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11/26/2006

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ben

These five paragraphs from Posner constitute a demolition of the argument for minimum wage. The argument against minimum wage is so compelling that the Democrats' resounding rejection of it in the form of a proposed 40% increase amounts to a rejection of reason itself as an input into policy.

Who is the American voter supposed to vote for when its politics is so polarised that reason is so frequently abandoned? On the one hand you have Democrats who will do little but hurt the poor by raising the minimum wage and erecting trade barriers, and on the other you have Republicans and their faith-based logic.

Brandon, you have misunderstood the unions argument. The ability of unions to extract wages above market rate are improved the higher the price of competing non-union labor.

Lawrence Indyk, University of Kansas School of Law

Perhaps it was because Iraq occupied so much attention during the campaign, but I find it unfortunate that a raise in the minimum wage was made part of a platform without explanation, debate, or analysis of the costs and benefits. Here are some of the questions that regretfully were not addressed by our politicians during the election season.

1. Why a federal wage? Economic conditions vary greatly across the country, so why shouldn't the states continue to serve as "laboratories of democracy" and be allowed to experiment with diverse wage strategies? These state differences are what allow the economic impact of minimum wage increases to be studied in the first place.

As Brandon Bertelson notes above, 45 states already have minimum wage laws, 20 above the Federal rate, and five of those already above even the proposed $7.25. Cities such as Santa Fe and San Francisco even have their own policies, and Los Angeles distinguishes between jobs that do or don't offer health benefits. Why not let these entities and their constituents debate and decide for themselves what the minimum wage in their area ought to be?

2. Why not a "real" minimum wage tied to inflation? Washington, Arizona, Florida, and Ohio already tie their wages to the CPI. If the nation is committed to having a minimum wage, one tied to inflation would seem to end the repetitive political debates.

3. What's so special about $7.25? Why not $8? Why not $10. Professor Becker notes that even minimum wage raise advocates recognize the economic damage that dramatic increases could accomplish. I have not seen the argument that $7.25 is some kind of maximizer in our labor market.

4. Why not create a wage system that differentiates between part timers (or teenagers learning how to do their first job while living at home) and full time employees providing for a family?

5. If the problem is poverty, or as the politicians say, "That a man working full time cannot provide for his family", why not simply increase the EITC which targets such situations much more efficiently?

6. What effect will a 40% increase in the minimum wage have on outsourcing and illegal immigration if those phenomena are considered problematic at current wage rates?

Brandon Erik Bertelsen

Ben,

I probably should have expanded on how I think about big labour.

My thought is that once a labour union is implemented it is very difficult for any mechanism of price or competition to push them out. In other words, yes - it is a political reason for the Democrats to increase the minimum wage. But I believe that in reality it poses no great benefit that the unions as an established body of workers do not already infer to themselves through political clout, protectionism, and countervailing power.

Bernard Yomtov

Judge Posner says:

why are the Democrats pushing to increase the minimum wage rather than to make EITC more generous? Three reasons can be conjectured.

I have a fourth:

If there were no pressure to raise the minimum wage it would be impossible to increase the EITC.

Let's be blunt. All the praise conservatives are suddenly heaping on the EITC is no more than a reaction to the proposed minimum wage increases. Without these proposals there would be little chance to pass EITC increases. So whichever policy is more efficient, the only way to get either one is to talk about minimum wage increases.

In fact, Posner as much as admits this. Consider his second reason:

increasing the EITC would mean an increase in government spending and hence in pressure to increase taxes, and the Democrats wish to avoid being labeled tax-and-spend liberals.

In other words, conservatives would make large amounts of political hay, justified or not, out of a proposal to increase the EITC. A minimum wage increase is politically more acceptable.

So oppose the minimum wage if you like, but skip the tender concerns about helping the poor via the EITC.

Michael Hartl

So why are the Democrats pushing to increase the minimum wage rather than to make EITC more generous?


The minimum wage is much easier to understand than the EITC and has great (though misguided) intuitive appeal. Many people are unhappy with workers being paid less than they "deserve": the government should insure decent wages as a simple matter of human dignity. Support for raising the minimum wage is an emotional, almost religious issue that transcends (read: ignores) rational arguments.


Many Democrats believe these things, and even those who don't have constituents who doand they know it.

mig

Unquestionably, minimum wage policies have some negative consequences. However, EITC is not necessarily better. For example, EITC is, in effect, a subsidy to companies that rely heavily on minimum wage - i.e. the state supplements minimum wage workers’ income, leading them to accept some job offers witch otherwise would not be acceptable. In this sense, it is an incentive to lower wages.

Allan

EITC is, in effect, a subsidy to companies that rely heavily on minimum wage

The EITC is not a subsidy to companies. A subsidy to companies implies a benefit to the companies. But the EITC benefits the workers not the commpanies. The idea that some workers accept job offers which otherwise would not be acceptable does not make sense. Why would workers who recieve EITC take lesser paying jobs than they could obtain absent the EITC? The answer is, of course, that they would not do so. Clearly, there is no reason for workers receiving EITC to take lesser paying jobs than they could otherwise obtain. Thus, there is no reason to believe that the EITC changes the labor market in such a way that benefits employers who pay low wages. Therefore, the EITC is not a subsidy.

Wes

I'm not sure why the Democrats are focusing on the minimum wage either. If it were up to me, their priorities would be:An accurate assessment of the situation in Iraq including how the USA got there and what outcomes can realisticly be achieved.Paying off the national debt and trying to do something about the trade deficit. This would probably involve heavily taxing the top earning corporate management (a kind of "maximum wage").Protecting individual rights including an absolute protection of human right (no torture, secret detentions, etc.) and a gentle push for civil rights (separation of church and state, etc.).Having said that, the relationship Republicans have to poverty is similar to the relationship Democrats have to the war in Iraq. They offer a lot of criticism and imply that they could magically solve the problem if their ideas were implemented but, when it comes down to the details, the Republicans really don't have much to offer other than criticism.Googling for information on the earned income credit, it looks like the average payout per family was $1,766 with a maximum possible payout of $4,400 per family. In terms of totals, 21 million families received $36 billion in refunds.I'm sure a couple thousand helps but, given the cost of living in the USA, it sure isn't much. What is interesting to me, though, is the relative priorities in the USA. The USA has spent well over $300 billion bringing "democracy" to Iraq (over $10,000 per person in Iraq) but it only spends $36 billion reducing poverty in the USA.

Jake

The EITC is not a realistic substitute for the minimum wage (whatever its merits). EITC fraud is rampant. But there is no political will to enforce the rules governing the EITC, because such enforcement would be viewed as falling disproportionately on persons who are defined by federal law as economically disadvantaged (a curious phenomenon in itself, if one reflects on it).

Sam Dustin

While I agree with many of the points presented by Judge Posner, he fails to take into account the effects of inflation upon those minimum wage workers who ARE dependent on this income for survival. The CPI has been rising steadily since 2001, with increases year to year of 3.3 and 3.4 percent in 2004 and 2005, while the federal minimum wage has remained the same. This disparity has led to a decrease in real purchasing power for these lower income members of the population, and has had the effect of making an already difficult struggle to survive even harder. While I agree that raising the minimum wage is not without its drawbacks, the EITC has not been able to solve the problem. Until our elected officials are able to offer real solutions to the problems faced by the lower earning segment of our society, temporary solutions to the problem such as raising the minimum wage may be the best possible alternative.

Wendi Morales

I pose two questions:

1. Is the minimum wage truly the market value of the said labor?

One of the vices of many textbook treatments of wage determination is to leave the impression that the “invisible hand" automatically ensures that each worker is paid according to his or her marginal productivity. Textbooks neglect the most vital premise–the employer must be forced to bid for workers in a competitive market against other employers if employees are to realize the full value of their work. In a world of unemployment, no such bidding takes place. It is often forgotten that the determination of wage is settled through a bargaining process between labor and capital. Adam Smith observed that this negotiation typically favors the employer—a fact particularly influential if an economy is characterized by even a modest level of unemployment. As John Bates Clark, the originator of the marginal product theory of distribution, observed: “A few men out of employment may serve to bring down the wages of a large number. The few may make it impossible for many to exact pay that corresponds to their productive power.”

For the minimum wage worker, I posit that Frank Tausig words echo a pertinent argument for today’s debate. As he stated it may well be there is a need of “prescribing minimum rates for those in the lowest group. The conditions of their employment are such as to lead easily to ‘unfair’ wages-–wages kept low by taking advantage of timidity, ignorance, lack of mobility, lack of bargaining power.”

2. Is there substantial evidence against Card and Kruegar's final economic conclusions that no unemployment effects resulted from the minimum wage increase? I have yet to read a convincing argument either way.

In 2000, Card and Krueger concluded: “the increase in New Jersey’s minimum wage probably had no effect on total employment in New Jersey’s fast-food industry, and possibly had a small positive effect." Neumark and Wascher maintained Card and Krueger initial results were wrong; yet, similarly concluded: “New Jersey’s minimum-wage increase did not raise fast-food employment in the state.” The two contending studies ultimately concluded no adverse employment facts with the New Jersey minimum wage increase.

Furthermore, a 2006 study on the San Francisco minimum wage, validates C & K's initial results. See Reich, Michael, Arindrajit Dube, and Gina Vickery. 2006. “The Econoimcs of Citywide Minimum Wages: the San Francisco Model.” UC Berkely Institute of Industrial Relations, 3.

The San Francisco study specifically addressed the questions: Will a minimum wage as high as $8.50 adversely effect employment? Does the narrow geographic reach of the policy create greater incentives for businesses to relocate outside the city?

The study found the wage increase substantially increased pay for low-wage workers. The percentage of low-wage workers that received a wage below $8.50 declined from 52 percent to 4 percent. Employment growth (measured by full-time equivalents) was not affected by the minimum wage policy and even found a statistically insignificant increase of 2.5 percent. Furthermore, workers remained employed for longer periods of time and were more likely to have full-time jobs. Finally, the average job tenure increased by approximately 3.5 months, and 6 percent of the workforce moved from part-time to full-time jobs. The research, thus, found that the San Francisco citywide minimum wage policy improved job quality and substantially increased pay for low-wage workers without leading to job loss.

Thoughts?

Joel Pinheiro

The minimum wage is one of the most despicable political tools for gaining popular support at the ballots at the expense of society (and especially the poorest in it).

It simply prohibits hiring everyone whose productivity is below the mandatory minimum. And who are those whose productivity is so low as to be below the minimum wage? The poor, the young, the old, the handicapped, the uneducated.

If minimum wage defenders actually believed in what they are saying, they would follow their proposal to its logical conclusion and ask for 50 dollars/hour.
"With every worker earning that much, imagine how much more they would consume! And this extra consumption would boost the economy, generating even more jobs, and so on. It is a virtuous cycle!"

Behind every such reasoning is the belief that what keeps poor nations or regions poor is simply lack of political will, or of positive expectations. If everyone just believed that the economy will grow, and agreed to raise the wages paid, the economy would in fact grow and prosperity would follow.

This is false. And this error has serious consequences, for the reason why many people are unemployed is exactly that kind of thought, which leads to higher minimum wages and other labour laws with similar effects.

Every May 1st (workers' day) the Brazilian president announces the raise in the minimum wage. The general public celebrates the event; little do they know that every increase in its value keeps more people unemployed (earning NOTHING instead of a little) and has further negative impacts on the economy.

Wages rise, and can only rise, as companies compete for the scarce resource that is labour, and when the productivity of workers increase (investments either in physical or human capital). There is no other way.
All human laws which disregard this basic economic law will simply make it harder for the poorest members of society to make ends meet.

Joel Pinheiro

Congratulations for Prof. Becker and Judge Posner for helping destroy the myths surrounding this harmful political measure.

ben

Wendi

I'll have a go at your first point.

You are effectively positing that in the market for low skill labour a free lunch is being ignored by employers. Employers, you say, are paying x dollars per hour for labor but receive y dollars per hour for the efforts, y > x, and employers earn rents by not paying workers what they are worth.

In a competitive market, how can these rents perist? What prevents those rents being competed away by rational, atomistic employers who each have the problem of paying as little as they can get away yet still attract suitable workers in sufficient numbers. Its not as if employers of low-skilled labor can collude.

I think it is hard to argue current unemployment rates, after subtracting frictional unemployment, can cause a breakdown in bargaining and permit sustained economic rents to be extracted. The reason is that there a couple of mechanisms prevent rents being extracted.

1) Supply side. Workers will withdraw their supply of labor from a market offering low compensation and do alternatives - start up a business that exploits the cheap labor, go back to school, sell their labor in the black market.

2) Demand side. Profit-seeking firms will see the rents earned from cheap labor and enter the market or expand existing employment of low skilled labor.

Between supply-side and demand-side responses, I can't see any reason why unemployment will allow employers to sustainably get away with underpaying their workers.

Chris S

I will preface my statements by stating that on the economics side of this equation, I am decidedly out of my depth. However, what I do know is that arguments for expanding EITC without corresponding means to rationally distribute the current EITC lump sum payments makes the assumption that families or individuals who qualify for the EITC will make rational spending choices, including distributing that income throughout the year to offset their expenses in a way that helps to lift them out of poverty. There are several state programs which provide exactly this kind of benefit, but it is hardly integrated into the filing process and without adequate information about the availability of such programs, most will take a lump sum payment and use it as needed. I don't think too many families who qualify for the EITC are making enough money to pay $500 to a good tax accountant or even $100 to pay H&R Block. My guess, and it is just a guess, is that most of these families file their taxes themselves and take a lump sum payment. An additional supposition is that a lump sum payment to a family who qualifies will be exhausted fairly quickly.

In short, the benefit of the increased minimum wage to low wage earners is that the increase is distributed throughout the year enabling them to live at a higher level the whole year. I can grasp the concept that for reasons of efficiency, and economy it makes more sense to increase the EITC either in terms of eligility or the amount payed out to qualified tax payers. It just seems that absent some uniform and simple method of distributing that income throughout the year it fails to make the type of impact that an increase in minimum wage can make on these earners. Why not increase the EITC and instead of offering lump sum payment use the credit to provide a federal wage subsidy that increases a lower base pay rate based upon the amount of eligible tax credit? (half joking there... but only half)

Dave S

If the government can mandate a meager "living wage", why not mandate wealth? Let's set a minimum wage of, say $100 an hour, or $1,000. What the hey.

Chris Perry

There are some interesting complexities to raising the minimum wage. One might at first blush consider that raising the minimum wage transfers weath from employers to the employees. On second blush, one migh consider that employers might simply reduce the number of employees. But I think the most realistic reaction is that the employers would react rationally. That is, they will take measures to increase efficency through capital investment in mechanization and automation.

So I think the notion that the increased minimum wage will make the few minimum-wage-only earners materailly better off is misguided because many of them will be eliminated. Unemployment pays less than minimum wage and increases taxes. But at the same time, there are some non-horrible side effects by making employers innovate.

Hans Gruber

Card is also the guy who thinks mass immigration doesn't lower wages. Hey, at least he's consistent.

As to what could possibly motivate them? Well, politics, Posner. Raising the minimum wage is very popular (it passed in every state where it was on the ballot in November). In my state of Colorado, we passed a terrible amendment to our Constitution which not only increased the minimum wage but provided for scheduled increases based on the CPI).

You are mistaken if you think only the "genuninely poor" vote on this or related issues. It doesn't matter that this isnt' an efficient policy for helping the poor or that few votes will be literally bought. It's the symbolism, Democrats sticking up for the little guy.

Jack Keane

Bit more on "Employers NOT hiring" due to a higher min wage. First this has NEVER been shown to be the case and today one assumes that the employer has already SENT those jobs to India, or that they are not transportable and must be done here...... or not at all.

To which American Progressive Econ shouts "GREAT!!" as that's how enforcement of a living wage and ""above market"" union wages have long spurred productivity improvements which are the ONLY means of truly increasion our standard of living and separates us from the stagnation of many third world economies.

In a century we've gone from 70% of labor force producing our food to less than 5% armed with the best machinery in the world and distribution systems using fewer and fewer people. Armies of carpenters with hammers, nails and chisels yeilded to far fewer packing $10,000 worth of air nailers and specialized tools. Plaster yeilds to sheet rock and cabinets are mass produced in factories.

Super market checkout clerks? regardless of pay they are fewer since UPC codes and will be fewer yet as embedded RFIDs ring out a whole basket as it passes under a hi-tech reader.

Some here may recall McD's Ray Kroc BUYING an agreement from Nixon for $250,000 to keep the min wage low or use a "split" min for "part timers" if need be. Perhaps that has held McDs back from implementing the tech it should have and why legions of poorly trained workers with tremendous rates of turnover chaotically produce poor food, slowly, that is not particularly cheap?

ben

Jack

Let me start by pointing out the irony of freely posting a tirade against freedom and big business by typing it into a computer made by a corporation, the message transported to a server owned by a corporation, while wearing a shirt, drinking a beer, watching a television, all made by corporations. You may even work for a corporation.

Let me finish by saying the rest of your post is pure imagination, but in particular the ideas that a) economists (or the system they promote) are souless - actually they share your desire to see the poor do better, but they realize the near ubiquitous tendency for governments to cock things up, and they understand why governments do that so regularly. The minimum wage is the best example of all for governments achieving the opposite of what was intended. b) your idea that economists believe capitalism is perfect is nonsense.

David

I find two flaws in Judge Posner's argument. First, he misinterprets the reason why 70% of the population supports raising the minimum wage. And, second, he buys into the tired, old conservative line that raising the minimum wage will harm the economy.

The "economic harm" argument has been tried by opponents of fair labor standards for decades and, each time, the fear-mongering has been proved false. Minimum wage laws have not harmed the economy in the past, and raising the wage for the first time in 10 years will put hardly anyone out of work. I, for one, fail to understand the conservative devotion to arguing that employers must be permitted to impose sweat shop labor conditions. Most likely, it derives from a blind and misguided opposition to all regulation of markets.

Second, there are two principal reasons why a large majority of Americans support raising the minimum wage, and - by extension - why the Democrats and most moderate Republicans support it. First, it is unconscionable for any American in the 21st century to work 40 hours per week and earn only $10,000. The bump to $14,000 isn't so much better, really, but at least it's a start. It could help a few people begin to climb out of poverty. And, since it comes in the form of a wage, the money will be earned. It will not appear to be a form of welfare, like the EIC.

Second, raising the minimum wage would have the indirect effect of raising the entire wage scale, at a time when wages are stagnant, but the corporate execs at the top are raking in record profits. This, in truth, is why unions like the minimum wage and why corporate execs hate it. Americans are mad that 98% of the population is struggling to pay for health care (not to mention their mortgage payments), while a few at the top are living in McMansions in gated communities and debating whether to buy that third vacation home. They want a little redistribution, and this is the first battle. I predict that the second battle will be universal health insurance. And, ultimately, the 98% majority will win those battles, because votes matter. Though it will take a bit of effort to overcome the campaign contribution advantage enjoyed by the 2%.

Joel Pinheiro

David, employers cannot "impose" sweatshop labour conditions.

Suppose you are offered work in a sweatshop for a ridiculously low salary. You would not accept it; afterall, you could get a better job somewhere else. That means the wage offered by the sweatshop is far below your productivity.

Now, suppose a very poor population on the verge of starvation. A factory which offered "sweatshop" jobs would most likely get employees. Afterall, the man who is heading to the factory to get his job has no other job opportunities offered to him (nor can he, as far as he is aware, use his own spare time and energy in a way which will improve his life condition).

Every voluntary job contract is mutually beneficial, even when one of the parties faces starvation if they don´t accept it. In this case is particularly beneficial to him, who would otherwise die!

If the factory is able to make a considerable profit, more people interested in making a profit will set up their own factories and companies there, thus raising the wages up to the perceived productivity of workers.

And will a company hire someone for less than what their job is worth in the company´s estimation? No.
Thus, a minimum wage will effectively make it illegal for anyone with a productivity lower than the wage to be hired.

No-one who has any concern for the poor and who understands this simple truth can possibly defend the minimum wage.

It is also, together with other labour laws, a notorious political tool of big companies to bar competition from smaller firms. Afterall, a company such as Wal-Mart, which usually pays above the legal minimum, will not be hit by a new higher wage. However, small firms, which may be operating on already very low margins, will have a harder time surviving after the new law (and many more will not even be started).

General Alcibialdes

Dear Prof. Posner,

Thank you for thoughts. I would like you to comment on the effect of raising the minimum wage at the same time that we are trying to reform immigration. We are telling employers of low skilled workers to stop hiring illegal immigrants, but at the same time we are adding significantly to their incentie to do so.
regards,
Alcibialdes

postkey

"As a matter of economic theory, ..."

As a matter of naive economic theory assuming a perfectly competitive labour market. A doubtful assumption!

If the labour market is monopsonistic, an increase in the minimum wage can, up to a certain point, lead to more employment and a higher wage.

Flunkout

We all want to thank you for just spitting out what we all learned in our first year economics classes.

Here I thought a guy of your supposed caliber would actually have something new to say. Silly me. Of course, I read this for Becker anyway.

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