machine Michael.
The Devil is in the details. But let me clarify: Just as weight is only a hazy indicator of health, I would argue that wage is a hazy indicator of a person’s worth to the market. Luck often plays a part in employment.
I’m just seeing how the analogy holds up against a sanity check. And bear in mind, the weight analogy is hardly minutia… it is central to this posting. If you have a substantial counter point, I’d love to hear it! Personally, I haven’t decided what to think about minimum wage. Economics is not my area of expertise.
Old Mexican said, And thus you think that pricing them out of the market helps them, instead of hindering them, right? I thought so… you are so nice a person, sugar covered with honey.
jimmywitz replied, You know, that’s not fair, nor is it what I said.
BS. OM was being absolutely fair. That is EXACTLY what you said. Either apologize to Old Mexican or admit to being a liar.
How can you argue that Labor can be a “free-market”? A person is not an inanimate disposable good. In a free market, you can choose what apple to buy; the apple has no say in it… it doesn’t care if it’s used to make applesauce, apple pie, or left in a refrigerator to rot. An apple won’t need to be bought in order to feed its family, and an apple won’t hold out for the highest bidder or sell itself short so that it can pay rent.
In all this intellectual economic speech behind the ways labor can have similar characteristics to a free market… nobody looks at the fact that we’re talking about human beings. Put labor into the free market, and watch those with the money and power reduce this nation into nothing but slaves and prostitutes…
Minimum wage laws are in place SPECIFICALLY because of heartless, greedy individuals who have lost the ability to see the difference between a person and a commodity. In attempting to prove how labor can be treated like nothing more than a common good and you’re only proving why we need it.
Minimum wage laws do nothing but cause unemployment of the laborers that you supposedly care about. This is econ 101, you retard. This is what happens when people feel about economics, instead of thinking about it. It’s typical of leftist idiots who don’t know how to think, and assume that feeling is an acceptable substitute.
That’s under the FALSE assumption that job creators will create more jobs and not line their own pockets. Look up Larry Young, executive at Dr. Pepper/Snapple. He’s doubled his salary to 6.5 million dollars in 2 years, while his company is raking in record profits. Meanwhile he’s trying to cut wages and benefits for plant workers… you think if this guy had free-market labor he’d use it to create more jobs?
That’s the type of inane assumptions you make when you stuff your head up an economics book and don’t know how to apply reality and common sense.
Actually, I consider myself conservative… I just don’t blindly follow a political party. I’m not a big fan of over-regulation, big government, or high taxes… but I do have some common decency and the ability to look beyond a theory and know what WOULD happen rather than what SHOULD happen.
That’s a nice bit of rhetoric there, but that’s all it is. This argument concerning minimum wages is not scientific fact (like gravity, evolution etc) due to it’s untestability. Years of study on minimum wages has failed to prove the world actually works like that.
There are many reasons why a minimum wage can sometimes raise employment. Multiple market equilibria, for example, also search costs and market friction which we all know exist but are assumed not to in classical theory.
Hill and Myatt “The Economics Anti-textbook” for a good review.
Compare: if it costs $100 to produce a ton of steel, the free market can work anywhere above (and a little bit below) that price. $100 is the base, since if the level drops below that, it makes no sense to build a business on it (again, some exceptions there). What is the ‘production cost’ of one hour of human productivity? Is it zero? No, i don’t think so.. it takes effort to eat, live, be healthy etc. But, it’s hard to establish by any individual. Here comes the government, which says $5 is really the minimum cost of one hour of human productivity. Not based on some vague idea, but based on a more or less shared assumption of what cost people generally have to live a normal life. So, it does not differ much from ‘free’ market: all that changes is who has established the real ‘production cost’. And as with any market, powerful buyers will want to go below production cost, which in human terms could be called exploitation or slavery, depending on how much below production cost you want to go. ‘Dumping’ is not allowed, either for goods OR for people.. so again, nothing special here!
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