David R. Henderson  

Ozimek on Hanauer

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A few days ago, a regular reader of Econlog wrote me to suggest that I do a critique of a long piece written by Nick Hanauer, the person who made a few billion dollars as a tech investor. Hanauer has become a persistent advocate of a minimum wage of $15 an hour. So I looked at the piece and wrote this reader the following:

I started to read it and didn't want to finish. If he [Hanauer] were to draw a simple demand curve for low-skilled labor, he would see the problem with his argument. I don't know if it's worth responding to on my blog.

Fortunately, Adam Ozimek has written an excellent critique of a shorter piece by Hanauer. I recommend the whole thing.

In one part, Ozimek quotes Hanauer's statement, where he tries to make the point that there is little connection between high wages of low-skilled workers and high unemployment:

Everywhere you care to look, you can find examples of high-wage places with low unemployment, and low-wage places with high unemployment... In the overwhelming majority of circumstances, the high-wage states and cities enjoy low unemployment while the unemployment rate in low-wage states continues to climb.

Ozimek responds:
Again, you [Hanauer] have a total lack of understanding of supply and demand. There are high equilibrium wages in some labor markets, and low equilibrium wages in others. What does this tell you about the effect of a price floor? Nothing. This is like arguing that the existence of Cadillacs proves that a tax on cars won't reduce demand because people pay a lot of money for some cars.

Beautiful analogy.

Ozimek points out that Hanauer has argued that a minimum wage of $28 an hour would make the economy boom.

The whole Ozimek piece, which is not long, is worth reading.

Comments and Sharing

COMMENTS (10 to date)
Jon Murphy writes:

I think you may have the wrong link. When I click the link, it takes me to a piece by a John Cook.

David R. Henderson writes:

@Jon Murphy,
I screwed up on links even more than you said. I think they’re all fixed now. Thanks.

Art Carden writes:

I read the Ozimek piece. "If high wages reduce employment, then why do so many places with high wages have low unemployment?" is to economics as "if we evolved from monkeys, why are there still monkeys?" is to evolutionary biology--such a profound misunderstanding of the basics that it's clear the prerequisites for a useful discussion have not been met.

Don Boudreaux writes:

The ECON 101 student who does not manage to learn to distinguish changes in demand and in supply (which cause prices to change) from changes in quantity demanded and in quantity supplied (which are the results of changing prices) flunks the course. In contrast, the billionaire who does not manage to learn this elementary but vitally important distinction gets lots of love and applause from those ECON 101 students who flunked the course (and from many others who never even bothered to take ECON 101) when his failure to understand this distinction leads him to utter nonsense about economic matters.

Trevor H writes:

Progressives encourage us to think about the dynamic effects of increased demand driven by the additional cash for low wage workers, assuming that this will more than compensate for the inevitable price increases. That's pretty speculative and requires some questionable assumptions about price elasticities.

But there's another dynamic effect which requires no such speculation and that's the evaporation of capital and reduction of investment. Let's take the progressive hope that the minimum wage increase works out to be simply a transfer of profits from the owner to the workers, then what? Workers may not lose their jobs and a small business owner, particularly one using debt financing, may continue to operate the business even at a loss if it's cash flow positive and they can avoid a default.

But the value of that business and its assets plummets as a result. This owner no longer has collateral to finance a second store. A potential competitor sees the new low or nonexistent returns to capital and cancels plans to open a new store across the street that would have employed another 20 minimum wage workers. Maybe that capital is invested in a new Vietnamese shoe factory instead.

Nobody lost their job, but there are certainly employment effects. And there aren't any heroic assumptions in that story, it's a pretty straightforward description of the expected impact of a minimum wage hike - that investment in businesses that depend on such workers should plummet. The employment effects are unseen but unfortunately very real.

Chris Wegener writes:

@Trevor H
Your argument would be more persuasive if there were a significant number of small business in the economy that employee minimum wage workers,

The argument for higher minimum wage is driven by welfare firms like Walmart and other giant employers in the retail space that refuse to pay a living wage.

We have experimented with supply side tax cuts that have been enacted on the premise that they would cause an economic boom. I think that after thirty years we would have noticed that boom. We have all missed it.

The higher minimum wage is based on the demand side. It seems after the failure of the supply side to deliver its promised results. (Despite all the Econ 101 arguments about why it would work) I think it is time to try it. It can't possibly be any worse than the tax cuts that have exploded the deficit.

Trevor H writes:

@Chris Wegener

I don't see why it matters whether it's a small or large business, the economic facts are the same. A regulatory change like an increase in minimum wage that reduces the profitability of firms will reduce their value and discourage investment, regardless of the scale of the firms. Even if it doesn't result in immediate mass unemployment because of the sunk cost of previous investment, it acts as a brake against the growth of employment which is already trending below the growth of population.

I will note that small businesses employ huge numbers of minimum wage workers, much of the fast food industry for instance. Most of those franchises are owned and operated by small businesses.

I'm not sure why supply side tax cuts are relevant. I agree that shrinking the deficit, whether through tax increases or spending cuts, would likely spur economic growth. Are you arguing that because the country implemented one bad idea that it should now implement another one?

Chris Wegener writes:

Well since you had no objection to the tax cuts why object to the increase in minimum wage?

Lets try it and find out what happens.

Apropos fast food being a small business, all the empirical evidence points to improved performance of those fast food franchises that have raised they're wages. Lower turn over, improved productivity as well as improved employee moral.

David R. Henderson writes:

@Chris Wegener,
Apropos fast food being a small business, all the empirical evidence points to improved performance of those fast food franchises that have raised they're wages. Lower turn over, improved productivity as well as improved employee moral.
And you think that employers are too dumb, shortsighted, or willful to understand this?

Chris Wegener writes:

Pretty much

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