In the past few days, I’ve heard two arguments for minimum wage:
1) Minimum wage needs to be committed at the high level (national level) because firms can adjust at the local level, but not at the national level
2) Minimum wage needs to be committed at the local level because knowledge is better at the lower level.
Both arguments have elements of truth, but make the same crucial error: the locality of the legislation can override economic laws.
With the first argument, the idea is when legislation is passed at the local level, a firm can move to another locality to avoid the new legislation, but at the national level, that is considerably harder to do. While it is true that national legislation becomes more difficult (but not impossible) to avoid, this argument assumes that relocation is the only meth a firm can use to lower its costs. Automation and cuts to non-monetary benefits or hours are still viable. The law of demand and supply doesn’t disappear at the macro level.
With the second argument, the idea is that local politicians have a better idea of local labor market conditions, so they can more accurately set minimum wage. While it is true that local actions likely have better knowledge than national actors, there is still the problem of the knowledge of a particular time and place. If the business owners, who have direct knowledge of their circumstances, cannot set the “proper” wage, how could political actors, who have, at best, indirect knowledge, do any better? Public Choice doesn’t disappear at the local level.
Los Angeles became the third city to implement a $15 minimum wage, following Seattle and San Francisco. With all three cities, the rise is phased in. Far smarter people than I have addressed this phase in and potential reasons for it, but I’d like to address this while channeling Bastiat.
The phase-in helps hide the effects of minimum wage. By relying on arbitration (not replacing a worker who has left, or replacing him with automation), firms can adjust their employment to the new wages. If, indeed, the wage were hiked immediately to $15/hr, disemployment effects would be obvious. With the phase-in, they become hidden. This is a big reason why so many minimum wage studies find only small/no effect on employment stemming from the price increase.
But the poor economist looks only at the seen. Bastiat teaches us to look beyond what is obvious. What is not seen by many proponents of minimum wage is the potential number of jobs that are now lost. Sure, jobs may have increased by 400, but absent the minimum wage increase, they’d have increased by 800. That is a loss of 400 unseen jobs. The poor economist misses this.
Bernie Sanders (I-VT) recently introduced a bill that would have the government pay for tuition and some fees at public 4-year universities. Setting aside whether this would be a good or bad thing, there is something in the bill itself that is confusing to me, as an economist:
STATE ELIGIBILITY REQUIREMENTS:
—In order to be eligible to receive an allotment [from the federal government to help recoup the cost of tuition and fees] under this section for a fiscal year, a State shall— (1) ensure that public institutions of higher education in the State maintain per-pupil expenditures on instruction at levels that meet or exceed the expenditures for the previous fiscal year…
(Page 4, Lines 7-12)
So, in order to remain eligible for government subsidies, states must continue to spend more per pupil. This is confusing to me because the purpose of economics is to find ways to achieve the same or better product using less resources, not more. In fact, as this bill is written, it is economically wasteful. It focuses entirely on costs, but not benefits.
As its written, the bill actually creates an incentive for education to become more expensive with potentially no additional benefit to the product (the student).
Here we see in action one of the great insights of Public Choice Economics (which is a personal interest of mine), namely that, because they do not feel the same costs of their actions, political choices tend to be inefficient. Bernie Sanders doesn’t face the cost of college: he’s not spending his own money. He’s spending other people’s. Therefore, there is no incentive for him to look for efficiencies, there’s no reason for him to look for ways to save (in fact, as we discussed above, he promotes inefficiency).
In a future post, I’ll discuss the implications of such a bill (where I will be judging whether it is a good or bad bill).
I’ve spoken a lot about prices and how they act as signals. I’ve spoken a lot about how individuals are more likely to make productive choices than governments. However, I do want to stress one point so that no one among you, dear readers, may be accidentally lead to an incorrect conclusion based upon my own sin of omission.
Markets are not perfect. Prices act as signals, yes, but it is not always a perfectly clear message. Individuals generally make better choices than governments, but they still mess up.
All too often, we free-marketers tend to focus on bubbles, how they lead to recessions, and how government messed it all up. But even in a perfectly free-market society bubbles would still happen. There will still be bouts of irrational exuberance. There still will be people who spend too much for too little. There will still be bad bank loans and debt problems. None of that would go away. Why? We’re all human, folks. We make mistakes and those mistakes do have consequences. What is likely, however, is those bubbles would be smaller, more confined. Government tends to turn localized crises into national problems. Free markets would be more likely to contain the problems.
Markets are not perfect and until God Himself comes down and directs everything, they never will be. But that is not an argument against markets. It is merely the acceptance that we are all humans.
There is a strange argument that is often put forth when discussing minimum wage, namely that eliminating the minimum wage would result in falling wages. Allusions to slavery are often made. Allow me to quote the ever-hilarious Robert Reich:
Now….there is a certain diabolical logic to [eliminating minimum wage]. Maybe, if we were willing to all work for a nickel or a penny, perhaps we would all have jobs. In fact, slavery was a full employment system.
Do you see the absurdity…To assume that the goal is just to get jobs by keeping wages down completely puts logic on its head.
(By the way, this video is certainly another case for a Reich v. Reich post since here he admits higher wages cost jobs but in his minimum wage video of the other day, he staunchly denies such reality).
Reich (and others) seem to think that wages are kept high only because of minimum wage. Interestingly enough, there is no evidence to suggest this is true. According to the BLS, just 3.9% of hourly workers earn minimum wage or less. That’s about 2.6% of the total employed labor force. Not a big number. In order for Reich’s assertion to be correct, those working at or near minimum wage would have to be much closer to 100%. Workers are paid according to the value they add to the firm. If minimum wage were eliminated, it is not likely many, if anyone, would face pay cuts. However, those who aren’t allowed to join the labor force now because they are priced out would have an easier time finding jobs.
Robert Reich has put on quite a show lately demonstrating the pervasiveness of economic ignorance in political and general discourse. He does an excellent job showing why economic education is needed. Unfortunately, his plans, and their flaws, are not unique to him.
The biggest problem with his “10 Steps” plan is also found within many political plans, from Stalin’s Five-Year Plans to the New Deal to the Great Society, etc etc. They all contain contradicting elements. Earlier, I discussed how Reich goes from demanding raising wages to demanding falling wages (within a day of one another). In the past, I’ve talked about his confused case both against and for automation. But this can be seen in other economic policies: green energy (the federal government subsidizing green energy, yet imposing tariffs on solar panels to make them more expensive), War on Poverty (imposing minimum wage, which harms employment, and the EITC, which supports employment), consumer debt (keeping interest rates low to discourage saving in safe assets but providing non-taxed retirement plans), the list goes on.
When a government plans, especially in a republic or democracy, the policies change with different administrations. Representatives hock their own special interests (Iowa senators want corn subsidies while California senators want almond subsidies), and oftentimes they contradict. As favors are rarely repealed and vote trading is a real thing, this often leads to incoherent economic policies that do nothing but cost billions of billions of dollars.
Get politics out of economics and watch the world thrive.