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Raise the Minimum Wage?
I consider myself a classical liberal on economic matters. That means that I favor a system that maximizes economic freedom in labor, goods and capital markets. I'm a strong believer that economic liberty is essential to all the other freedoms we enjoy.
Perhaps the only issue where I find myself disagreeing with classical liberals is on the minimum wage issue: I support marginal increases to the minimum wage. I do so primarily because it seems to me that the low end of the labor market is inefficient and will always be so.
In order for labor markets to work efficiently, both those who supply and demand labor must have access to adequate information about the labor market and adequate opportunities to choose to go elsewhere. But in reality, employees and employers do not have equal access to the same market information and low skilled workers do not have the same opportunties to bargain for a competetive wage. The result of this inefficiency is that low wage laborers are not paid the true value of their services. The minimum wage is therefore a necessary evil that can be used to promote greater competition in the low end of the labor market. This seems to be supported by studies that show that marginal increases in the minimum wage do not have the negative economic impact that some economic theories would suggest.
FWIW, this is the converse of what happens at the upper end of the labor market, where CEOs, actors and professional athletes have a superior bargaining position because supply is low and demand is high and therefore wages continually go up.
Minimum wage gets maximum priority
After nearly a decade of inaction on the issue, Congress appears poised to consider legislation in the coming months that would raise the federal minimum wage.
Democrats, who won control of Congress in last week's elections, said Thursday that they intend to make raising the minimum wage one of their top priorities in the coming session.
Although I disagree with the quasi-marxist class rhetoric employed by the Democrats on this issue, I support the policy they are promoting. I think I can do this on free market grounds.
Comments
Who's making $5.15 an hour?
It's my understanding that most people employed at the low end of the pay scale are making more than the minimum wage. The "theoretical" problem is that the rest who might otherwise be employed at or beneath the mandatory wage are unemployed, that is, making the absolutely minimal wage. The classical theory suggests if you raise the mandatory wage, you increase this unemployment. How do the studies you allude to contradict the theory?
Vedran Vuk discusses Joseph Stiglitz' conversion to supporting the minimum wage. He mentions Stiglitz' use of "new empirical studies" that convinced him to change his position. Tell me what you think.
I guess it's possible to
I guess it's possible to make this argument on a classical liberal basis--perhaps one that advocates small interferences in light of a utilitarian ethic. But I don't see how you can make this case on a "free market" basis. You're advocating the restriction the choices of some for the benefit of others, i.e., you're trying to improve the free market with an interference.
Also, you mention "the true value of [labor's] services." Just what is the true value, exactly? Defending this claim will involve abandoning any Hayekian-style theory of prices and a subjectivist theory of value.
Minimum Wage
I agree that most people support a minimum wage for political reasons.
The studies I recall seeing show that marginal (read: very small) increases in the minimum wage do not cause increases in unemployment. The trick is finding out at what point the theory becomes reality. In other words, what is the optimal minimum wage? Just as it is important to find optimal tax rates, I think it is equally beneficial to try to find the optimal minimum wage.
UNITED WE STAND, DIVIDED WE FALL
Minimum wage study
Curt: the study you are referring to is the Card and Krueger study that was done in NJ. This study was rather unscientific and had some pretty major holes in it. So I would not agree whatsoever that "studies have shown that marginal increases in the minimum wage do not cause increases in unemployment".
I'm also not sure what you mean by optimal minimum wage. I would argue that the optimal minimum wage is that set by a truly free market.
Might not hurt, but what good will it do?
Curt,
It seems like your position amounts to saying that a marginal increase in the mandatory minimum wage might not result in negative economic effects based on a limited study. What positive quantitative benefit do these studies suggest a marginal increase will provide? Increasing someones $5.15 wage by a few quarters is not going to make a substantial improvement to his quality of life. By the time you've increased it to an amount that does, it's no longer a marginal increase and you will cause unemployment at that level. And there's still a good possibility that under circumstances that vary from those of the study you allude to, unemployment will rise even with marginal increases to the mandatory minimum wage.
So it seems to me the chief benefit of proposing these marginal increases is political, either for politicians seeking votes from lower income classes or others trying to find leverage with Progressive politicians. It's still highly doubtful to me that it really improves the lot of the poor.
Will's making the same point
Will's making the same point as I made, I think. Here's a different way of putting it--what is the "optimal price" for gasoline? The Hayekian answer is that there isn't one, or at least not one that any one person can discern. Rather, the true price of gasoline emerges from an aggregation of numerous choices on the part of sellers and buyers. Freezing that price at a level that is supposedly "optimal" will ultimately result in gluts or shortages as the "optimal" level diverges from what the market actually calls for.
Why should labor be any different? In fact, in one respect, labor is more complicated to price than gasoline, because it can be used for different things. There's no reason to think that the labor that goes into mowing a lawn is worth the same as the labor that goes into building an airplane.
I've heard about studies that purportedly show that raises in the minimum wage have no discernable effect on employment. But I think they mask a redistribution of employment: at a higher wage, employers higher more skilled labor and less unskilled. So it actually works against unskilled labor, which I doubt anyone thinks is a worthwhile policy result.
Also, it still remains to be seen how any mandated minimum wage is consistent with a free market. Rather, it's a restriction of economic freedom, isn't it?
Minimum Wage
Don't get too caught up in my use of the phrase "true value of their services." I'm not suggesting that anything other than the market should set the price of labor in a working market. Nor am I arguing for a "fair wage". I'm suggesting that the labor market doesn't work at the low end. I'm suggesting that the principles of competition are absent (or severely lacking) at the low end. Employers have an almost limitless supply of unskilled labor to chose from. They can almost always find someone who will work for less than the last person. This puts continuous downward pressure on wages. There is in effect no market clearing equilibrium price. Supply of cheap labor is always going to be greater than demand, therefore the price will always move down, with no competative mechanism for correction. Without competition, there is no "market".
UNITED WE STAND, DIVIDED WE FALL
The Poor You Will Always Have with You
One the one hand you say:
On the other hand you say:
Even assuming these statements are entirely accurate, you are stipulating a questionable definition for the term "competition". In the first statement, it is competition as it is ordinarily understood that drives the price of labor downward. Then, in the second statement, you use the term "competition" in that mystical sense of "perfect competition".
There most certainly is a market; it's just not a perfect market. No market is perfect, but perhaps the imperfections of the low-end labor market are more severe than others. Why is this? I really don't know. Perhaps it's illegal immigration, which would make it something of an exogenous factor, and not, as you seem to be implying, a market failure. What is the argument for preferring this economic policy at this point in time rather than further analysis of the situation which may lead to solutions that don't require more government intervention in the marketplace?
In any case, I still don't see this proposal as genuine aid to the poor. No political solution is going eradicate poverty and this one could potentially hurt the poor in the long run.
A small contribution on minimum wage studies...
Curt's comment on there being no market clearing "low end" equilibrium price, is only manifest during periods of extended unemployment. Usually, the labor market operates like any other - and if the equilibrium price is sufficiently above the minimum wage, one may "get away" with an increase in the minimum wage without causing significant unemployment. For example, where I live (Northern Virginia) even the yard workers are making $15/hour.
The serious problem with relying on this kind of study is that the labor market is regional, not national. On can conduct a study in NJ or NoVA, and find that a small increase in minimum wage doesn't have much impact. But in Montana, that same increase may mean a farmer has to hire one fewer laborer - hence an increase in unemployment.
Like most classical liberals, I view minimum wage as the antithesis of sound social and economic policy. It has the paradoxical impact of hurting most those on the lowest end of the wage scale -- driving their wage to zero.
Why not do the truly best option?
Just all become socialists. Seriously.
Because
Capitalism has been proven to be the best way to improve the quality of life for the poor.
No it hasn't
Socialism has never been truly tried. It's been used often as a front for greedy dictators, but I'm talking about TRUE socialism - like the kind you find at the end of Acts 2.
Acts 2?
guru: what about the end of Acts 2 do you find prescriptive as opposed to descriptive?
And may it never be
To the extent that there have been the kind of command economies required by socialism, they have proven to be a disaster — e.g., the Soviet Union. It doesn't matter if there were other factors keeping them from being examples of "pure socialism". The problem with socialism is that the exchange of goods and services is too vast and too complex for central planners, with even the most advanced technology, to properly allocate resources. You cannot make resource calculations in the market without prices and real prices require the free exchange of goods and services; in other words, they require a a free market. It's not that pure socialism is an untried ideal; it's an incoherent idea.
btw, the communism practiced in Acts 2 was a temporary arrangement in preparation for the coming destruction of Jerusalem and didn't involve legislative coercion. You would have to bend a few established hermeneutical rules to derive a general normative principle from that passage. The New England Puritans tried communism at first, and it turned out to be a disaster too.
Acts 2
The Acts 2 community was not socialism, it was voluntary communalism, and it didn't last for more than a few years. Socialism has been tried and it is nowhere near as good at allocating resources and providing for the poor as capitalism and private property.
UNITED WE STAND, DIVIDED WE FALL
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