Cafe Hayek - Latest Comments in Do minimum wages cause unemployment?

Re: Do minimum wages cause unemployment?

anon — Mon, 24 Apr 2006 21:34:25 -0000

A person making and living on the mimimum

wage in the US is currently living far below the poverty line. Many of these folks require public assistance to live, especially in very expensive health care.

A marginal increase in minimum wage is like a tax rebate. We can probably assume that 100 % of the marginal increase in the minimum wage will be spent on consumption. The cost of the wage increase may be born through slightly higher prices, where producers have the power to pass on the increased costs, and possibly by the investor class through slightly reduced returns.

An equally likely outcome is that the extra income will be spent on goods in which the marginal cost of production decreases with higher unit demand (economies of scale), completely offsetting the marginal increase in labor cost. There may also be an offsetting benefit to society in reduced cost for public assistance.

A potential long term benfit would be enhanced future prospects for the children of minimum wage workers, who may increase their future productivity as a result of slightly higher family income.

Union wages in the former US allowed the rise of the baby boom-bearing middle class, whose children went to college and ultimately resulted in the wealthiest, most advanced society the world has ever known.

If one considers the polarization or concentration of income a good thing, there are plenty of examples just south of the US, and other places in the world, in which extreme wealth concentration is a net negative.

The US has not increased the minimum wage for many years. The case can be made that the marginal benefits are considerably higher than the marginal cost of a $1.00 increase in the minimum wage.

Re: Do minimum wages cause unemployment?

John Dewey — Thu, 02 Mar 2006 05:55:39 -0000

Radical,

I agree that union-bought politicians share the blame for the plight of highly unionized companies now in trouble. But all politicians are not the same.

The tide turned for the unions about 1981, when one politician stood up to the Air Traffic Controllers. Deregulation of industries (championed by politicians), right to work laws (enacted by politicians), and globalization are slowly reining in union power. We won't be able to blame the unions much longer if our domestic factories remain uncompetitive.

Re: Do minimum wages cause unemployment?

the Radical — Wed, 01 Mar 2006 10:58:05 -0000

John Dewey,

I agree that the blame doesn't entirely fall on the unions and that caving into unsustainable demands is manigerial irresponsibility. I also think that much of the blame goes to politicians who have made the unions virtually untouchable. It amazes me that if I agree to work for $12 an hour and later decide that I won't do the work I agreed to do at $12 for less than $15 an hour its called quitting and my boss simply finds someone else. (where I live people would line up around the block twice for $12 an hour) If me and all my union buddies at work decide the same thing, however, its called a 'strike' and the federal government forces my boss to negotioate a deal that usually ends up screwing him as well as my fellow "brothers" and I. Wal-mart has the right idea: better to shut down then unionize.

Re: Do minimum wages cause unemployment?

Swimmy — Wed, 01 Mar 2006 08:11:26 -0000

Furthermore, Russell's hypothesis testing is actually quite relevant. That situation - and every other imaginable situation - proves that *demand curves slope downard*. This is unquestionable, a settled matter of science for which endless literature could be called upon.

What research of the minimum wage tells us is not whether or not it causes unemployment at all (because we know it does), but the degree to which unemployment rises relative to the degree to which the wage rises. In other words, it tells us just how steep or flat is the demand curve for labor. (And yes, the hypothesis that small increases in it don't do much damage is tenable.)

Re: Do minimum wages cause unemployment?

Swimmy — Wed, 01 Mar 2006 05:58:25 -0000

deb:

This is simply a thought experiment. No numbers have actually been crunched here. However, you are right; it is an empirical question. Just, you know. Not one that can be answered with the provided data. At all. (As several commenters and the original email already pointed out.)

Re: Do minimum wages cause unemployment?

deb — Wed, 01 Mar 2006 04:36:49 -0000

Russell: If you are a wage-earner, you can run your own experiment. Give yourself a minimum wage increase. Tell your boss that you have decided that you need a minimum wage of $13/hour. He can either pay you that wage, or fire you.

The way you test a hypothesis like "Laws establishing minimum wages increase unemployment" is to compare places where such laws exist to places where they don't. As Don notes, when you crunch the numbers, they doesn't support the faith-based economists' claim.

An individual setting her own "minimum wage" and telling her boss would not be a very good way to test the hypothesis about minimum wage laws. But keep trying - you'll get the hang of empirical hypothesis testing if you keep at it!

Re: Do minimum wages cause unemployment?

JohnDewey — Wed, 01 Mar 2006 02:57:47 -0000

Radical,

Should we really place blame on the unions? I think GM and Ford negotiators agreed to outrageous union demands in good times and in bad. They traded long term, unsustainable cost structures for short term worker harmony, and presumably for short term executive bonuses.

I agree that union leaders are ruthless in their attempts to gain everything possible for their workers. But that's their job. I think it's the job of management to hold the line when demands clearly threaten a firm's survival.

Re: Do minimum wages cause unemployment?

Henri Hein — Tue, 28 Feb 2006 21:09:55 -0000

Several people have commented that minimum wage always cause unemployment. Perhaps 'at the margin,' or perhaps, as the last post states, "little increases cause invisible unemployment."

This doesn't make any sense. To see why, let's do a thought experiment.

Economists like to point out to progressives that if the minimum wage is so wonderful, why not increase it an order of magnitude? Why not make it $50?

Try that in the opposite direction. What if the minimum wage was an order of magnitude smaller, at $0.50? At that level, the minimum wage would have no impact on employment, at the margin or anywhere else.

I live in California, where the minimum wage is $6-$7.50 (it varies a bit with parameters I never quite deciphered). When I pick up day workers to work in my yard, they ask $12-15.

These guys have no education and offer no particular skills. Some of them don't even have legal status or speak English. Yet, they ask twice the minimum wage. I don't mean "ask" as in "would like," I mean as in "won't work for less." (On a different note, they work hard and are worth the money).

It's hard to imagine the CA minimum wage having any effect.

I didn't read all the links posted to the various studies, but I can't help guessing that the level of minimum wage is somewhat related to welfare coverage, in the sense that governments supporting one is likely to support the other. Sorting out what unemployment was caused by minimum wage, and what was caused by welfare, strikes me as an extremely difficult excercise. Both artificially raise the cost of labor.

Re: Do minimum wages cause unemployment?

Russell Nelson — Tue, 28 Feb 2006 19:53:03 -0000

deb-- it's not a question of accepting the conclusion on faith. It's a question of saying "big minimum wage increases cause big unemployment; little increases cause invisible unemployment." The unemployment is there; thankfully it's so small that it hides among the employment caused by other things.

But you don't have to take me on faith. If you are a wage-earner, you can run your own experiment. Give yourself a minimum wage increase. Tell your boss that you have decided that you need a minimum wage of $13/hour. He can either pay you that wage, or fire you.

Do you think anything different would happen if a government law was enacted rather than a deb law?

Re: Do minimum wages cause unemployment?

the Radical — Tue, 28 Feb 2006 19:36:19 -0000

"You are saying that unionized firms are driving unionized firms out of business because they are unionized."--Spencer

No, I'm saying that unions are driving unionized firms out of business. The fact that the competition is unionizd as well makes no difference. Unions tear down the structure of unionized firms from within, the competition merely bulldozes the rubble away. As John Dewey pointed out, Detroit isn't producing models that people want to drive. This alone, however, is not what is doing these companies in. Millions of people will still buy anything with a traditional American brand name out of sheer blind nationalism. As this article points out

http://www.freemarketprojec...

it is the fact that Ford and GM have far higher union-imposed costs than their competitors that is killing their bottom line.

If Ford and GM had labor-cost structures that were driven by markets instead of by government backed extortion they would be in a far better position to absorb and recover from the effects of making an unappealing product. As it stands, by forcing their employers into paying hundreds of millions of $$ a year for people not to work on top of demanding wages inflated far above market rates, unions at Ford and GM are issuing their own layoff notices.

Though I was using these auto makers as only a few examples from recent national headlines my argument holds for them as well as other unionized industries. As I said before, unions cut off their own legs by driving the price of union labor far above its actual market value. No firm can sustain long term profitability if they are paying far-above-market rates for any part of their factors of production. Markets prices represent market realities and reality is not optional.

Re: Do minimum wages cause unemployment?

John Pertz — Tue, 28 Feb 2006 18:39:25 -0000

Spencer, you and liberty are both correct but clarification is neaded to prove why. Liberty is arguing that the GM'S unions are driving it out of business. This point is true but another point needs to be made first. First and foremost, GM is strugling because of diminished sales stemming from the fact that their foriegn competitors sell better products. The foreign competitors are also uising unionized labor, however, the unions are not killing them because they are making money. This is why Unionism works much better in an environment of protectionism and why many people on the left are afraid of globalization because of the competitive presures that is applies to industry. Competition should be regaurded as enemy number one to unions because they promote uncertainty where a non competitive, heavily regulated economy tends towards less instability.

Re: Do minimum wages cause unemployment?

deb — Tue, 28 Feb 2006 18:12:51 -0000

Mazel tov on viewing the question of the relationship between minimum wage and unemployment as an empirical question! You might want to have a talk with Arnold Kling who still believes in faith-based economics:

http://www.tcsdaily.com/art...

".....standard economic analysis, which predicts that putting a high floor under wages causes excess supply of labor -- in other words, unemployment."

According to Arnold, people who don't take it on faith that minimum wage laws are bad suffer from a "Moses complex."

Re: Do minimum wages cause unemployment?

John Dewey — Tue, 28 Feb 2006 11:15:24 -0000

Spencer,

Though I agree with most of Radical's arguments, I think you are right about the auto unions. Here's an article pointing out that 79% of Toyota's North America vehicle production is in No-Right-To-Work states:

http://tinyurl.com/gd9ax

In my opinion, Toyota produces better-engineered vehicles with more excuiting designs. Except for the Mustang and the Avalanche, Detroit's models seem boring to me.

Re: Do minimum wages cause unemployment?

spencer — Tue, 28 Feb 2006 11:01:48 -0000

the Radical -- If the unions are what are driving GM out of business why is it that the competition in Germany and Japan are also unionized? In Germany the Union even have a seat on the Board of Directors.

You are saying that unionized firms are driving unionized firms out of business because they are unionized. That seems to be a little hard for me to follow.

Re: Do minimum wages cause unemployment?

John Dewey — Tue, 28 Feb 2006 09:00:09 -0000

Swimmy,

Thank you! The CATO article is excellent!

I was especially pleased to see that Jack Kennedy in 1954 was very open about his motive for favoring a higher minimum wage: to protect Massachusetts industry. By contrast, little brother Ted continues the hypocritical claim that he only wants to help the poor through a $7.00 minimum wage.

Re: Do minimum wages cause unemployment?

liberty — Tue, 28 Feb 2006 06:40:14 -0000

The aggregate unemployment figure is very broad and encompasses many factors - tax rate, industries in the state, manufacturing vs. services, etc. It is imporant to look at different productivity levels and longitudinal data. If you can follow the bottom quintile of wage earners from before to after a hike in the minimum wage, you could see whether they simply earned more after or whether they lost their jobs; you could see whether there was an influx of new labor into the market, perhaps more highly trained workers willing to work for the higher wage; you could see whether small businesses went under and if you followed those entrepreneurs with the longitundianl study you could see whether they moved to another state or attempted a new kind of business or joined the labor force as skilled labor.

Studies have done some of this but there is a lot left to be done. Recently Santa Fe introduced a "living wage" and some studies have tracked the outcomes of people there.

http://www.epionline.org/st...

Re: Do minimum wages cause unemployment?

Don — Tue, 28 Feb 2006 04:55:28 -0000

I'm sure Russ will mention this, but the Card & Krueger fast food study has been credibly called into question if not entirely discredited.

Re: Do minimum wages cause unemployment?

Russell Nelson — Mon, 27 Feb 2006 22:00:55 -0000

Unfortunately, I cannot find the reference again, but a decade or so ago I was trying to resolve this question for myself. I came across a reference to the Haitian lace industry being destroyed by a minimum wage law which inadvertantly doubled the minimum wage in Haiti. If you Google for Haiti+lace+minimum+wage, the only online reference you can find is me referring to the offline reference. Sigh.

Re: Do minimum wages cause unemployment?

Russell Nelson — Mon, 27 Feb 2006 21:54:50 -0000

Nobody has yet pointed out that minimum wage laws are only raised long after most people are earning a higher than minimum wage. Consequently, very few jobs are affected by a minimum wage increase. What does that mean?? SMALL SAMPLE SIZE! So if you're trying to find a minimum wage effect from a small increase in the minimum wage, stop looking. Instead, try doubling the minimum wage and see if minimum wage laws don't increase unemployment. Just, please, don't run that experiment in my state? Okay? Thanks.

Re: Do minimum wages cause unemployment?

the Radical — Mon, 27 Feb 2006 21:24:30 -0000

I think that the analysis of min wage laws needs to take into account their effect on what those most strongly advocate such policy really intend. Min wage laws are perhaps one of the greatest examples of rent seeking. The most ardent supporters of min wage are unions, not because they care about unskilled workers but because they care about themselves. To unions, min wage drives up the price of substitute goods (unskilled labor) in order to make their products ("skilled" labor) relatively more affordable.

We of course know that unions cut off their own legs by driving the price of union labor far above its actual market value. We need only to look at recent cuts at Ford and GM for proof of this (here in Northern WV there are weekly announcements of layoffs at the many sites where unions not long ago declared "victorys"). Min wage is an attempt to stave off this inevitable outcome.

Thus a critical question to be asked in the process of understanding the effects of min wage is whether min wage increases the number of union members employed in areas with such laws. This is of course only a piece of the puzzle but I think it an important one.

Re: Do minimum wages cause unemployment?

econgeek — Mon, 27 Feb 2006 17:34:35 -0000

Also with rewards to the above,

Labor Market Institutions and the Distribution of Wages, 1973-1992: A Semiparametric Approach - J DiNardo, NM Fortin, T Lemieux - Econometrica, 1996

is very good (pretty pictures!), in general the minimum wage seems not to matter much.

-- Note all the studies above are with the idea of a developed country labour market in mind. The effects in developing country labour markets are likely to be far stronger as well as more strong redistributive between workers.

Re: Do minimum wages cause unemployment?

econgeek — Mon, 27 Feb 2006 17:29:37 -0000

The standard reference in the empirical literature is;

Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania

David Card; Alan B. Krueger

The American Economic Review, Vol. 84, No. 4. (Sep., 1994), pp. 772-793.

http://links.jstor.org/sici...

Card and Kruger are not exactly amateurs in labour economics and this is as close to a natural experiment as we have.

In general the empirical findings of the better studies can be characterized as follows;

- it is very hard to find an effect on employment at the micro level

- it is very hard to find an effect on unemploment at the agregate level

In terms of the theoretical literature, Akorlof on labour contracts as partial gift exchanges is interesting.

If you are wondering about just how irational someone might be with rewards to their own sweat, then;

Is Tomorrow Another Day? The Labor Supply of New York City Cabdrivers, HS Farber - Journal of Political Economy, 2005

is the paper for you.

Re: Do minimum wages cause unemployment?

johnny bonk — Mon, 27 Feb 2006 17:28:04 -0000

Dudes,

Everyone is forgetting that the labour markets in the high wage West are massively out of equilibrium, so the self evident truth that minimum wages reduce labour demand do not really apply.

There are literally hundreds of millions (billions even?) of workers who would come to the West to work if they were permitted to, however immigration restrictions mean they cannot.

Most Western countries have a minimum wage, all have some unemployment and all would be able to find work for many more immigrants if they were permitted to come - this is true in countries with "high" unemployment (France, Germany etc) and countries with "low" unemployment (UK, USA etc).

Trivially, a minimum wage would reduce the number of immigrant workers in an "open borders" labour market, but there are no such labour markets so the question is moot.

Unemployment in the West is best explained by cultural resistance to "crap" jobs, which may be (is) a function of welfare and general prosperity.

Raising the minimum wage may reduce the availability of easy jobs, but there is a massive surplus of (low paid) work in most of the West (ask a Mexican / Pakistani / Morrocan / Turk / Nigerian etc etc).

Minimum wages surely reduce labour demand, but the actual demand is in fact vastly greater than supply - people don't want the work, so the jobs never even get conceived (until the immigrants arrive).

The problem in the West (for its indigenous workers) is thus little to do with minimum wages, but the much more difficult task of creating (the conditions conducive to business creating ) enough well paid work, though this is of course a moving target that can never be quite achieved.

Re: Do minimum wages cause unemployment?

Swimmy — Mon, 27 Feb 2006 16:28:01 -0000

And indeed there is. Though I can't find the study itself on the internet, it's called "Minimum Wages and the Distribution of Economic Activity" by Marshall Colberg. I don't know how much of it has been verified by the data. Colberg's research seems to be entirely on senator votes, not on the specific effects of the minimum wage in low and high cost cities.

GMU's own Thomas Rustici covers the argument in this paper:

http://www.cato.org/pubs/jo...

(PDF)

Re: Do minimum wages cause unemployment?

Swimmy — Mon, 27 Feb 2006 13:16:18 -0000

I didn't say that minimum wages are more common in higher cost states (though this seems to be the case) - I said they do the least damage there because the real wage rates are likely to be naturally higher. In lower cost states, the real wage rates are likely lower and even the federal minimum wage can cause more unemployment than a higher minimum wage in a high cost state.

In which case, you're correct. We would find industries and unions in higher cost states advocating a higher minimum wage because it will do them minimal damage, but it will force many competitors in lower cost states out.

Again, I'm not sure if the data actually supports this. Wouldn't surprise me to find there's a study or two out there.