David R. Henderson  

Meer vs. Galbraith on the $15 Minimum Wage

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I finally got around to watching the debate about the minimum wage between Jonathan Meer and Jamie Galbraith. Meer is an economics professor at Texas A&M University and Galbraith is an economics professor in the Lyndon B. Johnson School at the University of Texas.

Co-blogger Bryan Caplan had recommended it earlier. So do I. I also recommend listening at 1.25 speed and saving 20% of your time.

It won't surprise regular readers of this blog that I thought Meer, who argued against the minimum wage, got the better of the debate over Galbraith, who favors an increase to $15 per hour over a few years.

I usually point to specific minute and second points for those who want to find the actual statements I discuss, but I was watching this as I was watching the baseball game and packing for a trip and so I didn't write down all the times. I did note some.

In his opening statement in favor of the minimum wage, Galbraith said there wasn't any evidence that the minimum wage causes job loss. In fact, there is lots of evidence. Galbraith might have had in mind that there are studies that find no impact but, of course, that's quite different from saying there's no evidence.

I was very impressed with Jonathan Meer's command of the empirical literature on the minimum wage, evidenced throughout. Also, although I had known much about the racist origins of the minimum wage, and I have blogged here about John F. Kennedy's racist case for the minimum wage, I had not known the Sydney Webb reference (around the 25:00 point.) Also, in his opening statement, Meer pointed out that of all the young black men who don't have a high school diploma and who are not in prison or not in the military, only 6% have full-time jobs. (at about the 26:50 point.) His point, of course, was that some of this is due to the minimum wage and a large increase in the minimum wage would make it even harder for them to find full-time work.

What I found striking about Jamie Galbraith's case, especially in his rebuttal to Meer and in his responses to questions from the audience, was how "priceless" it was. That is, there was no price theory, no basic microeconomics in his argument. Galbraith argued that raising the minimum wage would give workers more money to spend and that their expenditures would cause other industries to grow, with no net loss in jobs or in economic activity. But if that's so, and Jonathan Meer made this point in his response, then there really would be no good economic argument against raising the minimum wage even further--to $20 an hour, $30 an hour, even $50 an hour.

Also in Q&A, Meer challenged Galbraith's view (at about the 1:12:30 point), which I often see Robert Reich and others express, that the welfare state allows companies like Wal-Mart to pay their workers less. Meer pointed out that the basic economics is exactly the opposite: Wal-Mart has to compete against the welfare state. The welfare state raises workers' reservation wages. Galbraith had a pretty weak rejoinder. (This was all relatively late in the Q&A.)

If you want to see someone sink really low, by the way, watch Galbraith at the 1:14:10 point. Fortunately, it didn't seem to work with the audience. I wonder if that's all Jamie had left because he couldn't think of a good argument against Jonathan.


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COMMENTS (10 to date)
Daniel Kuehn writes:

I also liked Meer's performance very much, but I think the welfare point is more complicated than that. If welfare is only bailable if you're not in the labor market that's true but it is available to workers (and family members of workers) and it quite intentionally subsidizes wages.

Nathan W writes:

For the question of why not a $20 minimum wage or $50 minimum wage, just consider a monopolist interpretation.

The aggregate wage bill of minimum wage workers will rise up to a certain point, but then will become lower thereafter. It is not unreasonably to suppose that the aggregate wage bill of minimum wage workers might increase with a 10% increase in the minimum wage, but at $50 an hour, perhaps only a few of them would be employable.

Compare this to Apple. Marginal cost is about $200 per iPhone. Yet, the prices is $600. Why not increase to $3000 a phone? Because total profits decline.

No one thinks thinks that it's clever to ask "if Apple gains by raising prices to $600, then why not $3000". But apparently many people think it's clever to say, of minimum wages "if $15 is OK, then why not $20 or $50/hr?".

That having been said, assuming (which some people reject) that certain forces imply a need for a minimum wage, the "optimum minimum wage" from the perspective of long term GDP growth would presumably be lower than the amount that maximizes the aggregate wage bill of low income earners. Simply, because employers aren't just buying BMWs and second homes with their proceeds, but also plough some (much?) of the money back into their businesses, contributing to longer term capital accumulation.

ThomasH writes:

As a debate I agree with Henderson. I think an unbiased viewer would come away somewhat less favorable toward a minimum wage than more. As providing elements of judgement about whether to favor or oppose a specific increase, I though both sides failed.

I do not think that the viewer got a good idea of how much additional income either gentleman thinks would go to low paid workers and now many low paid workers would fail to find/lose employment. Any real-life policy has costs and benefits and without a sense of the magnitude of each, no judgement can be reached.

And neither addresses why we might be discussing an costs and benefits increase in the minimum wage rather than the costs and benefits of an increase in EITC or a wage subsidy or elimination of the SS and Medicare taxes on the wages of low income workers as ways of transferring income to low-wage workers.

Another element that was not addressed -- and this kind of debate is hardly the place to do so -- is the macroeconomic effect, taking into account the how the Fed would address any higher unemployment that could result from a specific increase with no monetary accommodation. Presumably, if the Fed were following a strict NGDP target and the increase occurred when the NGDP was on target, there would be no accommodation, just a small shift to lower real GDP and higher inflation. Of course, if the employment effect is small, this point is moot.

I guess in principle one might conclude that a higher minimum wage will cause no fall in real GDP so long as the Fed has "room" for additional monetary stimulation, but that when that runs out it's time to substitute a higher EITC for the minimum wage.

Don Boudreaux writes:

If I were a minimum-wage proponent I'd be unhappy with Galbraith's performance in this debate. It was weak - in large part because of a fact that David identifies in his post: Galbraith is either innocent of, or uninterested in, price theory. (This fact, sadly, does not distinguish Galbraith from many of today's economists.)

I want here, though, to make just one comment on a specific point made by Galbraith. Galbraith completely missed the point in his response to Meer's criticism of empirically measuring brick by individual brick the effect on water-displacement of bricks dropped into a swimming pool.

Meer used this analogy to explain why so many empirical studies fail to detect the job-destruction effects of minimum-wage hikes. Galbraith, however, interpreted Meer's point here to be a criticism of a policy of gradualism in raising the minimum wage. If this misinterpretation by Galbraith was intentional, I suppose it qualifies as a good debate tactic (that is, pretend the point is different than the actual one that you can't adequately refute), but it nevertheless utterly sidestepped the important analytical point that Meer raised with his excellent brick analogy.

Floccina writes:

I find the idea that the welfare state allows companies like Wal-Mart to pay their workers less, illogical and so if you want me to believe it you will have to come with a lot empirical data.

Don Boudreaux writes:

Floccina: I agree with you that the claim that the welfare state allows employers of welfare-receiving workers to pay those workers less than they would pay those workers absent welfare is illogical. This claim is certainly inconsistent with foundational microeconomics. The chief reason why is that the claim rests on the assumption that each worker's pay is detached from that worker's productivity. My best guess is that those who endorse this claim assume that a worker's pay is chiefly a function of that worker's 'needs' (either materially or psychologically determined). Whether my best guess here is correct or incorrect, it remains true that at the heart of the claim is that a welfare-receiveing worker's pay is detached from that worker's productivity.

This proposition does indeed require for its acceptance extraordinary empirical support in addition to some plausible theory for why payments of welfare assistance to workers cause those workers' pay to be detached from those workers' productivities. Indeed, any such theory must explain not only why welfare payments detach worker pay from worker productivity, it must explain why this detachment occurs in ways that result in worker pay actually falling.

I myself can think of no such plausible theory, for each time that I try to imagine why welfare payments might detach worker pay from worker productivity, I come up against questions such as these:

- Is teenager pay negatively correlated with household income? (Teens from wealthier households 'need' income less urgently than do teens from poorer households.)

- Is adult pay negatively correlated with household wealth? Relatedly, do adults' pay generally fall as their personal or household wealth increases? (Adults in wealthier households 'need' income less urgently than do adults in poorer households.)

- Do real wages generally decline as a country grows richer? (The richer a country, the less 'need' workers in that country have for pay raises.)

The answer to each of the above questions is, I'm quite certain, no. And so it is a deep mystery why higher income or greater wealth supplied to some workers by the government will generally cause those workers to be paid, not according to their productivities, but, instead, according to the value of the welfare payments they receive from the government.

Yesterday at my blog I wrote a post on this matter.

Nathan W writes:

Don - I'm left wondering whether you may exhibit what I consider to be ideological faith in the perfection of markets, in implying that workers are compensated at their level of productivity. (Or, perhaps I misunderstand you and you are questioning this, but I assert that it would take a lot of faith to be quite confident in this perfect matching of productivity and wages.)

In a minimum wage business, the LEAST productive worker must still earn their keep. But, those who work twice as hard, and are twice as productive, often only make a few percent higher salary. Anyone who has ever worked in a minimum wage position knows this is most often true.

Jack PQ writes:

To be precise, Galbraith is an economist but not a professor of economics. He is the Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government at UT Austin's LBJ School of Public Affairs. I don't wish to be churlish, but the distinction emphasizes that Galbraith's research is not mainstream in the economics profession.

adam writes:

"No one thinks thinks that it's clever to ask "if Apple gains by raising prices to $600, then why not $3000". But apparently many people think it's clever to say, of minimum wages "if $15 is OK, then why not $20 or $50/hr?"."

But of course Apple is selling fewer phones as a result of charging $600 for a phone instead of $300. Apple is ok with this because Apple gets higher profits by choosing the monopoly price. And the unsold phones don't care either.

Unlike iPhones, a person cares if he is not employed. The increased wages going to the person that does not become unemployed as a result of a higher minimum wage isn't any comfort to the person that becomes unemployed as result the higher minimum wage. He doesn't care about the "aggregate wage bill." He cares about his own wages.

Jay writes:

@Floccina

If a worker's market clearing wage is X but their lifestyle needs are Y, why is it on Wal-Mart's back to make sure X is always greater than Y? If society (voters) believe that the gap between X and Y should be made up somehow, why are we forcing the only people actually helping that worker to do it versus the rest of society?

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