Cafe Hayek: The Downside of Minimum-Wage Legislation
Jake Russ
· 3 months ago
The NYT article states "...When the Russell Sage Foundation announced a grant to help finance the survey, it said that low-wage workers were “hard to find” for interviews..."
Exactly. They're hard to find for interviews because minimum-wage laws destroy jobs for low-skilled workers. You can't interview the guy/gal whose job doesn't exist.
Reuvain Borchardt
· 3 months ago
If these evil, greedy business owners had not been able to "violate" wage laws, many of them likely would have been unable or unwilling to hire these workers in the first place.
It is utter arrogance for any politician to think that he/she can decide on my "proper" wage better than I and my employer can negotiate on our own.
vikingvista
· 3 months ago
“When unscrupulous employers break the law, they’re robbing families of money to put food on the table, they’re robbing communities of spending power and they’re robbing governments of vital tax revenues.”
It is a big assumption that those workers would be employed at higher wages (HINT: there ARE higher wage jobs, and they AREN'T employed at them).
It is an obvious false assumption that those workers would prefer unemployment to the employment they chose (HINT: they've asserted their preferences by keeping those jobs).
Now here's an experiment. Let's have the government storm in and vigorously enforce the wage laws for those companies. Let's then follow-up 12 months later and see how many of those same employees remain employed.
Justin P
· 3 months ago
The problem, especially in Econ, is that you can't design and run an experiment that explicitly tests your hypothesis. Hence the moniker "Dismal Science." It would be nice if we could, hold everything constant and test.
The way we have it now, is that you can test and prove almost anything you want, which is why we have Keynes.
jakeruss
· 3 months ago
Actually Justin, the term "Dismal Science" comes from Thomas Carlyle in response to economic theories related to Malthusian growth stagnation and ending slavery. In both cases according to Carlyle, the economics led to grim predictions. What you've stated does not follow.
You're correct we can't test things in lab conditions, but natural experiments happen all the time. You just have to know where to look.
vikingvista
· 3 months ago
"you can't design and run an experiment that explicitly tests your hypothesis"
That is definitely a severe limitation of empirical economic analysis, and one that those using economic studies do not seem to fully appreciate when it comes to the confidence in which they assert their conclusions.
The solution to that problem is not to toss up your hands at the futility of economic knowledge. It is to place greater emphasis on an objective rational framework in which to interpret observed data. The depth and complexity of that framework must be greater than what is frequently necessary in the hard sciences. That, and an irrational skepticism against objective reason (and perhaps an element of intellectual laziness, or ideological defense), leaves many economists clinging to the impossible notion of an empirical economic science.
With minimum wage, we have a good example of this. You have the latter type of economist actually thinking that the C-K data proved (and could possibly prove) the objective necessary rational foundation of economics to be incorrect.
A good economist (e.g. one from the school of Mises) would rightly treat any empirical claim requiring that logical contradictions are real, or that human nature is not what it is, with extreme skepticism.
dmooreca
· 3 months ago
The RSF study shows that many low wage workers voluntarily supply their labor below the arbitrary price set by the government. Both the employer and worker benefit from such a voluntary exchange; otherwise the exchange would not occur. Employers necessarily would demand fewer low wage workers at the higher government-set price, as they would not benefit from such an exchange at the margin.
The RSF study undermines the Card-Krueger work by showing that that market rate for labor often prevails despite government price fixing. Thus, the aggregated employment data used in the analysis may not capture the true quantity of labor that would be demanded were the minimum wage universally accepted/enforced.
danielkuehn
· 3 months ago
Card and Krueger hang a lot of their very (theoretically) suspect blockbuster results on tenuous instrumental variable models. There was an article in the Economist recently about these models and why we should all be a little skeptical.
I presented a paper at an IZA seminar this spring, and mine was one of only a couple papers that did not implement an IV model. But you know what? The only people that believed any of those IV models were the authors of the papers. That should tell us something...
Krueger-Card
· 3 months ago
it is the magnitude of the decrease that is in question. see, for example, Krueger-Card, who find "no indication that the rise in the minimum wage reduced employment." http://web.uvic.ca/~hschuetz/econ370/CardKruMW.pdf
Sam Grove
· 3 months ago
The new study reveals that the reason the minimum wage has had little impact is because it is routinely ignored, by both employer and employees.
If government we able to effectively enforce such a wage, the statistics might reveal a different story.
hamilt0n
· 3 months ago
1) Europe is not a country. 2) Most countries in Europe have permanently higher rates of unemployment than in the US, which would support the thesis that minimum wage laws hurt low-wage workers.
Sam Grove
· 3 months ago
Careful who you click to reply to.
Europeans also, unwittingly, accept a lower standard of living as a result. Perhaps that is why they resent Americans.
vikingvista
· 3 months ago
Great point. The new study clearly undermines the Card/Kreuger study, even though both are from the same ideological bent.
Sceptic
· 3 months ago
Well, what about other countries like Europe? And what about big companies rather than small companies? I'd be interested in a study that tries to quantify the effect on big companies (more than 200 employees).
I think that those companies can adjust to minimum wages more easily and compensate the payroll costs in an adequate fashion.
So what about giving minimum wages based on company size?
vikingvista
· 3 months ago
Most bigger companies probably don't use such low wage labor. But the fact will always remain, that if an employer does not think he can bring in from a person's labor more than that labor costs him, he simply won't buy that labor.
That may mean the employer chooses not to do those low labor tasks, or it may mean he distributes those tasks among the existing responsibilities of his higher wage employees.
Either way, no matter how you slice it, it is the low wage worker who suffers most.
The true minimum wage is always zero.
Draw your supply and demand curves, cut them with an above market price floor, and tell me if you like what you see--a surplus of supply (labor).
johndewey
· 3 months ago
Large companies already face health insurance mandates which small companies can avoid. So what happened to large company low wage jobs as health insurance costs went through the roof? Those jobs were outsourced to small companies that didn't have the mandated benefits burden of large companies.
If large companies but not small companies were subject to high minimum wage laws, the large companies would outsource even more functions.
billy_h
· 3 months ago
What about this paragraph:
“These practices are not just morally reprehensible, but they’re bad for the economy,” said Annette Bernhardt, an author of the study and policy co-director of the National Employment Law Project. “When unscrupulous employers break the law, they’re robbing families of money to put food on the table, they’re robbing communities of spending power and they’re robbing governments of vital tax revenues.”
Is she implying that paying more than the market wage is somehow beneficial to the economy?
vikingvista
· 3 months ago
Worse. She falsely thinks that minimum wage laws result in them getting higher than market wages, rather than the greatest available wage less than or equal to the market wage (otherwise known as "zero").
Ike Pigott
· 3 months ago
“When unscrupulous employers break the law, they’re robbing families of money to put food on the table, they’re robbing communities of spending power and they’re robbing governments of vital tax revenues.”
So, an employer who chooses to not fill an open position is now a criminal.
Maybe they should be forced to give back to the community the amount of tax revenue they aren't paying because they didn't hire someone.
karl_lembke
· 3 months ago
davesmith001: Read a little further.
"...many small businesses say they are forced to violate wage laws to remain competitive."
The labor isn't worth the price small businesses are being required to pay for it.
joenorton
· 3 months ago
I think Dave got it.
Also a note on the effects of minimum wage, notice that teenage unemployment is at the highest ever (Gov. has only been keeping track since 1948), and it's about 3x the national rate and 4x the rate of skilled and experienced workers over the age of 55. It ain't easy when the government makes it illegal for you to work at your productivity corresponding wage rate.
davesmith001
· 3 months ago
Easy...stopped reading after the first few paragraphs. An above market clearing wage allows employers to more easily abuse workers without those workers quitting.
OR---the jobs are so good for employees that have them, they won't quit.
Curious
· 3 months ago
The employees don't get the above market clearing wage Dave, they get the actual market rate (the violations reduce the actual wage).
The reason they don't quit is, because they're happy with the actual market rate (that's why it's called the market rate).
If they ask for the above market rate, they get fired or suspended (2nd paragraph from the bottom). I think that's the answer to Don's question.
lafp1958
· 3 months ago
How do you know it is what the market will bear? I don't think you can make any judgements on the article unless you take the profit margin of the companies that are denying these wages to the employees.
The workers are human, per the article mainly women with childen, poor, mobility is sometimes limited for low wage employees(jobs they can get to, time they have to look for new employment, ability to relocate to a different city) , so yes, they work for what they can get but not becuase they really want to or are happy with the wage; they have to. They do not have all of these fantasy options that you all dream up.
mgroves
· 3 months ago
Seems pretty obvious: a firm can take advantage of illegal immigrants who might be afraid to take legal action (because of their illegal status, obviously) and do other cost-reducing activities that they are unlikely to get punished for in order to get around minimum wage laws.
"But many small businesses say they are forced to violate wage laws to remain competitive."
I haven't read the Card/Krueger book, so is there something less obvious?
juandos
· 3 months ago
What can you say for Card and Krueger other than the day to day realities obviously don't make any impact on them at all...
"Low-wage workers are routinely denied proper overtime pay and are often paid less than the minimum wage..."
Now there's more than one reason why these people get the minimum wage and deserve it...
surfisto in Chile
· 3 months ago
If I read the Russell Sage study a year ago I would blame the findings on the "greedy capitalists" as I think many will think who read the study. So it's confirming what I guess would be the left's thoughts on the Card/Krueger BOOK (They have a whole book), higher min wage good, capitalism bad. All (we) have is this study that we claim to be the results of min wage and not greedy capitalists. I think we need a better or more understandable arguement. I want to understand an agruement for abolishing min wage. Are we talking about " Input Price Equalization?" So if we get rid of min wage more firms will move back to the US and also hire more workers creating more demand for labor raising the wage rates as firms compete for labor?
Mike
· 3 months ago
For starters, it is clear that the minwage is binding ...
schwabby
· 3 months ago
Yes, I can explain why: they are being cleaned by capitalism. Get rid of all those darned laws and regulations and they will be even cleaner, like a Mr. Clean who can"t afford clothes.
schwabby
· 3 months ago
Yes, I can explain why. They have been cleaned by capitalism!
MWG
· 3 months ago
"Can you explain why?" -Prof. Boudreaux
I'd prefer it if you "spell it out" for me.
Yair
· 3 months ago
Prof Boudreaux,
Here is a first order proposed explanation: Free consenting adults will tend to contract when it is in their mutual interests to do so no matter what legislation says. The fact that (almost) everybody is in contravention of the legislation just goes on to prove that this legislation is largely irrelevant.
Here is a second order explanation: we can infer rules of just conduct from the observation of the actions of market actors. This empirical study tends to demonstrate that the law (in the Hayekian acception of the term - that is rules of just conduct) is that people are free to enter into any contract they like if they don't harm a third party. Luckliy, people follow the law despite the fact that there exist a legislation which purports to override it.
politicalcalcs
· 3 months ago
While employers that rely upon low-wage employees see an increase in their cost of doing business thanks to mandated minimum wage increases, they do not see a corresponding increase in their revenues to compensate for the difference.
The new study demonstrates a number of methods by which some employers might control their costs of continuing to employ such workers rather than by reducing their hours or by reducing their ranks.
Speaking of which, here's a tool where you can put yourself in the shoes of a small business owner having to deal with an increase in the minimum wage. And speaking of teen jobs, see here for the data that confirms the disproportionate impact of the recession and minimum wage increases upon the least educated, skilled and experienced portion of America's workforce.
SheetWise
· 3 months ago
70% of those interviewed were immigrants, and the groups median wage was over the prevailing minimum wage in all three cities.
NathanS
· 3 months ago
Easy, the number of jobs doesn't decrease because there is no real minimum wage being applied. Employers simply reduce the minimum wage to the market wage by forcing people to work off the clock, or not take other benefits like workers compensation.
eidolways
· 3 months ago
He hit the nail on the head, here. It's rather like the drug war. Outlawing drugs doesn't mean people stop wanting drugs. Rather, the market is forced underground and the only way for users to obtain the object of their demand is through illegal channels.
It is the same here. With minimum wage laws, they have effectively outlawed low-wage labor. But outlawing low-wage labor does not reduce the demand for it. Rather, it means that low-wage labor must be obtained through "extra-legal" means. In this case, that means intentionally skirting the laws and pressuring employees to help the employers control costs by doing the same.
LowcountryJoe
· 3 months ago
And if the arrangement persists, how much of the work off the clock is being forced?
hamilt0n
· 3 months ago
According to undergrad micro:
If firms do not employ fewer workers as when the minimum wage increases it means the marginal rate of technical substitution didn't change. This means either the marginal product of capital changed proportionally and simultaneously with the MP of labor, or that the wage change didn't affect the MP of labor.
If the latter, it seems that businesses began to expect proportionally greater amounts of output for the change in wages or that workers were willing to do the same amount of work as paid for by prior wages, or both.
I also suggest that the minimum wage reduces the supply of jobs below that wage level thus increasing the relative demand for such jobs, which is most detrimental to those with the least valued skills. That makes it a buyer's market.
vikingvista
· 3 months ago
I think you are using "supply" and "demand" opposite to what I am used to. Laborers supply labor. Employers demand it. A minimum wage is a price floor which, when above the equilibrium price, creates a supply surplus (aka unemployment).
Sam Grove
· 3 months ago
You do have to flip perspective. Employers have a demand for employees. Workers have a demand for jobs (income). Employers supply jobs. Workers supply labor.
Minimum wage reduces the supply of below min. wage jobs. Ignoring such laws will increase the supply of such jobs.
One problem with the discussion over jobs is the inability of many to perceive jobs as a cost. I tried to explain to a friend that the purpose of economic activity is to create goods and services, not to create jobs.
vikingvista
· 3 months ago
I'm not sure you have to flip perspective, but you certainly can, and still present equivalent concepts.
When you increase costs on supply (e.g., supply being those companies which hire people and manufacture products) it does increase supplied price per unit quantity (i.e. shifts the supply curve left). But the prices and quantities for the S/D curves in that analysis are for the manufactured product being sold, not the labor.
When analyzing the price and quantity of labor (wages), labor is supplied by workers, demanded by employers. E.g., employers will want more labor when the price decreases (that is a demand curve). Workers will want to provide more labor when the price increases (a supply curve).
Sam Grove
· 3 months ago
I meant you have to flip it to get the way I put it.
pipertom
· 3 months ago
Prof Boudreaux reply is wonderful (as usual) but leaves out one important thing: the statute that putatively overrides the law ALSO raises the costs of the transaction (the hiring). Therefore, the harm to low wage workers is direct.
dce
· 3 months ago
I have not read the book but would like to know what time frame the data covers. I would think that a profitable business may let natural attrition take care of any extra labor. I know when I managed a restaurant that employed a lot of minimum and just above minimum wage I would cut hours (no over time) in the short run and cut back on hiring. Most (if not all) unskilled labor industries have very high turnover over 40%+. I watched my P&L close as I am sure any business owner does, but you still have a service or good to provide to your customers. So there has to be some stickiness to the amount of employees that you have. As people leave naturally you would not want to fill behind that person and split up those duties to other employees. It may take some time to see an impact. This is assuming you have not been able to increase prices or decrease services.
Jobs For Teens
· 3 months ago
You are all saying the same thing. I have a job listing site for teens (quite a popular one) and none of them can land a job these days except with me as all my work is legitimate online work. The companies that I put them into hire them on the same day anywhere in the world. So there are options out there. Online work is the ultimate teen job, It's just a matter of weeding out the good places from the bad placed to work for. Great article.
All Comments
Exactly. They're hard to find for interviews because minimum-wage laws destroy jobs for low-skilled workers. You can't interview the guy/gal whose job doesn't exist.
It is utter arrogance for any politician to think that he/she can decide on my "proper" wage better than I and my employer can negotiate on our own.
It is a big assumption that those workers would be employed at higher wages (HINT: there ARE higher wage jobs, and they AREN'T employed at them).
It is an obvious false assumption that those workers would prefer unemployment to the employment they chose (HINT: they've asserted their preferences by keeping those jobs).
Now here's an experiment. Let's have the government storm in and vigorously enforce the wage laws for those companies. Let's then follow-up 12 months later and see how many of those same employees remain employed.
It would be nice if we could, hold everything constant and test.
The way we have it now, is that you can test and prove almost anything you want, which is why we have Keynes.
You're correct we can't test things in lab conditions, but natural experiments happen all the time. You just have to know where to look.
That is definitely a severe limitation of empirical economic analysis, and one that those using economic studies do not seem to fully appreciate when it comes to the confidence in which they assert their conclusions.
The solution to that problem is not to toss up your hands at the futility of economic knowledge. It is to place greater emphasis on an objective rational framework in which to interpret observed data. The depth and complexity of that framework must be greater than what is frequently necessary in the hard sciences. That, and an irrational skepticism against objective reason (and perhaps an element of intellectual laziness, or ideological defense), leaves many economists clinging to the impossible notion of an empirical economic science.
With minimum wage, we have a good example of this. You have the latter type of economist actually thinking that the C-K data proved (and could possibly prove) the objective necessary rational foundation of economics to be incorrect.
A good economist (e.g. one from the school of Mises) would rightly treat any empirical claim requiring that logical contradictions are real, or that human nature is not what it is, with extreme skepticism.
The RSF study undermines the Card-Krueger work by showing that that market rate for labor often prevails despite government price fixing. Thus, the aggregated employment data used in the analysis may not capture the true quantity of labor that would be demanded were the minimum wage universally accepted/enforced.
I presented a paper at an IZA seminar this spring, and mine was one of only a couple papers that did not implement an IV model. But you know what? The only people that believed any of those IV models were the authors of the papers. That should tell us something...
see, for example, Krueger-Card, who find "no indication that the rise in the minimum wage reduced employment."
http://web.uvic.ca/~hschuetz/econ370/CardKruMW.pdf
If government we able to effectively enforce such a wage, the statistics might reveal a different story.
2) Most countries in Europe have permanently higher rates of unemployment than in the US, which would support the thesis that minimum wage laws hurt low-wage workers.
Europeans also, unwittingly, accept a lower standard of living as a result.
Perhaps that is why they resent Americans.
I think that those companies can adjust to minimum wages more easily and compensate the payroll costs in an adequate fashion.
So what about giving minimum wages based on company size?
That may mean the employer chooses not to do those low labor tasks, or it may mean he distributes those tasks among the existing responsibilities of his higher wage employees.
Either way, no matter how you slice it, it is the low wage worker who suffers most.
The true minimum wage is always zero.
Draw your supply and demand curves, cut them with an above market price floor, and tell me if you like what you see--a surplus of supply (labor).
If large companies but not small companies were subject to high minimum wage laws, the large companies would outsource even more functions.
“These practices are not just morally reprehensible, but they’re bad for the economy,” said Annette Bernhardt, an author of the study and policy co-director of the National Employment Law Project. “When unscrupulous employers break the law, they’re robbing families of money to put food on the table, they’re robbing communities of spending power and they’re robbing governments of vital tax revenues.”
Is she implying that paying more than the market wage is somehow beneficial to the economy?
So, an employer who chooses to not fill an open position is now a criminal.
Maybe they should be forced to give back to the community the amount of tax revenue they aren't paying because they didn't hire someone.
"...many small businesses say they are forced to violate wage laws to remain competitive."
The labor isn't worth the price small businesses are being required to pay for it.
Also a note on the effects of minimum wage, notice that teenage unemployment is at the highest ever (Gov. has only been keeping track since 1948), and it's about 3x the national rate and 4x the rate of skilled and experienced workers over the age of 55. It ain't easy when the government makes it illegal for you to work at your productivity corresponding wage rate.
OR---the jobs are so good for employees that have them, they won't quit.
The reason they don't quit is, because they're happy with the actual market rate (that's why it's called the market rate).
If they ask for the above market rate, they get fired or suspended (2nd paragraph from the bottom). I think that's the answer to Don's question.
The workers are human, per the article mainly women with childen, poor, mobility is sometimes limited for low wage employees(jobs they can get to, time they have to look for new employment, ability to relocate to a different city) , so yes, they work for what they can get but not becuase they really want to or are happy with the wage; they have to. They do not have all of these fantasy options that you all dream up.
"But many small businesses say they are forced to violate wage laws to remain competitive."
I haven't read the Card/Krueger book, so is there something less obvious?
"Low-wage workers are routinely denied proper overtime pay and are often paid less than the minimum wage..."
Now there's more than one reason why these people get the minimum wage and deserve it...
I think we need a better or more understandable arguement.
I want to understand an agruement for abolishing min wage. Are we talking about " Input Price Equalization?" So if we get rid of min wage more firms will move back to the US and also hire more workers creating more demand for labor raising the wage rates as firms compete for labor?
-Prof. Boudreaux
I'd prefer it if you "spell it out" for me.
Here is a first order proposed explanation: Free consenting adults will tend to contract when it is in their mutual interests to do so no matter what legislation says. The fact that (almost) everybody is in contravention of the legislation just goes on to prove that this legislation is largely irrelevant.
Here is a second order explanation: we can infer rules of just conduct from the observation of the actions of market actors. This empirical study tends to demonstrate that the law (in the Hayekian acception of the term - that is rules of just conduct) is that people are free to enter into any contract they like if they don't harm a third party. Luckliy, people follow the law despite the fact that there exist a legislation which purports to override it.
The new study demonstrates a number of methods by which some employers might control their costs of continuing to employ such workers rather than by reducing their hours or by reducing their ranks.
Speaking of which, here's a tool where you can put yourself in the shoes of a small business owner having to deal with an increase in the minimum wage. And speaking of teen jobs, see here for the data that confirms the disproportionate impact of the recession and minimum wage increases upon the least educated, skilled and experienced portion of America's workforce.
It is the same here. With minimum wage laws, they have effectively outlawed low-wage labor. But outlawing low-wage labor does not reduce the demand for it. Rather, it means that low-wage labor must be obtained through "extra-legal" means. In this case, that means intentionally skirting the laws and pressuring employees to help the employers control costs by doing the same.
If firms do not employ fewer workers as when the minimum wage increases it means the marginal rate of technical substitution didn't change. This means either the marginal product of capital changed proportionally and simultaneously with the MP of labor, or that the wage change didn't affect the MP of labor.
If the latter, it seems that businesses began to expect proportionally greater amounts of output for the change in wages or that workers were willing to do the same amount of work as paid for by prior wages, or both.
That makes it a buyer's market.
Employers have a demand for employees.
Workers have a demand for jobs (income).
Employers supply jobs.
Workers supply labor.
Minimum wage reduces the supply of below min. wage jobs.
Ignoring such laws will increase the supply of such jobs.
One problem with the discussion over jobs is the inability of many to perceive jobs as a cost. I tried to explain to a friend that the purpose of economic activity is to create goods and services, not to create jobs.
When you increase costs on supply (e.g., supply being those companies which hire people and manufacture products) it does increase supplied price per unit quantity (i.e. shifts the supply curve left). But the prices and quantities for the S/D curves in that analysis are for the manufactured product being sold, not the labor.
When analyzing the price and quantity of labor (wages), labor is supplied by workers, demanded by employers. E.g., employers will want more labor when the price decreases (that is a demand curve). Workers will want to provide more labor when the price increases (a supply curve).
So there has to be some stickiness to the amount of employees that you have. As people leave naturally you would not want to fill behind that person and split up those duties to other employees. It may take some time to see an impact. This is assuming you have not been able to increase prices or decrease services.