Jonathan Meer, an economics professor and first-rate economic researcher at Texas A&M University, shared with me an op/ed on the minimum wage that he wrote recently. It was rejected by a few publications, although I think, as you’ll see, the rejection had nothing to do with the quality of the piece. So he and I have agreed that I’ll run it here as a guest blog post.
(I posted about Jonathan’s excellent performance in a debate on the minimum wage with Jamie Galbraith here.)
The Downsides of Minimum Wage Increases
The House of Representatives recently took up the Raise the Wage Act, which would more than double the federal minimum wage to $15 an hour over the next five years. The debate among economists over the impacts of minimum wage increases on employment is still ongoing, even as there is widespread agreement that low-income families need support. But often lost in these arguments over the number of jobs is a more important question: who benefits and who is hurt by this policy?
When debate focuses on the total number of jobs lost or gained, it hides this potentially nasty distribution of the benefits: a recent college graduate with a barista job may get a few more dollars an hour, but the high school dropout finds it harder to get and keep a job. Those who have the least to offer employers, might need more training, or are the biggest risks to hire will face the toughest challenges.
Some opponents of higher minimum wages skip over the fact that some people absolutely would benefit. Those who get and keep these higher-paying jobs might be winners, seeing an increase in their take-home pay.
But those gains have offsetting losses that could either reduce that gain or even reverse it.
My research shows that when the minimum wage is raised, employers offset increased labor costs by reducing benefits like the generosity of health insurance. Other benefits, like free parking or flexibility in scheduling, are more difficult to measure but are also likely to be cut back. Employers will likely expect more work effort when they are forced to pay more, changing the nature of jobs. And in the longer run, economists have found that employers shift towards automation and expecting customers to do more things themselves– reducing job growth in ways that aren’t always obvious. This damage takes time to be seen, which is one reason minimum wage hikes, like rent control, often seem appealing.
And then there are those who would definitely lose because they can’t find work, and they aren’t likely to be picked at random. The minimum wage is a blunt instrument. It doesn’t distinguish between types of workers and the households they come from. The teenage children of well-off families, earning money to buy video games, are treated the same as single moms struggling to get by. When wages are set at an artificially high rate, why should an employer take a risk on the single mother who needs the occasional shift off to take her kids to the doctor? The kid from a disadvantaged background who needs some direction on how to treat customers appropriately? Or the recently released felon trying to work his way back into the community? Why should employers bother with them when there are plenty of lower-risk people who are willing to work at those artificially high wages?
Recent evidence from Seattle’s minimum wage increases show that it’s precisely the most inexperienced workers who struggle the most in the face of high minimum wages. And another line of my own research finds that minimum wage increases cause employers shift towards workers with more credentials.
It will get much worse in the next recession. The economic expansion over the last decade has allowed employers to absorb much of the cost of increased labor market regulations, but a downturn will quickly force them to cut jobs that are marginally productive only in good times. Those at the margins of the workforce will be left further behind. Low-wage jobs aren’t easy, don’t pay well, and are rarely fun. But not being able to find work at all is far worse.
Despite the lowest unemployment rates in decades, only 39% of adults without a high school degree had a full-time job in 2018 – and among young African-Americans dropouts, it’s a shocking 26%. It’s hard to believe that the best way to help them find work and start climbing the job ladder is to put the first rung out of reach, making it difficult for them to find work and driving them to illegal employment with few protections.
A national minimum wage of $15 per hour ignores the wide variation in labor markets and the cost of living. Even in high-wage New York and California, half of hourly workers outside of metropolitan areas earn less than $15 an hour. Nineteen states, including Texas, have median hourly wages below $15; outside of large cities in Texas, 60 percent of hourly workers earn less than $15. A uniform minimum wage at such an unprecedented level, far beyond historical norms, would cause real damage to inexperienced and low-skill workers – especially in areas in desperate need of more opportunities.
Advocates are absolutely correct that we have to do something to help low-income families. Other policies, like the Earned Income Tax Credit, are better targeted and much more effective. By transferring money to low-wage workers in low-income households, these kinds of programs get funds to those who actually need them without reducing employers’ incentives to hire.
We should never minimize the struggles of low-income families to get ahead. But good intentions are no substitute for good policy. Minimum wage proponents mean well, but the unintended consequences hurt the worst-off the most.
Jonathan Meer, Texas A&M University
(Jonathan Meer is a professor of economics at Texas A&M University. His research focuses on charitable giving, the economics of low-wage labor markets, and the economics of education.)
READER COMMENTS
Don Boudreaux
Apr 6 2019 at 12:54pm
Meer’s op-ed is simply superb. Thanks, David, for posting it here (and thanks, Prof. Meer, for writing it – and for doing the difficult research on which it is based).
It’s appalling that no major publication sought fit to publish this excellent piece of analysis.
john hare
Apr 6 2019 at 2:17pm
The incentives to work off the books increase for both low productive employees and companies with increased costs as well. There are some major contractors that subcontract work at well below what it would cost to do it right and pay all the employee costs.
There seems to be a turnover of small subcontractor companies that start up and accept that work by using people off the books that don’t get overtime, insurance, or competitive wages. Often with illegals or people that can’t pass drug tests and other requirements for regulated businesses. They get away with it by having a fraction of their people that are legitimate and pay the rest in cash….until they get busted after which the major company hires another subcontractor.
It is easy to cut labor costs in half like this. Often the ones going under owe a lot of back taxes as well. It seems some of the people involved have figured out other workarounds as they seem to have a different company doing the same work every few years.
Billy Kaubashine
Apr 7 2019 at 10:19am
I think it was Alan Geenspan who said that raising the minimum wage is like raising the first rung on the ladder of opportunity.
Black Knight
Apr 7 2019 at 11:13am
What was left out was the fact that many if not most employers who have to raise wages, cut hours which in many instances reduces pay to a level that the employees can’t live on. Be careful what you ask for. You may not like the amswer
Mr Bill
Apr 7 2019 at 11:40am
I learned early in life you have to learn how to do a higher paying job in order to get one. Even if I had to work for free to prove I could learn how to do the job, and prove I really wanted it. Kids with no work experience and no job skills I would never hire. I started working on a vegetable farm for 35 cent an hour. Ended up a project manager making $80K/year in the 1980’s. I did use my veterans benefits to go to computer programming school. Hard work and long hours got me sent to schools at IBM, and other software companies. I never believed that I “Deserved a high paying job”. Instead I learned and studied on my job how to do it the best I could. I hear college grads who have never worked a day in their life say, “Well, I’ve got a degree, I deserve a good paying job”! NUTS!
Phil H
Apr 7 2019 at 2:11pm
I’m struggling to see how some of these arguments are supposed to be strong arguments against the minimum wage.
(1) Employers claw back some of the minimum wage in benefits. Why is this a bad thing? I mean, I can see that it means some of the effect of the policy is offset, but that’s not in itself bad. In particular, it’s an odd argument to see on a libertarian-leaning site. More liberty is obtained when jobs pay cash, not benefits.
(2) The minimum wage encourages automation. Why is this a bad thing?
(3) “The minimum…doesn’t distinguish between types of workers and the households they come from.” Why is equal treatment a bad thing?
“The teenage children of well-off families, earning money to buy video games, are treated the same as single moms struggling to get by.” This is a step forward! The implication is that without the minimum wage, these two different types of employees would be treated differently. How? The most obvious answer is that the rich teenagers would be treated better, because they have more bargaining power (they don’t really need the jobs). So far as I can see, this is a claim that the minimum wage has reduced inequality. Why is this a bad thing?
(4) “When wages are set at an artificially high rate, why should an employer take a risk on the single mother who needs the occasional shift off to take her kids to the doctor? The kid from a disadvantaged background who needs some direction on how to treat customers appropriately? Or the recently released felon trying to work his way back into the community? Why should employers bother with them when there are plenty of lower-risk people who are willing to work at those artificially high wages?”
This section appears to be arguing that if someone is disadvantaged or perceived to be disadvantaged, it would be better if there were a lower-wage track for them. Is the author actively calling for racist/sexist double standards in wages? Or does he just not believe that such a thing could not possibly exist – after all, it’s never happened before, right?
I’m sure that the author is actually a well-intentioned person, but that whole paragraph is a weird, weird, weird argument. He keeps asserting that the law imposing a kind of equality on different jobseekers is a bad thing, and he seems to assume that we will know why it’s a bad thing.
(To be honest, I think I do know what the missing steps in the argument are, but he would have to spell them out and argue for each one in order to be convincing.)
(5) The minimum wage affects low wage workers most. No shit.
I honestly don’t think these arguments are much good. Moreover, this author alludes to one really important major argument against the minimum wage, but never explains or defends it. It’s just brushed past in two words: “job ladder”.
It’s an argument worth a lot of consideration, but I have two big questions about it.
Does the job ladder exist? I.e. do people move from the lowest-paid jobs to higher paid jobs in a way that does not happen when those lowest-paid jobs are taken away? I don’t think I know the answer to this question, and it is surely the crucial one.
Is the job ladder really just for those rich teenagers mentioned in the article? Poor people work in low-paid jobs all their lives, by definition. If the first rung on the ladder is only a couple of summers when you’re in college, sure, you don’t care how high it is. But when you’re going to be on that first rung your whole life, how high it is makes a big difference.
So I worry that the “job ladder” model is really doing most of the argumentative work in this article, and it’s not unpacked, and it may be a bad model.
Dave Smith
Apr 8 2019 at 10:38am
A quick reply to only one of your points: policy should not artificially encourage automation.
Phil H
Apr 8 2019 at 11:14am
Hi, Dave. Thanks for the reply. “policy should not artificially encourage automation.” Why?
Your claim raises two questions.
(1) Is there such a thing as a natural rate of automation? How would we tell what it is, and how would we know when automation is happening “artificially”? (I’m not convinced there is.)
(2) Why would artificially encouraged automation be a bad thing? As I see it, progress in technology is the biggest driver of human progress and happiness. (Followed by good social institutions.)
Jon Murphy
Apr 9 2019 at 7:48am
Crudely speaking, yes. It’s where the marginal cost of automation (that is, the cost of adding one more unit of automation) is equal to the marginal benefit (that is, the benefit deriving from that one more unit of automation).
Given that the benefits of automation are not infinite, there is some such level. It will be revealed (ie, it cannot be known ahead of time) by people’s actions in the market.
To put this concretely: Have you automated absolutely everything in your house? Do you have sliding doors? Multiple Roombas for every room? Voice-activated everything? The most up-to-date appliances and HVAC? Do you replace your computer every time something new comes out? Etc. If the answer is “no,” then we’ve determined there is some natural rate of automation for you. There is no reason such logic would not apply to the world of Not-You.
Because the costs of automation are not zero. Consider my response above. What if someone forced you to get a new computer every time tech advanced? Would you be made better off because of it? You face costs; that is, you face trade-offs. If you are spending resources on tech, that means there are fewer resources to spend on other things. And if you are getting a lower benefit from the automation than it costs, you are being made worse off.
Phil H
Apr 9 2019 at 8:31am
Thanks, Jon.
Everything you’ve said there makes sense, but I don’t think it addresses the question at issue. You’ve convinced me that for a certain set of market conditions, there will be a resulting “rate of automation,” and I accept that it would be reasonable to call that the “natural rate” *for that set of market conditions*.
If we accept the story that increasing the minimum wage encourages automation (and it’s a plausible story, but far from proven!), then I would say that what is happening is that we are changing the market conditions (to my mind: ending a market distortion, the sale of labour at lower than cost price). That change in market conditions changes the natural rate of automation. I wouldn’t see the fact that the rate of automation changes as evidence that it’s bad to change market conditions. Do you see what I mean? I guess I’m saying, I don’t think the kind of “natural rate” that you’ve established here has any normative meaning – the current “natural rate of automation” is not a goal to be aimed for.
Quite the contrary: I see advances in technology as having tremendous value in terms of future human utility; and speeding up automation may well encourage faster innovation; therefore I’d think that pretty much anything we do (within some limits!) to speed up automation would ultimately be a good. Even if it does impose a cost now, I would expect that cost to be recouped in future growth. Obviously that’s just a personal guess, but I’m saying I think I see a market externality here.
Jon Murphy
Apr 9 2019 at 8:55am
Yes. And the minimum wage does change the market conditions from what occurs naturally (and by that I mean between people acting freely) and those that are artificially (by that I mean market conditions that are imposed).*
Possible, but not probable. Even if your guess is correct, it does not imply that some artificial means is ideal or improving. We’d need to ask why such improvement hasn’t already occurred. The model of externalities suggests that in a world without transaction costs, the externalities would be internalized immediately. In other words, if there is a market externality and it is costless to bargain, then the parties involved will simply bargain it away. In your tech example, people would borrow money now to finance said automation and pay it off with the future profits. Thus, no need for government intervention.
However, in the world we live in, costs are not zero. There are information costs (information is costly to obtain), there are bargaining and other transaction costs, there is uncertainty, etc. Given these costs, if the costs of moving from one market level to another is too high compared to the benefits, the move will not occur (think about it like this: when you go to buy something, say an apple, do you search every grocery store in the country to find the best apple at the best price? No? What about in the state? County? Town? Why not?). Thus, there is no externality even if by “blackboard economics” there is a market failure.
*I’m not a big fan of the phrases “natural” and “artificial” here, but it appears to be the terminology chosen so I’m just going with it.
Phil H
Apr 9 2019 at 10:27am
Thanks, Jon.
Those answers don’t really scratch the itch, I’m afraid. You say you’re not a fan of the natural/artificial terminology, but those concepts are doing work in your argument. You are implying that we should prefer a market result from a market that is “natural”, i.e. hasn’t been tampered with by externally applied “artificial” rules like a minimum wage. But I see no reason to think that any existing labour market is natural. All labour markets are the product of sets of laws and conventions and historical contingency. You may be able to tease out some “natural” (something like spontaneous emergent) properties of existing markets, but that work remains to be done. And that’s a necessary prior, if this natural rate of automation market is to work at all. Otherwise, what reason do I have to prefer (current complex labour market) over (current complex labour market + $15 minimum wage)?
I didn’t understand the externality argument at all. Were you arguing that the existence of a market failure (due to transaction costs) does not necessarily imply the existence of an externality? I don’t understand how the argument works, though I suppose it’s possible. But my argument is more that I can literally see what the externality is (technological progress), so I’m not sure I need to “prove” its existence. And I think I see it as arising more from a complex principal-agent problem…
Briefly, it seems like the conditions for the industrial revolution may have existed several times in history, but it only happened once, where one aggressive empire-building state happened to have enough resources to adopt uneconomic technologies for long enough that they could mature and become profitable. Maybe other prods need to be applied to current uneconomic technologies as well? I admit, this is highly speculative!
Floccina
Apr 8 2019 at 12:24pm
I think that is a good point cash is generally better than in kind benefits. I disagree with your other points though. For one example We want automation when it is cheaper than people not before.
Joel P
Apr 11 2019 at 12:08pm
Phil,
I think you raise some interesting points, but you may be missing a larger one.
I think the op-ed intends to show that there are a variety of unintended consequences of raising the minimum wage that offset its stated goal of increasing the incomes of the poor. As you’ve summarized, these include changes in the compensation structure for low-income workers, encouraging automation, and reducing employment for low-skill workers who are actually poor (as opposed to teenage workers who are supported by non-poor parents). One can certainly argue about whether these consequences are good (I don’t think they are), but nobody is advocating the minimum wage increase on the grounds that it will increase automation or improve compensation structures. People support this policy because they think it will raise the incomes of the poor, and this op-ed means to show that this isn’t true.
If you want more automation, then subsidize automation. If you want to encourage employers to increase the share of compensation offered in cash, then remove the existing incentives to do things the other way. Don’t achieve these goals indirectly while distorting the low-wage labor market along the way.
A final note about your points (3) and (4): Professor Meer is not saying that the minimum wage increase leads to more equal treatment. Precisely the opposite. Because employers can no longer discriminate between workers on the basis of wages, they will discriminate based on other factors, like whether they have young children at home or were recently convicted of a felony. So if you’re a less desirable employee, maybe you were making $7.25/hour, and your more desirable counterparts were making $9.25/hour. If the minimum wage goes to $15/hour, then your wage goes to $0/hour and theirs goes to $15/hour. That’s less equal treatment, not more.
Joel
Phil H
Apr 18 2019 at 9:17pm
Hi, Joel. You’re kinda right about the way the argument is structured. I didn’t really address myself to the question of minimum wages themselves. I was just focused on saying that Meer’s arguments, as presented, didn’t make much sense – therefore his piece can’t be taken as evidence either for or against a minimum wage.
I just want to say a final thing about the language used to describe the minimum wage. You and other use words like “distorting” to suggest that people being paid very low wages is in some way “natural”. I think that’s simply incorrect. Meer notes that without a higher minimum wage, these workers will definitely need government support in the form of tax credits or similar. That says to me that they are being paid less than cost price. The existence of wages below subsistence level is the distortion. You wouldn’t demand that any other resource be sold at less than cost; why demand it with our very greatest resource, i.e. human resources?
Helga Weber
Apr 7 2019 at 2:50pm
Minimum Wage
Whatever Prof. Meer is saying, is true. However, proponents of minimum wage forget that m.w. was never intended to sustain a family, it was for entry-level jobs for students etc. M.w. has other ramifications, namely employers will also unload the added cost to transportation etc., making everyday goods more expensive, thus the ones that get higher wages will also pay higher costs – ergo it makes no sense [at least to me]. If high school drop outs and felons cannot get jobs, it is their fault, not the minimum wage’s, they should have thought earlier about their ‘career’ choices. do not blame society. When getting a low m.w., work hard, learn something and get a better job. Our lousy education system does not help either — educate, not indoctrinate.
Thaomas
Apr 7 2019 at 4:49pm
It’s not big news that a higher minimum wage could have some downsides for some people, so I can understand why the oped might have been rejected from some publications since the professor did not attempt to quantify who wins and loses and by how much. Assuming that we agree about wanting to raise the incomes of low paid workers, perhaps employers should be offered a tax credit on wages at and above the minimum wage by some amount. Or maybe a much higher EITC would be a superior alternate to a higher minimum wage. A careful quantification of the effects of a minimum wage would shed light on it vs the alternatives.
Godfree Roberts
Apr 7 2019 at 6:35pm
The Chinese have managed to raise their minimum wage eighteen times in the past 21 years by creating eleven million new jobs every year.
The result? Next year every Chinese will have a home, a job, plenty of food, education, safe streets, health- and old age care.
500,000,000 urban Chinese will have more net worth and disposable income than the average American, their mothers and infants will be less likely to die in childbirth, their children will graduate from high school three years ahead of American kids.
Then there will be more drug addicts, suicides and executions, more homeless, poor, hungry and imprisoned people in America than in China.
As Kishore Mahbubani, former President, UN Security Council, says, “The key question the West must ask is: how was the relative over-performance of Western societies in the second half of the 20th century replaced by underperformance in the 21st century? The answer will not come from looking at China. It will come from looking in the mirror”.
Monte Woods
Apr 7 2019 at 11:29pm
@ Godfree:
“The Chinese have managed to raise their minimum wage eighteen times in the past 21 years by creating eleven million new jobs every year.
The result? Next year every Chinese will have a home, a job, plenty of food, education, safe streets, health- and old age care.”
Sources, please.
“500,000,000 urban Chinese will have more net worth and disposable income than the average American, their mothers and infants will be less likely to die in childbirth, their children will graduate from high school three years ahead of American kids.
Then there will be more drug addicts, suicides and executions, more homeless, poor, hungry and imprisoned people in America than in China.”
This seems a bit fanciful to me. Sinophilia?
dede
Apr 8 2019 at 4:01am
“500,000,000 urban Chinese will have more net worth and disposable income than the average American”
Maybe one zero too many?
https://www.stlouisfed.org/on-the-economy/2018/january/income-living-standards-china
Monte Woods
Apr 8 2019 at 4:35pm
@Godfree Roberts:
“The Chinese have managed to raise their minimum wage eighteen times in the past 21 years by creating eleven million new jobs every year. The result? Next year every Chinese will have a home, a job, plenty of food, education, safe streets, health- and old age care.”
Sources?
“500,000,000 urban Chinese will have more net worth and disposable income than the average American, their mothers and infants will be less likely to die in childbirth, their children will graduate from high school three years ahead of American kids. Then there will be more drug addicts, suicides and executions, more homeless, poor, hungry and imprisoned people in America than in China.”
Sinophilia?
Benjamin Cole
Apr 7 2019 at 7:59pm
The US should get rid of the minimum wage, as soon as it gets rid of property zoning and the routine criminalization of push -cart vending.
jim
Apr 7 2019 at 11:48pm
IMO the min wage is also a tax grab: how much more taxes will workers pay when their wage doubles? 🙂
Why are we wasting our time on this silly minimum wage discussion when the real discussion should be about creating an economy with fewer people on minimum wage? Why are we talking about minimum wage when we should be talking about broad prosperity?
One obvious way to improve broad prosperity is to increase resource production – logging, mining, oil gas and coal – and stop blocking exports of energy commodities. Progressives strive relentlessly to prevent these jobs from materializing, preferring to instead have some other country incur the environmental risk, thereby exporting both the wealth and taxes they generate.
Another way is to massively revamp environmental regulations that drastically increase the costs and reduce the benefits of economic infrastructure projects. Here in Seattle, our light rail system requires 3-6 years of environmental study for each segment (say, 10 miles) of line! Yet in the 1960s, some 480 miles of 4-6 lane freeway – were built in less than 15 years! Sound Transit, after nearly 20 years of operation, has a mere 22 miles of railway! Outrageous! The longer we stick to outdated and insufficient infrastructure, the more wealth we drain away.
But yes, lets shift the discussion back to prosperity.
john gibson
Apr 8 2019 at 2:34am
This is a brilliant paper. Finally someone shows how increasing wages hurts the little guy. Now for the next step. If we could back out the minimum wage increases since 1969 {50 years according to my research, which I will only refer to, instead of explaining, but if you would like to go more deeply, you may well use the equation Yiost = α + [a f terst × MWgroups]β + Io + Is + It + Xstγ + eiost (} then we would find that an hour’s minimum wage of $1.25 purchased 4.33 gallons of gas. Today I bought gas at 2.59 so 4.33 gallons ran $11.21. Last summer that gas would have run $13.37. But a couple months ago it would have been only $7.84. If we average the three we find that minimum wage should be set at $ 10.81, but as Professor Meer understands, in order to get the desired results, we must include the 1969 data, which yields an average gas purchasing ability of $8.42, which of course will allow the rich and the poor to promote AGW equally. And equal is good, right? However, my preference would be to flush all the gobbledygook, and set the guaranteed minimum income at $13,991 (8.41 x 30 x 52, since we should have standardized the work week at 30 hours around 27 years ago, thereby increasing demand since then by a factor of 2). All of this I have shown can be accomplished by using only the numbers 1,2, 4,5, and 7 through 9. As evidence in support of this claim, I challenge all of you to find the single grammatical or spelling error in this post.
Tom Grey
Apr 8 2019 at 11:28am
I no longer believe they “mean well” — they know that there will be fewer jobs for low skilled HS dropouts.
They want fewer jobs.
They want more welfare and more poor people to be forever dependent on gov’t. They want this so that they can favor more cash to non-workers, and think themselves better than those who want more jobs.
It’s time to call them out for wanting fewer jobs.
john hare
Apr 8 2019 at 1:38pm
I believe you are mostly correct except as to motivation. Many of the people that want more unemployed and on some form of welfare profit financially and have whole careers based on “serving” those poor unfortunates. If the poor unfortunates move up, the career goes away and they will have to get another job that may have more accountability. There may be some feeling of superiority as you say, but I would suggest that perceived self interest is a far higher motivator.
Todd Crouse
Apr 8 2019 at 3:30pm
In a world where we all benefit from increased automation, I think there should be fewer jobs….or at least much fewer hours worked by all. Why should the masses continue to be required to put in so many hours when less effort is required to sustain us?
Other than that, check your cynicism please. I think if you question anyone you reference as “they” a little further, you will find that no one is interested in incentivising sloth over the willingness to work. Or put another way, we all believe those who do work should be able to reap as many rewards from that labor as possible, regardless of how much we think government should intervene to maintain a baseline for all.
Phil H
Apr 9 2019 at 1:16am
Hi, Tom.
There are a couple of reasons to be cautious about the argument you’re proposing.
(1) You’d have to be very certain of your facts, and this debate is much more complex than that.
(2) Jumping from “Your policy is wrong” to “You’re a bad person” inevitably makes political debate more difficult. And it’s impolite.
(3) It’s not a great move politically. The purpose of “calling out” the people on the other side of the debate as “bad” is to make their position unspeakable. It’s very unlikely to achieve that aim when the other side of the debate is saying “We think those people should get more money.” That never sounds like an unsayable thing.
(4) Last but not least – what you’re saying is just factually wrong. I’m a person (not a policymaker, just a guy) who supports minimum wages, sometimes. And I can subjectively report that it has literally never crossed my mind that this would be a good way to swell the ranks of the dispossessed army. So when you make this kind of argument, I’m just going to think: this guy doesn’t seem to understand the people he’s arguing with. Not worth listening to.
Mark Z
Apr 9 2019 at 2:52pm
You literally just wrote above here that you’d consider it positive for minimum wage to induce automation (eliminating jobs).
You can’t have your cake and eat it too. If it doesn’t eliminate jobs then it doesn’t spur automation. If it spurs automation, good or bad (bad, really; we should only favor automation when it’s actually cheaper than labor) then it eliminates employment.
Phil H
Apr 9 2019 at 10:49pm
Er… but automation doesn’t reduce employment in the long term! When did Luddism make such a comeback? (1) Individual firms use more technology (and fewer workers) because workers cost more; (2) The economy grows, so more companies hire more workers. This is just standard development economics.
Mark Z
Apr 10 2019 at 12:46am
But people don’t just live in the long run, they also live in the short run. People go stretches of time without jobs needlessly (and goods and services are unnecessarily expensive for stretches of time). One can’t simply discount short run costs.
Phil H
Apr 10 2019 at 3:04am
“You can’t have your cake and eat it too.”
When you said this, it made me think. You and I clearly agree on lots and lots of things. I clearly agree on lots and lots of things with the authors of this blog (or more precisely, I defer to their better knowledge of economics on lots and lots of things.) But then there are disagreements, and they seem very sharp. I wonder if that metaphor you used is one of the “intuition pumps” that drives disagreement.
My view of economics (that I’d like you to share!) is that it is precisely about having your cake and eating it. The goal of prescriptive economics is to develop policies that make for a bigger cake, and ideally Pareto improvements in the way that the economy works.
Moreover, history indicates that this is definitely possible. We are hundreds of times better off than we used to be.
I often feel that you (and many other people with whom I discuss economics online and offline) seem to start out from a heuristic like no cake and eating it. If a policy improves the state of one group, you naturally suspect that it has made life equivalently worse for some other group. Or (Jon Murphy above), the suggestion that the economy is at some sort of equilibrium, and that any change will inevitably be for the worse. But often, I think that’s not the case. The economy is extremely complex, and it isn’t “poised” at some highly sensitive equilibrium most of the time. Harms have to be found, evidenced, and analyzed. It shouldn’t just be assumed that they inevitably exist.
Of course, “who loses out” is a good question to ask. But there are situations – precisely those situations we seek – when no one loses out, or at least when the average gets a bit better for everyone.
Background experience: I live in China, which maintained 10% growth for something like 30 years. I have literally read whole generations of economists saying, “this is just impossible, it’s all going to crash in a couple of years.” But it didn’t. Of course that doesn’t mean it won’t ever! Growth has now slowed considerably. But there’s no real sign of a crash coming. Higher growth and better living standards for all are possible. I chat here in the hopes of learning more about how!
Cheers,
Phil
Mark Z
Apr 9 2019 at 2:58pm
i don’t think such an insidious calculation goes into it. I think – as with most policies – most minimum wage supporters support it because, in their minds, paying someone less than a certain amount is “just wrong.” Same with price controls. There’s some conception of a fair price and charging more than that is just wrong.
Most policy preferences are motivated by a visceral sense of indignation at something rather than by cost benefit analysis (or a positive desire to ruin someone’s life). Even sophisticated reasons are often just clever post hoc explanations for one’s initial reaction. When people meet policies, like when they meet other people, it’s first impressions that count most.
Rene Sorrentino
Apr 8 2019 at 1:47pm
I like your article but disagree when you state proponents of minimum wage Increases are well intended. The vast majority of them are politicians who are invested politically in looking like a good person who cares for the poor. Any economist will tell you minimum wage increases in the long run hurt the poor and middle class but help the politicians.
Fred_in_PA
Apr 8 2019 at 11:05pm
I wonder if we haven’t mis-defined the problem (and hence, derived a dysfunctional answer).
We think the problem is low wages, and hence seek some way to raise them. But raising them may not really help.
Suppose that the real problem is that those in the bottom 20% have some “defect” that more cash can’t repair. Suppose that 5% of our population have a drug or alcohol problem. Suppose 5% have an extremely low IQ (let’s say around 80). Suppose 5% are criminally inclined — they don’t play well with others. Suppose 5% are some where between seriously neurotic and flat out psychotic. More money is not going to suddenly dry these folks out, turn them into rocket scientists, make them kind, considerate pillars of the community, or as sane as a theology grad. Indeed more money is likely to go down this rat hole with little detectable effect.
They don’t need a higher minimum wage; they’ve got bigger problems. Custodial care would probably do more good. But re-opening the asylums is a tough sell.
pgl
Apr 9 2019 at 2:28pm
Meer’s research is interesting as is his oped which you reproduced. But your link goes to something written by Linda Gorman, which strikes me as more partisan than enlightening. I saw this at Cochrane’s place whose link to the Meer et al. paper I found most interesting was screwed up too. No harm as I found the paper. Here is a very different interpretation of what their research suggests:
http://econospeak.blogspot.com/2019/04/does-cochrane-really-understand-latest.html
David Henderson
Apr 10 2019 at 7:37pm
The link to the minimum wage article by Linda Gorman was meant to be a link to her article.
There’s no link to Jonathan Meer’s op/ed other than this post. As I explained, it wasn’t published and so he asked me to publish it.
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