Random thoughts on minimum wages
Given that the minimum wage is going to be hiked soon, I was thinking about what other levers work in conjunction with it. Tyrone writes that the minimum wage is a good program that promotes self-help and therefore reduces the amount of transfer payments generally. I reply that almost every program could be justified on those grounds.
Rush Limbaugh is the annual generator of a couple of simplistic arguments:
1) If raising to $7.25 is good, why not raise it to $20? I'm not sure how clearcut the case is at $20, but let's tell Rush, heck, why not $100? At that point, we can clearly say, "because they aren't worth it. Nobody else is." Okay, now we have a negotiation: everyone can agree that even the laziest or least knowledgeable employee is worth between $0 and $100, so the answer is where exactly to draw the line. The economic theorist's answer is to set wages equal to marginal output. The problem there is that we really don't know what it is. Not knowing is not a good argument for either raising or standing pat.
2) Rush's other argument is that some jobs will be lost. That sounds good, and comes directly from Econ 101, but we generally learn by Econ 401 that a number of assumptions were made to arrive at many of Econ 101's lessons, assumptions that don't hold in the real world. Those include things like perfect knowledge and competition.
Still, people arguing for minimum wages must also acknowledge that many people are employed by small businesses (about 11% were employed by businesses with less than 10 employees in 2003 (15.9 million (census stats) of 146 million were employed that year (more) and 25% more in the range between 10 and 99 employees (referenced here)), and that some of those small businesses operate on razor thin margins (I think 2-3% profit is the norm for restaurants). Suddenly, you increase their major cost by 40%. That's a relative advantage to large employers, so don't let me hear you whine about Wal-mart taking jobs while simultaneously asking for yet another pro-large business policy.
But I think I spy another puzzle:
Given that only about 2-3% (the percentage varies) makes the minimum and about 2-3% more make wages between the current and proposed minimum wage (EPI says that 5% of the employed workforce makes less than $7.25/hr). That means that 97% of businesses pay more than the legally mandated minimum, proof enough that the overwhelming majority of businesses don't screw their employees, that they compete for employees and pay fair wages. Overnight, that number would drop from 97 to 95% (though most will obviously remain compliant by raising wages).
Of course, this says nothing about the number of people who want jobs but can't have them because their skills and the demand for them are such that they would earn less than minimum. They simply aren't allowed into the workforce, thus letting everyone in favor of a higher minimum wage pat themselves on the back for helping 5% of the workforce without having to acknowledge the anonymous unemployed that were harmed by the change. If you're first thought is not, "Oh, well, screw them," then perhaps we can agree that this is yet another argument against utilitarianism?
Some notes about the demographics of the minimum, i.e. wage vs. age: Do you think, as Rush does, that it's mostly teenagers making it? EPI says that 80% of those making minimum wage are adults (they define it as anyone over 20). I would be more interested in knowing how many of them are working their first job.
There is an argument in favor of the minimum wage that says that employers ought to hire people and then invest in training them (up-skilling) to make them worth (i.e., earn) that wage. However, there is no guarantee that they will ever get to that level of skill, or that they will stay on with the employer who trained them when they do (thus, the argument overlooks two market failures, which would be enough in some circles to doom it, but nobody scrutinizes policies for market failure-like mechanisms). Employers thus take a risk on inexperienced employees. How much will they risk? That depends on the potential cost. Given two employees, one who costs more to gamble and the other less, the employer will be more likely to gamble on the cheaper one. The same is true in time, too: today, recruits cost less to gamble on than they will after the minimum wage is increased.
The safety net here is that employers can let most of these workers go at will. That is, if the gamble is starting to look bad (remember: when they are first hired, they all look the same, but employers ought to be able to judge results within a few days or hours), they can fire them and try another one. If you remove that safety valve, employers will take even fewer chances, since this effectively increases the cost of the gamble (because you will be stuck with a bad employee until he quits).
Employers as law consumers are going to be willing to tolerate a mandate for either an increase in wages or an increase in job security, but not both. We have chosen wages over security.
Rush Limbaugh is the annual generator of a couple of simplistic arguments:
1) If raising to $7.25 is good, why not raise it to $20? I'm not sure how clearcut the case is at $20, but let's tell Rush, heck, why not $100? At that point, we can clearly say, "because they aren't worth it. Nobody else is." Okay, now we have a negotiation: everyone can agree that even the laziest or least knowledgeable employee is worth between $0 and $100, so the answer is where exactly to draw the line. The economic theorist's answer is to set wages equal to marginal output. The problem there is that we really don't know what it is. Not knowing is not a good argument for either raising or standing pat.
2) Rush's other argument is that some jobs will be lost. That sounds good, and comes directly from Econ 101, but we generally learn by Econ 401 that a number of assumptions were made to arrive at many of Econ 101's lessons, assumptions that don't hold in the real world. Those include things like perfect knowledge and competition.
Still, people arguing for minimum wages must also acknowledge that many people are employed by small businesses (about 11% were employed by businesses with less than 10 employees in 2003 (15.9 million (census stats) of 146 million were employed that year (more) and 25% more in the range between 10 and 99 employees (referenced here)), and that some of those small businesses operate on razor thin margins (I think 2-3% profit is the norm for restaurants). Suddenly, you increase their major cost by 40%. That's a relative advantage to large employers, so don't let me hear you whine about Wal-mart taking jobs while simultaneously asking for yet another pro-large business policy.
But I think I spy another puzzle:
Given that only about 2-3% (the percentage varies) makes the minimum and about 2-3% more make wages between the current and proposed minimum wage (EPI says that 5% of the employed workforce makes less than $7.25/hr). That means that 97% of businesses pay more than the legally mandated minimum, proof enough that the overwhelming majority of businesses don't screw their employees, that they compete for employees and pay fair wages. Overnight, that number would drop from 97 to 95% (though most will obviously remain compliant by raising wages).
Of course, this says nothing about the number of people who want jobs but can't have them because their skills and the demand for them are such that they would earn less than minimum. They simply aren't allowed into the workforce, thus letting everyone in favor of a higher minimum wage pat themselves on the back for helping 5% of the workforce without having to acknowledge the anonymous unemployed that were harmed by the change. If you're first thought is not, "Oh, well, screw them," then perhaps we can agree that this is yet another argument against utilitarianism?
Some notes about the demographics of the minimum, i.e. wage vs. age: Do you think, as Rush does, that it's mostly teenagers making it? EPI says that 80% of those making minimum wage are adults (they define it as anyone over 20). I would be more interested in knowing how many of them are working their first job.
There is an argument in favor of the minimum wage that says that employers ought to hire people and then invest in training them (up-skilling) to make them worth (i.e., earn) that wage. However, there is no guarantee that they will ever get to that level of skill, or that they will stay on with the employer who trained them when they do (thus, the argument overlooks two market failures, which would be enough in some circles to doom it, but nobody scrutinizes policies for market failure-like mechanisms). Employers thus take a risk on inexperienced employees. How much will they risk? That depends on the potential cost. Given two employees, one who costs more to gamble and the other less, the employer will be more likely to gamble on the cheaper one. The same is true in time, too: today, recruits cost less to gamble on than they will after the minimum wage is increased.
The safety net here is that employers can let most of these workers go at will. That is, if the gamble is starting to look bad (remember: when they are first hired, they all look the same, but employers ought to be able to judge results within a few days or hours), they can fire them and try another one. If you remove that safety valve, employers will take even fewer chances, since this effectively increases the cost of the gamble (because you will be stuck with a bad employee until he quits).
Employers as law consumers are going to be willing to tolerate a mandate for either an increase in wages or an increase in job security, but not both. We have chosen wages over security.
Labels: philosophy, regulation
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