Categories:
Behavioral Economics
Quoth David Neumark:
The accumulated evidence undermines the case for minimum wages even in
the best of times. I recognize that there is continuing debate about
some of the effects of minimum wages, and that strong public support
for higher minimums — regardless of the evidence — will likely lead
to future increases.
Or, to paraphrase Mises:
The world inclines to the minimum wage because the great majority of people
want it. They want it because they believe that the minimum wage will
guarantee a higher standard of welfare for the poor. The loss of this conviction
would signify the end of the minimum wage.
READER COMMENTS
Jesse
Jun 12 2009 at 11:50am
At the rate everything’s going, I wouldn’t be surprised if there was a large uprising from the poorer and middle class demanding lower minimum wage!
I imagine that some who are unemployed today would gladly work for $5/hr just to get something, if only they could do so “legally.”
El Presidente
Jun 12 2009 at 12:04pm
Bryan,
Rational to what end? To say that advocating an increase in the minimum wage is irrational is to presume to know what end the individual seeks, for rationality can only be evaluated with respect to a goal. If we assume that the goal is for poorer people to be better off generally, then we have to factor in social safety nets, EITC, larger MPC of low-earners, multipliers, etc. It’s not cut and dry. The timing issue David referenced in his post is certainly a concern. There could be better times for it, and there may be other policies that will need to accompany this one in order to reduce or reverse the effect of dissuading employment.
In the case of minimum wages, if people are simply wrong about the likely outcome of their preferred policy, they are not irrational on the basis of their preference alone. The most we could say is that they are incorrect. However, if they understand the impact of this particular policy and would like it to be complemented by other policies, then we are the irrational ones for deliberately limiting our enquiry to this singular policy question as a basis for evaluating the rationality of voters. If you had to go East to get out of your neighborhood and get to a freeway that would take you West, we wouldn’t blame you for taking the paved road instead of driving through your home and/or yard to get to the freeway. Context matters.
David Jinkins
Jun 12 2009 at 12:50pm
This does seem like a plausible “MRV” situation. In this case, though, it is rather harmless. The minimum wage, bane of economics 101 professors everywhere, turns out to have very little effect in the real world:
http://www.rau.ro/intranet/Aer/2000/9005/90051397.pdf
Tom West
Jun 12 2009 at 3:39pm
I’ve never understood this hatred of the minimum wage. For jobs in which the worker wages are capturing most of the value of the work, then an increase in minimum wage will mean loss of jobs. But for most minimum wage jobs I’ve seen, the value created is a lot higher than the wage. It’s simply supply that keeps the wages low.
In such cases, a minimum wage law (to a reasonable maximum) doesn’t do much harm to jobs, but transfers a moderate amount of wealth to the minimum wage workers (and even more significantly, the *huge* number of workers that earn minimum wage + small amount)
Tom West
Jun 12 2009 at 3:46pm
I imagine that some who are unemployed today would gladly work for $5/hr just to get something, if only they could do so “legally.”
No doubt. Unfortunately, that worker only gets his $5/hr job at the cost of turning everyone else’s $10/hr job into a $5/hr job – a massive impoverishment of all those who are earning at or close to minimum wage…
Minimum wage is a trade-off of a few suffering a lot (unemployment) in order to aid many. But from what I’ve seen of the statistics, the few really are quite few and the many are a lot indeed (I include the large number who work within a $1-2 of minimum wage and are generally adjusted up as minimum wage is adjusted up.)
It doesn’t seem surprising to me that so many economists support an increase in the minimum wage – it transfers a significant amount of wealth to the working poor.
Maniel
Jun 12 2009 at 3:52pm
The minimum wage is effectively a law against working (unless you can offer enough value to a prospective employer to merit that wage). It could be considered racist because it strikes hardest at young people in poor, urban communities who might not have worked before and might appear to present a risk to a prospective employer. In those cases, jobs which might have been created for lower pay just never materialize. Most workers add to their value over time – this generally is rewarded with higher wages. In Europe, they call beginning at a low, training wage an “apprentice” system.
Prakhar Goel
Jun 12 2009 at 4:55pm
@Tom
The other people may have their wages dropped to $5/hr but that change in cost will be reflected in prices (due to competition) and overall result in greater net welfare.
Jesse
Jun 12 2009 at 4:56pm
@Tom:
I don’t see why the $5/hr worker would turn “everyone else’s $10/hr job into a $5/hr job.”
Wouldn’t wages within certain industries tend toward equilibrium? Assuming wages are a measure of productivity, the lower paid, yet highly productive, worker could be “bought out” by competing companies who will pay closer to his productive capacity, while those overpaid employees would tend to fall further down the pay scale as the more productive took over. I’m not saying wages wouldn’t fall, though I’m not saying that they definitely will either, but I am saying that a $5/hr workforce in an industry where other workers are paid $10/hr for equally productive work could facilitate something more like higher employment, possibly only at a minor cost to those higher wage workers who would then be found to be overpaid.
I’m not an economist (maybe I just made that completely obvious) and I’ve never had an economics class, so I’d like to hear where I go wrong in my analysis. Also, would you say that it’s better (for a community) to have a $10/hr wage average and high unemployment, or to have something like a $7/hr wage average and low unemployment.
Jesse
Jun 12 2009 at 4:58pm
Sorry for the long post… I think Prakhar made the point that I was stumbling towards… however in a concise fashion.
Devin Snead
Jun 12 2009 at 4:58pm
It would probably easier to jump off a cliff than to try and convince a someone like a reader of Huffington Post that the minimum wage doesn’t help the poor.
Colin K
Jun 12 2009 at 5:23pm
@Tom West:
So let’s say the minimum wage drops from $10 to $5 in Econostan:
1. On day zero, Econostan’s top two fast-food joints, Burger Baron and Taco Gong, each employ five people who are paid $10/hr.
2. On day one, the owners of both decide to drop pay to $5.
3. On day two, only half the people at each show up for work. The other half get high and play Xbox instead.
4. On day three, the owner of Taco Gong tells everyone he’ll pay $7.50 so long as they show up. Meanwhile, the owner of Burger Baron twirls his moustache and celebrates his superior cost-reduction acumen.
5. On day four, nobody shows up for work at Burger Baron, because the ones who actually wanted to work heard Taco Gong was paying 50% more and showed up there.
6. On day five, Burger Baron offers $8 and gets half of his old employees back, and one of the stoners decides it’s worth working at that point, so he’s back in business.
7. lather, rinse, repeat until equilibirum.
Dennis Tuchler
Jun 12 2009 at 6:04pm
As to people wanting to raise the minimum wage, this is probably a case of persons giving what they think is other people’s money away. How many small business types want to raise the minimum wage?
If people really believed that the minimum wage affects the amount they pay for items for sale, there would be fewer interested in supporting an increase in the minimum wage.
kebko
Jun 13 2009 at 2:52am
Once you take out teenagers & college students, people at low-stress part time jobs for some extra cash or to be near their kids or to get out of the house, retirees looking for something to do that doesn’t effect their benefits, mentally handicapped people, people who have a history of trouble or a hard time being responsible enough to keep a job, people who are mostly working for tips or employee discounts, you’re left with about 14 people in the entire country working for the minimum wage.
The main effect of it is to get a few more play dollars for suburban teens at the expense of less affluent teens who are more likely to go unemployed & who really need the experience.
I think people have an image of good, upstanding citizens working hard year after year all across the country & never getting above minimum wage. Those people just aren’t out there. I know people who hire adults at minimum wage & if they can get someone to show up for 2 weeks without being drunk or fighting & actually perform a task responsibly, they are elated & they give them a raise so they don’t leave.
In the spirit of Russ Roberts’s question, the fact that there are supposed studies out there muddying the consensus on this disheartens me about economics. If any economist bothers to go see who is working these jobs, it would be obvious to him that for a lot of people, being able to hold down any job for any amount of money is the goal.
But, there aren’t even that many people in that position. Most of these jobs are taken by teens & people working for tips.
RSJ
Jun 18 2009 at 6:55am
Did you all forget that we were teens at one point? Not all teens are worthless stoners playing xbox all day. Some are amazing people with great character who can achieve great things. Cut em some slack.
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