Disspelling Minimum Wage Myth.

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http://www.mises.org/story/2447

Libertarians have been exasperated by the Bush Administration's supposedly laissez-faire policies that are anything but. Yet as enjoyable as it is to poke holes in the plans to "privatize" Social Security and so forth, there's nothing quite so fun as economic commentary from a good old-fashioned leftist. In this respect, Robert Reich's recent commentary on NPR didn't disappoint.

The former Labor Secretary under Clinton was discussing President Bush's offer to go along with the Democrats' plan for hiking the minimum wage $2.10 per hour, so long as it is accompanied by tax relief for small businesses. Reich would have none of this, claiming that the proposed hike in the minimum wage wouldn't burden small businesses at all. To defend this paradoxical claim, Reich offered three main reasons.

Reich's Reason #1: Businesses can pass the hike along to consumers.

In Reich's words:

"[V]irtually all small businesses that pay the minimum wage compete in the local service economy. They're retailers, contractors, providers of elder care and child care, local hospitals. They don't compete internationally or even nationally. Their competitors are in the same city or town and all of them will be paying the same minimum-wage increase. So it's likely that the increase will be passed on to consumers."

Here Reich overlooks the fact that ultimately all businesses are competing for the consumers' money. It is certainly true that a hike in labor expenses will be much more tolerable for a given operation, so long as all of its direct competitors are given a similar handicap.

If all the hardware retailers raise prices 5 cents per item, that won't hurt any individual store's revenue as much as would be the case if a single store unilaterally raised its prices. Even so, the industry's revenue could still fall drastically, especially when foreign imports face no such burden.

Remember that the consumer can always choose to forgo a product or service altogether, or to produce it outside of the market. If the government hiked the minimum wage to, say, $50 per hour, this would annihilate the child care industry, as plenty of working parents would elect to stay home with the kids.

Reich is also simplistically ignoring the differential impact of the minimum wage hike on various small businesses. Some of them might be able to weather the blow fairly easily, by substituting out of labor and into more automation, or (as Reich suggests) by raising prices. But other small businesses enjoy no such luxuries, and will have to make hard choices should the Democrats' plan go through.

Finally, I note with some irony that Reich conveniently fails to complete his train of thought. Let us suppose for the sake of argument that Reich is correct, and that Bush's call for small business tax relief is unnecessary, since the increase will be passed along to consumers. Fine, fair enough. Even so, shouldn't we then couple the minimum wage hike with tax relief for consumers? Perhaps Reich's call for such cuts was edited out for reasons of space…

Reich's Reason #2: The minimum wage increase wouldn't be a minimum wage increase.

You may suspect that I'm misrepresenting Reich's claim. See for yourself:

"Besides, it's not really an increase anyway. The current minimum wage was enacted 10 years ago, and inflation since then has eroded its value so much that the new proposed minimum is more like an inflation adjustment than a real increase. Most small businesses charge prices that have risen with inflation. So it's only fair that their employees' wages should rise with inflation, too."

Here Reich is quite openly conflating his notion of fairness with the entirely different condition of one number (namely, $7.25) being larger than another (namely, $5.15). He also adopts the typical political trick of using a moving baseline that biases the outcome in the direction he favors. This is how the government can "slash spending" and "gut programs" while federal outlays increase, or how "core inflation" isn't so bad after we've filtered out the volatile components (i.e., the ones that increase a lot). Using this approach, I could argue that Robert Reich multiplied by Ludwig von Mises is a decent economist.
Naturally, the free market economist would point out that small businesses are currently operating in an environment where the minimum wage is $5.15 an hour, and their prices reflect the real (inflation adjusted) magnitude of this regulation. The burden is indeed lower than it was ten years ago, but that doesn't mean businesses pocketed the annual gains with the steady creep of inflation. No, it meant that they could gradually hire more low skilled workers, and raise prices more slowly than otherwise would have been the case, because of the shrinking real minimum wage.

Now to "adjust" the regulation for inflation will simply force businesses to lay off some of those marginal workers and to restrict the quality of their products, not to mention hiking prices.

There is something even more fundamentally wrong with Reich's statement. He seems to think that there was something magical about the minimum wage of $5.15 an hour when it was set in 1997, and that returning to that level of hardship on small businesses is only appropriate.

But what is the basis for this judgment? Suppose Vladimir Putin answered conspiracy theorists by pointing out that the mysterious murders of a few journalists was no real hardship for the profession, because the percentage of such killings had declined drastically since Stalin's purges. Would Reich get behind that argument? If not, then so what if the Democrats' proposed hike merely adjusts the minimum wage for inflation? That's completely irrelevant to whether it would pose a hardship for small businesses (and also to whether it's "fair").

Reich's Reason #3: The minimum wage increase would actually help small businesses.

Before letting Reich speak in his own words, let us review lest the reader become lost. First, Reich argued that the minimum wage hike wouldn't hurt businesses because the damage would be passed on to another group. Then, Reich denied that the hike would be a hike. Now, in his third argument, Reich is claiming that the non-hike hike, the harm of which could be shunted to others, is actually not harmful. OK? Let us proceed:

"In fact, a minimum wage hike may actually help small businesses. Evidence from states that have already increased their own minimum wages suggests that a modest increase convinces more people to enter the labor market — people like retirees, spouses or teenagers who wouldn't bother working at a lower minimum wage. For all these reasons, small businesses won't be harmed by the proposed minimum wage increase and don't need a tax cut."

Isn't that interesting? I bet there were a few small business owners who almost caused an accident while listening to NPR, so excited were they, to learn that higher pay attracted more workers.

Seriously, Reich's argument here is so silly that he can't possibly believe it. If a particular small business would benefit from the larger pool of applicants responding to higher promised wages, its owner doesn't need encouragement from Robert Reich (or Nancy Pelosi) to offer such wages. After all, most employers currently pay more than the government mandated minimum.

What's truly ironic is that this alleged benefit is reduced when the government forces every business to raise wages. For example, a business that currently pays $7.25 an hour (and yes, there really are such employers right now) can be far choosier with its employees than will be the case when all businesses pay at least that rate. But no worries: I'm sure such businesses will make up for the reduction in productivity by cutting product quality and raising prices.

Conclusion

It's been fun to watch the Republicans get government off our backs and bring some conservatism to the federal budget. But if Robert Reich's NPR commentary is any indication, we can look forward to some great yuks under the Democratic Congress, too.

Also for further consideration, in 2005 Wal-Mart lobbied for a minimum wage hike. Many people suspect it was because Wal-Mart already payed most of its workers above the minimum wage, and that such an increase would make it harder for other retailers to compete with them.

Jam it back in, in the dark.

Robert Reich is and always has been a socialist buffoon, so it's not surprising that he would make an argument that contradicts itself.

There's nowhere I can't reach.

It follows that government interference in the market will only create incidents like Wal-Mart's love of regulation. Wasn't it clear from the beginning that the nature of lassiez-faire was to protect businesses, much like the seperation of church and state was to protect churches?

For a more technical question, would abolishing minimum wage at this stage lower consumer prices all over the country?

This thing is sticky, and I don't like it. I don't appreciate it.

Interesting question Hachfusa, I would say that abolishing the minimum wage would disparage even more people than it has already at the current rate in many states. It would also give Corporate America MUCH more power in terms of labour production and control...

I am a dolphin, do you want me on your body?

What we really need, is the establishment of a maximun wage. Doesn't the average CEO get paid something like 200 times the wage of the average worker in their own company? Instead of them sitting on it, the economy could be doing much better if a lot of that money was int he hands of the working class,w ho would immediately spend it.

I was speaking idiomatically.

Wage caps sort of eliminate the whole profit motive. Establishing a wage cap is like telling the most productive members of society that they should only produce so much. Why bother making more money just to have it seized and redistributed to jerks you don't know?

They don't really make wages in any case.

I also don't think the purpose of a "laissez-faire" economic policy is to "protect business." Protecting business is usually the realm of corporate welfare, breaking up strikes with police power, and military adventurism.

What kind of toxic man-thing is happening now?

Originally Posted by Bradylama

I also don't think the purpose of a "laissez-faire" economic policy is to "protect business." Protecting business is usually the realm of corporate welfare, breaking up strikes with police power, and military adventurism.

It is to protect business, just not in the sense that you mention. It protects a person's right to engage in business, free from the constraints of government. That's what 'lassiez-faire' economic policy is. Corporate welfare and military adventurism favors business above all else. That's like saying that the seperation of church and state is the same as installing a theocracy. Uh, no.

Christ, buddy, you love turning tables on everyone and being a dick, eh?

FELIPE NO

It sustains me.

What I'm going to get at, though, is that Laissez-faire doesn't protect anybody's interests in an exchange. In a free market, deals go both ways when it comes to relationships between sellers and buyers, and employers and labor. "Protecting Business" is the very essence of Keynesian economics, yet in protecting business, it also destroys competition and discourages the growth of new industries.

My argument is semantical, and while you can claim that not interfering in exchanges and observing property rights benefits "business," I would claim that it benefits everybody in the sense that all people are consumers, yet not all people engage in business.

Laissez-Faire is the observance of free exchange, not protection of business.

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Originally Posted by Bradylama

My argument is semantical, and while you can claim that not interfering in exchanges and observing property rights benefits "business," I would claim that it benefits everybody in the sense that all people are consumers, yet not all people engage in business.

Laissez-Faire is the observance of free exchange, not protection of business.

You're right in that it's semantical. I was arguing that, in advocating free exchage, business is protected. So are consumers, for that matter. I guess I have to watch my ass when I throw around words and phrases so that I'm not misunderstood.

But to expand before on my question, I'll skip the original question and go on to the larger issue: if the minumum wage is clearly not the way to go, why in god's name are there so many Keynesians running around? I'm not talking about the average citizen who just likes a pay increase, but the learned economists who love to shout out that our government should index our wage against the cost of living and whatnot. Is America, or rather, the entirety of western civilization so blind?

Past that, how would Americans go about fixing the problems instilled by a minimum wage?

Jam it back in, in the dark.

Well, the simplest way to fix the problem would be to get rid of minimum wage.

Why are there so many Keynesians? A number of reasons. Keynesian economics have been popular since the New Deal, and since Roosevelt used the practice of appointing economist to central planning authorities (not an insignificant irony of history) economists understood that Keynesian policies were how their bread was going to be buttered.

The reason free market economists and monetarists aren't high in positions of government is because free marketers want government to roll back, and monetarists want government to treat the money supply responsibly. States, however, have an inevitable tendency to expand their duties and spend more, because they have a monopoly of force. With that monopoly, the only way the state can expand its business is by making more laws and spending more, which justifies higher revenues through taxes or borrowing. "Rolling back government" doesn't appeal to government. As for the money supply, if the government was responsible with it, then it couldn't finance welfare programs, and military adventurism.

There's nowhere I can't reach.

I thought small business owners aren't affected by minimum wage. For example, I make $6 an hour (this is true). Missouri raised the minimum to $6.50 from $5.15. My boss still pays me $6 an hour because his business is too small to be forced into raising his rate of pay.

This thing is sticky, and I don't like it. I don't appreciate it.

Maybe there are exceptions for small businesses in the state of Missouri. Either that, or your boss is breaking the law, and lying to you.

I am a dolphin, do you want me on your body?

The federal rate will go up soon enough as it is.

I was speaking idiomatically.

Originally Posted by RABicle

Instead of them sitting on it, the economy could be doing much better if a lot of that money was int he hands of the working class,w ho would immediately spend it.

Well, I guess in the consumer perspective, having more more money to spend on the economy would increase the economy to a certain extent. I think the biggest problem right now is the lack of equilibrium between the average worker , and the large profits many businesses (especially national and international) make. Things have been so developed and interlaced that it is difficult to make changes without upsetting something. Which probably explains why the government tries to avoid touching anything... Its like a china shop where if you aren't careful, something could break.

What kind of toxic man-thing is happening now?

Originally Posted by Bradylama

Maybe there are exceptions for small businesses in the state of Missouri. Either that, or your boss is breaking the law, and lying to you.

Quote:

In addition to the exemption for federally covered employment, the law exempts, among others, employees of a retail or service business with gross annual sales or business done of less than $500,000.

Yep. Seems that there are special cases.

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Hm. How do you think the Federal Minimum would affect the laws in Missouri? Or do you think that Missouri will maintain its current laws and not give in to Federal extortion?

What, you don't want my bikini-clad body?

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It's been fun to watch the Republicans get government off our backs and bring some conservatism to the federal budget.

I, honestly, hope he was kidding with that closing comment.

I do, however, think that this country could benefit greatly from a different approach to combatting poverty than regulating business.

Also, I hate it when people throw around the term lassez-faire, especially when referring to the U.S. economic system. It's anything but.

Jam it back in, in the dark.

Originally Posted by Bradylama

Hm. How do you think the Federal Minimum would affect the laws in Missouri? Or do you think that Missouri will maintain its current laws and not give in to Federal extortion?

Love the, uh, language chosen.

Only laws that stay in effect are ones above the federal minimum wage. If Missouri's wage was higher than whatever Congress sets it at, they could keep that law about paying under the state minimum in certain instances, as long as they paid at or above Federal rates, as I understand it.

Lukage, does your boss really seem to do less than $500k in sales a year? I mean, that's only $2k a day.

There's nowhere I can't reach.

Wait, wait, which of these scenarios are we going for?



a) You get welfare or you work. Minimum wage drops to be barely over welfare payments, just enough to entice some people to work. (e.g. Welfare is $20/day. Min wage is $3/hour, enough that working is a little better than welfare, plus hey, you might get promoted or something)

b) Everyone below a certain income (poverty line) is paid welfare. This gives everyone a bare minimum with which to participate in most of American society, and gives their kids a chance to grow up somewhat healthy and schooled if the parents aren't crack-whores. But then, minimum wage can float, and people can work to keep a bit more money than welfare. Minimum wage drops until it is barely worth people's time to go to work. (e.g. Everyone gets at least $20/day, min wage is $1.5/hour on top of that to get people off the couch)

c) You cancel welfare & etc. and let minimum wage float. Pay becomes just enough to make work hours more productive than other activities you might try to stay alive (e.g. crime, begging). Or just barely enough to get the creame de le poor-masses crop, if your business happens to need that.

Originally Posted by Bradylama

Wage caps sort of eliminate the whole profit motive. Establishing a wage cap is like telling the most productive members of society that they should only produce so much. Why bother making more money just to have it seized and redistributed to jerks you don't know?

Rather than monster pay, couldn't you give business people preferential terms in buying their own shares, instead of exorbitant salaries? The push to do better would still exist. Similar deals could be worked out for sports athletes, doctors in private hospitals.

...wouldn't work for the largest of the private firms though. And the doctors thing might cause free riders. And financial workers would still be able to make money at insane rates.

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No, if executives and business owners want to give themselves obscene salaries and make their businesses less competitive, that's their perogative. It's essentially the same problem with discriminating based on race.

Consequently, I don't think people are putting enough faith in the power of labour to affect change independent of the government. If labor feels that capitalists are making obscene amounts of money relative to the wealth that's being created, then they're perfectly capable of negotiating the gap to an acceptable end for all parties.

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c) You cancel welfare & etc. and let minimum wage float. Pay becomes just enough to make work hours more productive than other activities you might try to stay alive (e.g. crime, begging). Or just barely enough to get the creame de le poor-masses crop, if your business happens to need that.

It's unlikely that anybody would work for a mere dollar-fifty an hour, yet people who subsist on the current minimum wage are already living below the poverty line as it is. The primary demographic of people who would work low-skill jobs should be teenagers and those living on fixed incomes, such as the elderly, in order to supplement lifestyles. Otherwise, if they subsist their lifestyle on a low-skill income, then they're fucked unless they can pool resources in a cohesive family unit (although, if they had cohesive families, then they would probably have a few college graduates at this point).

Also, if minimum wage floats, it essentially means that everybody can be employed, meaning that businesses have to compete for labor instead of drawing from a pool of unemployment. I mean, most low-skill workers already make above the minimum wage as it is, wouldn't wage rates naturally gravitate to be relative to the amount of wealth that a worker produces?

There's no reason any business shouldn't want the most productive workers possible, and if a business doesn't take steps to provide incentives for labour, then it has no real right to remain competitive.

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I also believe there's a more important problem concerning minimum wage; it's a feedback loop. As you raise the incentives for unskilled labor (past what their market rate would be), you inherently increase the value in being an unskilled laborer.

Say minimum wage is $5.00, and a (relatively) unskilled person can train and invest in enough education to get a $10.00 an hour job. He's more than willing to do this. But when you raise minimum wage to $8.00, it makes no sense to spend time and money trying to learn a job that will only pay marginally better than what you do now.

This inevitably causes a drop in the average wage (raising the minimum wage alone causes no difference in the average, because enough people will lose their jobs to cancel out any gains). It's a very small effect when you consider it individually, but over several hundred million people, it adds up. Now, we're in an economically worse situation than we were before. And what's the solution? Hike the minimum wage...

I was speaking idiomatically.

Originally Posted by RABicle

What we really need, is the establishment of a maximun wage. Doesn't the average CEO get paid something like 200 times the wage of the average worker in their own company? Instead of them sitting on it, the economy could be doing much better if a lot of that money was int he hands of the working class,w ho would immediately spend it.

The average CEO of a fortune 500 company only makes 300,000. What makes them incredibly rich are stock options, and the equity they get from thier respective companies. And the fact that they DON'T sit on thier money, or leave it in the bank to grow at 2% a year. And no it wouldn't be better in the hands of the working class because they'll buy say a new car, or a new tv. When they buy a new car it'll probrably be made in say Japan, or a new tv that was probrably made in China. An investor will sometimes invest in international stocks; but will probrably stick to domestic stocks and real estate. When you hear so and so is worth X billion of dollars; that's his net worth. The number of stocks he owns, the houses, he owns, land, his assets. Only a small portion of that is sitting in his bank accounts.

What kind of toxic man-thing is happening now?

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I also believe there's a more important problem concerning minimum wage; it's a feedback loop. As you raise the incentives for unskilled labor (past what their market rate would be), you inherently increase the value in being an unskilled laborer.

I'd believe this if minimum wage was tied to inflation.

FELIPE NO

It doesn't matter if the minimum wage is tied to a real wage or not. If you raise the minimum to a point where it begins to coincide with more skilled labor, there's no incentive for unskilled workers to get those kind of jobs.

If the minimum wage was 7.50 at the time I was job-hunting in 2005, I probably would've accepted the job as a mall janitor instead of working for a steel detailing firm in Baton Rouge where that was the starting rate. I ended up being their fucking janitor anyways, but at least I had more duties that actually involved work I needed to be trained for. (also avoided incontinent old people stool)

Even worse, if the minimum wage had been 7.50, chances would've been that the job opening wouldn't exist and they'd just pay their current janitor more for expanded duties. The only reason I got the job in detailing was because of old church connections, and if I hadn't been connected in an environment where I had absolutely no marketability, I would've been shit out of luck.

What, you don't want my bikini-clad body?

I'm not quite sure if I read it right, but is this guy saying that minimum wage hasn't actually gone up in 10 years? I understand what he's saying about it rising with inflation but it's not like they increase simultaneously. I'm having a really hard time finding the logic in this guy's argument.

Jam it back in, in the dark.