Tuesday, October 28, 2014

Obfuscation on the minimum wage

Here's a bit of free advice. When economists - or any social scientist - tells you that "studies" show something, remain skeptical. As a general rule, there are almost always contradictory studies and those that purport to "show" some real world cause and effect usually do not.

This op-ed by Mike Rosen, an MATC instructor with decidedly heterodox views of economics, The sayt that, the science is "in," minimum wages do no harm.

But that's just wrong. Some studies show no loss of employment. Others do. Indeed, a recent study by the John K. MacIver Institute for Public Policy shows that an increase in the minimum wage to $15/hr would cost 90,000 jobs.

This shouldn't surprise us. Basic theory tells us that the impact of a minimum wage increase will be complicated. In almost all places and at all times, some workers will make more money, some will lose their jobs, some will keep their jobs and work fewer hours, others will be made to work harder and some will never be hired. The return on labor saving technology will increase. There will be winners and losers and there is no guarantee that the poorest of low wage workers (not all low-wage workers are poor) will be ones who are helped.

Because things other than the minimum wage will be affecting unemployment and low-wage job growth, it is difficult to figure out - even after the fact - what has happened. To simply say, well, we raised the minimum wage and employment didn't decline may or may not mean that there are no fewer workers today than there would have been had the minimum wage not increased.

The idea that politicians - or even economists - can find the "sweet spot" where benefits exceed costs seems implausible. Indeed, where this inscrutable "sweet spot" might be will differ from place to place, time to time and industry to industry. Even if "we" decide that we know what the benefits and costs are and the benefits of any particular minimum wage increase exceeds the cost, "we" are not the ones that have to pay those costs. "We" are not the sixteen year old who doesn't get her first job at McDonald's or the grandmother who loses her job - or has her hours cut - at WalMart.

This is why increasing the minimum wage is an inefficient and counterproductive way to help low income workers. If we want to help the working poor, things like the earned income credit or food stamps seem less likely to have harmful effects.

Rosen says that minimum wage employers are big companies who are somehow immune from concerns about the marginal cost of labor exceeding its productivity. This, not to put too fine a point at it, is preposterous. fact, Rosen can't actually believe it. Even he would concede that there is an increase - say to $15 or $20 or $30/hr - at which the "productivity of labor" would be lead to declining - even catastrophically declining - rates of employment.

What he really means is that some more modest increase will not have a negative impact that he is not willing to accept. He seems to base this on an assumption that national chains, unike "Mom and Pop" stores, are either high margin businesses who can afford to lower their margins or have market power that would permit them to pass increases on to customers.

I doubt that. Wal-Mart, to take an example, is successful because it is a low margin business. It works because it has figured out how to provide acceptable (if lower quality) goods at astonishingly low prices. If you raise its costs, it will figure out other ways to lower them. This is because it has little margin to erode (as rich as they are, the Waltons are not going to keep open stores that lose money) and little room to raise prices - if Wal Mart charged Target prices, no one would go to Wal Mart. The latter's customer loyalty is rooted in little but price.

The idea that you can increase the cost of hiring low skilled workers without increasing the demand for them is like saying that you can raise the price of a good - even a popular one like an iPhone 6 - without dissuading some people from buying it. There are, I suppose, cases where this could be true - where, as economists say, demand is price inelastic - but it almost never is. I doubt that the demand for counter workers at Burger King or greeters at WalMart are among those cases.

For example, let's say that the minimum wage were increased to $ 10.10/hr. The cost of employing those who actually earn the current minimum - a relatively small number - would increase by almost 40%. Does anyone really believe that this would not decrease the demand for such workers? Is it even remotely likely that such an increase would not create powerful incentives for employers to find ways to employ fewer of them. It is those who actually earn minimum wage who are most likely to be hurt.

So why do our friends on the left work so hard to avoid the obvious. First, increasing the minimum wage is politically popular. People support it because it does not seem to cost them anything (unlike welfare benefits) and they imagine that the pinch will be felt by rich people who "can afford it." Second, those who lose when minimum wages arise are invisible. They tend to be people who did not get something - a job or increased hours - that they otherwise would have. No one knows who they are. Finally, for these reasons, its free "generosity." It is a chance to put on the cloth of righteous and appear magnanimous without having to pay for the privilege.

Don't believe me? Here's one more thing to ponder. Democrats applaud Mary Burke for announcing that she knows, as a business woman (someone who worked in the family business before apparently dropping out of the work force in 2007) that minimum wage hikes will not hurt business. Yet her family business - the same one from which she derived millions to spend on her campaign - shipped jobs to China - where it does not pay US minimum wages -  to lower labor costs.

I am not about to criticize Trek for that. But it lies ill in the mouth of Mary Burke to advocate for imposing costs on others that she and her family would not accept for themselves.


Anonymous said...

I sure hope you don't get minimum wage writing this crap.

Anonymous said...

"Indeed, a recent study shows that an increase in the minimum wage to $15/hr would cost 90,000 jobs"

I find it an interesting omission that you did not provide the source for this reference. It is of course from the John K. MacIver Institute for Public Policy, an organiztion you have represented through the Wisconsin Institute for Law & Liberty..

I can only assume that this omission is meant to provide a valuable teaching moment for us all in the use of obfuscation

Rick Esenberg said...

Anon 12:15

You are absolutely right although for the wrong reasons. I wrote too fast and should have given the good folks at MacIver full credit for their excellent work. My apologies to Brett and company.

Anon 6:35

Rest easy. I don't get paid anything for this.

Anonymous said...

thanks for clarifying, (you don't get paid)

maybe I should get paid for reading it.

or maybe I'm the fool.

also Maciver is made up of a bunch of political hacks.

just an FYI.

jimspice said...

Yes, Rick, writing too fast. I'm sure that's the reason. And NOT trying to obfuscate your common paycheck sources.

BTW, why no crosspost to JS this time?

JM said...

"I wrote too fast and should have given the good folks at MacIver full credit for their excellent work."

Then, following your own advice, I remain skeptical.