Art Carden  

New at Forbes: McDonald's and Minimum Wages

David Kennedy on Early 20th Ce... The Economics of Self-Imposed ...

Here's my latest article, which is written in part in response to fellow contributor Laura Shin's question about whether the attention given to McDonald's wages will lead a higher minimum wage.

I highlight what is, I think, one of the most important and overlooked aspects of price controls: they encourage wasteful competition. In the case of a price ceiling, people will "spend" the difference between the maximum they are willing to pay and the maximum they are allowed to pay by doing things like waiting in long lines. In the case of a price floor, people will "spend" the difference between the minimum they are allowed to accept and the minimum they are willing to accept by doing wasteful things like waiting, accumulating more signals, and other things. Michael Munger explains in the context of price controls on gas after disasters.

I close the article with one of my favorite quotes; this one is from Robert Lucas:

Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution. In this very minute, a child is being born to an American family and another child, equally valued by God, is being born to a family in India. The resources of all kinds that will be at the disposal of this new American will be on the order of 15 times the resources available to his Indian brother. This seems to us a terrible wrong, justifying direct corrective action, and perhaps some actions of this kind can and should be taken. But of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.


COMMENTS (9 to date)
Hazel Meade writes:

Debates of the minimum wage seems to be missing a piece of the puzzle in that they tend to ignore the effect of the marginal price increase on consumer behavior. Many people seem to assume that a $0.40 increase in the price of a hamburger will have a negligible effect on demand for hamburgers. But the demand has to come out of the economy somewhere, right? Consumers have a finite budget and if they are spending it on lunch they aren't spending it one something else. Marginal increases in cost WILL produce marginal reductions in demand, and not just on fast-food workers, but probably on the economy at large.

Andrew King writes:

Art, and then there is this:

Daublin writes:

It's a message well worth repeating. It's a clear result of economic theory that is backed up by the preponderance of evidence.

In addition to the hard-headed economic analysis, I have found it helpful to talk about low rungs on the economic ladder. That is, not everyone taking a low-wage job is the primary bread-winner of a home. Lots of people taking low-wage jobs are teenagers, recovering drug addicts, and even elderly people who would rather do an easy job than sit at home watching TV all day.

Now it's true that all of these people would benefit from more money. Who wouldn't? None of them need the money to survive, however. They are simply people that are better off taking a real job than being a total depedent. They may have to rely on someone else to pay the rent, but at least they would have the dignity of buying their own movie ticket.

Arthur_500 writes:

There were several key pieces of information missing from the original article that made me question the intelligence of the author. I hate one-sided equations. Did these folks ever attend Economics 101?

If everything remained the same and we raised prices only profits would be hurt. Who cares about those individuals who invest we only care about those individuals who mop floors.

But wait! What about those who purchase the goods/ services, aren't they also important? If I have to pay the same for a Big Mac meal maybe I would rather go to the local diner and sit down and have my equivalent meal served to me. Substitution seems to be forgotten in these one-sided equations.

Then we have that dastardly investor who makes money by investing it into corporations. When they no longer have the return on investment they substitute that investment with another. Now McDonald's doesn't have investment cash available at that price point and they have to use more expensive cash which reduces growth opportunities and jobs.

And what about the individual who is/ was employed? Maybe they want to work only four hours each day as it gives them cash and fits into their schedule. Maybe this is a great entry-level job where the individual learns systems, cleanliness, basic cooking skills, inter-personal skills, etc. They get training and get paid! No one else will do this outside of the military and they may not qualify for the military. So instead of having part-time employees I need to pay for full-time employees so these folks are out of a job since I might as well get highly productive quality workers for the money I am now required to pay them.

Do any of these so-called economists ever go shopping on a budget? Maybe the New York Times pays so much that there is never a question of filet mignon versus ny strip steak and they don't understand substitution. Personally, I substitute my hard-earned dollars for better quality analysis and don't pay for the New York Times.

eric falkenstein writes:

If you accept the argument against strict utilitarianism based on pragmatics and common sense, I think you should empathize better with those of us who use similar reason to oppose open borders. Our argument isn't a proof and is superficially callous, but we find the other side naive and counterproductive.

Tom West writes:

Did these folks ever attend Economics 101?

Possibly, but I think they're also probably aware that Economics 101 is only a small part of the decision to support minimum wage, including among economists.

Moreover, given the plethora of studies that find no significant disemployment effect, or occasionally an employment effect(!) (along with the studies that do find an disemployment effect), it appears that human beings don't seem to be utterly bound by the simple two dimensional models of Eco 101.

There's no doubt that Eco 101 has a lot to offer, but assuming that it's the sum total of the all that needs to go into decisions that have significant social repercussions upon the populace as a whole is perhaps thinking a little narrowly.

Mark V Anderson writes:

How come almost no one ever brings up the earned income credit (EIC)? My understanding is that this credit for low earners was initiated in the '80's partly as a substitute for a higher minimum wage. So when people complain about minimum wages falling behind inflation, they need to account for the effect of the EIC, which adds a couple of dollars an hour to workers' wages.

It is true that to make a decent sized EIC, one must have kids, so dependentless minimum wage earners benefit very little from the minimum wage. But EIC is supposed to benefit those few minimum wage earners with families, because minimum wage is a living wage for those without dependents.

Also, Tom West brings up those studies that show that minimum wage increases do not increase unemployment. But I think there is really only one study that showed an increase in employment (the comparison of fast food workers in NJ and PA), and even the author of that study agreed there were problems with that study. Even more important, every study done on minimum wages focuses on short term effects, for obvious methodological reasons. But the biggest effects happen over the course of a few years, as employers adjust to the higher minimum wage by hiring fewer workers thru automation or downsizing. Since it makes no economic sense for employment NOT to decrease in the face of increasing minimum wages, advocates need more than poor studies over a short term basis to prove the logical answer is wrong.

Tom West writes:

First, my impression is that most studies about disemployment effects end up with no significant measurable effect. No wonder, really, as there's *way* too many variables to employment to be able to measure anything as marginal as the minimum wage effects (a commenter posted some enlightening statistics about how few are on minimum wage.)

In an issue as fuzzy as this one, there's enough studies to support everyone's opinion fairly robustly.

Secondly, if you think *any* law of economics is sacrosanct, I'd urge you to read "Thinking Fast and Slow" by Daniel Kahneman. Makes clear just how divorced we are from the self-interested rational Homo Economus.

The laws of economics are usually the way to bet, but any assumption that they're universally true for all of humanity, under every culture, under every condition has forgotten that economics is a *social* science. After all, calling it a "law of human behaviour" sounds rather hubristic, doesn't it?

Floccina writes:

IMHO the utilitarian debate on the minimum wage should focus on:

Whether it is better to have many people making more money with a little more unemployment or vise versa. One side could list the evils of unemployment and the other side the benefits of higher wages for low earners. This is seldom the focus of MW debates. BTW I think unemployment is very bad and that working for low wages is not so bad so I favor ending the minimum wage (idle hands are the workshop of the devil).

The other issue is that if you look at the difference between the wage an employer would pay what they pay under the minimum wage as a tax. Then you should ask who pays that tax. I would say that in the short run this tax is paid by those who employ low wage workers and in the long run by those who buy goods and services from those who employ low wage workers. So then we should debate why these parties be taxed and not all of us?

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