Saturday, January 07, 2006

Minimum wage

I've always said it would be a mistake for Montana to raise its minimum wage unless the whole country went along. This study suggests that I am wrong. But then I'm skeptical of the source.

UPDATE: Left in the West disagrees with me, sort of.

2ND UPDATE: More states are exceeding the federal minimum wage than I thought.

3RD UPDATE: Just got a news release from Jon Tester endorsing the initiative to raise Montana's minimum wage to $6.15 an hour.

44 comments:

Anonymous said...

I would give them the minimum wage increase if we can become a right to work state.

D. Ricardo said...

More upside-down economics!

If a higher minimum wage creates more jobs, why stop at $7.50 an hour? Why not go to $17.50 an hour? Or $117.50 an hour? Or will we run out of workers?

Yeah, David, you’re skeptical of the source, all right. “New Mexicans for a Fair Wage” and “New Mexico Voices for Children” doesn’t exactly sound like a brain trust.

Anonymous said...

We are already out of workers...that is why Golden Corral is paying a $500 hiring bonus

D. Ricardo said...

Golden Corral should try raising their hiring bonus to $5000.

Mark T said...

Much of economics is counterintuitive - when we get into these types of debates, people drive by the seat of their pants. It could well be that increasing the minimum wage would lead to economic growth - simply by putting money in different hands. Those who give up money - employers - are more likely to spend less in the local economy, more likely to invest it elsewhere. It tends to leave the local economy. Employees are more likely to spend all they earn here and now. It could be that as a whole, we are better off with money in the hands of those who buy consumer goods, keeping the local multiplier up. Same with tax cuts - we're better off with middle class tax cuts than those given to the wealthy. But people tend to believe what is convenient to believe.

But who knows ... just as with tax cuts, there's no solid evidence, and economists on both sides of the issue. The only laboratory study I know of was done by Princeton economists David Card and Alan B. Krueger. That study, based on a survey of fast-food restaurants, found that employment in New Jersey, whose state government raised the minimum wage from $4.25 to $5.05 in April 1992, rose relative to employment in Pennsylvania, which kept the federal $4.25 minimum.

People have come along and questioned the raw data, but so far as I know, Krueger and Card stand by their data.

For myself, I say raise the minimum wage because it's a nice way to prevent sweatshops.

D. Ricardo said...

Mark T.-- There is only one REAL minimum wage, and that is the minimum wage set by the free market for labor. The minimum wage you speak of is the LEGAL minimum wage. It can have no positive effect on employment whatsoever; it can only have a negative effect.

The supply and demand for labor determines the minimum wage for a particular job. When the supply of labor for a particular job falls, the minimum wage for that job rises. This is the situation you see in most businesses today. Very few businesses pay the legal minimum wage because the free market minimum wage is well above it.

If the demand for labor is not met by an increase in workers coming into that sector, then the free market minimum wage will continue to rise until enough workers are attracted to that sector (increased employment).

Conversely, as the demand for labor falls, or the supply of labor becomes too great, the free market minimum wage will begin to fall. When the free market minimum wage falls below the legal minimum wage, business stops hiring altogether (decreased employment). This is so because the legal minimum wage represents an artificial cost that business cannot recover under current economic conditions.

Even if all businesses in a certain sector were equally burdened by the additional cost of hiring at the legal minimum wage, they would all lose money and eventually go out of business. This is because no sector operates in an economic vacuum. The free market will provide consumers with lower-priced substitutes for the over-priced goods coming from any sector that has been crippled by a legal minimum wage.

The legal minimum wage does not prevent “sweatshops,” rather it creates breadlines.

Mark T said...

For so long as we have a labor surplus, pressure on wages will be downward. Without minimum wage, certain sectors of our society would be working for less than $5.15 per hour - I'm thinking of fast food segment. Free markets are fine, but when they produce negative results, we should fix them. It's that simple. They don't alwasy work well. Try telling sweatshop laborers in Signapore the glories of your free market. They'll explain it better to you than I can.

Mark T said...

By the way, you have no data to support you. This is typical of this type of debate - flying by the seat of your pants. Economics cna be counterintuitive.

D. Ricardo said...

Free markets are self-correcting markets. And there is nothing you or any other genius can do to “fix” them. The very fact that you believe in such nonsense puts you in the same class as all the failed socialist “thinkers” of the last 100 years.

[Hello, Mark T! Have you heard the news? The worldwide triumph of capitalism is nearly complete. Even the communist Chinese are loving it!]

Almost all fast food restaurants are well above the minimum wage. In Bozeman, Montana, the fast food wage is approaching $10 per hour.

And stop the sappy “sweatshop” talk, please. Have you ever considered what your hypothetically oppressed people in Singapore would be doing for work were they not making socks and sneakers? Do you think they would be making high definition, flat panel TVs? How about creating new financial products for the global market? Tell us, please, what would these poor, exploited people be doing for work in your fantasy world?

Every economic principle I have stated in this thread was derived from well recognized authorities, many of whom have won the Nobel Prize in economics.

Mark T said...

If wages exceed the minimum wage level, fine. That does not negate the need for minimum wage laws. Market failure is common - free markets don't work in utilities (huge entry costs prevent competittiion), medicine (40 million uninsured) agriculture (can't make it without subsidy). Faced with market failure, we fix markets. You are somewhat a utopian, and need to get into the real world.

Without minimum wage laws, wages spiral downward, sweatshops pop up. That's why so many businesses outsource - jobs garvitate to places without minimum wage laws. It's a race to the bottom.

D. Ricardo said...

Mark T. – I must read your post to my class tonight! Rarely does the real world produce such a textbook example of so many economic fallacies—and so many political clich├ęs—all in one place!

Or is this satire on your part?

Mark T said...

And, pray tell, what class would you be taking? I've kind of sort of been through my economics classes you know ... interesting subject, but a very faddish one, and right now, "free"markets are all the rage. I've been down that road - I read Friedman. Believed in him for a while.

Anyway, typical discussion - I threw one element of raw data at you, the Card Krueger study. You passed over it. So far as I can tell, you've put up exactly nothing but some pretty nice opinions that reflect conventional conservative wisdom. And as I mentioned, economics can be counterintuitive.

Steve T. said...

D. Ricardo- You speak of China as if you're arguing against a Communist. Someone who is arguing for a little government control over the markets does not automatically support Communist China. China is learning the benefits of a "free" market, but only because their government is controlling how fast they privatize, and they will continue to exercise a great degree of control over every sector of the economy. And guess what? Their economy will continue to flourish. Listen, a die hard Socialist would argue for complete government control over the economy (meaning people with no knowledge of textile production will be controlling the output of textiles), and similar extremists like yourself would argue for complete government non-intervention in an economy. (leading to child labor and sweatshops, just as it did in this country before we learned our lesson.) As always, the answer is somewhere in the middle. Allow the market to be free, but the government needs to keep a guiding hand on the economy to prevent exploitation and concentration of wealth.

D. Ricardo said...

So many fallacies, so little time! Now someone thinks the government ended “child labor” and “sweatshops” in this county. And the government must prevent “exploitation” and the “concentration of wealth.”

I should send you people a bill! Either that or turn ECON 150 loose on you…


Class:

I’ve been doing some blogging lately, mostly trying to educate people about fundamental economic concepts. Below is a response that I received in a debate about minimum wage laws and other things.

[Mark T. post snipped.]

If you’d like a little extra credit, write a short piece (one page) identifying as many fallacies as you can. Explain where needed. Cite to Hazlitt’s “Economics in One Lesson” if he covered that fallacy.

*****
[On the minimum wage, junior, male.]

Minimum wage laws, much like unions, only benefit those who are still employed after their implementation. Everyone else becomes unemployed.

For example, a factory owner has $500 available every hour to pay
his 100 employees. Assuming each employee is roughly equal in
experience and skill, their wages will average $5 per hour. But now, in the interest of the worker, the government imposes a minimum wage of $15 per hour. This puts the factory owner in a bind because now he can only employ 33 workers ($500 available/$15 per worker), if he wants to stay in business. The remaining 67 workers are let go.

Minimum wage laws are not a godsend that magically create wealth but simply an illusionary device, backed only by fallacies such as the "race to the bottom," which increases one worker's wages at the expense of another worker.

“Real wages come out of production, not out of government decrees.” (Hazlitt, p. 139)

*****

[On “The Race to the Bottom”]

[Excerpt, sophomore, male]
I don’t know about the race to the bottom because I’ve always been in the race to the top.

Our economy is always shedding unproductive businesses and workers. This makes the economy work more efficiently (more profits, higher wages, better living standards, etc.). We send low-productivity jobs to China because we have more productive uses for our economy at home. The Chinese take those jobs because the jobs are more productive relative to the jobs they had before.

In my opinion whoever wrote that blog has his head on cross-threaded or he’s been watching too much MTV.

[Excerpt, sophomore, female]
I’ve heard this expression around and it doesn’t make any sense to me. I doubt if everybody could fit in the bottom (:)) or be a loser or whatever. Logically somebody has to be better off than somebody else because it’s impossible for all resources to be allocated equally. (I couldn’t find this one in specifically Hazlitt’s book but it similar to the “enough to buy back the product” fallacy in chapter 21.)


*****
[On large capital expenditures, freshman, male]

Hazlitt covers all this in the chapter on the New Deal about how several corporations can pool their capital to build a hydroelectric dam or any big project. They did this with the railroads years ago. Just because the costs huge doesn’t rule out the private sector from doing the project. If there’s a big enough demand for something somebody will find the money to make everything happen. Basically the invisible hand produces the things people want but the government only produces things it thinks the people want. This why you get a hydroelectric dam and no houses wired for electricity or you can have a county airport with no planes in the whole county.

*****

[Excerpt, on farming subsidies, freshman, female]
Bogus! My dad says there’s plenty of money in farming. The problem is the government’s “cheap food” policy. (pages 93-97 and 111-112)

Eric Coobs said...

This debate is missing the point - here in Billings our company can't get people who want to work for double the minimum wage!

Mark T said...

"Minimum wage laws, much like unions, only benefit those who are still employed after their implementation. Everyone else becomes unemployed." You offer no data. In fact, this is all couniting angels on pinheads - there is no real world data to support your theory or that book you read.

Anonymous said...

"This debate is missing the point - here in Billings our company can't get people who want to work for double the minimum wage!"

For what sort of help, Eric? Counter people? Mechanics?

If you cant get employees for $10.30 an hour the market must be high than that.

The oil boom is creeping towards Billings. Just wait until you have to compete with the oil patch for employees.

Mark T said...

Steve T - that was one of the best posts I have ever seen. Man, you stone-cold nailed it.

Eric Coobs said...

We're looking for somebody right now. They need to be drug-free, honest, dependable, willing to learn and have a good driving record.

They'll be doing sales, deliveries as needed, yard work, and possibly light mechanics.

Trust me, it is not easy to find people. If you fit the bill, and aren't afraid to load scaffold on a truck, and don't mind driving to the Heights, stop in & apply!

5 said...

Gee Coobs, I'd almost run right up there!

Mark T said...

Mr. Coobs - if you are making the point that there are jobs that pay more than minimum wage, point taken, but that does not negagte need for a minimum wage.

Mr. Ricardo - it's not like I'm not familiary with free market economics - I used to be a patron and follower. But there are things going on that your philosophy does not address - such as market failure. From what I see, your response to market failure is simply to deny its existence.

D. Ricardo said...

Mr. Mark T. -- I have done all I can to make you think about the economic fallacies you espouse. Your tutelage ends with this post.

I see no reason to respond to your requests for “raw data” or to address your fuzzy slogans like “market failure” when you have not responded to many of the questions I posed to you earlier in this thread. For example, you have not explained how your “race to the bottom” operates, or how a minimum wage law helps anyone, or what the poor, exploited people in Singapore will be doing for work in your new economic paradise, or for that matter, what they did for work before the mean ol’ capitalists began grinding them down.

You cannot point to a single instance where interventionism, statism, or socialism has produced a better economic result than the free market. You deal only in slogans and innuendo.

David said...

D. Ricardo:
Here's my case for someone who's helped by minimum wage: the unskilled worker with no bargaining power in the marketplace. The minimum wage acts as a floor to allow that person to make at least a subsistence living.

Your reply will be, I suppose, that that person is still worse off because fewer jobs will be available. But I would argue that a job that doesn't allow the worker to make a living has no long-term advantage over no job at all. And I can't recall that I've ever seen hard evidence to show that modest increases in the minimum wage hurt the economy.

I'm also not persuaded that the cost of increasing the minimum wage can't successfully be passed along to consumers. Maybe not in factories (which typically pay well above minimum wage anyway), but it's hard to believe that dishes that need to be washed and tables that need to be bused can be successfully outsourced to foreign workers making pennies an hour.

Mark T said...

"I see no reason to respond to your requests for “raw data”" ...

That speaks volumes. You are all theory, no data. What percentage of those who work for minimum wage are breadwinners? What has been the effect on local economies when the minimum wage was raised? What has been the effect on unemployment rates? That sort of data would bolster your case, if you'dtake the trouble to collect it. I really don't think it is available - the only studies I have seen put your case in a bad light.

Market failure is a real phenomenon - farm subsidies did not come about by accident. Farmers were not making it, and leaders decided it was important to have farms. Subsidy. The medical marketplace is chaos, with 45 million uninsured, costs spiraling, corporations doing cartwheels to contain medical costs. Market failure. And did you see the paper today that NWE charges the highest rate of any utility around? Market hasn't failed,yet, but I'll be damned if my pocketbook doesn't say I was better off before we deregulated.

Market failure is a real phenomenon.

I guess you had better point out my "innuendo" and "slogans" - I'm usually blunt to a fault.

Steve T. said...

Mark T. -

You must have missed it, but Mr. (or is it Professor?) Ricardo DID use raw data. Did you already forget his hypothetical factory (I'm pretending it's a chocolate factory because it's more fun that way) where an employer only has $500 with which to pay employees and then has to lay off 2/3 of his work force because of your damn market controls? Well it doesn't get any more raw than a random and entirely made up chocolate factory. He stone-cold nailed you there.

5 said...

Black Jack=D. Ricardo...

Ed said...

Tony = Paris Hilton...

Bart said...

Homer:

“Farmers were not making it, and leaders decided it was important to have farms. Subsidy.” One-third of all Americans lived on farms before World War II; less than 5 percent live on farms today. Duh-oh! Government failure!

“The medical marketplace is chaos, with 45 million uninsured, costs spiraling, corporations doing cartwheels to contain medical costs. Market failure.” Having trouble getting a doctor’s appointment or a hospital room? Try socialist Canada, but bring enough money to stay six to eight months, because that’s the wait time. Duh-oh! Government failure! Forty-five million “uninsured”? (Hey, it was only 40 million in your last post!) How many of those “uninsured” were denied medical care and kicked down the hospital steps? Duh-oh! Zero! Costs out of control? Try getting rid of Medicaid and Medicare price supports. Duh-oh! Government failure! (BONUS ROUND: College costs got you down? Try getting rid of subsidized student loans. Duh-oh! Government failure!)

“NWE charges the highest rate of any utility around.” Why would that bother a guy who lives in the dark? Duh-oh!

Ed Kemmick said...

OK, so I'm guessing D. Ricardo and Black Jack, both incarnations of Don Mellon, beyond question, appropriated my name to insult Tony a couple of posts above this one. Beautiful. Anonymity is the last refuge ... hell, the only refuge, of a scoundrel like Don Mellon. Posing as D. Ricardo (and formerly as James Fort and Ed Burke), he likes to pretend he is a professor, spouting sources and citing facts. As Black Jack he is praising Hitler for exterminating Polish Jews. He is a piece of work behind whatever mask he wears. His most recent posting on my blog carried the IP number of 216.129.238.154. He wants to be respected but he has no ethics and no courage. Using my name was particularly low, but not surprising. David, is inventing names one thing and using someone else's quite another?

Mark T said...

I feel so ... so unclean. I've been had by this slug.

Oh well - I've learned two things on this thread - one is that it is virtually impossible to discuss the minimum wage with free market zealots. They have nothing to bolster their case aside boneheaded conservative economic theory - the kind you get from the Readers Digest.

Another is that American understanding of the Canadian health care system is only rivaled by American grasp of world geography. Most Canucks are happy with their system, don't want ours, don't have the waiting periods they scream about down here, don't come running down here for major surgery or any other reason - but when Americans talk to other Americans about Canadian health, it doesn’t' come off well.

I guess you could say that conservative economics is a compendium of Einstein's common sense, or that body of prejudices acquired before the age of eighteen.

Ed said...

Ed -- I didn't know you had the exclusive rights to the name ED. I see ED all the time in TV and magazine ads. I guess they’re talking about you, from the sound of your post above.

Ed Kemmick said...

Not one ounce of courage.

Rocky Smith said...

"I'm also not persuaded that the cost of increasing the minimum wage can't successfully be passed along to consumers."

That's exactly what happens. This creates inflationary pressure on prices and usually eats up the minimum wage increase. Net result = no gain for these low wage people. How about decreasing costs for schools and other training to make these unskilled workers actually worth more pay? The artificial minimum wage floor just isn't getting any real progress done.

David said...

Rocky,
Not necessarily. Increasing the minimum wage only puts pressure on industries that pay at or near minimum wage. So if wages for, say, restaurant workers go up, people who don't want to pay the additional cost can eat another a meal or two a month at home. So they spend more at the grocery store, which probably already pays well above minimum wage.

And all those low-wage earners wind up with a few extra dollars in their pockets, which they immediately pump back into the economy. Who loses?

Rocky Smith said...

No David- minimum wage increases affect the entire economy. If you raise Joe teenager's wage to say $6.15 per hour, the guy above him who is already at that wage will demand an increase. The guy above him will then rightly want an increase too. This balloon will travel far up the pay scale. If you think this is limited to burger flippers at McD's, you haven't thought things through very far. It will be an upward pressure on prices throughout the economy. Eating a couple of more meals at home every week isn't going to cover it sir.

Wally B. said...

Rocky: Notice through this entire thread the minimum wage lovers missed your simple point:

"Minimum wage increases affect the entire economy."

They're like children who don't know how money is made. All they know is that they want something.

Steve T. said...

I guess I'm amazed that it took 34 comments for the inflation argument to even be brought up.....seems like a pretty obvious one to me......way to be on the ball Conservatives!

David said...

Rocky,
I agree that there will be upward pressure, but that pressure will attenuate the higher up the pay scale you go. The guy already making $6.15 an hour is definitely going to make a case for a raise. The guy making $50,000 a year will have a much weaker case, especially when the existing minimum wage is as low as it is now.

Rocky Smith said...

And all that pressure will be translated into higher prices for all. I say again- there went the buying power of your raise. I'd also like to point out that there are not a lot of people at or above your $50,000 per year wage in terms of percentage of the work force.

No matter where you set the minimum wage, market forces will keep their buying power relatively unchanged; but you can FEEL better about yourself for getting them a raise. Right?

Mark T said...

Rocky said "And all that pressure will be translated into higher prices for all." That statement is accepted fact, but not necessarily true. It's Readers Digest economics at work - it appears to be sensible, but misses the subtleties. Higher wages for one segment of society can be recouped in an expanding economy without affecting prices. Even were that not to happen, those higher prices might be offset by contraction elsewhere - perhaps smaller executive salaries, perhaps one fewer trophy home on the Bitterroot.

D. Ricardo said...

A lesson in the allocation of scarce medical resources. (Excerpted from, “Wealth Grows, but Health Care Withers in China,” by HOWARD W. FRENCH, New York Times, Jan. 14, 2006.)

***
That China finds itself in this situation today [loss of rural medical services] is as remarkable as the country's economic takeoff and, paradoxically, is inseparably related to it. Until the beginning of the reform period in the early 1980's, China's socialized medical system, with "barefoot doctors" at its core, worked public health wonders.

From 1952 to 1982 infant mortality fell from 200 per 1,000 live births to 34, and life expectancy increased from about 35 years to 68, according to a recent study published by The New England Journal of Medicine.

Since then, in one of the great policy reversals of modern times, China has dissolved its rural communes, privatized vast swaths of the economy and shifted public health resources away from rural areas and toward the cities. Public hospitals were urged to charge commercial rates for new drugs and most procedures, and today the salaries of health care workers are typically linked to the amount of income they generate for their hospitals.

More than half of urban residents, by comparison, enjoy some kind of coverage, which is supplied by their employers.

The recent emphasis on profit, meanwhile, has led doctors and other well-trained health care workers to abandon the countryside, with a result that peasants are left at the mercy of unqualified caregivers and outright charlatans who peddle expensive, improperly prescribed drugs and counterfeit medicines.

"From the liberation to the Cultural Revolution, conditions in the rural areas were fairly good," Dr. Wang Weizhong, a physician and member of the National People's Congress from Jilin Province in the northeast, said of the period from 1949 to the 1970's. "There were township clinics in every area, and there was no problem getting at least small illnesses treated everywhere."
***

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