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About Expat Teacher
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A teacher that spent 5 years in Europe, but I've been back in DC for the last few months. I lean left and generally support Democrats, but I like a good conversation. I've been known to change my mind.
Minimum Wage is a bumblebee
In Mark 14:7, Jesus said, "The poor you will always have with you, and you can help them any time you want. But you will not always have me."
From a common sense point of view, it seems that a minimum wage is an excellent way to "help them any time you want." Yet the debate at GoodWillHinton has been about whether raising the minimum wage really does help the poor.
And IN THEORY it doesn't. It drives up the cost of labor and makes businesses lay people off.
Yet, minimum wage is like a bumblebee. There is theory and there is reality. In theory, bumblebees shouldn't be able to fly. But, of course, we know they do. Minimum wage should make the poor worse off, but it doesn't. Let me offer some reality-based evidence that a moderate increase in minimum wage is good for the poor and doesn't create additional unemployment.
First, we can look at a smaller market than America. "The United Kingdom has been raising the adult minimum wage in England since 1999, and the series of hikes is due to conclude in October 2006 at an adult mimimum wage of £5.35. That's a 49% nominal increase since 1999, about 2/3 of which survives inflation over the period. In the U.K., since 2002, the increase in the minimum wage has been ten percentage points higher than the comparable increase in average hourly earnings.
The British Low Pay Commission discussed recent minimum wage and macro experience in England in their 2006 report. In a nutshell -- as can be seen in the snazzy graph on page 17 (PDF) -- the gross employment rate has risen from 71% to 75% of the British population since 1992 and hasn't changed since 1999. Over the same period, the official adult unemployment rate has fallen from 10% to 5%, the last 1% of the fall coming during the period of minimum wage hikes. Neither is there any evidence that employment in low-paying service sectors has fallen in response to the higher minimum wages -- every sector has seen an increase in the number of jobs available"
But, I hear you say, the United Kingdom is fundamentally different than America. True. Shall we take another example from our side of the pond? Oregon raised their minimum wage and unemployment went down. The Wall Street Journal says, "Four years later, though it is impossible to say what would have happened had the minimum not been raised, Oregon's experience suggests the most strident doomsayers were wrong. Private, nonfarm payrolls are up 8% over the past four years, nearly twice the national increase. Wages are up, too. Job growth is strong in industries employing many minimum-wage workers, such as restaurants and hotels. Oregon's estimated 5.4% unemployment rate for 2006, though higher than the national average, is down from 7.6% in 2002, when the state was emerging from a recession."
Using traditional classical economic theory, jobs should go where labor costs are lower. That means, the states with high minimum wages should have high unemployment, correct? Using CNN's list of state employment data (Sept 2006) and Wikipedia's list of state minimum wages, what do we find?
Listed below are the 5 lowest and highest unemployment rates.
| State | Unemployment % | Minimum Wage |
| 1-Hawaii | 2.5% | $6.75 |
| 2-Utah | 2.8% | $5.15 |
| 3-Nebraska | 3.1% | $5.15 |
| 3-North Dakota | 3.1% | $5.15 |
| 5-Florida | 3.2% | $6.67 (with COLA) |
| 5-New Hampshire | 3.2% | $5.15 |
| 5-South Dakota | 3.2% | $5.15 |
| 5-Virginia | 3.2% | $5.15 |
| 45-West Virginia | 5.4% | $5.85 |
| 47-South Carolina | 6.4% | $5.15 |
| 48-Alaska | 6.6% | $7.15 |
| 49-Michigan | 7.1% | $6.95 |
| 50-Mississippi | 7.2% | $5.15 |
Other Notables include
| 14-Vermont | 3.7% | $7.25 |
| 42-Kentucky | 5.3% | $5.15 |
| 33-California | 4.8% | $6.75 |
| 14-Delaware | 3.7% | $6.15 |
There doesn't appear to be much corralation between minimum wage and unemployment. With a minimum wage $1.60 over the federal wage, Hawaii has the lowest unemployment levels and Mississippi, with the federal minimum, has the highest unemployment.
As Kevin Drum says, "At this point, the bulk of the evidence suggests that modest minimum wage increases (a) provide a measurable benefit for poor workers, (b) have little or no impact on employment levels, and (c) are paid for by the customers of low-wage industries, which means the cost is broadly dispersed among all of us."
For classical economists, this will certainly create cognitive dissonance. So am I blazingly wrong with my facts or can a moderate increase in the minimum wage really be a way we can help the poor any time we want?
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Comments
The Thing about Bumblebees
Actually, bumblebees fly according to the laws of aerodynamics and even before it could be proved, the fact of their ability to fly was directly observable. With regard to the minimum wage, we are dealing with a complex set of factors and even assuming regression analysis has been done, there's no way to be sure all the factors have been accounted for properly.
However, what is most likely being overlooked in these statistics you've posted is how unemployment is being assessed. In fact, many people are "employed" below the minimum wage: more than are employed at the minimum wage. Look at Table 636 "Workers Paid Hourly Rates by Selected Characteristics: 2004" on the U.S. Census Bureau's 2006 Statistical Abstract. 2.7% of all workers are at or below the minimum wage, but only 0.7% of them are at the minimum wage. 2.0% (nearly three times as many) are working below minimum wage.
So, sure, raising the minimum wage may not necessarily increase unemployment, but it probably increases the number working below minimum wage. This is no benefit to the poor at any time.
Exemptions would make up that 2% wouldn't they?
I read the Statistical Abstract, but couldn't figure out how they came up with that 2.7% and the 2% below $5.15/hour.
However, there are exemptions for the federal minimum wage. Both tipped employees and agricultural workers can make less than $5.15.
Is it possible that tipped employees and workers in agriculture (2% of the US working population) are the members of that 2% less than $5.15 group?
If so, any additional evidence that a modest minimum wage increase is a bad idea?
Wrong Dates, More Exemptions
The 2% agriculture figure you referenced appears to be from the 1990s: "by the end of the century only 2 percent worked on farms". The data I linked to are from 2004. Furthermore, exemptions to the minimum wage are not limited to tipped workers and agricultural workers. Other exemptions include, but are not limited to, babysitters, amusement park workers, and newspaper delivery people. Not to mention undocumented work. Government interventions in the economy are famous for creating "black markets".
Sound economic reasoning should lead us to expect that price fixing the labor market will lead to a burden on the poor: that is, at the lower end where the price is artificially created. If we jump quickly to the opposite conclusion based on a few unexplained statistical anomalies, our confidence in the minimum wage is informed more by ideology than concern for the poor.
A Lot More Exemptions
As exemptions multiply, the argument that below-minimum-wage-earners are limited to the exemptions loses all force as an argument against the negative effect of the minimum wage on the poor. It also raises the potential problem of rent-seeking: inciting business groups to lobby for more exemptions as the minimum wage increases.
Here is a link that enumerates the exemptions. It also states generally:
So, the FLSA exempts most businesses with revenues less that $0.5M. Even with the qualifications, that's a lot of exemptions.
Not a theory
Expat: I think a deeper issue here is that you mistakenly believe that capitalism is simply a theory. This is a fallacy. Basic economic laws such as supply and demand are just that: laws no different than the law of gravity. Can you provide an example where supply and demand do not work as the law states?
As commonly used, it's a theory
The theory of capitalism is that it's the most efficient, and ultimately the best* allocator of capital.
* "Best" can be defined in any number of ways without changing the synthetic (theoretical) nature of the above proposition.
Depends on Who Does the Defining
"Theory", in this context, is better understood as an explanation of a particular set of empirical facts. The "law of supply and demand" and other economic "laws" are closer to a priori truth, regardless of whatever your metaphysical commitments are. One can sit in her armchair and derive the basic laws of economics without conscious focus on any particular empirical facts. Whether you take that as Real universals, analytic truths, or embodied interaction with the environment, they still have a very different character from "scientific theory".
Let me try again
I happily accept the law of supply and demand and the other unstipulated laws of economics. Capitalism becomes theory, then, when we join these axioms together into normative postulates (capitalism is best at X).
That said, I think I misunderstood your point. Were you saying that a higher minimum wage would necessarily lead to higher unemployment simply by dint of the laws of economics?
If that's the case, fair enough. I think the proper rejoinder would be to note that the gains produced by the minimum wage are well worth the marginal losses. Dunno if that's empirically the case, but it's clearly the tact that would be taken (and a cursory google search confirms that).
Yes and No
Yes, I was arguing from the force of economic laws, but, no, I should not have been suggesting that it leads necessarily to higher unemployement. There are other possible negative consequences.
That's already been drawn into question here on two counts: (1) empirically: Do the data really prove that? (2) economically: how can you assess the losses of what is not seen in the equation.
Also, apart from what is not
Also, apart from what is not seen, it's worth asking just who gets the gains and who suffers the marginal losses. Non-utilitarians will have a difficult time simply accepting a net improvement with little to no regard for the actual distribution of benefits and costs. One concern I've seen addressed is that the benefits accrue to skilled labor and the detriments to the unskilled; at a higher wage, an employer has a stronger preference for higher skilled labor. But I suspect there are other parties to be considered in such a trade-off, too, such as small business owners v. large, established firms.
Supply and Demand IS NOT Gravity
Will,
The Law of Gravity works constantly without exception.
The "Law of Supply and Demand" has plenty of exceptions. When either the consumer or the producer don't have perfect knowledge of the market, "the law of supply and demand" doesn't work to allot resources efficiently.
You know how this works in real life. Someone buys a house 'undervalued' or there is a run on a specific Christmas present that drives up the price, even though it could be bought for less across town or online.
The first sentence of the
The first sentence of the quotation from the WSJ is critical: "though it is impossible to say what would have happened had the minimum not been raised."
No one is claiming (or should be claiming) that the price of labor is the only determinant of the level of employment. The key issue is what employment would have been without the intervention. In the UK and Oregon, the last four years have seen economic recovery from the recession, so it's to be expected that more people would go back to work. Some factor like this could explain why the raise in minimum wage did not result in a loss of employment or (if this is in fact the case) did not cause a shift away from unskilled to skilled labor.
A rise in labor's price isn't necessarily enough to cause a business to relocate--it has to be greater than the other costs associated with relocation to a cheaper labor market. But the increse in outsourcing and the shift of manufacturing to Mexico and other parts of the third world suggest that American labor is becoming too expensive to be profitable, and minimum wage laws don't exactly help American workers compete in an increasingly global market.
Of course, this is all speculation on my part. I'm not an economist, but it seems like what they would say if they were trying to offer an explanation consistent with the theory.
Excellent Point!
CAC, I neglected my Bastiat. Thanks for bringing in the larger economic consequences of "that which is not seen".
Excellent Example of an earlier point you made
CAC's non-economist post is an uncanny exemplar of your idea that econ proceeds by something like a priori truths that can be figured out by armchair avocationalists.
Opportunity Knocked
You're being a rhetorical opportunist. The armchair figure—which you have made me regret—was meant to help people understand what an a priori truth is.
I guess I wasn't clear
I was schooled in philosophy, where armchair theorization isn't, in any way, a bad thing, and I certainly didn't mean it as such.
My Apologies
I've been criticized for being an armchair thinker in a pejorative sense so many times I had a knee jerk reaction. Thanks for clarifying.
So to summarize..the facts are all wrong?
Try as I might, I can't find anyone who has offered anything substantive against my overall point.
The biggest objection I can find is that the facts are wrong. That somehow the government can't count or that the percentage of people working under the minimum wage will increase if politicians increase exemptions.
The second is that we really can't tell if the facts about Oregon or the UK are right because the economy is too complex. How then can you make any counter-claims yourself?
Since, like Marc so nicely pointed out, the bumblebee can fly not because of theory, but because of empirical evidence. I'd argue that minimum wage is EVEN MORE LIKE THE BUMBLEBEE than ever before. Since the introduction of the minimum wage, America hasn't suffered a large increase in unemployment. Therefore, I'm tempted to observe that an increase in minimum wage doesn't create unemployment.
If I'm wrong, would you help out this untrained, armchair economist?
Direct Observation vs. An Inferred Denial of Causal Relations
As I understand the discussion, substantial objections have been presented against your claim that, in general, marginal increases in the mandatory minimum wage do not have an adverse effect on the poor. At the very least, you can be charged with hasty generalization, but I am not going to force the issue.
Perhaps it would help if I corrected this:
It is irrelevant to what I said to draw the inference that a bumblebee does not fly because of theory. I stated that, in fact, bumblebees have always flown in accordance with theory, it just wasn't always possible to prove it. Your analogy from bumblebees to the minimum wage fails because you do not have a directly observable empirical datum that cannot be proved by the theory. What you have is a juxtaposition of separate phenomena under restricted circumstances, which you are claiming is a counter-evidence against what the general law of supply and demand would tell us about limited price fixing of the labor market. This thread contains sufficient argument to expose the weakness of this claim.
It's not that the facts are all wrong. What is wrong is the way you are interpreting them.
I'll take another swing, too.
Expat, I find this last comment of yours puzzling. Maybe I don't understand what you mean by "substantive."
But let's grant that in all the places you've mentioned, unemployment has not risen in the wake of a raise in the minimum wage. From this observation, you (cautiously, to be sure) suggest that raising the minimum wage is a means of helping the poor.
What I and others here have done is to challenge the validity of drawing that conclusion based on that observation. In other words, even if the observation is exactly what it seems (i.e., the facts are as you have reported them), there are still reasons to suspect that raising the minimum wage is NOT a way to "help the poor."
1. Does the wage raise precede/cause a general rise in prices? If so, does the price increase outweigh the increase in income for the poor? A rise in prices disproportionately burdens the poor.
2. Apart from changes in prices, does the wage actually give the poor much of a benefit? Or does it simply motivate employers to reduce other kinds of compensation (i.e., reduction in health care benefits, fewer breaks, no free doughnuts in the break room, fewer hours per shift, demands for increased productivity, fewer vacation days and holidays) so that the total income--not just $$--from a job is relatively unchanged?
3. If the raise is "paid for by the customers of low-wage industries" (your quotation of K. Drum), are those customers the very same people who benefit from the wage raise? If so, then the poor are simply being subsidized by the poor themselves, who make up a large share of the customer base for companies like Wal-Mart and McDonalds. If the price of labor is being funded by the customers, then there's not much of a net gain, if any.
4. Could there have been downward pressure on employment that resulted from the increased wage but that was also offset by other economic forces, such as recovery from recession? If so, in the absence of other forces, then a decline in employment would have resulted from it in other circumstances. To borrow from the hard sciences, just b/c an airplane stays aloft doesn't mean that either the theory of gravity is false or that gravitational force isn't presently acting on the plane. Thus, Oregon and the UK could have experienced a net gain in employment due to other factors; in the absence of the wage raise, that net gain could have been even larger, in which case the poor have likely been harmed.
5. Does the higher wage make it more difficult for small businesses to compete against large ones (think about your neighborhood hardware store v. Wal-Mart)? If so, then the wage contributes to a long term trend that works against employment options for poor people, for a greater number of employers provides greater competition and more variety in efforts to entice laborers. Fewer employers means greater uniformity of benefit packages. Higher labor costs make it harder for start-up businesses to compete against established firms, too.
Again, I'm just the armchair guy, and most of these questions will need to be addressed by empirical studies. I'm not even convinced that your conclusion is false. I've just tried to indicate some questions that will need to be answered before we can accept it.
Thanks, that's what I needed
CAC,
Those points are clear and help me to understand the different threads of the conversation here.
It would appear that the test you've laid out would be virtually unknowable on either side. So the discussion of whether or not to increase the minimum wage comes down to an intellectual pissing contest.
Yes, it will!
No, it won't!
Yes, it will!
No, it won't!
OK, No it Won't, then.
Actually, I don't think the debate reduces down to mere bickering. As I said, these questions will require empirical research in order to be answered satisfactorily. I know that econ research rarely meets with 100% consensus, but I suspect it could give us more or less reasonably acceptable answers.
However, if you're right, and the answers are unknowable (by which I take it you mean that we don't have an inkling about their answers), we could still point to the basics of theory. What generally happens when you artificially raise the price for a certain good? People consume less, all else being equal. That gives us a reason against instituting a minimum wage in the interest of helping the poor.
I'd also be inclined to accept, as a guiding maxim, something like the following rule, "Unless the evidence is clearly in your favor, do not intervene in the market." Intervening in the market intereres (by definition) with people's free choices, and so you shouldn't do it unless you have a pretty compelling case. Thus, the unknowability of these questions would actually speak against adopting the minimum wage increase. Honestly, if one admits one doesn't know the likely results of a given policy, wouldn't it be reckless to press for it anyway?
Minimum Wage Debate is Like a Hornet
Expat,
I apologize for my previous posts to whatever degree they turned this discussion into an intellectual pissing contest. That was not my intent. I was striving for clarity in the analysis, but I was all too terse in doing so.
You raise a good point worthy of our attention:
That's just about the rub of it. Although some empirical work can help corroborate both theory and exceptions to the theory, in general, economic phenomena and their interrelations are too vast and too complex for limited empirical assessments. Furthermore, assessing them often requires the use of—notoriously problematic—counterfactuals (e.g., what would have happened if the minimum wage had not been raised under the circumstances of studies X, Y, and Z.) Judgments contrary to theory based on empirical studies are probably going to be less than satisfactory most of the time. That doesn't mean we should ignore them altogether, but it does mean we need to know their place in our assessments.
That is why economic theory (or, basic economic laws—call 'em what you will) is important and should not be easily dismissed in light of limited empirical data.
I believe you are sincerely concerned for the poor and I don't think you have an ideological axe to grind. However, I do think your concern for the poor is not well served by this kind of economic policy.
Hornets, Bumblebees...they all fly and sting!
Marc and CAC,
I appreciate you spelling out your objections in a way that is easier for me to understand.
I do have a real concern for the poor and it isn't ideologically or politically based. I don't have time for the populists in the Democratic Party that want to stop offshoring, close down trade, etc.
However, we may just have to agree to disagree. While capitalism is great at growing the economic pie, it does a horrible job sharing the spoils.
I'm convinced by the empirical data and you both claim to need more. I don't need more. I'm happy to support a modest increase in minimum wage.
Can We Agree To Continue Disagreeing?
Expat, that's discouraging because if you are wrong, then you are supporting a policy that hurts the poor. The arguments CAC and I have offered do not prove the case against your claim, but they weaken it considerably. It is easy to derive apparently strong conclusions from limited evidence. The challenge is to overcome confirmation bias; that is, it is an intellectual obligation to contend with contradictory evidence before putting your confidence in a particular conclusion.
I know you won't like the domain name for this URL, but please read the article on the minimum wage anyway and cross-check the empirical data provided.
Absolutely! Let's talk about our differences...
Marc,
We can keep talking, but I just feel like I'm getting nowhere. You have your economic theory objections. They are real and legitimate. They also feel like an excuse for not doing anything.
Economic theory is important, but so is historical data. I've seen additional evidence that since the introduction of the minimum wage, unemployment levels haven't gone up dramatically, as predicted. They have stayed flat or decreased slightly. If they've stayed flat, why should I care? Well ask the person moving from $4.75 to $5.15 an hour if they appreciate having an additional $800 a year.
You are correct to point out that if I'm wrong, then I'm supporting a policy that hurts the poor. However, if your wrong, your indecision means you are support policies that hurt the poor. I think that is the crux of the discussion. Who is correct?
I'm all for economic theory, but on this one, I'm just not buying it in the face of the historical and empirical data I've seen. Heritage's policy document raises some interesting questions. I don't buy the argument that raising the minimum wage increases dropout rates. It may be a contributing factor along with dozens of others, but it seems that it can be solved by requiring students to attend school through age 18.
And let's assume that I accept their assertion of
What am I to do? Accept the status quo? That is not acceptable, either. Argue against a minimum wage all together? Considering the imperfections in the job market, that is unacceptable too.
Should we just recognize that capitalism makes a certain segment of the population poor and there is nothing we can do about that? Seems offly fatalistic....
Broaden the Channels of Charity
The State is not the only vehicle for helping the poor. In fact, I think it's a very poor vehicle for the poor, but let's stay on topic. Even despite the criticism in Stephanie Strom's New York Times article (subscription required), it is clear that business can aid the poor. There are also not-so-well-endowed philanthropic and charitable organizations: churches, for example. Tocqueville observed that in early 19th America, virtually no government was required in caring for the poor.
The choice is not between endorsing government policy and doing nothing. So, with all due respect, you're using a false dilemma.
Slippery Slopes
This raises another kind of law: the law of unintended consequences. The problem with letting the government regulate even small areas of the economy is that it inevitably results in more and more regulation (i.e., coercion and loss of liberty) to maintain those small adjustments. Your suggestion here illustrates this problem.
Mark 14:7
I have to draw attention to the fact that your post begins with a reference to Mark 14:7. We do not have the poor as a result of any particular economic arrangement. We have the poor as a result of our fallen condition. The idea that we can solve this problem by means of a coercive institution is contrary to the nature and direction of the Gospel itself.
Assuming Jesus was talking about a dinerius and not the soul
First, one has to read Mark 14:7 as only speaking about money and not about other 'poor' conditions like physical or spiritual health.
That said, if what Jesus said is true. Why shouldn't I be a fatalist on poverty? Why not parrot my in-laws who argue that since the poor will always exist, nothing needs to be done. Regardless of what we try, we'll never fix the problem, cuz that is what Jesus said.
Certainly More, but Not Less
I agree that Jesus was talking about more than economic poverty, but it would be a tortured interpretation to insist that He wasn't including that too.
As I said already, we are not faced with the dilemma you have provided. I'm sorry to hear about your in-laws. They are wrong AND we can address this issue without government interventions.
A Note on the Term 'Capitalism'
As a side note, I want to draw attention to the absence of the term "capitalism" in anything I have written above. In some sense of the word, my economic views are capitalist, but the term has come to mean too many things, including a positive attitude toward corporate welfare—which is absurd. It gets bandied about in the same manner of "Liberal" and "Conservative".
Instead of turning this discussion into a titanic battle between Socialism and Capitalism, I think we will be better disposed toward a profitable discussion if we discuss the merits of particular economic laws and empirical data.
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