Bump.

Here’s a longish response to Blonde’s last comment on “A question about the living wage.”

Yet again I’m late. I understand your logic better than before, and I agree with the rationale. I guess then, for me, and I assume for at least some others, it comes down to a social-economic issue rather than a purely mathematical-economic issue.

These issues are not incompatible. The apparent incompatibility arises from the fact that not all forms of cost and benefit are as easily quantifiable as dollars are. Effective economic thinking takes non-financial factors into account, though still analyzing them mathematically. We prefer greater happiness to less happiness, don’t we?

I understand the productivity vs. wage argument, and that this is a significant factor for businesses and corporations in their bottom line. We are a capitalistic society, after all, and businesses typically exist solely for the purpose of gaining capital.

It’s more accurate to say they exist for the purpose of gaining profit. For most businesses, capital is a means to an end, the end being profit.

But I think there’s an issue when working 40 hours a week does not guarantee a person or family sufficient food, housing, or clothing, and I think this is hugely problematic. What is the incentive to work or educate yourself if there is not a strong likelihood of a good outcome for the individual?

Did you ever work a job that paid less than enough to support yourself independently, or to support a family? What was your incentive? There’s your answer.

According to a BLS report from March of 2014 (very first paragraph), there were approximately 3.3 million hourly workers in America who work for minimum wage or less. Ask them why they bother. Are they suckers? Presumably there were millions more who earned above the minimum wage, but less than a hypothetical living wage. What was their incentive? And I’d bet there are hundreds of thousands, if not more, of people who are looking for work, but can’t get it because the federal or local minimum wage is too high. Why are they looking for work at all?

Given that there are people working for less than a hypothetical living wage, and given that there are unemployed people looking for similar jobs, and given that both groups are clearly responding to some incentive, why make it harder to hire them?

By the way, it is imprecise to suggest that people seek “good” outcomes, because “good” is in the eye of the beholder and, more importantly, “good” outcomes aren’t always available. People seek the best available outcomes. Minimum wage laws limit access to some people’s best available outcomes.

And by the way by the way, is it reasonable to demand (I use that word because we’re talking about laws here) that a teenager should be able to earn enough in 40 working hours to feed, house, and clothe himself? Or a family? That’s an important question because according to that BLS report, that’s almost a quarter of the 3.3 million in question, and raising the minimum wage as high as you suggest puts those jobs in peril.

Workers are trading their time and energy for capital. Why bother to participate in this process if the tradeoff doesn’t leave you able to feed yourself? Why not go into a nefarious and illegal profession instead of wasting tuition payments and time on being a productive member of society if your productivity is deemed to be below the threshold of a livable wage?

Again, I ask, why make it harder to hire these people? I know you don’t want to make it harder to hire marginal workers. I know you don’t want to make it harder for them to earn some money, gain experience, build skills, and make contacts. But that’s exactly what minimum wage hikes do to those workers who need money, experience, skills, and contacts the most. That’s why I oppose minimum wage laws.

And in keeping with the free-markety tone of my answers, many (not all) of those nefarious and illegal professions wouldn’t be so nefarious if they weren’t illegal, and probably shouldn’t be illegal in the first place.

I will always be a product of a capitalist society, and I do not think that there is anything inherently wrong with the goal of a business or corporation being profits. But I also think that as such an ingrained part of our society, businesses and corporations also have a responsibility to pay their workers living wages, even if this means decreasing profit somewhat.

Nope. They have a responsibility to pay their workers what they contract to pay their workers. The end.

If you think that there’s a social responsibility to ensure a minimum standard of living for everyone, then a minimum living wage is an inefficient way for society to provide that standard to those in need. If society wants to provide that standard, it should do so through transfer (welfare) programs. Don’t get the wrong idea– I’m not a huge fan of that either, but it’s more direct, it’s more efficient, and it doesn’t force businesses to hang on to workers who cost them too much money.

After all, if people en masse are unable to afford the necessities of living based on their jobs, business will ultimately decline as a result of decreased purchasing power. It’s in the business or corporations best interest to take a loss now (through increased wages) in order to ensure stabilized or growing profits later (through increased purchasing power), no?

Not necessarily. That’s partly why I don’t want to mandate higher wages. And despite stereotypes, the business world is interested in long-term profitability.

I can imagine situations in which businesses make themselves better off by paying workers more money specifically so that those workers can buy the businesses’ products. But I can’t think of any off the top of my head… can you? They say that’s what Henry Ford did, but it was a myth– he raised wages in order to attract and keep the most productive workers.

Just out of curiosity, what do you think would happen to businesses if the feds enacted a minimum profit law? Or to landlords if there were a minimum rent law? Or to banks if there were a minimum interest rate law?

Anyhow, I just wanted to keep this conversation going because it’s an important and enjoyable topic. I’ll delve into the responsibilities of businesses later.

16 comments

  1. I really like what Donald J. Boudreaux recently said in a news article:

    “Basic economics teaches that forcing up the price of something makes people less willing to buy that something. This reasoning, for example, is behind the administration’s recent hike in tariffs on Korean steel. The president correctly understands that forcing up the price of Korean steel will cause Americans to buy less of it. Contrary to Obama’s suggestion, the same logic holds for labor. Forcing up labor’s price will cause employers to hire less of it”

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    1. It’s impossible to predict how MUCH unemployment would change. What we can say is: if minimum wage laws are currently such that they push wages higher than existing market wages, then the removal of said laws, ceteris paribus, will lead to a decrease in involuntary unemployment.

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      1. I know nobody can say with certainty exactly how low unemployment numbers would dip; I was asking for opinions from an economically-aware group.

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        1. Switzerland does not have a minimum wage – their unemployment peaked at about 3.2% during the economic crisis.

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        2. I know you have good intentions in asking your question, but I want to try to make a point. I believe there is a common misconception that economists can and should make quantitative predictions about the economy. The problem is, being economically aware cannot give any insight into the quantitative effects of a policy change.

          In this case, we cannot even know how distant the market wage is from the minimum wage. Sure, we could make a guess at the quantitative impacts, but it would and should carry little water. It may turn out that removing minimum wage has no change on unemployment whatsoever because it was already under the market wage.

          Let us move towards the bigger picture though. Consider Physics, a science that is quite accurate in making predictions. Physics is able to make accurate predictions thanks to constants. You can conduct repeated experiments and come away with the same precise outcome every time. If an object has a mass of 5kg and is traveling at 10m/s2, it will always produce a force of 50N. Economics on the other hand has no quantitative constants; all it has are constantly changing variables. Because individual’s values are constantly changing, you cannot predict their decisions with any certainty. Today you may value a pizza more than you value $2; tomorrow you may not. We cannot know for sure until we actually see you make the exchange. However, even when we observe the exchange, it cannot tell us how MUCH more you valued the pizza (would you have paid $2.20, $8.50?), and it definitely doesn’t give us any insight into Jane Doe’s preferences. To cloud the picture even more, you could very well hate the pizza but value building your relationship up with the pizza deliver girl more than the $12.50 you trade.

          TLDR: Economists shouldn’t be making quantitative predictions. Leave that guesswork to entrepreneurs and businessmen. End Rant.

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        3. @Noutheteo: Excellent points. Well put!

          @V&T: Unemployment would drop by exactly 1.9%. No more, no less.

          A semi-serious, wild-ish guess: in the short run, we’d see a very slight (less than one percentage point) decrease in the U3 unemployment rate. I believe (without looking up the stats right this second) that a large majority of the currently unemployed are in the market for jobs that pay more than the current minimum wage, and thus would not be as directly affected by its abolition.

          In the long-run, of course anything could happen. But I tend to think that if we could perform a multiverse simulation using the Baukman Generator in Switzerland, we’d see that all else held equal, the US without a minimum wage would outperform the US with a minimum wage. More people would be able to find suitable work that utilized and developed their skills; human capital grows; production rises faster; more Ataris and Walkman cassette players for all.

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  2. VDV,

    From your understanding, what was the reason behind the creation of the Minimum Wage via the Fair Labor Standards Act in 1938? Was there an official standpoint then? Is there one now? Knowing the supposed goal of the minimum wage, would make it easier to evaluate in terms of effectiveness.

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    1. It was passed to make labor standards more fair. It’s right there in the title. What’s wrong with you? Why do you hate fairness?

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      1. Snark aside, here’s my understanding:

        The idea was that the minimum wage and overtime rules were part of the same system. The minimum wage was obvious – put a floor on wages. The overtime rules were meant to encourage employers to hire more people, since there was a financial penalty for employees going over 40 hours.

        The overall intent was supposed to be getting more people hired at a livable wage. Its effectiveness is of course debatable.

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  3. The snark comment was great! I thought reading Roosevelt’s letter to congress or the DOL’s history of the FLSA might give me a more objective purpose, but “fairness” and “social progress” really seems to be the point. At the end of Roosevelt’s letter though, he does bring up the objective: “decrease unemployment in those groups in which unemployment today principally exists”

    So I believe the good Doctor is on to something with his remarks regarding the use of minimum wage alongside overtime pay. At least it gives me something to start evaluating.

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  4. Christ, I’m terrible at checking this regularly.

    I will respond in full sometime this week, because I would also love to keep this conversation going. Thank you for the fleshed out response.

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  5. “Did you ever work a job that paid less than enough to support yourself independently, or to support a family? What was your incentive? There’s your answer.”

    Not since prior to college. From university and onwards I’ve been financially independent. I couldn’t afford to take a job that didn’t pay enough to house or feed me. I was lucky enough that employers deemed my productivity at or (now, finally) above the living wage. A lot of people aren’t as lucky, young and old alike. That’s a factor as to why people turn to nefarious and illegal activities (whether they should be nefarious or illegal is another discussion), like drug dealing and manufacturing, prostitution, or theft. And why homelessness is an endemic.

    “And by the way, is it reasonable to demand … that a teenager should be able to earn enough in 40 working hours to feed, house, and clothe himself? Or a family? That’s an important question because according to that BLS report, that’s almost a quarter of the 3.3 million in question, and raising these minimum wage as high as you suggest puts those jobs in peril.”

    Firstly, some states have different minimum wages for those under certain ages. Washington State has a lower minimum wage for those working persons between the ages of 16-17, for example, and an even lower wage for those 14-15. Secondly, there do exist teenagers who either a) must support their families financially and/or b) have children of their own to support. Should they be barred from making enough money to support their families if they’ve elected to work 40 hours a week simply because they’re too young? Thirdly, and most importantly, these numbers mean that over 75 percent, or more than the 2.475 million in question, are not teenagers. It does not require an abnormal explanation to justify the demand for a living wage based on 40 hours of work for these people, even with the concession that your normal teenager coming from a normal home does not need to earn enough to live independently or to support a family.

    “Again, I ask, why make it harder to hire these people? … I know you don’t want to make it harder for them to earn some money, gain experience, build skills, and make contacts. But that’s exactly what these minimum wage hikes do to those workers who need money, experience, skills and contacts the most. That’s why I oppose minimum wage laws.”

    This argument I understand and respect wholeheartedly. No, of course no one wants to make hiring these people more difficult. Yes, there is evidence to suggest that minimum wage hikes do have this affect. And yes, that makes a valid argument against minimum wage hikes. But wouldn’t this affect be more or less temporary? Businesses would (and are) resist(ing), but at the end of the day they still have a product or service to produce. They still need laborers to produce them. They still have a product or service to sell. They still need consumers to buy them.What good are people if they cannot afford to purchase these products or services (vis-à-vis take a cut now, gain it back long term via increased purchasing power.)

    “If society wants to provide that standard, it should do so through transfer (welfare) programs… it’s more direct, it’s more efficient, and it doesn’t force businesses to hang on to workers who cost them too much money.”

    No, but it does force taxpayers to pay for the workers the businesses aren’t willing to pay enough to so that they can eat food and sleep under a roof. The same taxpayers who are already stretched thin enough to take care of themselves. Are the profits of business more valuable and less sacrificial? I am not against welfare systems as a whole. However, I think most welfare systems in the United States are unbelievably inefficient and broken. And I think that by putting the responsibility on government welfare to keep people fed and housed rather than businesses you’re creating a wretched cycle.

    “I can imagine situations in which businesses make themselves better off by paying workers more money specifically so that those workers can buy the businesses’ products. But I can’t think of any off the top of my head… can you?”

    As an example (though long-winded), I recently started a position at a corporate litigation law firm here in Seattle. During the interview process, I was asked for my wage expectations. I asked for approximately two percent higher than I’ve ever earned before. When I was offered the position, they offered me a wage eighteen percent higher than I’d requested. They threw in an unlimited public transit card (which, I can’t emphasize enough, is the best perk EVER when you live in a giant city with out a car), and offered to pay my premiums on all insurance, including medical, dental and life, all of which are exceptional plans. Despite being hourly I not only accrue 20 days PTO (which they pay out at the end of the year if unused), but I also receive paid holidays, which do not deduct from my PTO. Another bonus, I was only asked to sign a nondisclosure agreement as it related to our clients and casework, and not a noncompete agreement. They did not do this because they expect me to open a corporation and be able to afford their counsel. They did this, as expressed by the hiring partner, because they felt their employees were much more productive and much more loyal when they were happy. The position is incredibly demanding in terms of my time and my energy, but I feel dedicated and I work harder because I know how much I’m being paid to do it. I would not, and have not in the past, worked as hard when I’ve made wages that made buying groceries a harrowing and desperate ordeal. This arrangement means that the partners make more money from happier, healthier employees who bill higher hours, and people are, well, happier and healthier. It’s a win-win.

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  6. “Yes, there is evidence to suggest that minimum wage hikes do have this affect. And yes, that makes a valid argument against minimum wage hikes. But wouldn’t this affect be more or less temporary? Businesses would (and are) resist(ing), but at the end of the day they still have a product or service to produce. They still need laborers to produce them.” Unless workers get replaced by Machines because the machines cost less than the new minimum wage. E.g. Walk into McDonalds, walk up to a computer, and click your order. Cashiers not needed.

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  7. Noutheteo — everyone always assumes flipping burgers is the only minimum wage job that exists. There are plenty of office, driving, and human labor jobs that either pay minimum wage, or somewhere between minimum wage and the living wage.

    Not that I’m intentionally trying to undermine my own argument, but VDV, I thought you’d get a laugh out of this: http://weaselzippers.us/203014-seattle-socialist-party-calling-for-20-minimum-wage-says-they-cant-afford-to-pay-that-rate/

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    1. RE automation: It ain’t just burgers, and it isn’t limited to minimum wage jobs. It still amazes me how few people it takes to run a modern manufacturing facility whenever I get a plant tour. Google has been putting a lot of work into autonomous vehicles. Secretaries had to reinvent themselves as Administrative Assistants after a lot of the menial office functions can now be done better with computers.

      And no, my day job doesn’t involve automation projects.

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