David R. Henderson  

Mitt Romney's True Colors

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"I ... part company with many of the conservatives of my party on the issue of the minimum wage," he said in an interview on MSNBC's "Morning Joe."

"I think we ought to raise it because, frankly, our party is all about more jobs and better pay, and I think communicating that is important to us," he said.


This is from Jim Puzzanghera, "Romney calls for minimum-wage increase in split with business groups," Los Angeles Times, May 9, 2014. Not that my vote mattered, but this makes me even gladder about my decision not to vote for Mitt Romney.

Think through the economics of his statement. "Our party is about more jobs and better pay." Well, which is it, Mitt? If by better pay, you mean higher legislated pay, which, in context, it's clear you do, then that won't create more jobs; that will create fewer jobs.

The only situation under which his statement could be correct is if there is widespread monopsony in the market for unskilled labor. Given that it's unskilled, which means that there are many potential employers, widespread monopsony seems unlikely.

Moreover, it's not even clear that the minimum wage will make for "better pay" for those workers who are lucky enough to keep their jobs and who get raises because the minimum wage increased. Imagine a worker being paid $9.00 an hour and getting some nice benefits that cost the employer $2 an hour. If the government raises the minimum wage to $10.10 an hour, the employee might keep his job because the employer cuts benefits so that his cost of those benefits is 90 cents an hour. Assuming that the employee valued the previous benefits at more than $2 an hour (Why might this be true? Because benefits aren't typically taxed), the worker is getting worse pay because of the increase in the minimum wage.

I never had the idea that Mitt was economically illiterate. In fact, at one point, I defended his economic literacy on his statement "corporations are people." But this statement shows him to be economically illiterate--or worse.

HT to Harry Watson.


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COMMENTS (42 to date)
Daniel Kuehn writes:

I could never understand why someone would ever say that an unskilled worker has more potential employers than a skilled worker. That is precisely backwards.

I have also been a little hazy on what benefits people getting $9 an hour regularly get. That's more of an empirical question, admittedly. I'm sure some get some benefits. But this always seemed like something that required better documentation to me.

Overall I think it's a little much to call someone economically illiterate over this. For consistency that would require the condemnation of some clearly economically literate people. It seems like rhetorical corner cutting to me.

David R. Henderson writes:

@Daniel Kuehn,
I could never understand why someone would ever say that an unskilled worker has more potential employers than a skilled worker. That is precisely backwards.
You didn’t say why you think that. Why?

Daniel Kuehn writes:

Because more firms demand a skilled worker's labor than an unskilled workers labor at a given wage. At a given wage in a given labor market the demand for a skilled worker is going to be equal to or exceed that of an unskilled worker.

Now you have heterogeneity in skills of course. So when you compare workers with the same education, experience, etc. you will get variability in that relationship.

Daniel Kuehn writes:

In a recession, skilled workers are underemployed. Unskilled workers are unemployed.

David R. Henderson writes:

@Daniel Kuehn,
Because more firms demand a skilled worker's labor than an unskilled workers labor at a given wage. At a given wage in a given labor market the demand for a skilled worker is going to be equal to or exceed that of an unskilled worker.
Daniel, true, but that’s the wrong comparison. We aren’t looking at a given wage. Skilled workers earn more than unskilled workers. That’s why, to detect the effect of the minimum wage, we look at the market for unskilled workers, rather than for, say, economics professors.

Craig Richardson writes:

Romney is first and foremost a politician. Therefore what he says and what he thinks may be two different things. His public statements should not be judged as evidence of his internal knowledge.

Politicians are vote maximizers, and Romney's approach is probably focused on presenting himself (and the Republican party) as sympathetic to the working class, after his infamous comment about the bottom 47% that don't contribute anything to society. His comments are nothing more than an attempt to rebrand himself and the party.

Too bad he can't take a principled stand, but that's politics these days.

I wonder if he favors the minimum wage increases for his hired help around his mansion.

Daniel Kuehn writes:

I don't think that's right. Universities face a bilateral monopoly situation. They are one of the few employers of economics professors and economics PhDs are one of the few suppliers of that labor. Employers of unskilled workers represent outside options for economics professors (I was turning my resume into Home Depot at the same time that I was turning it in to the econ department for the adjunct position in case my summer fellowship did not work out [it did]).

Because employers of jobs requiring less skills can choose from virtually anyone in the economy they have considerable market power over those that they employ. The unskilled worker has much fewer outside options. They do not command the sort of monopoly power over their labor that you or I exercise.

More directly to the point, their employers know they can go fewer places than you or I can which is what monopsony power is.

David R. Henderson writes:

@Craig Richardson,
Politicians are vote maximizers, and Romney's approach is probably focused on presenting himself (and the Republican party) as sympathetic to the working class, after his infamous comment about the bottom 47% that don't contribute anything to society. His comments are nothing more than an attempt to rebrand himself and the party.
That’s the “or worse” part of my post.

David R. Henderson writes:

@Daniel Kuehn,
I don't think that's right. Universities face a bilateral monopoly situation. They are one of the few employers of economics professors and economics PhDs are one of the few suppliers of that labor.
I know of no economics professor or economics PhD who makes less than $10.10 an hour.

Daniel Kuehn writes:

David -
re: "I know of no economics professor or economics PhD who makes less than $10.10 an hour."

I don't either. I'm not sure I understand the point.

Joe Teicher writes:

Perhaps Romney knows something you do not? I mean, it seems very unlikely that he achieved so much business success without understanding how supply and demand work. The actual economy differs from the simple models economists use in many ways. Seems to me that when a wildly successful businessman disagrees with economists, the economists should assign a reasonable probability to the idea that the businessman knows more rather than less than they do.

Jay writes:

@Joe Teicher

You're assuming if you asked him the same question while he was a business man he would give the same answer. It is a much simpler explanation that now he's a politician and speaks as one.

Bob Murphy writes:

Daniel and David, I think you guys are both saying things that are true but slightly different, and yet you aren't realizing what the other guy is saying.

David is saying something like:

(A) A highly skilled worker might have a marginal product of $100 per hour, but only get paid $95 per hour because of monopsony among the few employers where his labor is worth that much. But a low skilled worker might have a marginal product of $10 per hour, which he could generate for hundreds of potential employers in his city. So he is definitely getting paid $10 per hour by one of them.


Daniel is saying something like:

(B) A worker with high skills can do any job that a low-skilled worker can do. So it's obviously always the case that a high skilled worker has more bargaining power to demand a higher wage than what a low skilled worker will end up getting.

Daniel Kuehn writes:

Bob -
I don't think what David says is wrong so much as that it does not imply what he claims it implies about the monopsony power exercised by the employers of low wage workers.

I'm not sure it's clear one way or the other where market power goes in specialized labor markets. Firms need very specific workers, but workers need very specific firms. It seems to be a bilateral monopoly situation to me and it probably goes different ways in different cases (and of course we as a society don't care as much about any "exploitation" that goes on in any case).

Daniel Kuehn writes:

I must leave this be, though, because I have to read Bob's new sure-to-be-excellent discussion of Piketty.

David R. Henderson writes:

@Bob Murphy,
Yes, Bob, I’m saying what you say in (A).
I’ll wait to see if this is what Daniel is saying.

Because employers of jobs requiring less skills can choose from virtually anyone in the economy they have considerable market power over those that they employ.
Clearly not, as those low skilled workers have many other options. Potential burger flippers are also potential janitors, bed pan emptiers, construction laborers, lawn mowers, car washers, gofers....

I'd be surprised if Romney ever employed a low skilled employee. Certainly he didn't at Bain. But, maybe we can push hard enough to become like India;

“It is India’s great paradox,” says Mr Subramanian, who once co-wrote a paper examining the phenomenon with Raghuram Rajan, now head of the Reserve Bank of India. “Essentially, India managed to make the relative price of skilled labour cheaper, and unskilled more expensive, which is highly unusual.”
Enial Cattesi writes:
Skilled workers earn more than unskilled workers.
Actually workers with marketable skills earn more then workers with unmarketable skills.
Because more firms demand a skilled worker's labor than an unskilled workers labor at a given wage. At a given wage in a given labor market the demand for a skilled worker is going to be equal to or exceed that of an unskilled worker.
What is an unskilled worker? When an employer looks for someone to dig holes (lets call him Keynes, who will also think that he'll become rich by paying the same man to fill the hole back and start all over) he will ask for someone who can dig. A man without hands cannot fulfill this requirement, for example. A potential employee who will accept the job is one who probably couldn't find anything better to do. Although most people would consider the worker unskilled, he would get payed for something he can do (usually called skill or ability).

The term "underemployed" is an interesting one, but it just means that your skills don't command the price they once did, or you think they should (many college graduates although they signal a lot?!).

Rommey is a politician. Most politicians go, by definition, against economic science.

Ryan Langrill writes:

DK,

I thought it was fairly well-accepted that 'skilled' workers had a lower number of potential employers than 'unskilled' workers. In Urban Economics, the heterogeneity of higher-educated workers is used to explain why cities tend to have more highly educated populations. The lower search-costs and demand-smoothing benefits of agglomeration economies primarily apply in 'high-skilled' professions.

Although, is your point that unskilled workers have fewer options because they only have access to the unskilled labor market, while a worker with a specific skill has access to both their specific labor market and the unskilled labor market? E.g., a professor is constrained by the 'monopsonistic' university market, but his total labor market is less monopsonistic than the unskilled worker (since he has the unskilled market plus the university market, which is by definition less monopsonistic than the unskilled market only).

So, while 'high-skill' markets may be more monopsonistic than 'unskilled' markets, unskilled workers face a more monopsonistic market in total than skilled workers.

I think that's what you're saying--I'm just posting this because, like Dr. Henderson, I was initially confused by your post.

Daniel Kuehn writes:

David -
Bob's B seems true but even outside of a bargaining model, unskilled workers have fewer employment opportunities and more competition relative to the available employment opportunities than skilled workers do. The company town is an idealization, but the low income worker's relationship to the low wage employer is more akin to this than those who have other outside options. Of course as I've said a couple times monopsony power is exercised in specialized labor markets too, but the outcome seems like it's ambiguous to me because there's a bilateral monopoly as well as several potentially well paying outside options. It's more of a mess (and not particularly relevant to the minimum wage discussion anyway).

Daniel Kuehn writes:

Ryan Langrill -
I don't know of anyone that thinks or any reason to think that getting more skills makes you less employable. But maybe your claim is different? Certainly as you get more specialized skills the number of jobs where those skills can substantially increase your marginal product is smaller. That's pretty much the definition of "specialized skill". But no, I don't think they have less employment opportunities.

You could imagine someone becoming so effete from education that they actually lose the capacity to do lower skilled work. Is that what you're thinking of?

Kevin Erdmann writes:

I think, if we think in terms of marginal utility, we can expect workers who receive wage increases from MW hikes to be worse off.

Non-wage benefits include a lot more than quantified fringe benefits. In terms of utility, it would include how flexible your schedule is, how much crap you're willing to put up with from co-workers or supervisors, etc. There are a lot of potential trade-offs there, even if most of them can't be measured accurately.

http://idiosyncraticwhisk.blogspot.com/2014/04/minimum-wage-hikes-hurt-job-keepers.html

Daniel Kuehn writes:

Ryan Langrill -
No on your agglomeration point I think it's critical to keep jobs and workers separate. Yes, as you increase the skill requirements of a job there are going to be fewer jobs with those skill requirements. And yes, agglomeration economies help in the case of those specialized jobs, and yes skilled workers are going to try to sort into specialized jobs and will follow those jobs. But it's the jobs that get more infrequent - not the number of jobs a skilled worker can perform. That increases with skill (at different rates and in different directions of course - human capital is as heterogeneous as physical capital).

Daniel Kuehn writes:

Kevin -
Right I hope nobody is thinking only in terms of monetary (or near-money) benefits. I don't think they are. But it still seems like a tough claim to make. It's not just "does X benefit exceed $2 of value to the worker", it's whether it is threatened by the minimum wage. Take the "low crap from supervisors" benefit you suggest. Let's say that's worth $3 from the worker per hour. A nice benefit. The minimum wage increases. Does the supervisor - in response to higher mandated labor costs - cease refraining from giving the worker crap to save money.

MAYBE. But it's not immediately clear whether this benefit for the worker translates into a labor cost for the employer. You could imagine increased productivity from being more of a jerk. But you could imagine increased productivity through other means too that are engaged in after labor costs go up that don't require being a jerk. These sorts of things are important and are quite often mentioned as part of the explanation for why employment doesn't seem to go down in response to the minimum wage.

I just feel like it's all a bit amorphous and it is especially hard for me to think that as a labor cost (not its valuation by the worker) it represents a third of the wage. Maybe I'm wrong I just don't feel like there's anything super substantive to latch on to.

This goes for a LOT of theory around what's going on with the minimum wage, btw. I think we are on much firmer empirical ground than theoretical ground in explaining what goes on.

Daniel Kuehn writes:

That last point (when it posts) was sloppy on my part. I think the big picture understanding of what is going on with the minimum wage is on much firmer ground than our understanding of the mechanisms driving it (which necessarily means that we don't have a good theory or at least don't know which theory is good). So it's not just an empirical/theory thing - there's quite a bit empirically that we don't have insights on either.

Maniel writes:

Apologies for stealing a few points from my comment on the Robert Reich post in April.
Minimum-wage (MW) proponents get off easy in that, as currently conceived, the MW is a law against working only if you are unskilled and cannot command the MW or better. To help Mr. Romney and others who see no (political) harm in that – since the poor are unlikely to vote and even less likely to make campaign donations – I propose (with some reticence) these changes to the MW: as our responsibilities and needs grow with age, let’s impose a sliding-scale minimum wage, such that, the older we are, the higher our minimum wage; let’s also throw in a multiplier for years spent in school, to help us catch up with less-schooled peers who have been working longer. I submit that these changes might cause a MW proponent to consider whether, as he continues to age, he will always find someone willing to pay him the appropriate (carefully-computed, government-approved) MW for his age and education group for the value that he offers.

Kevin Erdmann writes:

Daniel,

Clearly this adjustment would be made where qualitative changes to the job save the employer more than they cost the employee. But, also, let's say a young mother earning $8/hour has the flexibility to take time off to take the kids to the doctor, for instance. Now, the wage is raised legislatively to $10/hour. Now, the employer says he can't let her take time off at that wage. That flexibility may be worth $3/hour to the worker. Maybe it's only worth 50 cents an hour to the employer, but there are a lot of workers at $10/hour that don't need the flexibility. So, the wage limitation removes a source of competitive advantage for workers in vulnerable contexts.

While these issues aren't easily measured, they are numerous and obvious to any observer, I think. And, I don't know that we have much firmer ground in terms of empirics.

Here's a post I did regarding the sort of blind men feeling the elephant issue on MW, and how you could expect to find different outcomes based on the design of your research:
http://idiosyncraticwhisk.blogspot.com/2014/02/you-cant-analyze-market-interventions.html

Ryan Langrill writes:

Daniel,

If you read to the end of my last comment, you'll note that I was agreeing with you. The market for 'high-skills' is likely less competitive, but it does not follow that high-skilled workers face a more monopsonistic labor market. I think that's main source of misunderstanding of your comment.

A high skilled worker may have a lower number of opportunities *that fit their skill* than an unskilled worker. As you note, however, the 'skill' opens up opportunities on top of those an unskilled worker has, and thus the skilled worker faces a less monopsonistic labor market.

Your initial claim was (obviously) confusing, which is why people disagreed with it, since your point is almost tautologically true. It just took me longer to get to where Murphy was going.

Daniel Kuehn writes:

Kevin -
I understand the concept quite well, but I still think it's very tentative. Take this from your post: "But, also, let's say a young mother earning $8/hour has the flexibility to take time off to take the kids to the doctor, for instance."

Young mothers earning $8 an hour are precisely the sort of people that don't have this kind of flexibility. To say that these sorts of benefits are being cut into and that's why we don't observe a lot of reduced employment I think at the very least you have to identify a set of benefits like this that exist to say nothing of demonstrating that they've been reduced due to the minimum wage. Unfortunately we have much less research on this sort of question than we do on the employment question. But it seems like a very tall order - not an ace in the hole.

Kevin Erdmann writes:

There are entire industries built on the arbitrage of students accepting lower wages in exchange for working around their school schedules, and they are usually very low wage industries.

Chris Koresko writes:

Mitt Romney: "I think we ought to raise it because, frankly, our party is all about more jobs and better pay, and I think communicating that is important to us."

@David: I may be interpreting this wrong, but it sounds like Romney:

a) Wants to communicate that his party is "all about more jobs and better pay";

b) Knows that most Americans believe that a higher minimum wage will lead to those good things;

c) Thinks convincing them otherwise is a fight not worth fighting, partly because it's hard to make headway, partly because the real impact of a moderate increase in the minimum won't be too destructive, and partly because the other party would surely turn an effort to sell the public on a lower MW to their advantage;

d) And therefore concludes that the right move is to go along with the MW increase as a form of signaling.

Of course I can't really read Romney's mind. But the above seems at least plausible.

michael pettengill writes:

I find it interesting to see David Henderson's criticism of Romney's statement.

Clearly there is a different system view.

Is Romney thinking like a business who is desperate for more customer demand, observing the customers are all using food stamps, which Romney realizes are supplementing low wages because he sees their employer dress and badges, and now buying has dropped off because the food stamp benefits have been cut?

He is perhaps thinking that if sales fall further, he won't be able to pay the rent because he already cut his staff and then cut his own pay and can't cut it any more if he is to pay the mortgage and feed the kids and gas the car.

Would Romney the small business owner think:

"My solution is to close the business and liquidate and kill my family so they don't suffer starvation."

"I will lobby the government to tax the rich to double food stamp payments so the increased food stamp buying will save my business."

"I will call for higher minimum wages so my customers will have bigger paychecks so they can buy more from my business."

I'm not sure what David Henderson's thinking is; perhaps he will respond.

Does the economy operate with production/supply totally disconnected from income/demand?

Does the government provide a welfare state for the poor to keep the businesses selling all they can produce with their capital and a fraction of the people working?

Do people who are not working not need food, shelter, etc?? Even idle machinery and other productive assets cost businesses even if idle and not drawing power, not wearing and needing maintenance, etc.

And is the way to grow an economy to increase productivity and then eliminate the excess people who are no longer needed to work because machines are more productive? I think Asimov in some of his worlds imagined a few dozen people living solitary lives on planets with all their needs served by automation and robots; I believe he explained the low population on the basis of no need for workers, plus the elimination of all conflict leading to crime.

An economy is like two hands clapping. That's why economists have two hands. On the one hand you have production, On the other hand you have demand. When demand is low then wages must be low and production must be low and revenue must be low.

chipotle writes:

With a top graduate ranking in his Harvard MBA program and a long, successful career in finance, it's highly unlikely Mitt is economically illiterate.

But maybe his position says something about his character?

Let me burden you with a revealing anecdote.

Here is a 67-second video of Romney explaining to a wheelchair-bound young man who is under 80 pounds and suffering from Muscular Dystrophy why he will not support laws that would allow the patient to legally acquire the only treatment that works for him, medical marijuana. He pledges to arrest the victim and his doctors if they cooperate to deliver him the only thing that relieves his agony.

Come The Revolution, Mitt will be the first against the wall.

Chris Wegener` writes:

It is interesting this sudden desire to "help" the poor and unskilled. Yes, the CBO estimates that an increase to the minimum wage might cause an increase of unemployment of half a million workers.

What about the sixteen million workers who will see an increase in their take home pay?

Further, this increase in disposable income will foster an increase in aggregate demand which will need to be filled leading to more employment and investment.

More likely than an increase in unemployment there will be a decrease.

Paying the American workforce more will increase overall employment. It might decrease corporate profits some and reduce GDP growth a tiny amount. The question we need to ask as a country is "Do we want what is best for the wealth or the majority of people?"

David's answer is clearly the wealthy.

David R. Henderson writes:

@Chris Wegener,
It is interesting this sudden desire to "help" the poor and unskilled.
It’s not sudden, as you would know if you’ve read my posts regularly.
Yes, the CBO estimates that an increase to the minimum wage might cause an increase of unemployment of half a million workers.
Hang on to this fact, Chris, and then ask yourself how, with fewer people working at productive jobs, there can be more production.

David R. Henderson writes:

@michael pettengill,
I'm not sure what David Henderson's thinking is; perhaps he will respond.
See my response to Chris Wegener. You make the same mistake as he: that raising wages, in the absence of any increase in productivity, will result in more demand. This is the tragic mistake that both Herbert Hoover and FDR made, a mistake that helped make the Depression into the Great Depression.

Can I take my vote back?

Chris Koresko writes:

@David:

Apparently there's someone else who shares my view of Romney's comment.

Chris Wegener writes:

@David fewer people working at productive jobs, there can be more production

But the economy is not a zero sum game. Paying people more will increase aggregate demand causing corporations to start investing into further production. This will stimulate further employment and greater economic activity.

Or do you believe that those who receive an increase in pay will not spend that money?

In fact, speaking of FDR, if all of the Fortune 500 would increase their pay scale by some percentage the economy would increase greatly. The problem is that many wouldn't, hoping to increase sales by impoverishing their work force.

No one wins the current race to the bottom we are engaged in.

Jay writes:

@Chris Wegener

Yes, the CBO estimates that an increase to the minimum wage might cause an increase of unemployment of half a million workers.

What about the sixteen million workers who will see an increase in their take home pay?

First, What about them? They're essentially robbing the half million works of ALL their paychecks in order to increase their paycheck. It isn't the government or your job to deem that trade fair. Second, this trade off is rarely, if ever, mentioned on the pro-MW side, so obviously they don't think it is a popular argument to make.

Further, this increase in disposable income will foster an increase in aggregate demand which will need to be filled leading to more employment and investment.

I would be surprised if the CBO didn't account for the effect of increased pay and I don't think this offsetting the loss of employment is supported in any studies.

Massimo writes:

@DavidHenderson, Romney's job is to build political leverage, not articulate economics. His position on minimum wage is probably less about his personal economics understanding and more about his strategy to gain political leverage.

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