A Serious Argument Contains Serious Argumentation

(Don Boudreaux) Here’s a letter to a college student who tells me that she was “shocked,” when while doing research for a debate on welfare policy, she encountered my blog posts on minimum wages.

Ms. L___:

Thanks for your e-mail.

You allege that my and other “neoliberals’” opposition to minimum wages “shows” our racism. You reach this conclusion by asserting that, because blacks generally are paid less than whites, “raising the minimum wage to $15 will raise more black than white incomes.” Therefore, you reason, opposition to raising the minimum wage must be rooted in racism.

Are you aware that most research on the effects of minimum-wage hikes shows that, while some workers do get higher hourly pay, some other workers lose employment? Pushing up employers’ costs of labor makes labor less desirable to employ. And so especially if you’re correct that “America as a nation is inherently racist,” then do you not worry that blacks will bear a disproportionately large share of these job losses? Might it then be said that support for minimum-wage hikes is evidence of racism?

I happen now to be re-reading a book that I recommend to you; it’s my late colleague Walter Williams’s 2011 volume, Race & Economics. In this book Walter presents ample documentation of the racist consequences of minimum wages, as well as of other smiley-face-wearing government interventions, such as statutes mandating equal-pay-for-equal-work. Walter shows also that blacks would now bear a disproportionate share of the unemployment caused by minimum wages even in the absence today of racism.

Ms. L___, you might in good faith disagree with the arguments, and question the data, that are presented in Walter’s book, in the paper linked above (and in those linked below), and in the mountains of other research that reveal minimum wages to be an enemy of blacks and other minorities. I would welcome your reaction to this research after you study some of it.

But even if you have no wish to communicate further with me about minimum wages, it’s in your own interest to carefully study this research. If you’re genuinely convinced that minimum wages are “one of society’s best antipoverty and pro-equity tools,” then you owe it to the groups whose welfare you champion to make yourself as informed as possible in order to be as effective as possible an advocate for minimum wages. You’ll want to know your opponents’ strongest arguments so that you’ll be prepared to counter these with your strongest arguments.

To learn your opponents’ strongest arguments against minimum wages, consult the works of scholars such as – to name only a few – Walter WilliamsThomas SowellDavid Neumark and William WascherJeffrey ClemensJonathan Meer, and Richard Burkhauser.

You’ll greatly improve your prospects of swaying people to support minimum wages if, rather than accusing opponents of minimum wages of racism, you instead address the best arguments offered by these people and then do your best to explain why they are mistaken. If you’re correct about minimum wages, you should have no trouble doing so.

Source: A Serious Argument Contains Serious Argumentation

Again, Put Your Money Where Your Mouth Is or Shut Your Mouth Up

So let me support my claim by pointing to evidence that doesn’t appear in a study but that is as conclusive as evidence on such matters gets. The evidence is your own behavior – specifically, your failure to start a business that employs at least some among these legions of workers who you insist are today underpaid.

If you really believe that America is filled with legions of underpaid workers, you can make a sure fortune by taking a year or two away from school and starting, say, a chain of restaurants or lawn-care companies. Entry into these industries is easy. And with a large pool of underpaid workers currently toiling away at the likes of McDonald’s, Home Depot, and Aunt Myrtle’s Country Kitchen, you’ll easily be able to hire away these workers at wages above the exploitation wages they now earn yet still at levels that enable you to earn a handsome profit by employing each one.

You’ll grow rich as you raise the pay of the workers about whom you care so deeply. It’ll be a win-win.

But if you do not put your time, effort, and money where your mouth is, then I’m left with only one of two possible conclusions. Either you don’t really believe what you assert to be true, or – more likely – you haven’t thought with sufficient seriousness about the meaning and implications of your assertion. No third conclusion is plausible. (Note: The fact that your assertion is made also by some PhD-sporting economists doesn’t save you from my criticism here. Those economists’ failure to start firms that employ these allegedly underpaid workers means only that they, too, either don’t believe their assertions or that they haven’t thought seriously enough about what those assertions imply.)

Source: Again, Put Your Money Where Your Mouth Is or Shut Your Mouth Up

Sounds Like Something Out of an Ayn Rand Novel

Here’s a letter to someone in California who apparently believes that economic reality is optional:

Mr. Víctor Sánchez, Director
Long Beach Coalition for Good Jobs and a Healthy Community

Mr. Sánchez:

You call “shameful” the decision by Kroger to close stores in Long Beach after the City Council there ordered certain supermarkets to raise the hourly pay of some workers by $4 (“Kroger to close 2 California stores instead of giving $4 hourly ‘hero pay’”). This decision by Kroger, you allege, will “deny their workers the compensation they deserve.”

Put your money and action where your mouth is. If these workers really are worth employing at the wage mandated by the City Council, you should have no trouble convincing investors to back you in efforts to buy Kroger’s Long Beach facilities in order for you to keep these operating as supermarkets that pay wages as high as those ordered by the City Council.

If, however, you’re unwilling to make this effort, then your talk is cheap. No one has any reason to trust that you actually believe that the workers who you pose as championing really deserve a $4 per hour raise.

Sincerely,
Donald J. Boudreaux
Professor of Economics

Source: Sounds Like Something Out of an Ayn Rand Novel

Quotation of the Day…

… is from page 40 of my late, great colleague Walter Williams’s remarkable 1982 book, The State Against Blacks:

The racial effect of the minimum wage laws exist in the absence of racial preferences on behalf of employers. The minimum wage law gives firms effective economic incentive to seek to hire only the most productive employees, which means that firms are less willing to hire and/or train the least productive employee, which includes teenagers, particularly minority teenagers. But assuming away any productivity differences between black and white workers, minimum wage laws give firms incentive to racially discriminate in hiring. The reason is that the minimum wage law lowers the private cost of discriminating against the racially less preferred person.

Source: Quotation of the Day…

What does the minimum wage literature really tell us?

Let me turn over the microphone to David Neumark and Peter Shirley: The disagreement among studies of the employment effects of minimum wages in the United States is well known. What is less well known, and more puzzling, is the absence of agreement on what the research literature says – that is, how economists even summarize the body of evidence on the employment effects of minimum wages.

….

Our key conclusions are: (i) there is a clear preponderance of negative estimates in the literature; (ii) this evidence is stronger for teens and young adults as well as the less-educated; (iii) the evidence from studies of directly-affected workers points even more strongly to negative employment effects; and (iv) the evidence from studies of low-wage industries is less one-sided.

Here is the full NBER paper.

Source: What does the minimum wage literature really tell us?

The disparate impact of a national $15 minimum wage

Even if you believe Janet Yellen’s recent testimony that a $15 federal minimum wage would have a “very minimal” impact on overall employment, it is hard to imagine that raising the federal minimum wage from $7.25 to $15 an hour would not significantly impact business costs and employment in at least some parts of the country. But which parts, and by how much? I use publically available data to provide a rough answer to this important question.

Source: The disparate impact of a national $15 minimum wage

Consistency about elasticities

If you think “stimulus” is effective right now, presumably you think supply curves are pretty elastic and thus fairly horizontal. That is, some increase in price/offer will induce a lot more output.

If you think we should hike the minimum wage right now, presumably you think supply curves are pretty inelastic and thus fairly vertical.  That is, some increase in price for the inputs will lead not to much of a drop in output and employment, maybe none at all.  The supply curve is fairly vertical.

You might somehow think that supply is elastic with respect to output price, but inelastic with respect to input price.  Is there a model that can generate that conclusion?  It is the net profit on the marginal output units that should matter for decisions.  And did you start with that model, or develop it afterwards to justify your dual intuitions?

Source: Consistency about elasticities

Four Ways to Judge Minimum Wage Laws

There are at least four levels on which the effects of minimum wage legislation need to be analyzed.

When employers are required by law to pay a higher wage, some workers in some workplaces will receive this higher wage. If you assume that these workers deserve this higher wage and will be made happier by it, then the legislation is helpful. This is the good intentions level of the policy.

1. Immediate Effects

When employers are required by law to pay a higher wage, some workers in some workplaces will receive this higher wage. If you assume that these workers deserve this higher wage and will be made happier by it, then the legislation is helpful. This is the good intentions level of the policy.

2. Demand Effects

When you arbitrarily raise the price of something, you reduce the demand for it. This is elementary supply and demand theory. For example, suppose a grocery manager in a market has set a price of $1.00 a pound on tomatoes that are turning overripe. A well-intentioned legislator feels sorry for these tomatoes and arbitrarily raises their price to $1.50 a pound. The result will be that customers buy fewer these of these tomatoes, and more will end up rotting in the bin.

The same thing happens with marginal labor, including workers who are physically or mentally impaired, or young and inexperienced. If you arbitrarily raise the price that must be paid for this labor, less of it will be purchased. Employers adjust by substituting labor-saving machinery, by hiring fewer but more productive employees, or by closing the business altogether. What started out as a good intention ends up hurting many of the very workers one feels sorry for, pushing them into unemployment.

3. Price Effects

To the extent that a minimum wage law does put more money in the hands of some workers, this money has to come from somewhere. At first glance, it might seem that employers will pay this extra out of their own pockets. The problem with this expectation is that in all economic arrangements there is a great deal of cost-shifting going on. Businesses adjust to increased costs by increasing prices. The restaurant that charged $5.00 for a hamburger will raise the price to $5.50 to cover the higher wages being paid.

As a result of this cost-shifting, the burden of paying for an increase in the minimum wage falls on everyone, including the low-wage workers one hopes to help—and on non-working poor we didn’t even stop to think about.

4. Social Effects

From a distance, a job may seem a mere transfer of money, but in practice it involves many social and psychological benefits. A recovering drug addict may need a temporary job as therapy, a teenager may need employment to develop responsibility and self-confidence, a senior may need informal work to gain companionship. For these workers, the benefits of a job lie beyond the money being paid. Forcing an employer to pay a higher wage can destroy such arrangements, eliminating the social benefits connected with them. In one case I’ve learned about, a program that had patients of a mental hospital doing gardening and beautification work on hospital grounds was closed down by state regulators because it violated minimum wage requirements.

Pegging Minimum Wage to Inflation Will Not Help Minimum-Wage Workers

Whenever minimum wage is discussed, inevitably there is some conversation about “if the minimum wage was pegged to inflation, it would be X by now!” ( see, for example ) . Politicians and policy experts often then make recommendations to peg minimum wage to some measure of inflation.

Source: Pegging Minimum Wage to Inflation Will Not Help Minimum-Wage Workers

However, the Law of Demand tells us why this is a poor idea, even moreso than a simple (ie, not-pegged) minimum wage.

The Law of Demand has two parts to it:

1) All else held equal, as the relative price of a good rises, quantity demanded of the good will eventually fall.

2) The longer the relative price of a good remains high, the more elastic demand becomes.

The first part, or the First Law of Demand, tells us that the initial setting of the minimum wage (assuming it is above the equilibrium price), will cause fewer workers to be employed (or some other cut be made depending on the choices firms face).

The second part, or the Second Law of Demand, tells us that if minimum wage were pegged to inflation, employers would look for more and more ways to reduce their labor costs; in technical terms, they will find more and more substitutes for labor (eg, automation). What this indicates is the negative effects of a minimum wage hike will likely be enhanced if the minimum wage were pegged to inflation. Indeed, one of the main reasons minimum wage has so little documented negative effects presently is partly because the real minimum wage is below the prevailing market wage. Pegging minimum wage to inflation would reduce that happy effect.

The Law of Demand is pretty immutable. Minimum wage is no exception to it. You make workers more expensive to hire, people will look for alternatives.