Thursday, June 22, 2006

Does the Minimum Wage Really Cost Folks Jobs?

Don Boudreaux http://cafehayek.typepad.com/hayek/2006/06/testing_the_log.html likens arguments about the minimum wage to arguments about used car sales:

“The market prices of most used-cars are too low for sellers of those cars to support their families. This fact is especially true for poor people, who, when they sell their old cars, almost always have only old, high-mileage, often dilapidated used-cars to sell. These people aren't selling two-year-old Lexuses or BMWs. They're selling 15-year-old Chevys and 20-year-old Hondas. So let's enact legislation mandating that no used-car can sell for less than, say, $25,000. That way, anyone who sells a used-car is assured that he or she will earn at least enough money to support a family for a year.

I doubt that many people would argue that government should legislate a minumum price for used-cars. But why not? If merely identifying a problem with a low price (such as "At the current minimum wage, even full-time workers can't support a family of four") is sufficient to justify legislative action to raise that price, why won't such action work for used-cars as well as it will work for labor hours?”

He’s right; nobody would argue for minimum used car prices (except maybe used car dealers). That’s because it would be disingenuous to do so and because the analogy is so inapt. I might buy his argument that increases in the minimum wage would result in a loss of jobs for unskilled workers, but the used car analogy blows his credibility. I begin to doubt that his economics are sound when he displays such detachment from reality. Show me that increases in the minimum wage over the years have, in fact, caused higher unemployment among the unskilled. That should be simple enough since the data is available for several decades, but don’t insult my intelligence with the lame “wages are the same as used car sales” argument.

Wages are different. They are recognized in society as different from other types of income. The due process requirements for attaching wages are more stringent than for other types of property or income streams, and every state recognizes exemptions from garnishment for some minimum level of wage income. The fact is, that for most folks, wages are the sole attainable socially approved means of subsistence. Most folks find themselves structurally forced into employment for wages or salary.

If you are an average or below average schmendrick with a high school diploma or less, not cut out for college, you have almost no options other than wage earning as a subsistence strategy. You can’t forage off the wilderness, since the land is all claimed, and you don’t know how to forage. You can’t engage in subsistence farming since you don’t have land or money to buy land. Besides, you don’t know how to farm, so even sharecropping is out of reach for you. The road to entrepreneurship is full of obstacles and barriers to entry such as licensing requirements and regulations and a lack of capital or know how. If you enter the underground economy, society will lock you up or kill you. You can forage in the urban environment, I suppose, and be a homeless dumpster diver, but society will tolerate only so many of these foragers, and the carrying capacity of the environment is limited and doubtless all used up by other foragers.

Moreover, I am not convinced that there really is a free market in labor. Does not the Federal Reserve conspire to maintain a certain level of unemployment so as to suppress wages as an anti-inflationary measure? Isn’t immigration policy, at least in part, designed to keep wages from increasing by maintaining an increased supply of labor? Moreover, it isn’t at all easy for workers to relocate for employment opportunities. If you are a low wage earner, it might very well be insane for you to move away from your family and social support system in search of a few extra cents an hour. And God forbid you should be marked as a “job hopper”.

Maybe the minimum wage is a bad thing, but make the argument from compassion, not from ignorance of the actual conditions and circumstances of wage earning. Certainly, try not to appear that you don’t care about working men and women. Try to sound more like Commander Data after he installed his emotion chip.

I had a business client some years ago that wanted me to draft a letter to the government stating that an increase in the minimum wage would force them to cut jobs. When I asked what specific jobs would be cut, management admitted that there were not any superfluous workers and that nobody would really be laid off if the minimum were increased. Efficient companies don’t have a lot of expendable staff, especially at the low wage end of things. They will cut administrative or management costs before they will get rid of the folks who do the actual work.

Can some libertarian leaning economist craft an argument against the minimum wage that takes reality into account? Until they do, opponents of the minimum wage will always come off like corporate shills.

6 comments:

David Reynolds said...

I like the essay by B.K. Marcus, The 3 E's of the Minimum Wage. But, of course, he uses the economic argument that a higher minimum wage will mean employers will simply reduce the amount of minimum wage jobs available accordingly -- an idea you dismiss. As Marcus points out, the emotional argument is the toughest to overcome, and you seek an emotional argument against the minimum wage.

I do not have any statistical data to back up my stance on this, but I do have personal experience. Both of my parents worked all their lives in a non-union factory that manufactures clothing (the type of clothing has changed occasionally over the years). The factory employed close to 300 people at one time, and most of those people were paid a base salary of minimum wage with the ability to earn extra based on production.

When the minimum wage was increased, people there were immediately laid off. The factory usually employed surplus people that did not meet the standards required to make extra money through production. This is how people would be "trained" to do the job. They were hired at minimum wage and allowed to work on the production line under close supervision (more or less with a verbal whip at their backs) until they could reach expected output. These people relied exclusively on their minimum wage hourly pay. When the government mandated an increase in the minimum wage, the guy that owned the factory would simply look at the production numbers and order the elimination of the lowest producers in order to keep the base payroll static. The owner would then order the floor supervisors to push the remaining employees to increase their production to make up for whatever was lost through the layoffs.

It is difficult to say whether those jobs were permanently lost or not, because the output of the factory always fluctuated with the demands of the market. If orders picked up, some of those people previously laid off might be hired again. (It always seemed to me there was a constant revolving door of the same people coming and going there.) If demand dropped, people would be laid off.

The key point to me is what Marcus calls the ethical problem of state coercion that the minimum wage law introduces. Even if the labor market is not free, I cannot warm up to the notion of the state forcing people to do something.

Vache Folle said...

Thanks, David, for the thoughtful comment. I don't dismiss the idea that minimum wage increases will cost jobs; I'd just like to see the point made while acknowledging the unique aspects of the labor market. An emotional argument, or at least one that takes emotional aspects into account, would help win the hearts and minds of working class people. The bald economic argument won't fly. It doesn't even fly with me entirely.

I have scruples about coercing employers to pay more, but I wouldn't abolish the minimum wage until I had eliminated government action that suppresses wages.

iceberg said...

As Kevin Carson said, and what I assume you will agree to be true:

"When the theory predicts that in a free market wages will be determined by the productivity of labor, and we see that they aren't, what's the obvious conclusion? That we're dealing with power relations, not market relations."

The main reason to then oppose minimum wage laws is because they are ineffective interventions which do more harm then good.

We could do a ton better for the working class to eliminate the laws and regulations that distort the labor market, instead of going down the harmful and destructive path of ineffectual MW laws.

jomama said...

Last I heard, the corp was not the major employer in the uS. It was the independent small businessman and I'm sure they respond differently to min. wage increases than USA, Inc.

I met a Dutch woman recently who was all for min. wage. I then queried her about her own business she left in Holland and asked what happened when the min. wage was increased. She said it eventually shut down due to higher costs yet she was unwilling to give up the idea of valuing these decrees from The Godhead. Obviously the min. wage was a contributor, whether or not the main cause.

Earthmonkey is a strange animal.

Anton said...

The minimum wage was first instituted to protect White unions from competition by Black migrant labor. It remains to help ensure a supply of new meat for prisons.

Anton said...

Isn’t immigration policy, at least in part, designed to keep wages from increasing by maintaining an increased supply of labor?

To pose such a question is to imply that there would be no migration in a state of nature, which is clearly silly.