Bryan Caplan  

The Boudreaux Plan to Save the NYT

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Don Boudreaux, Master of economic ridicule, gets one step closer to unseating Grand Master Frederic Bastiat.  When the NYT calls to raise the minimum wage, Don replies:

In the same spirit of demanding that government improve people's economic well-being simply by ordering that people be paid more, allow me to make a similar plea on your behalf.

The newspaper business today is in difficult straits.  So I hereby call upon the legislature in Albany to force you and other newspapers in New York to raise your subscription and advertising rates by 17.2 percent (the same percentage raise that you want to force low-skilled workers to demand from their employers).  Voila!  If your economic theory is correct, your profits will rise.  And the magnitude of these higher profits, we can assume (just as you assume in the case of low-skilled workers), will be greater than any negative consequences that might be unleashed by such legislative interference in your ability to determine the terms on which you sell your services.

A general rule: The more you actually know about an industry, the easier it is to foresee the perverse behavioral effects of feel-good legislation.


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COMMENTS (18 to date)
Phil writes:

The newspapers might go for that ... it might benefit them! They might all be willing to raise their rates 17.2 percent only if the other newspapers do too.

William writes:

@Phil: To be safe, you'd probably want to raise by 17.2 percent the price of everything that is a substitute for advertising in or reading the newspaper.

Tom West writes:

I don't get this economic war on the minimum wage.

Given that we don't see huge unemployment jumps when the minimum wage rises, it's pretty clear that the marginal product of the vast majority of at/near minimum wage workers is far above what they're being paid.

Thus it really comes down to an increase in costs for business owners, which they will pass on to us. In other words, its a redistributive tax from consumers to the poorest workers.

I have no problem with claiming that one doesn't approve of this particular tax, but trying to pretend there's a vast economic problem that makes minimum wage impossible or catastrophic is disingenuous.

I find far too often that people try to disguise a legitimate value judgment under the trappings of "science" or "economics".

John writes:

Tom, roughly 3.5% of workers earn minimum wage. So expecting "huge unemployment jumps" is clearly far too high a bar. Increasing the unemployment rate by, say, 10% among those 3.5% of workers would hardly raise the overall unemployment rate at all, but still cause lots of harm.

Minimum wage earners also aren't necessarily "the poorest workers," unless you include "teenagers with an after-school job" in that category. Teenagers paid by the hour are about 5x more likely to work for minimum wage than hourly-workers over 25. And part-time workers are over 4x more likely to get minimum wage than full-time workers.

The minimum wage clearly does help some poor people. But it does so in an incredibly inefficient way, and probably does a fair amount of harm along the way.

http://www.bls.gov/cps/minwage2010.htm

johnson85 writes:
Thus it really comes down to an increase in costs for business owners, which they will pass on to us. In other words, its a redistributive tax from consumers to the poorest workers.

It's a tax where the deadweight loss is largely imposed on the most vulnerable. If you want to hand out welfare, hand out welfare. Don't impose minimum wage laws, and then pat yourself on the back because the vast majority of the burden is borne by a portion of the 3.5% of workers making minimum wage (and I guess some portion of the unemployed willing to work at or below minimum wage.)

Sergei writes:

The efficacy of both proposals depends on the price elasticity of demand.

If the demand for newspapers is very inelastic with respect to price, raising rates would be beneficial to the paper. Likewise, if the price elasticity of demand for low-skilled labor is very low, the gains to low-skilled labor may outweigh the efficiency loss, depending on your social welfare function.

I agree that a minimum wage increase has permanent efficiency costs, and alternatives may be more effective, but it is possible "that government improve people's economic well-being simply by ordering that people be paid more," for some social welfare function, in the same way that Pigovian taxes can improve welfare simply by ordering that people pay more of the social costs.

Mr. Econotarian writes:

Indeed, minimum wage and many other labor regulations are most likely to hurt the young. They are unproven, thus employers are less likely to take a risk on hiring someone they may have to overpay compared to their productivity or they may have difficulty firing.

Countries like Spain have nearly 50% youth unemployment, with Italy and Ireland near 30% youth unemployment.

chipotle writes:

I rather disagree with Caplan's assessment of Boudreaux's mastery of economic ridicule. Dr. B's heart (and his brain!) is in the right place but I think he simply lacks the panache to convince the economically ignorant that much of what is done to help the poor is (a) doomed to failure and (b) likely to make things worse.

In general, if something is too complicated to be conveyed in an SNL skit, it's too complex for a politically-significant portion of the electorate to understand.

Caplan's final sentence of this blog post, though, is a tiny masterpiece.

Chris Koresko writes:

Tom West: ...It's pretty clear that the marginal product of the vast majority of at/near minimum wage workers is far above what they're being paid.

If that's true, why is there be so much unemployment among low-skilled workers?

Sergei: ...It is possible "that government improve people's economic well-being simply by ordering that people be paid more," for some social welfare function

I think one reason for the confusion over the minimum wage is that so many people imagine that it's government ordering that people be paid more. In fact, it's government ordering that people may not work unless they are paid more.

Jeremy, Alabama writes:

In unrelated news, the NYT finesses the minimum wage laws by getting its lowest-paid workers for free, as interns.

Justin writes:

[Comment removed for ad hominem rudeness. --Econlib Ed.]

Tom West writes:

John, thanks for the reply. While there's no doubt that teenagers and weaker workers will bear the brunt of the job losses, I'm skeptical that the magnitude isn't easily worth the betterment of the workers wages and working conditions.

Note, the 5x statistic is a bit misleading. I'd be more interested in absolute numbers than in ratios.

To be honest, I've seen very few businesses where the cost of management, training, equipment, etc., didn't dwarf the cost of the minimum wage worker, which is why minimal measured job losses don't strike me as unlikely.

As well, my concern goes beyond the financial. While anecdotal, everything in my experience, both in North America and elsewhere, had made it clear that, just as an item we pay more for is automatically intrinsically "better", regardless of the items attributes, workers that are paid somewhat more are almost always treated more humanely, get safer working conditions, and get more training. It's human psychology, but it's a very real phenomenon.

If that's true, why is there be so much unemployment among low-skilled workers?

Because there are only a limited number of jobs for which a low skill worker can generate a significant marginal product. Again, drop the minimum wage to $0, and I don't think you'd see a big increase in employment. If there's not worth employing at $10/hour, I don't think most are worth employing at $0.

Countries like Spain have nearly 50% youth unemployment, with Italy and Ireland near 30% youth unemployment.

I think those are more to do with the difficulties of firing someone. Canadian minimum wage is $10/hour, and there's not a big difference in our youth unemployment vis-a-vis the U.S.

In fact, it's government ordering that people may not work unless they are paid more.

I have to say, while factually true, that's more rhetoric than useful to the debate, unless you're looking at it only from the freedom aspect. Again, I have no difficulty with that, as long as you make it clear that that is tenet on which you base your opinion.

John S writes:

Tom:

1. The absolute numbers are in table form here. There are 4.4 million workers earning at or below minimum wage, and almost half (49%) of them (2.1 million workers) are between 16 and 24 years old. 23% are 16-19.

2.

  • "it's pretty clear that the marginal product of the vast majority of at/near minimum wage workers is far above what they're being paid."

  • "there are only a limited number of jobs for which a low skill worker can generate a significant marginal product."

To be clear: you're claiming that the marginal productivity of currently employed low-skill workers is much higher than minimum wage, but that beyond our current "optimum" level of employment, their marginal productivity falls precipitously to near-zero?

3. It's plausible that extra pay causes better treatment. On the other hand: we'd clearly predict that correlation would exist between pay and non-financial benefits (CEO's generally get more prestige than fry cooks), and I don't see a good way for anecdotal evidence to control for this. And since employers compensate workers with all sorts of things--wages, health insurance, pleasant work environment, safety, etc.--and it's just as plausible that a floor on one compensation type will cause employers to spend less energy or money on other types. Without more evidence, I'd say the overall effect on our welfare estimates for low-skilled workers is unknown.

Seth writes:
I'm skeptical that the magnitude isn't easily worth the betterment of the workers wages and working conditions.
-Tom West

High unemployment tips the balance of power of working conditions to the employers' favor. For example, "If you're unwilling to work extra, there are 10 others in line to take this job."

Because there are only a limited number of jobs for which a low skill worker can generate a significant marginal product. Again, drop the minimum wage to $0, and I don't think you'd see a big increase in employment. If there's not worth employing at $10/hour, I don't think most are worth employing at $0.

If you are correct about this, that's an argument against the minimum wage. What purpose would it serve if this is true?

As John S. pointed out, there are plenty of people who do work for less than minimum wage. Why don't you ask them and their employers what they think.

I once did myself, and I'm glad I had that opportunity. Not only did it give me a chance to earn spending money, but I learned how to use some tools, sell things and make myself useful. The shop owner must've felt my marginal product was worth more than he was paying me.

I never understood why someone like you could think you knew better and would want to impose your will on the situation.

Tom P writes:

I don't get it. Wouldn't newspapers love it if the government helped them form a cartel to raise prices?

Tom West writes:

John S: Thanks for the statistic. That ratio makes sense. I'd be curious if teenagers compete with adults for full-time minimum wage jobs. My feeling is no, but I don't have statistics.

To be clear: you're claiming that the marginal productivity of currently employed low-skill workers is much higher than minimum wage, but that beyond our current "optimum" level of employment, their marginal productivity falls precipitously to near-zero?

Perhaps I haven't observed the right industries, but my observation has been that most businesses hiring at minimum wage (primarily retail worker and low level cleaning jobs) don't seem particularly wage sensitive. Like utilities, they've a need to fill, and fill it they do.

Now, I'll admit that my observations could be mistaken, but again, the statistics don't bear out a strong minimum wage effect.

I will say that the idea that it makes it harder for teenagers to find gainful employment is unfortunate, but if there is a shortage of low-skilled jobs (a problem I don't think would be much changed by eliminating the minimum wage), then I'd rather see adults get them at a decent wage.

Seth: If you are correct about this, that's an argument against the minimum wage.

Um, I don't think so. Only the maximum for wages are determined by the marginal product. The minimum is determined supply. In the simplest model, 1 worker for 1 opening can get paid their marginal product. Add a second worker, and the worker will only get paid subsistence.

Again, if I saw evidence of great elasticity at the bottom of the market, it would be different, but I don't, in which case over-supply of low skilled workers simply transfers wealth from the poorest to the owner or consumer, depending on the competitiveness of the market.

Tom West writes:

Seth: I never understood why someone like you could think you knew better and would want to impose your will on the situation.

Because your choices have ramifications far beyond yourself. Your willingness to accept a low wage (or any other job condition) impacts every other job seeker.

And of course, the same principle extends to health and safety working conditions, extra-work requirements (your willingness to accept the boss' requirement that you sleep with him to keep your job), etc.

I value freedom, but not above all other considerations.

Chris Koresko writes:

Tom P:I don't get it. Wouldn't newspapers love it if the government helped them form a cartel to raise prices?

Good catch! I think that is correct: newspaper prices would rise, maybe more than enough to offset the loss of circulation and increase their profits.

This points to a flaw in my (and other peoples') model of the minimum wage as discussed here. I have been treating hiring decisions as independent, so that an employer looks at the marginal product of a worker and hires if and only if it exceeds the wage he demands (actually the total cost of hiring, including benefits, risk of getting sued, etc). A minimum wage law just raises the cost of low-wage workers so that some of them won't get hired or will lose jobs they already have.

But that picture is too simple, because the minimum wage law affects not just individual hiring decisions but the labor market as a whole. It must have the effect of making low-wage workers scarcer, since some of them are forced out of the labor market. That scarcity must increase the wages of those who can find jobs, even if they were already above the minimum wage.

So I think the true story is that the minimum wage functions a bit like a labor union, raising the pay of some workers at the expense of consumers and other workers.

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