I recently had an ongoing dialog with someone on the minimum wage. It started with the article below and our dialog follows. I'm not certain of its significance, but note how many questions I pose and he asks not a single questions from me.
A Minimum Wage Equals Minimum Jobs
The unseen costs of minimum wage laws
John Stossel | July 30, 2009
The media are never better at displaying their economic illiteracy than when they report on the minimum wage.
"Workers got a raise
on Friday when the
federal minimum wage was hiked 70 cents to $7.25 an hour," the
Christian Science Monitor reported last week. "They'll be shouting, "Olé!"
They assume that if politicians declare that workers should get a raise, they will actually get it. But the idea that government can increase wages by decree with only good consequences rests on a serious economic fallacy: that employers set wages arbitrarily. If wages are very low, it must be that employers are stingy.
Actually, employers are stingy; they want to pay workers as little as possible, just as workers want to be paid as much as possible. But in a market—even a government-hampered market like ours—employers' wishes are tempered by the reality of competition. So even if an employer wants to pay workers who produce, say, $4 worth of value an hour only $2 an hour, he won't be able to. Someone else will hire them away for $3 or more.
Some clueless politicians want to "help" workers further by requiring a "living" wage, a minimum well above the national minimum. After all, it's hard to live on $7.50 an hour.
Several years ago, the city council of Santa Monica, Calif., decided to make the town a workers' paradise by passing a union-backed law requiring everyone to be paid at least $12.25 an hour.
At the time, restaurant owner Jeff King complained to me that that law would "dry up the entry-level jobs for just the people they're trying to help."
He was right. It's why gas stations no longer hire teenagers to wash your windshield. Wage minimums tell employers: "Don't give a beginner a chance."
Such losses are hard to see, but they are widespread. One company closes because it can't afford to pay higher wages. Another decides to produce its product with fewer workers, and another never expands. Perhaps most importantly, there's the business that never opens. The people who were never hired don't complain—they wouldn't know whom to blame—they don't even know that they were harmed. They are the unseen victims.
The good news is that the people of Santa Monica woke up and overturned the "
living wage."
The bad news is that more than a hundred other living-wage ordinances
have passed.
In Washington, D.C., companies that get $100,000 or more in government contracts are required to pay employees at least $11.75 per hour. In Manchester, Conn., they must pay at least $14.
If minimum-wage advocates really believe wages are set arbitrarily, why do they favor only a $7.50 or $14 minimum? Why not $100?
At those levels, even a diehard interventionist knows that workers would be hurt. But the principle is the same at lower levels. If wages are a function of productivity, not whim, then it follows that if the minimum wage is set above workers' productivity, those workers—the intended beneficiaries of the legislation—will be harmed.
The Law of Unintended Consequences strikes again. Well, let me correct that. For some minimum-wage advocates, the bad consequences are not quite unintended. Consider the support for the minimum wage from large companies like Wal-Mart and organized labor. Why do they want the minimum raised? Economist Alex Tabarrok of George Mason University
answers, "[T]hese employers will benefit from an increase in the minimum wage because it will raise the costs of their rivals. This is why unions have typically been in favor of the minimum wage even when their own workers make much more than the minimum."
Where there's "humanitarian" government intervention, there are politically connected special interests reaping the benefits.
Politicians have tried to defy the market process with minimum-wage and living-wage laws for years. The consequences are never good for the people they claim to want to help. When will we learn what workers need is not meddling politicians but free and competitive markets?
Anyone who truly wants to help workers achieve higher living standards will work to remove all government barriers to peaceful, consensual economic activity.
John Stossel is co-anchor of ABC News' 20/20
and the author of Myth, Lies, and Downright Stupidity
. He has a new blog at http://blogs.abcnews.com/johnstossel.. 1. Scott to Rick:It's true that in economic theory, the market wage will be set at the marginal value of the product produced. However, the big assumptions behind that theory are (1) perfect competition and (2) perfect mobility of labor. In the real world, it is extremely rare for either of these assumptions to actually be true. If either assumption is not true, firms will capture an economic surplus by under-paying their workers (who are either unable to leave the firm because of (1) or unable to move to a more competitive market because of (2)). The idea behind a
minimum wage law is to prevent firms from taking advantage of market conditions that aren't theoretically perfect and under-paying their workers. So, while it's clear that setting the minimum wage
above the marginal value of product for these low-skilled positions would result in
deadweight loss, that doesn't mean that we need to allow firms to under pay their workers.
Reply: Rick to Scott:Scott! Thanks for the response. How exactly are you defining "under-paid"? Who determines what under-paid is? You? The government?
I will tell you my definition. My definition of the correct level of a wage is set by the what a worker is willing to sell his labor and what an employer is willing to pay for his labor. The worker and employer define these terms by mutual agreement.
Certainly those two independent people know what a proper wage would be better than you, me or the government? Don't you think?
2. Scott to RickNeither: the market sets wages, and that's the point. In a functioning, competitive market (in both labor supply and labor demand), there are many firms and many laborers. In this type of market, those forces set the wage level and then firms hire workers until they start costing more than their
marginal value produced.
However, in a non-functioning market, these forces are distorted. Imagine, for example, you live in a small, midwestern town where Wal-Mart is the only supplier of low-skill labor. In this scenario, the Wal-Mart has a monopoly on the labor supply market and is able to set their wage-level at whatever they want. This allows them to hire the same number of workers that they would in a functioning market, except more cheaply. In this way they capture an
economic surplus.
Of course, in a functioning market, workers would simply leave town and find higher-paying jobs. But, this town is in the middle of nowhere and everyone has a disabled, immobile grandmother that they have to take care of; they have to work at the Wal-Mart, no matter what the wage is.
It is in this kind of scenario that
minimum wage laws are helpful. Since the store would have hired the same number of workers in either way, employment remains the same, but those workers are now making a reasonable wage rather than working for a pittance.
Reply: Rick to Scott: Thanks again for the reply. I enjoy the dialog.
You did not tell me how you define under-payed. Now you have added "reasonable wage" undefined. Are you, Scott, prepared to determine what a reasonable wage is for every job in every region in the country? Does not a butcher know how much an assistant is worth more than the government? Does not the assistant know what wage he is willing to work for more than the government? Even in a small town?
The "market" is millions of individuals making millions of decisions millions of times a day for their own self interest. A minimum wage, set by a third party (government) is what distorts markets, even in small mid-west towns. You simply cannot distort the laws of economics without consequences, even in small towns.
What attracts business to areas like you describe is precisely the low cost of labor. If you set a minimum wage that distorts the true market value of labor in a region, what is there to attract businesses there in the first place? You have not done anyone in the region any favors by repelling business to the region, including disabled, immobile grandmothers.
The article addresses this directly:
Perhaps most importantly, there's the business that never opens. The people who were never hired don't complain—they wouldn't know whom to blame—they don't even know that they were harmed. They are the unseen victims.
Scott, I've been giving some thought about what your wrote and hope you don't mind if I continue to comment. One of the functions of capitalism and free markets is the self-correction mechanism (what
Adam Smith called the "
invisible hand"). You wrote:
Of course, in a functioning market, workers would simply leave town and find higher-paying jobs. But, this town is in the middle of nowhere and everyone...It appears your concern is about the relatively few workers who find themselves in positions where it is impossible for them to relocate. If so, then we have to agree to disagree about what is the best social policy for such individuals.
I don't know if your immobile grandmother example was serious or not, but certainly
everyone in a region is not unable to move.
If a market is "non-functioning" as you say, then people will react to those forces and bring balance to those economic forces that are distorted.
You are correct - If there is a labor surplus in an area (forcing wages down) then people will move to areas where there is less of a surplus because of higher wages. If there is a
labor shortage (forcing wages up), then people will move to that area because high wages helping alleviate the shortage and restoring balance to the supply and demand of labor. This is good for workers and employers.
One way to insure that Wal-Mart remains the only low wage employer in a region (or even force them to relocate) is to inflict higher labor costs than the market rate.
If you watch the two minute clip of
Milton Friedman, I'll buy you lunch at Wahoos:
http://www.youtube.com/watch?v=RWsx1X8PV_A"The record of history is crystal clear..."
Thanks again,
Rick
3. Scott to Rick You simply cannot distort the laws of economics without consequences
This is exactly my point. Monopolization of labor demand and immobility of labor supply are themselves distortions of a free and functioning market. The theory of supply and demand works well, but only under many assumptions, including perfect competition and perfect mobility of labor, neither of which are available in reality.
In my example, two of these distorting forces were present (albeit exaggerated to some degree): the
Wal-Mart had a monopoly on the low-skill labor-demand market, and the mobility of labor was hampered by the fact that the town was small and in the middle of nowhere. Both of these forces contribute to pushing wages below the normal
equilibrium level. This is not the same as shifting the curves and changing the equilibrium point. Instead, the Wal-Mart, being the only consumer of labor, can pay essentially whatever they want and still hire people because they are the only option available.
Now, obviously it is the rare town where Wal-Mart
is the only employer, but the point still remains: perfect competition in labor markets and perfect mobility of labor are
never achieved in reality. All workers are, to some degree, immobile. This is especially true of low-skilled workers who make minimum wage (teenagers who don't own cars, for instance). These are the types of workers that don't have hundreds of firms competing for their labor, pushing their wage-level up. Instead, they have the local grocery store or movie theater. Without a minimum wage, these firms would be able to pay a pittance and, due to the fact that they are the only suppliers of low-skilled labor, still be able to hire workers who need some kind of income in order to survive.
In this reading, the point of the minimum wage is not to find some nebulously-defined 'reasonable wage', but rather to keep wages at the rate they would be in a real, competitive market rather than one distorted heavily in favor of employers.
Reply; Rick to Scott:The theory of supply and demand works well, but only under many assumptions, including perfect competition and perfect mobility of labor, neither of which are available in reality..
Can you tell me what school of economics this is from? I'm not trying to be a dick, I really want to know.
If the theory of supply and demand works only under many assumptions, including assumptions that aren't available in reality, aren't you saying the
theory of supply and demand does not work?
The
laws of supply and demand never stop working. You cannot escape the laws of supply and demand. Even in your small town/one employer example, it is the laws of supply and demand that drive wages down. Even in
communist countries, barter societies, agrarian societies....The laws of economics are as real as the laws of physics. You tinker with them at your peril.
I really do want to understand and to be honest, change your mind.
From the original article:
The bad news is that more than a hundred other living-wage ordinances have passed. From the list at the link: Ventura, Philadelphia, San Francisco, Santa Barbara, Albany, Santa Monica, Milwaukee, Sacramento, Arlington, New York, Washington D.C, Cincinnati.....
How many of these cities fit your hypothetical "city in the middle of nowhere with one employer"? It appears that none of the 100+ cities passing these ordinances have micro-economies remotely as you describe. Even a town like
Lincoln, Nebraska has a dynamic economy with a wide variety of businesses competing for workers. Each has many employers and employment is easily mobile from one employer to another.
You write:
the point of the minimum wage is not to find some nebulously-defined 'reasonable wage', but rather to keep wages at the rate they would be in a real, competitive market rather than one distorted heavily in favor of employers.
Do you believe that is how
minimum wages are actually calculated? Are you aware of a place where they have actually calculated a minimum wage in that manner ? If the cities mentioned above are not competitive, what city is? If they are competitive, how do you think they are calculating a reasonable wage for everyone? If they are competitive, shouldn't their wages already be reasonable?
I hope I can get you to reconsider. More important, I hope we can agree that we both want what is best for low skilled workers and the country.. I believe you do. I hope you believe I do, as well.
Do I owe you a Wahoo's lunch?
4. Scott to Rick:I don't think I was explaining myself clearly.
"
Supply and demand" is a model of markets, not a law under which they operate. The model then is used to make predictions about what will happen in a market under certain conditions -- firms have this demand curve, workers have this supply curve, and therefore the market clears at such and such dollars per hour.
Behind this model, as with any model, there are many assumptions. Under the most simplistic supply and demand model, these assumptions include perfect mobility of labor (between both markets and occupations) and perfect competition. In a model with these assumptions, individual workers and individual firms have equal amounts of market power: none. The aggregate movement of workers between firms and markets is what sets the wage level, rather than the whims and preferences of any single firm or person.
That said, there is no market in the real world where these conditions actually exist. This means that any model based on them ceases to be an accurate model.
In the real world, low-skilled labor employers have far more market power than employees. Individual employees
have to work in order to buy groceries and feed their children, whereas any individual firm can almost always find
someone willing to work for essentially any wage. Moreover, factors like immobility of labor and fewer information gathering resources on the part of employees further shift the balance towards the firms. In a supply and demand model based on these (in my view) more accurate assumptions, firms eat up the producer surplus of the workers by using a steeper demand curve when deciding what level to set their wages at. This is a
market failure.
Fixing
market failures is, generally, what the
role of the government is in the economy. In the case of this specific failure, the solution is to introduce a minimum wage, set at the marginal value of product of low-skilled labor. This reduces the market power of hiring firms, forcing them to use a less steep demand curve which, in turn, increases both wages and employment, creating a more efficient market.
Reply: Rick to Scott:Thanks again. I wish I had said that I am seeking clarity over agreement.
I will ask only 3 more questions.
In the case of this specific failure, the solution is to introduce a minimum wage, set at the marginal value of product of low-skilled labor. This reduces the market power of hiring firms, forcing them to use a less steep demand curve which, in turn, increases both wages and employment, creating a more efficient market.
1. If you increase the price of low-skilled labor for a business will you reach the "marginal value of product of low-skilled labor" employing fewer or greater numbers of low-skilled workers?
2. Where did you learn this?
3. Having lunch with Matt at Wahoo's
on Monday. Can you join us? On me.
5. Scott to Rick:1. The theory goes that, in the failing/dysfunctional market, hiring firms will have a demand curve that is artificially steeper than in a normal market, which would mean that they would hire less workers. However, because it is a market tipped in the favor of employers, the workers will likewise have a flatter supply curve, meaning that there will be enough labor to actually run the business. However, implementing a minimum wage forces employers to flatten out their demand curve, which would imply both higher wages and higher employment.
2. Combination of Microeconomics and
Wikipedia.
Reply: Rick to Scott:
Scott Harris:
In the real world, low-skilled labor employers have far more market power than employees. Individual employees have to work in order to buy groceries and feed their children, whereas any individual firm can almost always find someone willing to work for essentially any wage. Moreover, factors like immobility of labor and fewer information gathering resources on the part of employees further shift the balance towards the firms. In a supply and demand model based on these (in my view) more accurate assumptions, firms eat up the producer surplus of the workers by using a steeper demand curve when deciding what level to set their wages at.Wikipedia: Marxism:2. The critique of capitalism. Capitalism is seen as a society in which a small minority of the population (the bourgeoisie or capitalists) dominates and exploits the vast majority (the working class or proletariat). In Marx's labor theory of value, workers typically have no choice but produce more value and more output than is necessary to pay the cost of their reproduction as people in society over time. They do this under conditions that they do not control, i.e., under the direction of the supervisors and threatened by unemployment or poverty rather than following democratic decision-making, and thus give the surplus-product to the owners, the bourgeoisie. The capitalists then use this surplus (also called surplus value) to accumulate more wealth and power for themselves.I hope you don't really believe that firms simply "set" wages and workers will work for "essentially any wage". Both of these concepts were discredited within Marx's lifetime, as more and more workers were lifted out of poverty. Regardless, it appears to me that you are saying that higher wages and higher employment can be achieved by government decree. If only it were that easy. I hope you understand my skepticism.
Scott Harris:
"...perfect competition in labor markets and perfect mobility of labor are never achieved in reality"Thus, by your definition markets are always failing or dysfunctional. It is my understanding that rather than seeing markets as ever failing, it would be more accurate to look at them as ever evolving to changing economic forces.
Sorry you can't make lunch. The deal on the
Milton Friedman video is still good. Ironically, I'm violating one of Milton Friedman's most famous quotes on economics...
"there's no free lunch". A very appropriate quote for the subject.
Appreciate the great and civil dialog.
