Amazon and Minimum Wages

From Marginal Revolution:

What Do We Learn from Amazon and the Minimum Wage?

Amazon’s widely touted increase in its minimum wage was accompanied by an ending of their monthly bonus plan, which often added 8% to a worker’s salary (16% during holiday season), and its stock share program which recently gave workers shares worth $3,725 at two years of employment. I’m reasonably confident that most workers will still benefit on net, simply because the labor market is tight, but it’s clear that the increase in the minimum wage was not as generous as it first appeared.

What lessons does this episode hold for minimum wage research? Amazon increased its wages voluntarily but suppose that the minimum wage had been increased by law. What would have happened? Clearly, Amazon would have, at the very least, eliminated their bonus plan and their stock share plan! In this situation, researchers examining employment data would discover that the increase in the minimum wage did not much lower employment. Such researchers might conclude that minimum wages don’t reduce employment much because the demand for labor is inelastic. The conclusion is correct but the reasoning is false. The correct conclusion and reasoning would be that the minimum wage didn’t reduce employment much because the minimum wage didn’t increase net wages much.

Amazon is a big and newsworthy employer so its actions have been closely monitored but in most cases we never know the myriad ways in which firms respond to a law. Even using administrative data it would be difficult to pick up changes in a stock share plan or a pension plan, as this compensation doesn’t show up in earnings until years after the work is completed. Even a simple employment contract is a complicated bargain with many margins. During the holiday season, for example, Amazon hires a CamperForce of workers who live in RVs and it pays their campsite fees–no big deal, but that is a form of compensation that is hard to find on a W-2. More generally, firms can respond to a minimum wage by changing compensation on non-wage margins, adjusting working conditions, reducing benefits, changing wage growth patterns, and adjusting the type of workers they hire, to give just a few examples–and notice that all of these changes are difficult to measure and none of them have a first-order effect on employment.

More Welfare for Workers

 

Bernie Sanders billionaire welfare taxation defies all economic logic
Bernie Sanders has officially introduced legislation in Congress aimed at forcing large companies to reimburse the government for providing public benefits to their employees. Targeting Amazon in particular, the Vermont senator recently tweeted, “All over this country, many Amazon employees, who work for the wealthiest person on Earth, are paid wages so low they can’t make ends meet. The American taxpayer should not be subsidizing Jeff Bezos so he can underpay his employees.”

Not only is this proposal unworkable and likely to harm the small number of people it targets, but it also mischaracterizes companies like Amazon and Walmart as reaping the benefits of lower wages, while the government picks up the tab. This argument fails on basic economic principles and ignores investments that many of these companies make in their entry level workers. Rather than “taxing” major companies for giving jobs to low skilled workers, Congress should find ways to make it easier for them to educate and train their entry level workers.

One of the major problems with the proposed legislation is that it assumes that wages are set by the whims of company executives. But in a competitive labor market, wages are set by the supply and demand for labor, not some arbitrary decision making by executives. As economist Arindrajit Dube argued, research shows that benefit programs like food stamps and housing assistance actually reduce labor supply because they make work less attractive, which drives wages up instead of not down. He writes, “The key point is that it is difficult to imagine how food stamps would lower wages. If they don’t lower wages, they can’t be thought of as subsidies to low wage employers.” For the argument that safety net programs “subsidize” employers to ring true, wages would be higher in their absence, something I doubt proponents believe.

[snip]

 

Workers on Welfare

From Bloomberg Opinion:

Senator Bernie Sanders is all set to propose legislation that proposes to put a tax on large businesses with employees who receive benefits from safety-net programs. The idea is simple: If a business isn’t paying enough to keep its employees from qualifying for, say, food stamps and public housing, then the business should be taxed an amount equal to those benefits. If a McDonald’s employee receives $400 in food stamps, then McDonald’s would owe the government $400 in additional taxes.

Fox News host Tucker Carlson thinks this is smart policy. In a tweet last week, Carlson pointed out that Jeff Bezos, founder and CEO of Amazon, is “the richest man in the world. Many of his employees are so poor, you’re paying their welfare benefits.”

[snip]

Whether motivated by concerns about inequality, as the Vermont senator is, or by the increasingly common view on the political right that when it comes to certain corporations, big is bad, both Sanders and Carlson betray a fundamental misunderstanding of economics and of the proper ordering of society.

Forces in a market economy will push the wage earned by workers toward the amount of revenue they generate for their employer. It is simply unrealistic to expect a company to pay, say, $15 per hour to a worker who is only generating $9 per hour of revenue for the business. Under such an arrangement, the company is losing $6 every hour the worker is on the job. That situation is untenable.

My argument may sound off given the amount of attention currently paid in some circles to issues like “market concentration,” “monopsony power” and the like. To be clear, I do not deny that these factors play a role in determining wages. But particularly in the low-wage labor market, a worker’s productivity plays a very important role in determining his wage. And large gaps between wages and productivity are ultimately unsustainable for many workers.

So in some sense, Sanders and Carlson have it exactly backward: Walmart, Amazon and McDonald’s are not being subsidized by taxpayers because some of their employees receive assistance from safety-net programs. Instead, employers of lower-wage workers are surely reducing safety-net rolls. In the absence of these jobs, more people, not fewer, would likely be receiving government assistance.

The logic underlying the claim by Sanders and Carlson also leads to a place that the senator at least probably doesn’t want to go. Sanders argues that if Amazon has employees on Medicaid, then taxpayers are subsidizing Amazon. At the same time, the senator supports single-payer national health care (“Medicare for All”). Should we view any national health-care program as a multitrillion-dollar taxpayer subsidy to business?

Of course not. And we shouldn’t view food stamps as a subsidy to business, either. Doing so reflects a fundamental misunderstanding of how U.S. society has chosen, through politics, to assign different roles to different actors.

And while we’re at it, this from National Review:

Both Senator Bernie Sanders and Fox News host Tucker Carlson have recently slammed Amazon, Walmart, Uber, and other large companies for paying workers and contractors too little. In a withering monologue last week, Carlson claimed that the companies are all effectively subsidized by the taxpayer because many of their employees’ incomes are supplemented by various federal welfare benefits, such as food stamps. Sanders agrees. Yesterday, he introduced legislation (the so-called Stop BEZOS Act) to tax large corporations one dollar for every dollar their workers receive in government food stamps or health-care benefits.

If nothing else, it is amusing that neither Sanders nor Carlson fully acknowledges the logical implications of their position. If Sanders is right that programs such as food stamps modestly subsidize employers who pay low wages, then his hugely expensive Medicare-for-all and free-college-tuition proposals would constitute a massive subsidy to low-wage employers. If Carlson truly believes that large firms have the power to suppress wages below competitive rates, then he should support raising the minimum wage to combat that power — something that he has, in the past, sensibly advocated against.

Snark aside, the pair are simply wrong on the economics of the matter, and shortsighted to boot. An employer’s responsibility is to pay employees for the work they do, not to ensure that they have some societally agreed-upon level of livable household income. Indeed, it is a peculiar worldview that suggests that, when setting wages, a company employing low-skilled workers should ignore the value of the tasks the employee actually undertakes for them.

In competitive labor markets, we usually assume that firms pay workers according to their productivity, the marginal revenue product of their labor. Market wages are determined by where this demand interacts with the supply of workers. Firms can’t underpay workers without losing the best to rivals. Nor can they routinely pay employees for more than they add to company revenue without losing capital to rivals at home and abroad and risking going out of business. There is no evidence that Amazon, Walmart, or Uber have high-enough degrees of labor-market power that they are the single hirer of workers in any one geographical area. For Carlson to imply that their pay rates are evidence purely of corporate greed is the worst form of populism.

There is a basic conundrum hanging over this debate: In a world with no minimum-wage laws, no out-of-work benefits, and no in-work benefits, some workers with low productivity levels would obtain work but find it difficult to live comfortable lives on market income. The real questions then are: Who should help, and if it is the government, will that end up subsidizing firms?

One form of help comes in the form of means-tested programs that apply regardless of work status, such as basic food stamps. These explicitly do not subsidize employers as Sanders and Carlson allege. Actually, we’d imagine that transfers of this kind would have the opposite effect, because they replace income obtained from work: The more you earn, the less in transfers you receive. These programs therefore reduce the supply of workers, by raising the wage people would have to be offered to return to work, which in turn raises market wages if the supply of workers is upward-sloping. Far from a “subsidy,” then, means-tested federal welfare benefits are more like a “tax on employers.”

Indeed, the only forms of welfare that can theoretically subsidize employers through lower wages are transfers that supplement income from work and so increase labor supply, such as the earned-income tax credit (EITC). As a wage subsidy, the EITC encourages more potential workers to seek low-paying employment, because the earnings from that employment plus the subsidy are higher than the means-tested benefits they forfeit by going back to work. The EITC thus increases the labor supply by design, which is great for EITC recipients but can hurt ineligible groups, such as those without children, who see their wage rates fall as a result.

The benefits of such supplemental subsidies are indeed captured by a combination of the employer and all employees. Academic experts Auston Nichols and Jesse Rothstein, using reasonable assumptions, estimate that for every $1 put into the EITC program, employees receive $0.64 of the outlay and employers capture $0.36 owing to reduced market wages. One therefore could, if he were so inclined, call the EITC an “employer subsidy,” though strangely neither Sanders nor Carlson has bothered to mention it at all.

Given that Sanders’s and Carlson’s critique focuses instead on means-tested welfare programs, it makes no sense. Cajoling companies to pay more by imposing high minimum-wage rates or taxing those whose employees receive government assistance would simply make it more difficult for lower-productivity workers to find jobs, putting taxpayers on the hook for more safety-net spending. Only supplementary welfare programs such as the EITC have the effect that Sanders and Carlson describe, and cutting these programs would certainly hurt the workers who rely on them as much as, if not more than, employers.

The Empirical Reality of the Minimum Wage (Donald J. Boudreaux)

From the American Institute for Economic Research:

The Current Consensus

So what, really, is the state of modern empirical research into minimum wages? Let’s start with an unambiguous statement: Paul Krugman is factually mistaken. Plenty of recent evidence indicates that raising the minimum wage costs jobs. As long-time minimum-wage researcher David Neumark concluded in a December 2015 article for the Federal Reserve Bank of San Francisco:

Coupled with critiques of the [econometric] methods that generate little evidence of job loss, the overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers — with possibly larger adverse effects than earlier research suggested.

 

My own extensive reading of minimum-wage research confirms Neumark’s conclusion.

That said, it is also the case that quite a few, although not a majority, of the empirical studies of minimum-wage hikes find no evidence that these hikes destroy jobs. What explains these conflicting research results?

One reason for these inconsistent conclusions is simply the differences in skill and meticulousness that separate some researchers from others. Economic studies vary greatly in quality and reliability. Not every piece of published work by Ph.D. economists is trustworthy. Far from it.

But even after excluding all shoddily done studies of minimum wages, we’re still left with conflict in the conclusions. Fortunately, economic theory itself supplies clues as to why.

Clue #1: While the destruction of jobs for some low-wage workers is the banner prediction elementary economics makes about minimum wages, it’s not the only prediction. Employers and workers can adjust to minimum-wage hikes in other ways. For example, the value of fringe benefits can be reduced, as when restaurants no longer let their employees eat free of charge and when retailers stop offering their merchandise to employees at discount prices.

Similarly, employers can work their low-wage employees harder or become less tolerant of these employees’ showing up for work late, leaving work early, or texting and making personal phone calls while on company time.

To the extent that employers and employees adjust to hikes in minimum wages in these ways, the incentive for employers to reduce the number of low-wage workers they employ is muted. Hence the number of workers cast into unemployment by minimum-wage hikes is diminished.

Clue #2: Employers can adjust to higher minimum wages not only by reducing the number of low-skilled workers they employ, but by reducing the number of hours they employ each of these workers. Indeed, because minimum-wage legislation is written in terms of hourly wages, the most precise description of the banner prediction that elementary economics makes about minimum wages is that these legislative mandates reduce the number of hours of low-skilled labor that employers wish to hire (rather than the number of such workers themselves).

Therefore, empirical studies that count the number of workers employed, rather than the number of hours workers work, count the wrong variable. While it’s true that the most obvious way, and often the easiest way, for employers to reduce the number of hours of labor they employ is to employ fewer workers, empirical studies that find that minimum wages cause no reduction in the number of people employed do nothing to cast doubt on the elementary case against minimum wages because an alternative way is to employ the same number of workers but at fewer hours.

Even if no workers lose jobs because of minimum wages, minimum wages harm these workers if some of them are thereby unable to work as many hours as they would work absent minimum wages.

Clue #3: Employers in countries in which minimum wages have existed for many years have adjusted their business plans not only to the existence of minimum wages, but also to the likelihood that minimum wages will rise. In the United States, the current national minimum wage was first imposed in 1938 by the Fair Labor Standards Act. Starting off at $0.25 per hour, it has since been raised 22 times, an average of once every 44 months. This minimum wage is now $7.25 per hour.

Because this minimum wage has been around, without pause, for 80 years, because it is routinely increased, and because there is no realistic prospect of its being repealed, employers make their business plans accordingly. No firm today in the United States uses a production process as heavily reliant on low-skilled workers as some of these processes would be absent a minimum wage. Knowing of the existence both of the minimum wage and of the likelihood that it will be raised in the not-too-distant future, employers use more labor-saving machinery and fewer low-skilled workers than they would use otherwise.

So it’s no surprise that some researchers fail to detect any resulting decrease in employment whenever the minimum wage is increased. The negative employment effects of the minimum wage were already built into the structure of the American economy. Indeed, when this undeniably correct prediction of economics is understood, it is not too much to say that the most surprising fact about the many modern empirical studies of minimum wages is that any of them find that hikes in minimum wages continue to have statistically significant negative employment effects.

Despite some commentary to the contrary, empirical studies of the employment effects of minimum wages do not come close to proving that minimum wages don’t harm many of the people most minimum-wage supporters wish to help: low-skilled workers.

Teen Unemployment and Minimum Wage

From the Mercatus Center at George Mason University

The labor force participation and employment rates of young adults in the United States have declined sharply in recent years, especially among teenagers. The overall decline in the rate of labor force participation since the Great Recession has received a great deal of attention from researchers and policymakers, who focus in large part on trying to gauge whether this decline is permanent and what it implies about how tight the labor market is. However, the decline in labor force participation of young adults has been going on for much longer and does not coincide with swings in economic activity.

David Neumark and Cortnie Shupe consider three possible explanations for the decline in teen employment in the United States since 2000, with a particular focus on those age 16–17: (1) a rising minimum wage that could reduce employment opportunities for teens and potentially also increase the value of investing in schooling; (2) rising returns to schooling; and (3) increasing competition from immigrants. The higher minimum wage is the predominant factor explaining changes in the behavior of teens age 16–17 since 2000. Additionally, no evidence was found to suggest that higher minimum wages for teens leads to higher future earnings; if anything, the evidence points to the opposite effect.

  • Prior literature shows that teen employment has declined much more than the employment rates of those age 20–24 since 2000. These changes were larger for teens age 16–17 than for those age 18–19. The percentage of teens not in the labor force who reported wanting a job fell by almost half between 1994 and 2009, from 24 percent to 13.2 percent.
  • The decline in the number of teenagers in the workforce was owing to increases in teens being exclusively in school, rather than combining school and work.
  • In new results presented in this paper, the authors find that higher minimum wages are associated with a lower share of teens age 16–17 both in school and employed, and a higher share in school and not employed.
  • There is some evidence that changes in the return to schooling and an increase in the share of immigrants employed in the workforce may have contributed to the observed changes in employment and enrollment of teens age 16–17, although these effects are considerably smaller than the estimated minimum wage effects.
  • The study found no positive relationship between higher minimum wages for teens and higher future earnings. The evidence, if anything, says that teens exposed to higher minimum wages since 2000 had acquired fewer skills in adulthood. Thus, it is more likely that the principal effect of higher minimum wages since 2000, in terms of human capital, was to reduce employment opportunities that could enhance labor market experience.

 

As a matter of fact, minimum wage laws hurt the poor

NO ONE LIKES to admit having been wrong. It’s especially tough for members of the pundit class, whose job amounts to telling people what to think. So when National Review’s critic-at-large Kyle Smith last week published a piece with the headline “We Were Wrong About Stop-and-Frisk,” people noticed.

Smith and National Review are conservative. Like many conservatives, they had predicted that if New York Mayor Bill de Blasio fulfilled his campaign pledge to end stop-and-frisk — the police practice of stopping, questioning, and patting down people for weapons merely because they seemed suspicious — crime in the city would go up. But that’s not what happened.

In the four years since de Blasio became mayor, conceded Smith, major crime has declined “to the lowest rates since New York City began keeping extensive records on crime in the early 1960s.” The left-wing mayor turned out to be right about stop-and-frisk. The right-wing journal said so, and in so doing, displayed more loyalty to truth than to theory.

Following facts where they lead is a principle easier to state than to live up to, particularly when the facts upend our preconceptions. Some public-policy debates are endless because they are rooted in disagreement over fundamental principles — the question of capital punishment, for example. But other disputes ought to be resolvable, at some point, by facts on the ground. Advocates of an aggressive stop-and-frisk policy were certain the only alternative was higher crime rates. They were mistaken. The honest response is to acknowledge it, and end the debate.

Another controversy that should be laid to rest is the impact of minimum-wage laws.

When government raises the lowest hourly wage at which a worker may lawfully be employed, does it help those at the foot of the economic ladder? The issue has been fought over for decades. Yet reality repeatedly renders the same verdict: Artificially hiking minimum wages makes it harder to employ unskilled workers. Raising the cost of labor invariably prices some marginal laborers out of the job market. Advocates of higher minimums may wish to ensure a “living wage” for the working poor. Yet the result is that fewer poor people get work.

Two years ago, Seattle’s hourly minimum wage jumped to $13, the second hike in less than a year. Before the legislation was enacted, there had been the usual arguments pro and con. But the impact of Seattle’s law is now a matter of facts, not theory. And those facts confirm what opponents of the increase had foretold: Minimum-wage hikes hurt the poor.

In a major research paper last summer, economists commissioned by the city of Seattle reported that the hike to $13 an hour caused a decline in the employment of low-wage workers. For those who remained employed, it caused a sharp cutback in hours. When the gain from higher hourly wages was set against the loss of jobs and hours, the bottom line was stark: “The minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016.”

Another 2017 study, by Harvard Business School scholars, analyzed the effect of minimum wage hikes on San Francisco-area restaurants. The upshot: Every $1 increase in the mandatory minimum wage led to a 14 percent increase in the likelihood that a median-rated restaurant would go out of business. Decades of empirical research, dating back to the first federal minimum-wage law, have reached similar conclusions.

In 18 states this month, minimum wages are going up. Will those changes make unskilled workers more employable? Will the hours they work be increased? As in Seattle and the Bay Area, these questions will have answers. Soon enough, fresh data will shed even more light on the question of what happens to unskilled laborers when their labor is made more costly. Perhaps that will be the moment when someone more loyal to truth than to theory will publish an essay bowing to reality and conceding, at long last: “We Were Wrong About the Minimum Wage.”

The Blessing of the Minimum Wage Fallacy

From Henry Hazlitt’s Economics in One Lesson, we learn that “the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence: The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” Let us begin with a simple illustration: the 18 minimum wage hikes that will take place next Monday on January 1.

As a result of 18 state laws mandating that minimum wage workers will get paid $0.35 (in Michigan) to $1 an hour (in Maine) more on January 1, a young teenage worker named Alex working full-time at a small neighborhood pizza restaurant in Maine would make $160 in additional income every month (ignoring taxes). Alex would spend that additional monthly income of $160 at local merchants on items like food, clothing, footwear, Uber rides, movies, computer games, and electronics items. The local merchants who receive that $160 from Alex’s additional spending now have additional income and profits every week, and they can spend some of that additional income and profits on goods and services. Alex’s additional monthly income, therefore, ripples through the local Maine economy with an amazing multiplier effect that almost magically increases spending and income throughout the local economy. The pro-minimum wage crowd points to these many positive income effects from Maine’s pending $11 an hour minimum wage and Alex’s additional income, and many might even suggest that a minimum wage far above $11 an hour would create even greater and more positive benefits for workers like Alex and the local merchants who would be the beneficiaries of an even higher minimum wage. For example, EPI suggests that a $15 an hour federal minimum wage would lift wages for 41 million American workers.

But let us take another and closer look at the situation. The minimum wage crowd is at least right in its first conclusion about Alex’s spending, which is just a small part of the much larger $5 billion in additional wages and spending EPI estimates for next year. The public policy of artificially raising wages through government fiat will mean more business and billions of dollars in greater sales revenues for local merchants around the country. The local merchants will be no more unhappy to learn of the magical spending from 18 minimum wage hikes in 2018 than an undertaker to learn of a death.

However, we haven’t yet considered the situation that will now face hundreds of thousands of merchants and small business owners next year, including Alex’s boss – Mrs. Alice Johnson who owns the small pizza restaurant in Bangor where Alex works. As a result of Alex’s good fortune to receive $160 in extra income every month (and nearly $2,000 during the entire year) as a result of government fiat, his boss and sole-proprietor Alice Johnson now has $160 less every month (and $1,920 for the year) because she has to pay Alex out of her own income or profits. The Johnson family now has to cut back on their household spending by $160 every month that they would have spent on food, clothing, Uber rides and electronics products at local merchants. Alex’s gain of $160 each month comes at the direct expense of the Johnson family, who are now worse off in the same amount that Alex is made better off. (And if Mrs. Johnson employs more minimum wage workers than just Alex, she and her family are worse off by $160 per month, and $1,920 per year, for each worker.) If we consider that Alex and the Johnson family are a part of the same local community in Bangor, the community’s income hasn’t changed – rather, there’s only been a transfer of income of $1,920 per year from the Johnson family to Alex; but no net gain in community income, wealth, jobs, or prosperity has been achieved.

For the entire state of Maine, the $80 million in higher wages that EPI’s estimates next year as a result of the $1 an hour increase in the state’s minimum wage have to come from somewhere or someone. And that “somewhere” or “someones” are the thousands of local merchants in Maine like Mrs. Johnson who will be made collectively worse off by $80 million in 2018.

The people in the pro-minimum wage crowd think narrowly of only two affected groups from minimum wage hikes: Alex, the minimum wage worker, and the merchants that gained his business from his artificial increase in income. The minimum wage advocates forget completely about the third parties involved, namely small business owners and their families like the Johnsons in Maine, and the local merchants that now lose their business because the labor costs for small businesses have been artificially increased by government fiat. Minimum wage advocates will easily see Alex’s increased income and spending because it is immediately visible to the eye and easy to calculate ($5 billion next year according to EPI, and $144 billion annually if the federal minimum wage is increased to $15 an hour). They fail to see the lost income and subsequent reduction in spending by the Johnson family that otherwise would have occurred – because it’s less visible and harder to calculate.

The minimum wage example above exposes an elementary fallacy about its alleged positive income effects. Anybody, one would think, would be able to avoid that fallacy after a few moments thought. Yet the minimum wage fallacy, under a hundred disguises, is the most persistent in the history of economics. It is more rampant now than at any time in the past. It is solemnly reaffirmed every day by great captains of industry, by labor union leaders, by editorial writers and newspaper columnists, by progressive politicians and progressive think-tanks, by learned statisticians using the most refined techniques, and even by professors of economics in our best universities who sign statements in support of the minimum wage. In their various ways, they all perpetuate the minimum wage fallacy.

The minimum wage supporters see almost endless benefits despite the economic destruction that characterizes minimum wage laws. They see miracles of multiplying prosperity, increased income, and more jobs coming from minimum wage hikes, a form of economic magic enacted in state capitals, by city councils, and the federal government. But once we trace the long-term effects of such public policy on all groups in the economy, and analyze both what is seen and what is unseen, we should easily understand that the minimum wage cannot, and will not, have overall positive effects. At best it can only transfer income from one group (business owners like Mrs. Johnson above and/or their customers in the form of higher prices) to another group (low-skilled, limited-experienced workers), but with no net gain. It’s an ironclad law of economics that to stimulate one group with public policies like the minimum wage, protective tariffs, or farm subsidies, another group in the economy has to be equally “un-stimulated.” In the case of the 18 increases next week in state minimum wages, the EPI’s estimate of $5 billion in additional wages will stimulate low-skilled workers next year by the exact same amount that it will “un-stimulate” merchants, businesses, business owners and their families in those 18 states – by $5 billion.

When one considers all of the long-term effects on all groups that would result from minimum wage laws: the economic distortions, the misallocation of resources, the loss of employment opportunities for low-skilled workers and the lifetime consequences of not gaining work experience at an early age, and the businesses that close or are never opened, one can only come to one conclusion: the minimum wage law is a very bad and very cruel public policy that makes local communities and the entire economy overall much worse off, not better off.

MP: Groups like EPI that support increasing the minimum wage do a great job of addressing the benefits of higher wages to low-skilled workers, but then completely ignore the costs of those artificial wage increases. That is, they never answer the most important question of all, posed above: Where will the $5 billion in additional annual wages from the 18 minimum wage hikes next year come from?

For example, in a 60-page document released earlier this year by EPI’s senior economic analyst David Cooper, “Raising the minimum wage to $15 by 2024 would lift wages for 41 million American workers,” there is extensive coverage on every page of the estimated benefits of artificially higher wages ($144 billion annually) to various workers by demographics (age, gender, race/ethnicity, education, family status, children, geography, etc.) that would result from a $15 an hour federal minimum wage. But you won’t find a single sentence in the 60-pages of text that explains where the $144 billion will come from if the federal minimum wage is increased to $15 an hour!

There’s not a single mention in the EPI report of the word “business” except for a reference to a $15 minimum wage “spurring greater business activity and job growth.” There’s also not a single mention of what should be relevant terms like “higher prices,” “labor costs,” “profits,” “adjustments” or “reduced hours” that would give us some idea of the costs of a $15 an hour minimum wage, who pays those costs (businesses), and how those higher costs will offset the benefits. And that’s the essence of the “blessings of the minimum wage fallacy” that EPI has fallen prey to — a $15 minimum wage sounds like good public policy only when you count all of the blessings (benefits) to workers while ignoring the costs to businesses.

Bottom Line: We learned from Bastiat and Henry Hazlitt that broken windows and other forms of destruction can’t increase a community’s overall income, employment, and economic prosperity. Likewise, neither can the 18 minimum wage hikes scheduled to take place on Monday have overall, positive net economic benefits next year. Any public policy looks good when you look merely at the immediate effects, but not the longer effects; when you consider the consequences for just one group (workers in the case of the minimum wage) but for all groups (businesses), and only emphasize the benefits (to workers) while completely ignoring the costs (to employers). But that’s not sound economic logic or objective economic analysis on the part of groups like EPI; rather it’s pure partisan political advocacy for an economic fallacy that violates the ironclad law of economics described above. Or as Milton Friedman described it in 1966, support of the minimum wage is “monument to the power of superficial thinking.”

Update: As Not Sure points out in the comment section, there is an additional cost to employers when the minimum wage increases because of the 7.65% payroll tax imposed on employers for Social Security and Medicare. Therefore, the $5 billion in higher wages next year for minimum wage workers would actually cost their employers $5.3825 billion.

Minnesota: Rule or exception?

A meme, and a notion, floating around the Internet:

Image may contain: text

So do these changes really kick-start an economy? Here’s an analysis from the “Being Classically Liberal” Facebook page:

1. Minnesota had ALREADY been experiencing a decent economy prior to the tax increases. As USA today explains, “Minnesota had one of the nation’s lowest unemployment rates in 2012 …and one of its highest GDP growth rates, at 3.5%.” [a] The tax increases came the following year, in 2013. [b] Minnesota continued to maintain its rank of having one of the best unemployment rates, and any further decrease in its unemployment rate simply mirrored national trends. One cannot reasonably conclude, then, that the 2013 tax increases had “caused” the good economy which was already in place before said tax increases even existed.

2. Understand that this controversy is over TWO tax increases; One which increased income taxes on individuals earning above $150,000 a year or couples earning above $250,000. [b] [c] The other which increased the state’s excise tax on cigarette sales by 130%. [d] It’s rather disingenuous for progressives to point to the these two tax increases and declare ideological victory since jobs hadn’t vanished. For one, they’re conflating conerns. Concerns over businesses fleeing to neighboring states are not based on income taxes but more so on a state’s business environment. And in that regard, it’s relevant to point out two key facts:
a. Business taxes have actually been CUT since 2013. [e] This is something progressives don’t seem to be acknowledging.
b. Once analyzed in a 2014 study, the cigarette tax increase has, as predicted, been quite detrimental to sales. [d] We will list the pertinent details below.

THE CIGARETTE TAX:

“In 2013 the Minnesota Legislature passed a 130% increase in the cigarette excise tax and also increased the tax on other tobacco products from 70% of the wholesale price to 95% of the wholesale price.” In 2014, when a study was conducted to measure the effects of this new policy, the following conclusions were found: [d]

• 1,100 jobs were estimated to have been lost or eliminated by 2014 as a result.

• Tobacco sales declined 50% in Minnesota stores along the border.

• Dramatic sales increases of tobacco products occurred in all four bordering states, indicating consumers had merely shifted to out of state purchases.

• By 2014, $38 million of lost sales in non-tobacco products also occurred as an indirect result.

• Nearly a quarter of all cigarettes consumed in Minnesota are now estimated to be purchased in other states.

As you can see, Minnesota may in fact be doing well, but this is due to other variables and not due to an increase in income taxes or cigarette taxes. One must consider the many other relevant variables at play. For instance, Minnesota borders water which automatically benefits ANY region, as it makes it part of a commercial trade route. This alters the conditions that might otherwise push businesses to conduct commerce elsewhere. Consider this. Part of Minnesota’s border is water (beneficial to business), another part is Canada (not appealing to most companies seeking to stay in the US), and the rest of its border are 4 neighboring states, where 3 of which are landlocked. This gives Minnesota an upper hand relative to other states, which is entirely relevant when one’s concern is commerce. Furthermore, Minnesota is home to a major natural resource and produces 75% of the country’s iron ore. [f] The iron-ore industry can’t just pick up and leave. Lastly, there has emerged a rather extensive list of tax CUTS, credits, or simplifications, all potentially offsetting the detriments of the aforementioned two tax increases. [e] They are as follows:

• $230 million in reduced taxes, as well as a simplification of the tax code, for Middle Class Minnesotans.

• The elimination of the “marriage penalty” tax, saving more than 650,000 married couples an average of $115 per year.

• Over 16,000 additional middle class families will qualify for the Working Family Tax Credit.

• Tax Cuts for Parents. More than 25,000 families who qualify for child care tax credits will see an average increase in their tax credit of $74 per year.

• Tax Cuts for Students. More than 285,000 recent college graduates could save up to $190 per year by deducting their student loan interest. Another 40,000 current college students and parents will receive a tuition deduction of $140 per year, on average.

• Tax Cuts and simplification of the tax code for Small Employers as well as an elimination of a requirement to maintain separate records for federal taxes.

• Tax cuts for seniors, teachers, and homeowners.

• A reduction in business sales taxes by $232 million.

• All three business-to-business taxes were repealed.

• The sales tax on repair and maintenance of electronic, farm, and commercial equipment has been repealed.

• The warehousing sales tax was repealed.

• Sales tax on telecommunications equipment has been repealed.

• $3 million in tax CREDITS for “Innovation and Jobs” and specifically “fuel innovation” has been set aside.

• Another $3 million in Tax Credits for startup businesses and entrepreneurs.

• Simplification of the Estate Tax, raising the exemption from $1 million to $2 million.

• Elimination of the Gift Tax; a reduction of $43 million.

• Furthermore, in May of 2014, an additional $103 million in tax cuts for homeowners, renters and farmers was agreed to. [g]

CONCLUSION:
To point to all of this and declare, “Tax increases created jobs!” is MORE than a bit questionable. When you already have a decent economy, and firms see tax cuts for businesses and consumers on the horizon, it shouldn’t be a surprise that they’d likely remain in the state. Minnesota is doing well for many reasons, but their 2013 income tax increase on the top 2% of earners and their 2013 cigarette tax increase are NOT why. Add to all of the Minnesota tax cuts the fact that their government has begun shrinking in size per recent jobs numbers showing the government shed 4,200 jobs in December of 2014 alone [h] and it’s a wonder why Progressives keep proudly waiving this example around.
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Sources:
[a]  http://www.usatoday.com/…/states-with-the-fastest-…/2416239/

[b] http://www.albertleatribune.com/…/minnesotas-higher-taxes-…/

[c] http://www.revenue.state.mn.us/…/Minnesota_Income_Tax_Rates…

[d] http://www.cspnet.com/…/mn-tobacco-tax-crippling-retailers-…

[e] http://mn.gov/…/the-office-of-the-governor-blog-entry-detai…

[f] http://www.oxfordlearnersdictionaries.com/…/engli…/minnesota

[g] http://www.twincities.com/…/minnesota-tax-cuts-worth-100m-f…

[h] http://bringmethenews.com/…/minnesotas-unemployment-rate-f…/

The problem is, there are a multitude of variables in any economy. In order to claim that any given outcome is due only to one or two changes, you’d really need to have two Minnesotas, one where the changes happened, and one where they didn’t, but are otherwise identical.

This doesn’t exist anywhere in the world.

Minimum-Wage Proponents Continue to Believe in Free Lunches – Cafe Hayek

Source: Minimum-Wage Proponents Continue to Believe in Free Lunches – Cafe Hayek

Here’s a letter to the Wall Street Journal:

In “The $15 Minimum Wage Crowd Tries a Bait and Switch” (Sept. 26) David Neumark explains the challenges facing today’s minimum-wage researchers. Yet the difficulty of quantifying the consequences of minimum wages is even more daunting than Prof. Neumark’s excellent essay reveals.

First, because minimum wages in the U.S. have been in place for more than a century (Massachusetts enacted the first American one in 1912) and have consistently risen over time, employers long ago learned to adjust to their existence. Business decisions – especially the choice of how much labor to use relative to machines – are made with the expectation that minimum wages will rise. Thus, because firms adjust the sizes of their work forces in anticipation of minimum-wage hikes, measuring changes in employment after any given minimum wage hike fails to account for the jobs that were never created because employers expected the minimum wage to rise.

Second, while fewer jobs for low-skilled workers is a chief and especially unfortunate result of minimum wages, it isn’t the only negative result. Many other responses to minimum wages are possible instead of, or along with, reduced employment opportunities. My colleague Dan Klein offers some examples: the extent and difficulty of work duties grow; flexibility in employee scheduling lessens; fringe benefits and on-the-job training decrease; lockers, free food, and other amenities for workers are cut; workplace safety, comfort, and amiability decline. Because most of these other possible downsides of minimum wages are practically impossible to capture in empirical data, studies of minimum-wages’ effects almost certainly underestimate the harm inflicted on low-skilled workers by minimum wages.

50 Years of Research on the Minimum Wage

Joint Economic Committee Republicans
February 15, 1995

Introduction

For many years it has been a matter of conventional wisdom among economists that the minimum wage causes fewer jobs to exist than would be the case without it. This is simply a matter of price theory, taught in every economics textbook, requiring no elaborate analysis to justify. Were this not the case, there would be no logical reason why the minimum wage could not be set at $10, $100, or $1 million per hour.

Historically, defenders of the minimum wage have not disputed the disemployment effects of the minimum wage, but argued that on balance the working poor were better off. In other words, the higher incomes of those with jobs offset the lower incomes of those without jobs, as a result of the minimum wage [See, for example, Levitan and Belous, (1979)].

Now, the Clinton Administration is advancing the novel economic theory that modest increases in the minimum wage will have no impact whatsoever on employment. This proposition is based entirely on the work of three economists: David Card and Alan Krueger of Princeton, and Lawrence Katz of Harvard. Their studies of increases in the minimum wage in California, Texas and New Jersey apparently found no loss of jobs among fast food restaurants that were surveyed before and after the increase [See Card (1992b), Card and Krueger (1994), and Katz and Krueger (1992)].

While it is not yet clear why Card, Katz and Krueger got the results that they did, it is clear that their findings are directly contrary to virtually every empirical study ever done on the minimum wage. These studies were exhaustively surveyed by the Minimum Wage Study Commission, which concluded that a 10% increase in the minimum wage reduced teenage employment by 1% to 3%.

The following survey of the academic research on the minimum wage is designed to give nonspecialists a sense of just how isolated the Card, Krueger and Katz studies are. It will also indicate that the minimum wage has wide-ranging negative effects that go beyond unemployment. For example, higher minimum wages encourage employers to cut back on training, thus depriving low wage workers of an important means of long-term advancement, in return for a small increase in current income. For many workers this is a very bad trade-off, but one for which the law provides no alternative.