A Lesson in Economic Analysis from the Minimum Wage Debate

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A Lesson in Economic Analysis from the Minimum Wage DebateBy Ken Zahringer

Supporters of government interventions like minimum wages often pretend the economy is far less complex than it really is, and then conjure up a statistic as evidence of success. Careful analysis reveals another story, however.

Read more here:: Mises Blog

The Minimum Wage Debate- part 3

minimumwage

A recent opinion article published on CNN’s website, written by Gov. Peter Shumlin and Gov. Dan Malloy expresses their support for a minimum wage increase. While on the surface, an increase in the minimum wage (or a minimum wage at all) would be beneficial to those minimum wage earning employees (or the economy, in general), there are some unintended consequences that need to be considered. In the article, there were 3 reasons cites as to why these two gentlemen support a minimum wage increase. In this second part of the 3-part series, I will address the second point in their article. Note: You can read Part 1 at http://thelion.us/the-minmum-wage-debate-part-1. You can read Part 2 at http://thelion.us/the-minimum-wage-debate-part-2

Their third point is:

Three, it’s the right thing to do. No American working 40 hours or more a week deserves to live in poverty. Republican governors across the country have also stood in the way of progress. Some have pandered to stereotype, suggesting that a raise in the minimum wage should be rejected because it would only help young workers rather than acknowledging that 88% of workers who would be affected by moving the minimum wage to $10.10 an hour are over the age of 20, and more are over the age of 55 than are teenagers.

New Jersey Gov. Chris Christie and New Mexico Gov. Susana Martinez went so far as to veto minimum wage hikes in their states. Wisconsin Gov. Scott Walker mocked the idea, while Florida Gov. Rick Scott described how the proposal makes him “cringe.” Michigan Gov. Rick Snyder, Pennsylvania Gov. Tom Corbett and Maine Gov. Paul LePage all oppose this common-sense change. And of course there is billionaire Bruce Rauner, running in Illinois, who went so far as to suggest slashing minimum wage workers’ salaries by a dollar an hour in order to keep the state “competitive.” They just don’t get it. Just look at Bobby Jindal, former Republican Governors Association chair and current governor of Louisiana, who recently said — in a widely-criticized partisan outburst outside the White House — that raising the minimum wage was equivalent to “waving the white flag of surrender” on the economy. That’s patently absurd. But it’s what the tea party wants to hear. A fair minimum wage was once an issue upon which Republican and Democratic leaders could agree. But now, the Republican Congress and Republican governors have embraced partisanship and right-wing ideology rather than economic growth. And that’s why we are standing with President Obama today to make clear we won’t wait for Republicans to come around — we’re going to give hard-working Americans a raise and we are going to start today.

Since this is the last installment of my rebuttal to this article, I will comment briefly on their third and last point and then make my arguments in favor of low-wage workers, which coincidentally argues against a raised minimum wage, and frankly against any arbitrarily set minimum wage at all. The reason why I will briefly comment on this last point in the article is because there is no substantial argument for the economic viability of minimum wages (raised or otherwise). Their argument is strictly political and quite frankly, unproductive. Who really cares what political party thinks the other political party is doing, contrary to their view on any economic issue, when the debate should be about how these minimum wages will affect the market, businesses and ultimately the job seekers. When it comes to arguing the economic viability of the minimum wage, the productive discussion would leave politics aside and would instead discuss the effects of price, supply and demand on jobs. While ideally, no one working full time should live in poverty, the ideal is never reality. And there are some real, economic reasons why the minimum wage works contrary to the low-skilled, low-wage worker.




First, raising the minimum wage would introduce more people into the pool of potential employees that are in competition to the low-skilled, low wage jobs, increasing the competition for those jobs. When you arbitrarily raise the wages of a low-skilled job, you make that job (which generally requires little training) attractive to a new group of currently employed workers that were making a wage above the previous minimum wage, that would otherwise not be interested in those jobs. For example, let’s say a man is working in a very labor-intensive cabinet shop making $10.10 an hour and would like to work a job that is less strenuous, but paying the same. If you offered him that deal, he’d take 100 times out of 100. Then, let’s say there is a warehouse owner that needs to hire 5 new warehouse workers at minimum wage of $7.25 an hour. He is only offering minimum wage because the work he needs them to do happens to be not so labor intensive, and worth less than, let’s say the labor of the cabinet shop worker. Then, let’s say that the government sees that the minimum wage is not fair and arbitrarily raises the minimum wage to $10.10 an hour. What happens to the man working in the labor-intensive cabinet shop when he finds out about these 5 new jobs that are paying the same that he is making now, but offer a job that is not as strenuous? This is a simple example of how raising the minimum wage can make it harder to some to find jobs, as illustrated in this scenario.

Second, having a minimum wage in the first place works contrary to the benefit of low-skilled workers, exactly opposite of what politicians and other supporters purports that it does. They claim that a minimum wage protects workers from be unfairly under-paid by businesses, an idea that stems from a complete misunderstanding of how free markets work. In a minimum wage scenario, the set minimum wage is really a detriment to the low-skilled workers because it is essentially the government telling employers how much a worker’s labor is worth, instead of the allowing competing individuals in the market determine the worth of his labor. No matter how much value you put in your own labor, your labor is only as valuable as what an employer is willing to pay you for your labor. And that’s easy to understand. For example, if you have a piece of jewelry that has been in your family for decades, handed down from generations past, it probably holds a lot of value to you. And perhaps you find out that it is not actually made of the precious metal that you once thought, but that doesn’t affect the value in your eyes. However, if you go and try to sell it to someone, even though it holds a high value to you, there is a likelihood that you will not get the amount of money. Again, in the minimum wage scenario, the minimum wage is the arbitrary stated worth of your labor, no matter how efficient or how lazy of a worker you are. Let’s face it. The fact of the matter is that there are some people making minimum wage that aren’t worth minimum wage earning (in terms of quality of work). And there are other workers that making minimum wages that are worth more.

In a minimum wage scenario, the government has already pre-determined your worth, and has gone as far as putting a price tag on your labor. In a minimum wage scenario, there is little incentive for employers to increase a worker’s wage higher than minimum. You may get token raises as a good faith rewards, but you will not see large raises, because the employee knows if you refuse to accept the wages in an attempt to leverage for a higher wage, then he can replace you with someone willing to work at the minimum wage. Again, there is little incentive for the employer to pay more than the minimum wage.

Third, and maybe the most import point is that in a minimum wage scenario, workers lose the single most important factor that contributes to any worker’s ability to obtain higher wages. That factor is the leverage of the market. Market competition (both demand and supply) is one of the driving forces for higher wages. When skilled workers (let’s say accountants) who are generally not subject to any artificial, arbitrary wage constraints (like the minimum wage), look for jobs, there is a salary range that is dictated by the market (other employees in the same industry looking for jobs and employers looking for those same potential employees in that industry). If there is a small amount of available employees with the appropriate skills, compared to the number of jobs employers are seeking to hire, then the market rate for employment (wages) will increase. The opposite will be true as well. Low-skilled workers that have wages rules by minimum wage laws do not have the market as leverage to dictate their pay. Now, having the market as leverage doesn’t mean you will be able to earn whatever wage that you think is fair or what you feel your labor is worth, just as accountant cannot dictate the same. But, what is does is it allows the worker who deserves a higher wage (by hard work) the ability (leverage) to find employers willing to pay the wage he is worthy to earn.

Please comment!

Note: You can read the original article written by by Gov. Peter Shumlin and Gov. Dan Malloy at http://www.cnn.com/2014/03/05/opinion/shumlin-governors-minimum-wage/.

The Minimum Wage Debate- part 2

minimumwage

A recent opinion article published on CNN’s website, written by Gov. Peter Shumlin and Gov. Dan Malloy expresses their support for a minimum wage increase. While on the surface, an increase in the minimum wage (or a minimum wage at all) would be beneficial to those minimum wage earning employees (or the economy, in general), there are some unintended consequences that need to be considered. In the article, there were 3 reasons cited for these two gentlemen’s support of a minimum wage increase. In this second part of the 3-part series, I will address the second point in their article. Note: You can read Part 1 at http://thelion.us/the-minmum-wage-debate-part-1/

Their second point is:

Two, it’s good for women. Women account for roughly two-thirds of workers whose incomes would rise by increasing the minimum wage to $10.10 an hour. These women currently work 40 hours a week to make just $14,500 a year. These women are our daughters, sisters and mothers who are often the only breadwinners in their families. Our country is in a stronger position when women are in a stronger economic position. We need to make that a reality.

First, this is a political statement and not a statement on how a minimum wage increase is economically viable or makes economic sense. It seems to me that no matter if the wage earner is a woman or man, black or white, born in the US or an immigrant, the same economic dynamics apply. Why is it a fact (as they imply) that “our country is in a stronger position when women are in a stronger economic position“. Does it matter who is entrenched in this low wage dilemma? No, it doesn’t. This seems to be a classic example of identity politics, where arguments are made concerning specific social groups in order to advance a political position. And I understand that this is probably the very intent of the writers of this article (two politicians) and therefore of great expectation. But, there is no value in solving the problem of the low wage dilemma by making this point. Higher wages are good for men, college students, and every other political identity group, not just for women.

Second, the statement that “these women are our daughters, sisters and mothers who are often the only breadwinners in their families” again has nothing to do with the economic viability of an arbitrary raised minimum wage. This is more of a commentary statement of our current society. The assumption is that these women are working because they have to, forced by family dynamics not only to earn an income to supplement another income, but also to act as the breadwinners. And as breadwinners, they are working a minimum wage job. If that is not a sad commentary of our society, I don’t know what is. But, what is the connection between this heart-stringed statement and the economic impact of a raised minimum wage?




Third, since there is no economic reasoning in this second point of the article, I will offer one. The thought that keeps coming to my mind is why are people (women in this case) working minimum wage jobs, while having to act as the breadwinner of the family. I can understand that there will be some people in this dilemma, but the article claims that “women account for roughly two-thirds of workers (that are working minimum wage jobs)” and that they “are often the only breadwinners in their families“. The implication is that there are many women in this position. Why are so many women relying on minimum wage jobs as the sole source of income to raise a family? Minimum wage jobs are not intended to be jobs expected to support a family. Why should business owners be burdened with the social responsibility of making bad up for past and current decisions of their employees. Businesses that employee workers at minimum wage do so for a reason. First, they are in an industry where the work is generally un-skilled labor and the workforce is easily expendable or replaceable. In other words, if their fry cook, making $7.25 an hour quits today, the business owner can reasonably expect to hire another person replace him the next day (or in a short period of time) for $7.25 an hour, without expending many resources. Second (as mentioned in part 1), businesses generally do not have stash of cash sitting around waiting to be spent. The capacity to absorb an arbitrarily raised payroll expense is something that has to be carefully considered by the business owner, and often times the requires measures that produce unintended consequences.

In the third and final rebuttal of the article written by Gov. Peter Shumlin and Gov. Dan Malloy, I will talk about the minimum wage I general, and how the minimum wage actually works contrary to unskilled laborers, in ways that you probably have never considered.

Please comment!

Note: You can read the original article written by by Gov. Peter Shumlin and Gov. Dan Malloy at http://www.cnn.com/2014/03/05/opinion/shumlin-governors-minimum-wage/.

The Minimum Wage Debate- part 1

minimumwage

A recent opinion article published on CNN’s website, written by Gov. Peter Shumlin and Gov. Dan Malloy, expresses their support for a minimum wage increase. While the argument may be made that an increase in the minimum wage would be beneficial to those minimum wage earning employees (or the economy, in general), there are some unintended consequences that need to be considered. In the article, there were 3 reasons cites as to why these two gentlemen support a minimum wage increase. In this 3-part series, I will address each point that they make in their article.

Their first point is:

One, it (raising the minimum wage) makes good economic sense. The federal minimum wage is currently $7.25 an hour. Adjusted for inflation, that’s lower than it was in 1968. Raising the minimum wage to $10.10 an hour nationally will provide 28 million Americans with more money to spend and to invest, increasing economic activity and growth. In fact, recent studies conclude that raising the minimum wage makes workers more productive and therefore helps businesses retain profitability — a conclusion affirmed by Gap Inc.’s recent decision to raise the minimum wage for its employees to $10.10 an hour.

First, what do they mean by “good economic sense”? If the measure of good economic sense is how one group of people is affected, to the exclusion of all other groups, then one might have to agree with their assessment. Unfortunately, that is hardly ever the case. What is good for one group may not be good for another. In the full sense of the economy, raising the minimum wage is not “good economic sense” everyone involved.

Second, raising the minimum wage means that employers will be required to raise their overall payroll expense, which must come from some source that the business owner must identify. Most businesses do not have a stash of money that is un-used and ready for disposal. Most businesses, especially those who operate with low wage employees, have limited capital at their disposal. The capacity to pay this arbitrary increase in payroll expense must come from sources like increased prices, savings, or even from the reduction of other expenses, like payroll itself. For example, in order to increase the wages of 10 minimum wage employees, it may mean having to let one of those employees go to make up for the increased expense. Furthermore, an increase in the minimum wage may even be the difference in hiring an additional worker. A prudent business owner will make the necessary adjustments to reduce the impact of the arbitrary increase in expense on the bottom line. The same principle can be found in your own personal life. You bring home a certain amount of income each month. You also spend a certain amount in expenses each month. From month to month, you know how much you can spend as you compare it with the amount of income that you bring in. Let’s say as part of your monthly expenses, you find out that your electricity bill will double, because the electric company arbitrarily raises the cost of KwHs. This obviously makes the difference between your income and expenses smaller. And this causes you to react to the arbitrary change. You can either reduce your other expenses, spending less on entertainment, reducing your grocery spending or any other expenses that you can control. Or you can increase your income, finding another job or even a second job to make up for the increase in the electricity bill. Obviously, you can control your cost much faster and easier than you can find an extra job. You can start to see the pickle business owners are in when they are forced to arbitrarily increase their expenses.




Third, they make the statement that the increase in the minimum wage will increase the employees ability to spend and invest, increasing economic activity and growth. Again, this is to exclude all of the other players in the economy that are affected negatively by this arbitrary increase wage expense to businesses. Certainly, these employees will have more money at their disposal, but there are others that will never have the opportunity to earn a wage, either by being let go by the business (to make up for the increase in payroll expense) or by never being hired in the first place. Additionally, the lost earnings of the business due to the arbitrary increase in payroll expense limits businesses ability to expand and grow their businesses, removing the potential opportunities for other parties connected to these businesses (employees, customers, suppliers, etc.) to benefit. Unfortunately, these politicians never consider the effect on the other side of the coin. Politicians generally know that their voters only consider what the current workers are benefiting from with more income, but they never consider the impact on people who are never hired in the first place, jobs that never have the opportunity to be seen as lost, because they are prevented to be created. As with most politically charged economic issues, these one-sided considerations cause politicians to make bad economic decisions that affect our economy adversely. This idea is very prevalent in and outside of politics, and even by some well-intentioned people. I have written about this very principle in my article Invisible Unemployment.

So, the unintended consequences that are involved in the raising of minimum wages are now easier to see: lost jobs and stunted economic growth. This may sound like a pro-business, anti-worker article when in fact, it is actually both pro-business and pro-worker at the same time. In the amazingly efficient realm of capitalism (when it is allowed to be efficient), jobs are a “by-product” of business. Providing jobs is not the sole reason for businesses to operate. Businesses operate to supply the demand needs of a certain segment of consumers. And while I say that jobs are a by-product of business, that is not to say that they are unnecessary or even a waste (and some would define by-product). They are a necessary function of business, but just not the primary reason for businesses to exist. When politicians make economic decisions with the mindset that providing jobs is the primary function of business (while, they may never actually say it, but act in such a way to make you believe it), or that they arbitrarily

Please comment!

Note: You can read the original article written by by Gov. Peter Shumlin and Gov. Dan Malloy at http://www.cnn.com/2014/03/05/opinion/shumlin-governors-minimum-wage/.