Mon, 24 May 2004

Minimum Wages

Let's get this out of the way fast: any minimum wage law is wicked, and should be immediately abolished.

If that alone doesn't convince you, then let's get into details. A minimum wage law says, in effect, that anybody whose labor is not worth the minimum shall not be employed. Nobody would support a minimum wage law if it were written that way. The Department of Labor minimum wage page says "The FLSA requires that most employees in the United States be paid at least a minimum wage and overtime pay at time and one-half the regular rate of pay after 40 hours in a workweek."

Minimum wage laws are supported by four sets of people:

  1. Employers who do not want to have to compete with other employers who have lower labor costs.
  2. Employees who do not want to have to compete with other laborers willing to accept lower wages.
  3. Employees, typically represented by unions, who can claim that they are providing skilled labor, and should be paid more than a worker hired at the minimum wage.
  4. Busybodies, who support "a living wage".

The classic example of an employer supporting the minimum wage is the Northeast U.S. textile manufacturer. Textile mills were originally built in America in the Northeast, where water power was necessary and abundant. In time, water power became less important, and textiles could be manufactured anywhere. Labor was cheap in the South, and textile mills began to be built there, competing against Northeast mills.

The Northeast mill owners did not want to have to compete with the Southern mills. To raise everyone's costs to that of the Northeast, they supported a minimum wage law. Rather than allow the South to make textiles, and the Northeast workers move on to more profitable activities, the Northeast textile manufacturers lobbied for a minimum wage. In the end, they couldn't compete anyway, and most Northeast textile mills have closed.

Employees want to be paid as much as they can, of course. They will always have an incentive to have their own wages increased for the same amount of effort. The wise employee will realize that they are making a Faustian bargain. Their increased pay comes from another laborer's unemployment.

Unions are a legal monopoly on labor. A union will (at least in theory) take the members dues and spend them in such a manner as to raise the members wages enough higher to pay for the dues and then some. One of the ways they can do this is by supporting minimum wage laws. Typically, union members' wages are higher than minimum, sometimes by a factor of two or three. They do this so that they can argue "Well, the minimum wage is now fifty cents higher. Our members should get a raise of fifty cents."

Busybodies support minimum wages out of a sense of fairness. Some of them adhere to Marx's labor theory of value. This is the idea that labor produces all value, and so all profits should go to laborers. It's obviously balderdash, but it's convinced some people. There's also shouldness: nobody should have to work for such a low wage. This is obviously true, but the economist needs to add her own should: nobody should lose their job because of a minimum wage law. Equally obviously true.

Some busybodies total up the costs of living the way they want poor people to live, and call the wages necessary to pay thoses costs "a living wage". Without further thought, they support a minimum wage law to increase the wages to a "living wage." This is a "should" rather than an "is", just as in the previous paragraph. Just as they "should" get a living wage, neither "should" they endure the consequences of forcing employers to pay a living wage.

Follow the money

A minimum wage coerces an employer to pay more in wages than they are receiving in labor. Clearly, if the employer was receiving that value in labor, free market competition would force them to pay the wage for that labor. The money to pay wages in excess of labor received does not come from nowhere. It is a new cost imposed on a business. In a free market economy, in time, that cost will be reflected in the price of the good. Go read about prices, costs, and value if you think otherwise.

If nothing else changes, then, prices will rise to cover the increase to the minimum wage. The effect would be for everyone in the economy, including those formerly employed at the minimum wage, those currently employed at the minimum wage, and unemployed people, to pay for the increase. While the now-minimum-wage employees are better-off, the already-minimum-wage employees and unemployed people are worse off. They are paying more for things, but not getting any more themselves, even though they're equally or worse as well-off as the now-minimum-wage employees. This effect is ignored or dismissed by proponents of minimum wages.

You never have the case of nothing else changing, when you change the price of something. Because goods and services produced by minimum-wage employees are now more expensive, fewer of them will be purchased. Fewer minimum-wage employees will be needed. This effect is ignored or dismissed by proponents of minimum wages.

Labor is now more expensive. Whenever the cost of an input to production changes, the manager of that production will re-evaluate the production methods. It may be that a tool whose cost was formerly prohibitive is now cost-effective. The McDonalds near me now has a french-fry basket loader. They dump a big bag of fries into the hopper, and it loads a specific amount into a fry basket. No doubt the machine is cheaper to employ than the employee's time. This effect is ignored or dismissed by proponents of minimum wages.

An employer may reevaluate his processes, and find that he can do without the employee entirely. Perhaps a tool could be employed? Perhaps the production process may be made more efficient? Perhaps he can get other workers to work harder? This effect is ignored or dismissed by proponents of minimum wages.

No matter how you cut it, somebody worse-off than the employee ends up paying for the increased (above market) wages. That's a result of economics, which is value-neutral. We could use our values to decide that that's acceptable, fair, and moral. I don't think it is. Minimum wage laws should be abolished solely because of that negative effect.

Why didn't I notice this?

Right about now, somebody will say "there is no evidence that the minimum wage law creates unemployment." They are fortunately quite correct. The current minimum wage law doesn't lift wages much above the market level. That means that they also don't create much unemployment. You can point to the many people who have minimum wage jobs, if you want. That won't help, because some of those people will have minimum wage jobs anyway simply because the market price matches the minimum.

Another reason you won't notice the unemployment caused by the minimum wage is a very simple fact of human nature: it's hard to see things that don't exist. We are biased by millenia of evolution to notice things that exist, and disregard things that don't exist. It's very easy to see minimum wage jobs. They're advertized in the newspaper. People who are unemployed don't walk around with a sign saying "Unemployed because the minimum wage went up." Everybody who is alive today have ancestors who paid close attention to deadly things that exist, and less attention to things they only imagine.

Also, when a minimum wage law destroys a job, it does so stealthily. The loss of the job associated with an increase in the minimum wage might happen many months after the wage increase.

Some people want the minimum wage to be much higher than it is now. They would like to double the minimum wage. The Haitian lace industry was destroyed (and the livelihoods of thousands ruined) by application of a 1930's US minimum wage law which doubled the wages of workers there. We could try that experiment, but I wouldn't advise it. Any minimum wage law which significantly increased the minimum wage would also significantly increase unemployment. Thank your lucky stars that the existing minimum wage laws have so little effect.

Update, 09Dec2003: David writes:

There is another issue with minimum wages not mentioned in your entry, that of people assuming that banning something will make it go away.

In Australia, we have minimum wage laws and worker protection laws similar to those in western europe. What happens when you say that people can't legally work for less than a certain amount is that large numbers of people start working illegally for less than the minimum wage.

Before finishing my degree, I've worked as a delivery driver, dishwasher, cleaner, kitchenhand, counterhand, coffeemaker, night-filler, farm labourer and research assistant. For all but two of those jobs I worked cash in hand, for around one third to one half of the minimum wage. Thousands of others do the same.

Aside from being paid below the minimum wage, the real problem for workers in this sort of situation is that they are effectively excluded from protection under most worker protection, harassment and injury compensation laws. I've seen people injured while working who had to pay nearly a weeks wages for an ambulance to hospital.

Workers at the lower end of the economy are often the most vulnerable to exploitation, and these laws usually make things worse for them.

He is, of course, quite correct. Making jobs illegal doesn't eliminate the jobs, but it does take them completely out of the purview of the legal system.

Posted [23:52] [Filed in: economics] [permalink] [Google for the title] [digg this]


The most basic result of economics is the law of supply and demand. If the demand exceeds the supply, the price will go up. If the supply exceeds the demand, the price will fall. An indisputable observation is that people are getting paid more and more. This has been true for about the last four centuries. If you put these two things together, then you have to conclude that we don't have an overpopulation problem. We have, in fact, an underpopulation problem. It is not a new problem, and it is not likely to go away any time soon.

Posted [10:06] [Filed in: economics] [permalink] [Google for the title] [digg this]

The Unions are for the Unions

Just as in Lewis's The Last Battle, where "the dwarfs are for the dwarfs", so, too, "the unions are for the unions". Make no mistake about it, unions are not in any way public interest organizations. Oh, they'll tell you how good they are for society. There's even a bumper sticker that reads "Unions: the people who brought you the weekend." Don't believe it for a moment.

One of the functions of a union is to monopolize labor. To the extent that they actually succeed in doing so, unions are bad for society in the same way that any monopoly is bad for society. In case you haven't been following along on the play-by-play, it's because a monopoly can charge monopoly prices. A monopoly gets monopoly prices by restricting the amount of production so as to move the price point to a more profitable position. You can see, now, why unions are always threatening to strike, and why unions are hard to get into.

A union doesn't have to form a monopoly to be useful. They can still create benefits for their members by reducing transaction costs. They can also contract for insurance, which is substantially cheaper if you can supply the insurance company with a need-blind pool of customers. They can administer a pension program. They can supply social needs, like picnics and parties.

Unions claim to have coerced employers into reducing the work-week to 40 hours (in the US; 35 in France and Germany). This probably isn't the case. A union would have to have monopoly power over all labor, and that's never been the case. I don't remember the exact number, but even in the heyday of union power, they never had more than 50% of the work-force as members. What's more likely is that as people became more prosperous, they valued leisure over the incremental hour of work. In a free market, people generally get what they can afford. When blacks were freed following the US Civil War, they worked fewer hours per day. Not because blacks are lazy, but because they preferred leisure over the marginal value of those extra hours of work. Freed of the need to make a profit for their owner, they could afford the extra leisure.

Now I want to look at how unions form their monopoly over labor. It's not pretty. A monopoly is hard to maintain, particularly when it's over the efforts of individuals. Basically, some union members were assigned the task of beating the crap out of people who weren't union members, but did union work. Or burning their cars, or houses, or whatever. Most of the methods for monopolizing labor involve intimidation and/or actual violence.

Today, unions use the violence inherent in government to get their monopoly. In most states, a workplace is either unionized or it is not. If it is unionized, then you MUST be a member of the union to work there, and you MUST pay union dues. A simple majority vote of the workers is sufficient to unionize a workplace. The employer is very strictly limited in what she can say about unions.

It gets worse: unions, through the voting bloc of their membership, have extorted union workplace rules out of governments. As the membership of unions in corporations has decreased, it has increased in local governments. Yes, your taxes to go support unions whose purpose is to benefit a small class of workers, and the hell with everybody else. Outrageous? Enough to make you into an angry economist? It has me.

Update Sun May 18: the head of the CWA local, Mark Seymour, has a letter to the editor in today's paper, complaining about the DANC fiber. He uses some good reasons, but also a bad one (from an economist's perspective): because it might throw some CWA union members out of work. Sorry, Mark, I count you as a friend, but preserving your job is not a good reason to not improve society. It so happens that we're arguing the same point, but your reasons for doing so are not my reasons.

Posted [09:51] [Filed in: economics] [permalink] [Google for the title] [digg this]


Unemployment. Sounds like an undesirable attribute, like "undressed", or "unable", or "unstable", or ... "undesirable". It's true that anybody who wants to be employed surely doesn't want to have the label "unemployed". And yet ... there are nearly always jobs being advertised in the newspaper. So why is there persistent unemployment?

Another word for unemployment is leisure time. Sounds odd to put it that way, but yes, someone who is unemployed can be said to value leisure over all possible jobs. Leisure don't pay the mortgage, so why would anyone prefer leisure over employment?

The answer is simple enough: because they're waiting to find a better job. Someone who has taken an inferior job will be hindered in finding and getting a better job. Rather than get stuck in an inferior job, they refuse labor.

Let's say it right out: there will always be unemployment in a free market. The "natural" level of unemployment is affected by a number of things: the likelihood of someone finding a better job than any of their choices, their savings, whether they have other means of support (e.g. relatives), and their non-discretionary expenses. This level of unemployment is called "structural unemployment." The only way to eliminate this type of unemployment is to take away people's freedom to work at the job of their choice.

Another possibility is simply that labor is not desirable. Take as an example my wife, Heather. She has worked part-time as a bookkeeper for the local food coop, and could surely work full-time elsewhere as such. My income as a consultant makes it unnecessary for her to work. The incremental value of her salary is below the value of her leisure time to the family, so she doesn't work.

Now comes the truly interesting thing: how do you measure unemployment? The answer can only be that you can't. Someone who has the attribute "unemployed" has that attribute solely in their head. If they want a job and don't have one, they're unemployed. If they don't want a job and don't have one, they're at leisure. The only way to tell the difference, all the work of the Bureau of Labor Statistics aside, is to ask. Conduct an opinion poll.

Unemployment is in the mind of the beholder. Remember that the next time you hear authoritative-sounding figures about unemployment.

Posted [09:45] [Filed in: economics] [permalink] [Google for the title] [digg this]

Trade Deficits

People are, like, massively confused about "trade deficits", y'know? So often you hear this or that pundit pontificating about how horrible it is that we have a trade deficit with one country or another. We currently have a trade deficit with China.

It's more or less meaningless to compare the volume of goods sold by Chinamen to Americans against the volume of goods sold by Americans to Chinamen. They have very little to do with each other. Often you can make sense of trade issues by bringing them home. If it makes sense in your family, then it makes sense in international trade (if only because countries tend to act like two-year-olds!)

Let's say that you are a student at the University of Illinois at Chicago (UIC). You have a trade deficit with them. You buy more from them than you sell to them. Assuming that you can get the necessary tuition money, does anybody perceive this situation as a problem? The trade deficit could go on forever. Certainly there are some gradual students who would prefer that state of affairs.

Note the assumption, though. To make the previous paragraph true, I had to assume that you had a source of tuition funds. Where are the tuition funds going to come from? Let's say that you are very good at something, and you can do that thing well enough to earn enough money to pay the tuition, whilst still leaving you enough time for college classes. You could stay in college forever and have a permanent trade deficit with UIC.

In case that's not clear enough, consider that you have a permanent trade deficit with the supermarket that you buy your food from. They are forever selling you things, you are forever paying them, and yet you NEVER offer to sell them anything. Nobody has a problem with this. Nobody is decrying the trade deficits that customers everywhere have with stores. Of course not, because the concept is just wrong.

Another way to look at it: your employer has a trade deficit with you. You are constantly providing services for him; he is constantly paying you; and you rarely if ever buy anything that you produce for him.

Do you see why a "trade deficit with China" is a confusing idea? It has, at its core, an assumption that we are ultimately bartering with China -- that the sum total of goods we sell to them must be equal in value to the sum total of goods they sell to us. But we can sell things to Japan, who sells things to China, who sells things to us. That makes for three trade deficits and yet lots of happy people.

A trade deficit with everybody

Some people are less confused than others. They worry, instead, about having a trade deficit with everybody. Let's go back to our example. Let's say that we constantly shopped; had a trade deficit with every store we enter. To keep this relevent to international trade, let's say that we used our personal IOUs to pay (being a proxy for dollars). As long as we redeem our IOUs faithfully, stores will continue to accept them. If they pile up too excessively (trade deficit with the world), people are going to be reluctant to accept our IOUs. In the parlance of international trade, our IOUs (currency) will decrease in value. The dollar will fall against other currencies. Foreign products will be more expensive in dollars than they were. Our exports will be cheaper.

The goal is to import as much as you can, and export as little as you can. "Buy low, sell high" is not new financial advice. People will help us import by giving us some credit (by taking our money/IOUs), but only if we have a history of paying back the credit. In order to do this, we have to create products that other people want to buy. To the extent that we do this well, we won't have to export much (work hard) to get the imported goods we want.

There are other ways to get people to redeem our IOUs/dollars. We could sell ownership in our businesses. That has happened -- a LOT. Several reasons for this: 1) American businesses are very productive. We make very efficient use of capital. 2) Ownership is very secure in America. Businesses don't get expropriated like they do in other countries. 3) The dollar is widely accepted. Because of #1 and #2, Russians will accept dollars from Gambians. 4) The dollar has been fairly stable of late. We haven't been printing up new dollars since Reagan's presidency. That makes the dollar a reasonable currency to hold.

If people are willing to buy businesses in the USA, then just like a supermarket, we can have a trade deficit with the rest of the world forever. We need to stay productive, but it's not the bad thing that some pundits posit. We can keep creating new businesses to sell to foreigners until the cows come home.

Posted [09:41] [Filed in: economics] [permalink] [Google for the title] [digg this]