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New Illustration of the Folly of the Minimum Wage

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Don Boudreaux has come up with the first new way to explain the folly of the minimum wage I've read in years:

Allow me here to spin the core argument -- that minimum-wage legislation prices many low-skilled workers out of their jobs -- by wondering aloud if proponents of higher minimum wages would ever make the following claim:
The market prices of most used-cars are too low for sellers of those cars to support their families. This fact is especially true for poor people, who, when they sell their old cars, almost always have only old, high-mileage, often dilapidated used-cars to sell. These people aren't selling two-year-old Lexuses or BMWs. They're selling 15-year-old Chevys and 20-year-old Hondas. So let's enact legislation mandating that no used-car can sell for less than, say, $25,000. That way, anyone who sells a used-car is assured that he or she will earn at least enough money to support a family for a year.

I doubt that many people would argue that government should legislate a minumum price for used-cars. But why not? If merely identifying a problem with a low price (such as "At the current minimum wage, even full-time workers can't support a family of four") is sufficient to justify legislative action to raise that price, why won't such action work for used-cars as well as it will work for labor hours?

Good question. I may have to add it to my Labor Economics lecture on regulation. It would fit well next to my discussion of the Bryan Caplan Anti-Exploitation Act, a law which makes it illegal for anyone to hire me for less than $1M/year, and requires any employer to give me a support staff of ten RAs, ten TAs, and a chauffeur.


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COMMENTS (26 to date)
Half Sigma writes:

This is a straw man argument... NO ONE IS SUGGESTING A MINIMUM PRICE FOR USED CARS.

They aren't even comparable because used cars aren't fungible goods (1 year old Merdeces vs. 20 year old Chevy), while low wage workers are.

Chuckles writes:

The argument misses the point. Used cars dont suffer regardless of how low they are sold; in other words, subjective values placed on used cars dont have any *direct* human impact.
Labor is intrinsically human, hence the argument for a living wage - an argument, which BTW, I dont agree with.

spencer writes:

Why is that no one can ever actually find any any of these people who are supposedly priced out of the market by the minimum wage?

The real minimum wage is now about one-third lower then in 1980.

Can you demonstrate that the number of potential employees priced out of the market is lower now then it was in 1980?

Chris writes:

Half Sigma, the whole point of the exercise is that people don't suggest a minimum price for used cars, and Boudreaux is saying that the argument (which people dismiss) is similar to the argument for minimum wages. That's not a "straw man." It is called an "analogy."

JKB writes:

Half Sigma,

I fear it is you who have put forth the strawman. It is precisely that low wage earners are fungible that results in their low wage. Oil is fungible, perhaps we should retain its price high to ensure poor countries earn enough money to feed their poor? Of course, were this to happen buyers would seek to reduce their usage of oil resulting in lower revenue for the poor producers.

You seek to establish a high floor for all low wage earners. This would reduce the opportunities for many to earn any wage. Yet, it is precisely these opportunities that allow many to gain experience needed to progress to higher paying jobs. Where is the justice in denying the American dream to those willing to put forth the effort. The American dream of being able to better yourself through personal effort rather than being forced to seek leave from the government to alter your station in life.

Curt writes:

Edmund Phelps argues that there is both a private value of work and a social value of work, and that the government should institute a program to help subsidize low-wage work (see 'Rewarding Work' 1997).

Also worth noting is that Ireland, a country that most see as an economic success, has a higher minimum wage than the U.S. (it's up around 7.5 Euros/hr). And as noted, the U.S. min wage was much higher (peak in 1968). So while one may consider it a folly, it does not appear to get in the way of economic success, and it may well have enough social value to be worthwhile.

scarhill writes:

spencer says:
The real minimum wage is now about one-third lower then in 1980.

Can you demonstrate that the number of potential employees priced out of the market is lower now then it was in 1980?

Such a claim would be hard to prove, but note that the unwmployment rate is about one-third lower too--5.1% in 2005 vs 7.1% in 1980
(source).

Andrew M writes:

Robert Nozick once asked why, if a minimum wage of $10 was good, a minimum wage of $100 wouldn't be better. His point, like Don Boudreaux's, tells against a very naive proponent of a minimum wage. But a more sophisticated proponent presumably thinks that market forces don't determine a unique price for low-value labor; they determine an interval within which the actual price falls. The point of minimum wage laws is then to ensure that the actual price lies at the upper bound of this interval. I'm not endorsing this line myself, but I do suspect it's what lies behind much advocacy of minimum wage laws. Refuting this line might really advance debate.

Bill writes:

Edmund Phelps argues that there is both a private value of work and a social value of work, and that the government should institute a program to help subsidize low-wage work (see 'Rewarding Work' 1997).

We already have a program like this; it's called the Earned-Income Tax Credit.

Half Sigma writes:

"You seek to establish a high floor for all low wage earners. This would reduce the opportunities for many to earn any wage."

The same bogus argument about the minimum wage HURTING the low wage workers.

Sorry, don't buy it, the demand curve for low wage labor seems very inelastic at that level, so hardly anyone loses a job.

aaron writes:

I think that many bad or inconsequential ideas become popular because of the assumption that, literally, money IS power.

It is not. Money is just a counting device. The power only comes from the information it provides/suggests. Shifts in money distribution serve to influence behaviors (manipulating the data set). Money is not transmutable into objects and power.

samantha writes:

Half Sigma-

Theoretically we know that a floor reduces demand. I hope you accept this as given. (If not, then we have a thinking problem to address.)

Now, on a practical and real world basis, we can observe companies going to China, India, or Mexico for cheaper employees. This happens every business day and is called outsourcing. Again this is done to reduce labor costs. Companies see the lowest price (floor) as too high versus another market for the labor.

Think don't feel your way through life.

Tim Jones writes:

The real minimum wage is "zero dollars an hour", which is the one many often make in result of minimum wage laws.

That's why in many cases, many jobs are excluded from the minimum wage laws. Even the politicians recognize that some industries are far more sensitize to such price controls.

As far as the initial reply, it is a reasonable analogy. In both cases, a poor person is selling something: In one case, his time(labor) at a wage. In the other, he is selling a used vehicle.

Sorry, don't buy it, the demand curve for low wage labor seems very inelastic at that level, so hardly anyone loses a job.

Cheap labor has a very elastic demand. I'll list a few of the reasons:
automation
higher higher waged, better skilled workers
outsourcing domestically
outsourcing internationally

At a higher price, less will be demanded. we all agree on this I would suspect. Additionally, wages are typically paid in the pursuit of profit, therefore they are paid to satisfy more than just a psychic gain, such as being a movie ticket might be. IN the case of the businessman, a worker has a cost(wage) and an output. If minimum wage laws raise the price of a worker above his output, the business is losing money employing that employee. As profit margins are often razor thing, you can see how this can not ONLY disemploy workers but also cause many businesses to become less profitable, or to stop being profitable at all. This second reason is the main political force behind minimum wage: its effect at being a sort of internal tariff and cartelization device.

Half Sigma writes:

"Theoretically we know that a floor reduces demand. I hope you accept this as given. (If not, then we have a thinking problem to address.)"

The price of gasoline doubled recently, but use of gasoline in the U.S. actually rose! Now, of course I concede that use probably would have risen slightly more if the price hadn't doubled, but here is an example of a fungible good with an extremely inelastic demand curve.

Similary, I contend that the services of low wage laborers are so useful that there would be close to zero reduction in demand for their services if the minimum wage went up to $7.

In the long run this might encourage the creation of more labor saving inventions, but that's a GOOD THING. Surley no one here is saying that we should get rid of labor saving inventions to create low wage work. Are you?

Abhi writes:

Half-sigma : Similary, I contend that the
services of low wage laborers are so useful that
there would be close to zero reduction in demand
for their services if the minimum wage went up
to $7

If the demand is so inelastic, then why haven't the wages gone up already? Is there any ceiling on labor prices in the free market?

I think one of the basic assumptions of minimum wage proponents is that both laborers and their employers are both such total idiots, that they don't understand the value of labor. Probably they think the both are incapable of the logic that higher wages attract better labor and vice-versa.

Taking the case of Northern Virginia, let's say the minimum wage is dropped to zero, anyone care to explain how a Fairfax grocery would find someone to work at $2/h?

Abhi writes:

Correction: In my previous post, I meant "a low wage of around $2 or less, even if it were legal"

John Pertz writes:

The argument that the min wage should be raised to help the working poor is a non starter. Less than two percent of the workforce earns the min wage, which means that the min wage is for training. The reality that there exists hundreds of thousands of working poor families waiting for legislatures to step in and raise their pay is false. The min wage is also not an after market policy like the earned income tax credit so it's possible negative effects may never be known because they are exlusive to the operation of each individual business. There may be no one single negative adjustment trend, instead thousands of businesses may adjust in ways that are too specified and hidden to be observed. Demanding less labor is just one in a thousand options that businesses could employ to adjust to min wage hikes, all at the expense of workers.

anti-Half Sigma writes:

"If minimum wage is set at 50 dollars a week then those who are not worth 50 dollars won't be hired." I have no clue who I am quoting, or if that is a direct quote. As of yet, you have made many claims against this.
You claim earlier that the general real wage has risen above the minimum wage level. If this is so, then what is the purpose of minimum wage at all?
If this is true, which I highly doubt it is then it would the only increase centralisation.
As of yet, you have made no attempts at statistics to support your thoughts.
I will also agree with Samantha on your thinking problem.

Dezakin writes:

Lets assume redistribution is what society desires. Which would be a more productive (or least bad) method of redistribution? A higher minimum wage or just direct subsidies to the poor for every hour earned?

Half Sigma writes:

"I think one of the basic assumptions of minimum wage proponents is that both laborers and their employers are both such total idiots, that they don't understand the value of labor."

Workers have to take what they can get.

However, I DO wonder about the intelligence of employers. All the time I find myself walking away from businesses because the lines are too long. There was a certain supermarket in Arlington VA that always had long lines and cash registers just sitting there unused. Didn't they realize that they could MAKE MORE MONEY if only they hired MORE WORKERS?

CalgaryGuy76 writes:

Half Sigma,

If the supermarket ALWAYS had long lines and cash registers sitting there, why'd you keep going back after the first few times?

Besides, maybe it's not profitable to hire the extra workers because with the minimum wage (and other government mandated labour costs) it could mean they're paying more than any profit they'd make.

"In the long run this might encourage the creation of more labor saving inventions, but that's a GOOD THING. Surley no one here is saying that we should get rid of labor saving inventions to create low wage work. Are you?"

If it costs the equivalent of $6 an hour in labour saving inventions, how is it a good thing that it takes an increase in the minimum wage from $5 to $7 to spur that innovation? Doesn't that means costs have increased $1 per hour? If it weren't for government intervention companies could have the same level of output for $1 an hour less.

Daniel writes:

Quote John Pertz

Less than two percent of the workforce earns the min wage, which means that the min wage is for training.

Not correct. If the minimum wage would rise to 7.50, then at least 7% of the workforce would be affected. Because so many people are earning between 5.15 and 7.50 dollars per hour.

The argument that unemployment in 1980 was one third higher because minimum wage was (in real terms) one third higher than today, - is nonsense. Just a small part of the workforce (5-10%) is affected by moderate minimum wage hikes. The minimum wage hikes of the Clinton years didn't produce results, that would support these naive textbook claims.

The elasticity of low-wage labor is not substantial, if minimum wage is raised nationwide. Substitution of low-wage labor with technology takes time and is surely no option for these small businesses everyone seems to worry about. And finally one shouldn't neglect the spending habits of minimum wage earners and the positive results on demand of goods and services.

CalgaryGuy76 writes:

Can an increase from $5.15 to $7.50 really be described as moderate? I know if I received a 45% increase in my salary I wouldn't consider it "moderate".

Substitution of low-wage labor with technology takes time and is surely no option for these small businesses everyone seems to worry about. And finally one shouldn't neglect the spending habits of minimum wage earners and the positive results on demand of goods and services

But apparently you've forgotten about the spending habits of small business owners who see their incomes reduced if they can't pass along cost increases or the spending habits of customers who are now paying more for goods and services if prices are increased. At best, a minimum wage hike is zero sum, only transferring money from one group to another without an increase in productivity.

If the goal of a minimum wage is to ensure families aren't living in poverty, there are better ways to target them specifically rather than broad wage hikes that increase the incomes of the majority of low wage workers who aren't from low income families.

Daniel writes:

You're right about the small business owners, who see their income reduced. They may pass on prices but that in turn would raise prices for goods and services and "reduces" real income of minimum wage earners.

Calgary Guy 76 writes:

At best, a minimum wage hike is zero sum, only transferring money from one group to another without an increase in productivity.


Productivity: There's a study out there, that claims that minimum wage hikes do encourage employers to invest more into their workers abilities, i.e. productivity. They educate their employees more to match the increase in wages, instead of laying them off. There's a study from Acemoglu/Pischke "Minimum Wages and On-the-job Training" (2001).

Problem with negative Income Taxes and other goverment support programmes is that they are bureaucratic, subject to conditions (family) and often to tax fraud.

Minimum wage hikes may be zero sum games, when it comes to employment effects. But that would mean, that generally everyone remains employed at a higher pay rate. With a federal budget in deep trouble, I don't think low-wage earners could expect any increases in income support anytime soon.

Bill writes:

Once again, I agree with the anti min. wagers, but I think the argument's used against minimum wage advocates never actually address the arguments for the minimum wage. The arguments I see made against a minimum wage on blogs are things like, "Why not just raise the minimum wage to $100/hr", or, here, why don't we mandate minimum car prices so that people who sell cars can provide for their family?

The point is, fellow econ-loving libretarian leaning folks, is that the pro min wagers totally refuse to accept to believe that there are acceptably low levels of collusion and transaction costs, as well as acceptably high levels of information sufficient to make the standard econ model even partially predictive and instructive. So, to these people, minimum wage is a remedial measure to address what they see as unfair distribution, and they don't worry about the allocative side, or costs increasing, because they believe that employers and corps. are just raking it in while sipping dackeries and lighting cigars with hundreds. They don't believe you when you say the price will go up, maybe because they think the wage increase will just cut the "fat cat's" too ample percentage. The fact that worker's can't afford to support families reinforces their opinions and they never stop to ask, "but why should any one single employer be forced to support someone's family if that person can't?"

If I were one of the pro min. wagers I would answer questions like "why not rasie it to 100/hr then" with, "For the same reason that you shouldn't eat 100 apples a day, you need the right amount, which is higher than it is now, but not as high as 100/hr."

Kent writes:

I have another argument against a minimum wage: In an economy that uses fiat currency, raising the minimum wage is, in the long run, the equivalent of trying to eliminate global warming by raising the zero point on the thermometer.

Except that the short run is more painful.

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