Arnold Kling  

The Minimum Wage, Con't

Export-led growth?... SEC Taxes Mutual Funds?...

Glen Whitman writes,

The minimum-wage advocates who have thought much about it (of course, many haven't) usually have in mind some kind of monopsony model - that is, they assume a market in which employers have some degree of monopoly buying power. Under monopsony, wages can in theory be increased within a certain range with no reduction (and maybe even an increase) in employment. But if the wage rises above a critical point, then disemployment kicks in. Thus, a believer in the monopsony model can consistently favor small increases in the minimum wage while still opposing large ones.

In a product market, a monopolist will charge a price that is too high. In theory, the government can improve welfare by setting a price ceiling. The case of a labor market monopsonist (only one employer), the symmetrical argument is that a wage floor can improve welfare.

It's hard to think of any real-world labor market monopsonists. Perhaps there is monopolistic competition--many firms, each with some price-setting and wage-setting power. However, in a monopolistically competitive market, price ceilings (and presumably wage floors) do not increase output and employment. Instead, they drive firms out of business.

In any case, I expect that we are reaching the point in the business cycle where wage growth picks up. If there is a problem with wages being too low, that problem will have gone away by inauguration day, and perhaps sooner.

For Discussion. If you were advising Senator Kerry, what economic issues would you recommend using in his campaign?

Comments and Sharing

CATEGORIES: Labor Market

COMMENTS (18 to date)
Bernard Yomtov writes:

1. An out-of-control deficit.

2. Republican policies that seek to create a tax-exempt aristocracy.

Jim Glass writes:
The minimum-wage advocates who have thought much about it (of course, many haven't) usually have in mind some kind of monopsony model

I doubt if most advocates of a higher minimum wage could even pronounce "monopsony", much less have a monopsony model in mind.

"If you were advising Senator Kerry, what economic issues would you recommend using in his campaign?"

2. Republican policies that seek to create a tax-exempt aristocracy.

Right! Get rid of all the tax-exempt family trusts that let the Kennedys escape estate tax for generations to reign as the aristocracy of the Democratic Party.

I think some other Democrats might even go for that!

"I don't need Bush's tax cut. I have never worked a [bleeping] day in my life."

-- Rep. Patrick Kennedy (D-R.I.) in spite of never having worked a day in his life, at an anti-Bush rally as quoted in the the WaPo 6/27/03, commenting (however inadvertently) of the effectiveness of the estate tax as a wealth-and-power leveler and on the sincerity of Democratic anti-aristocracy policies in general.

I agree with #2. Go ahead Kerrey! Make 'em sincere! See if Dem. Rep. P.K. will vote for the idea of having to go out and get a job.

Bernard Yomtov writes:

Gee, Jim. You mean the Kennedys are the only family that benefits from trusts and the like? No Republican would ever set up a trust, I guess. Aren't you letting visceral hatred overcome mess with your brain?

Let's see. Eliminate estate taxes. Reduce, and try to eliminate, taxes on dividend income and capital gains. That sounds like a formula for creating an aristocracy to me.

And please, no standard lies about how the wealthy dodge the estate tax and it only hits small businessmen and farmers.

As far as monopsony goes, I actually can spell it and pronounce it and do understand it quite well, thank you. How many opponents of minimum wage increases do you think understand that competitive markets have to satisfy certain conditions, and are not simply an Edenic state spoiled by the serpent of government?

Walker writes:

1. Health Care/Health Insurance -- a simple and very tangible issue for many Americans.
2. Boosting the manufacturing sector -- plays well in the critical Midwest region. Having a plan is fine, but needs to do more to show that he understands the scope of the problem, and is genuinely willing to give it priority. In other words, he needs to "connect" with this block of voters.
3. The twin deficits -- An abstract issue, but worth hammering on in that it fits well into winning theme of depicting Bush as irresponsible and incompetent.
4. John Edwards' theme of the tax structure favoring wealth (corporate tax evasion/ relatively low capital gains rate/dividend ax cut/estate tax) rather than work.

Mcwop writes:

Bernard, perhaps you are right. However, I never see the Democrats propose a direct tax on intangible wealth. How about a 5% tax on all intangible property if the total value is greater than $25 million (Florida does something similar, and has no income tax)?

This means that a certain ketchup heriess would have to give up $27.5 million of her $550 million fortune each year. This would be in stark contrast to a minscule tax hike on two people each working 60 hours per week, and each earning $120,000.

I do need to point out that people could always avoid capital gains taxes, and dividend taxes. One simply had to own non-dividend paying stocks, and when one needs cash, then just sell a losing position.

My next proposal is that Kerry could run opposed to government policies that contribute to the high cost of health insurance.

Five different states require consumers to buy coverage for wigs. Yes, wigs. Other types of required coverage include alcoholism (45 states) and infertility treatment (14 states), contraceptives (25 states), acupuncturists (10 states), marriage therapists (14 states), massage therapists (2 states), and osteopaths (21 states). States have passed over 1,500 laws mandating that health-insurance purchasers (individuals and employers) buy particular types of coverage they may or may not want, usually at the behest of those who provide the covered service.
Studies have found these mandates increase the cost of coverage by 15-30 percent, and prevent up to 25 percent of the uninsured from purchasing insurance. The situation is so bad that a few years ago Vermont Gov. Howard Dean (D) — ... — begged Vermont's legislature to stop enacting mandates because they were making coverage too expensive.

Story Link

Lastly, if Kerry could articulate an alternative startegy against terrorism - not a Bush bashing one - but a truly better alternative.

That is a platform that would get my vote.

Where is Grover Cleveland when you need him?

Bernard Yomtov writes:


What do you mean by "intangible property?" Financial assets? Wouldn't such a tax just get people to buy real estate and such? Why tax one form of wealth and not others? Shares of Home Depot are taxed, but not a string of hardware stores?

I personally have never liked the idea of a general wealth tax, in part because wealth is even harder to measure than income. To take just one example, I am an investor in couple of privately held companies. Figuring out what those companies are worth, and hence how much wealth my investments represent, is not easy. And of course tons of companies are privately held, probably more than are public. Valuing any asset for which there is no public market is a crap shoot.

I do agree with you about health insurance mandates. The phrase "optional at extra cost" comes to mind. Still, I have a hard time seeing that as a big winner, unless it's maybe paired with some major reform.

You are right that you can avoid dividend taxes by buying non-dividend stocks. And you can sell losers to raise cash, but you run out of losers after a while, I hope. In fact, even without a lower rate, the ability to time capital gains so as to minimize taxes has always been a significant advantage for this form of income.

On the terrorism front, I would like to see more action on things like port security and training and supplying "first responders," especially the latter. I don't know if that constitutes "Bush-bashing" or not. I don't even know if it's a strategy. In my world-view blocking and tackling - getting the basics right - is generally more valuable than grand visions. Unfortunately grand visions are sexier.

Mcwop writes:

Using the Florida definition the most common types are:

-Shares or units of a mutual fund, including money market funds
-Ownership interest in a limited liability company
-Interest in limited partnerships registered with the Securities and Exchange Commission.
-Accounts receivable not arising from your normal course of trade or business

Real Estate is easy to tax since there are assessments readily available in most/all states (think property taxes). As to non-public companies, there are a number of ways to value them - maybe use book value.

I don't think a wealth tax is that difficult to administer. Estate taxes are a wealth tax, and that is a working system in place already. If it truly extracts more money out of the rich (remember in my proposal total assets under a certain level are exempt) then the extra expense might be worth the extra revenues to the treasury.

The wealth tax is one of the few ways to make sure you are hitting actual rich people – if that is your thing. I don’t understand why people that complain that the rich don’t pay enough oppose a true wealth tax.

At least if you are going to raise income taxes raise them on the truly rich, not start at $200,000 income (that could be a small businessman having one moderately good year).

Agree with your terrorism assessment, and no that was not Bush bashing that was common sense strategy/solutions.

Lawrance George Lux writes:

Advise to Senetor Kerry:
1) advocate a new Tax plan:
a) actually reduce tax rates
b) advocate denial of all tax credits, exemptions, and tax remissions unless and only if they are remitted on Individual or family household income.
c) Make Business and Corporation responsible Payee for Capital Gains taxes, with Individuals responsible for filing proper Tax returns for tax rebates.
d) Completely eliminate all tax remissions for Debt, allowing only the subtraction of losses.
e) set a uniform tax credit for work-related expense of Individuals, allowing the Economy to adjust compensation due to work-related costs.
f) Work to eliminate Excise taxes and/or insistence all taxes paid on a product be listed on the package and invoice.
g) Federal prohibition of State/Local Free Trade zones, insisting all Businesses pay equal share of Federal/State/Local tax assessments.
h) Insist all Foreign and Foreign Products pay an equal share of U.S. taxes as do domestic Products and Producers of like Products.

Kerry does not have the guts, but it is how you handle Job outsourcing, tax evasion, Corporate overpricing, Corporate Execitive Wage package overcompensation, and Domestic Producers' transfer of production overseas. lgl

Bernard Yomtov writes:


Glad you agree on terrorism. My own opinion is that it's very unlikely we can stop all terrorist plots, so we will most probably be hit with at least one attack in the next 2-3 years. I hope I'm wrong, but I think it would be imprudent, to say the least, to assume this won't happen.

Tragic as it will be, it will be worse if people die because we haven't given police, firefighters, EMS, etc. the training and equipment needed to deal with the situation. If we lose 1000 people instead of 750, say, then 250 deaths will be our fault.

Chris writes:


So who are you voting for? How about some electoral guidance for those of us still struggling with who to support?

I don't think I can vote for Bush (whom I voted for in 2000) because he sent us into Iraq.

I would vote for Kerry, but my libertarian principles, like yours, makes the idea of voting for a Democrat impalatable.

What to do?

Jervis Ninehammer writes:

Kerry is already pushing reform of health care as a theme. This is a good issue for Democrats. A corollary issue is the high price of prescription drugs. Kerry's proposals have no substance and probably wouldn't make it through Congress, but they might garner some votes. An education plan is the kind of thing Democrats would support, and swing voters might approve. Another idea would be to promise to use the money spent in Iraq on some popular domestic program (building roads or hospitals or some such). Kerry would be wise to downplay tax increases and deficit reduction, as this would be preaching to the choir.

Larry Jones writes:

A low-wage employment tax credit. It would accomplish the same intended goals of an increase in the minimum wage without the effect of driving down employment among low-wage workers.

I'm not advocating this by any measure, but it would be a very nifty, DLC-like proposal that doesn't stink of the stale, worn-out Democratic playbook.

joe shropshire writes:

We've already got that, Larry -- it's called the Earned Income Tax Credit. Here's the IRS FAQ if you are interested :

Earned Income Tax Credit (EITC) Questions and Answers

John Johnson writes:

Chris -

Why don't you actually vote Libertarian then. There is no doorprize for voting for the winner, and your vote will go to actually building a party rather than further entrenching what's already there.

Yet another Chris writes:

Well, as a Republican and a macroeconomist I have my own views that might not jibe with most Democrats'. Well, here goes:

1. Simplifying the tax code, eliminating most deductions including the mortgage interest deduction. Also eliminating the health insurance deduction, thus decoupling insurance from employment.

2. Pollution taxes or permit auctions (CO2?), allowing taxes on wages and capital to be reduced. At the same time eliminate most command and control regulations.

3. Eliminating most if not all corporate welfare schemes (e.g. agricultural subsidies).

4. I'm not so sure what to do about health care. Whatever happens, it won't pass Congress anyway.

5. Freeing up international trade and simplifying stuff like immigration and visas. The current system penalizes law-abiding foreigners while favoring illegals.

6. Realizing that there's no social security trust fund and planning accordingly. Private accounts are a good idea but hard to finance initially.

Larry Jones writes:

I know we have the EITC, but since when has anybody on the left worried about redundancy when it comes to the redistribution of wealth?

Something like my idea could be a credit to employers to pay for health care or something for low-wage workers. I think you get the idea.

I don't understand why Kerry's not doing it. It sounds good, and it doesn't come across as something old and tired like the class warfare garbage about the minimum wage.

John Doe writes:


There are no other 'economic' issues.

Jeff Smith writes:

I found the original post a bit odd. I do not
think anyone believes the monopsony model of the
low wage labor market. It is in the Card and
Krueger minimum wage book to respond to academic
critics who hammered them for not having a model.
I watched Alan get hammered on this in the Becker
workshop at Chicago back in my grad student days.

I think that intelligent people who advocate the
minimum wage (i.e., Alan and David) are looking
at the empirical literature, not the theoretical
literature. That literature suggests that the
employment effects are small and the wage effects
a bit less small. There are reasons to think the
literature may be biased downward - for example,
the famous Card and Krueger diff-in-diff study
looks only for instantaneous effects, while I
expect most of the effects actually come about
through capital/labor substitution (e.g., letting
customers fill their own soft drinks) over the
medium term. Nonetheless, if you take the
empirical literature at face value, advocating
small increases is not stupid. I wouldn't do
it because of the problem noted (and other issues
like the endogeneity of the state-level minimum
wages used to identify the effects in many of
the available studies) but it is not stupid on
the face of it.

An even less stupid position, which has been
hinted at in some of the earlier responses, is
to advocate a minimum wage plus the EITC. The
minimum wage makes sure that a good chunk of the
EITC goes to the worker instead of to the firm.

Again, I would prefer to just leave the labor
market alone. At the same time, it does not
advance the debate to assume that anyone who
supports small increases in the minimum wage
is a blithering idiot who does not understand
Economics 101. What people who do not like
the minimum wage should be doing is going after
the empirical literature, which, despite its
size, is an appealing target, at least in my

Jeff Smith

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