Archive for the 'Minimum Wage' Category

Question For Supporters Of The Minimum Wage

Given by economist Don Boudreaux:

In the U.S. in 1948, quoting my colleague Walter Williams, “the unemployment rate for white 16-17 year olds was 10.2 percent while that for blacks was 9.4 percent. Among white 18-19 year-olds, unemployment was 9.4 percent and for blacks it was 10.5 percent.” Today (October 2013) the unemployment rate for white 16-19 year olds is 19.4%; the unemployment rate for black 16-19 year olds is 36.0% – nearly double the rate of white teenage unemployment. (In 2006 – the year before the current recession began – the unemployment rate for white 16-19 year olds was 13.2%; the unemployment rate for black 16-19 years olds was 29.0% – slightly more than double the rate of white teenage unemployment.)

That is, the unemployment rate of black teenagers in 1948 was comparable to that of white teenagers, and about 2.5 times higher than the overall unemployment rate of 3.8%. Today, the unemployment rate for black teenagers is much higher than that for white teenagers, and nearly 5 times higher than the overall unemployment rate of 7.3%. (In 2006, the year before the current recession began, the unemployment rate for black teenagers was 6.3 times higher than the overall unemployment rate of 4.6%.)

How do you explain these data? Are American employers more prejudiced in 2013 than in 1948 against teenagers? More importantly, are Americans more racist in 2013 than they were in 1948?

These facts about teenage unemployment are straightforwardly explained by the standard economic theory that predicts that a legislated minimum wage causes the lowest-skilled, most poorly educated, or otherwise least-desirable workers to be the first to be fired and the last to be hired. What is your alternative explanation?

Minimum Wage Study

“new evidence based on methods that let the data identify the appropriate control groups leads to stronger evidence of disemployment effects, with teen employment elasticities near −0.3. We conclude that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.” — David Neumark, J.M. Ian Salas, William Wascher, via Greg Mankiw

Quote Of The Day

“Ironically, the minimum wage creates a reserve army of the unemployed. That in turn allows employers to be less thoughtful, helpful, and kind. It destroys the civilizing effect of competition by muting it. That encourages exploitation. It reduces the cost to employers of racism or cruelty. Before the increase, being obnoxious or racist made it much harder to find employees. A minimum wage makes it easier to indulge in bad behavior. The costs are lower. Before the minimum wage, a cruel, selfish employer might have had to mentor his employees or train them or be nice to them despite his nature. Now he won’t have to. He can still get workers to work for him. Even more cruelly, the minimum wage encourages workers to exploit themselves. They work harder and put up with more abuse from the boss because the minimum wage reduces the alternatives that are available.” — Economist Russ Roberts

Beverly Hills As The USA

Imagine that you lived in Beverly Hills, among the richest people in the United States. Some of your friends were the kids of executives at Fortune 500 companies. Others were the kids of famous Doctors, Lawyers, and some were the kids of hedge fund managers. While all relatively rich, assume there was quite a range of wealth from really rich, to filthy rich.

Further assume, that one day, a bleeding heart liberal starts feeling bad for the really rich. Her complaints are along the lines of: “The really rich can’t eat out at the $500/plate restaurants, they have to settle for the $100/plate restaurants, or, god forbid, make sandwiches at home”. Her complaints continue: “The really rich can’t afford the Lamborghini’s or Ferrari’s, they have to get by with the – GASP! – BMW’s and Mercedes Benz’s”. Worst yet, “the really rich actually have to live in mansions with no ocean view, or golf courses”. Most heartbreaking of all, “the really rich have to actually prioritize their lifestyle and set a budget. They can’t go to Europe on a moments notice, they can’t eat out everyday”.

Now further assume that said bleeding heart liberal decided to set up an “alleviate suffering” fund that took away from the filthy rich to give to the really rich. Such a fund would help equalize Beverly Hills and “bring people together”. But instead of making this fund voluntary, the bleeding heart liberal wanted to enforce this through the city. She wanted to make it a city tax that merely takes from the filthy rich and gives to the really rich. Her arguments, again, are to “alleviate suffering”.

What would your reaction be if you were suddenly transplanted to that society and debate? Would you support the “Beverly Hills tax”? I am not one of those that believes there are absolutely no circumstances that justify forcibly taking the wages of one to give to another. But such circumstances have to be met with atleast reasonable justification. Yet simply moving money around amongst the worlds richest people does not seem to me like an acceptable justification.

Such is the image that comes to mind whenever I have a discussion with a liberal about increasing redistribution via taxes to help the USA “poor”.  It’s the image my dad and uncles, who immigrated to the United States in their twenties from ranch life in the poorest parts of Mexico, gave me. It is certainly how they viewed me and my cousins growing up – no matter what our circumstances, be it growing up in Compton (as I did), living off of the income of mechanics, gardeners, or window tinters – we were all blessed beyond their wildest dreams. Where they had to eat tortillas off the dirt floor, work in fields in the scorching heat where there were no “sick days” or “vacation time”, even the McDonalds cashier can seem privileged. And this view isn’t far from reality. Even the “poor” in the United States are among the richest in the world (see here and here).

Quote Of The Day

“… there is no hard and fast distinction between cyclical and structural unemployment. For instance, if structural unemployment in American has risen closer to European levels, it may be partly due to the decision to extend unemployment insurance from 26 weeks to 99 weeks, and to increase the minimum wage by over 40% right before the recession. Does that mean that demand stimulus cannot lower unemployment? No, because the maximum length of unemployment insurance is itself an endogenous variable. If stimulus were to sharply boost aggregate demand it is quite likely that Congress would return the UI limit to 26 weeks, as it has during previous recoveries. For similar reasons, the real minimum wage would decline with more rapid growth in demand. Aggregate supply and demand are hopelessly entangled, a problem that many economists haven’t fully recognised.” — Scott Sumner, guest blogging on The Economist Blog

Quote Of The Day

“In four years’ time, the minimum cost of labor will be a $7.25 cash minimum wage and a $5.89 health minimum wage (family), for a total of $13.14 an hour or about $27,331 a year. (I think you can see already that no one is going to want to hire low-wage workers with families.)” — John Goodman, on the affects of Obamacare

Milton Friedman On The Responsibility To The Poor

[youtube:http://www.youtube.com/watch?v=Rls8H6MktrA&feature=player_embedded]
Just as true in 1978 as it is today.

The Other Side To The Minimum Wage

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John Stossel explains.

Origin Of The Minimum Wage In The United States

Economist David Henderson explains:

Proponents of the minimum wage, when it was legislated in 1938, were disproportionately from Northeastern high-wage states where a minimum wage would be binding only on a very small segment of the labor force. They used it to narrow the differential in wages between the Northeastern states and the Southeastern states, where black men were a much higher fraction of the labor force and where the minimum wage would be binding on a much higher fraction. I posted about the role of Senator John F. Kennedy in the 1950s and his explicit statement that he wanted to hobble competition from black labor.

Much more at the full post here.

How The Minimum Wage Harms Minorities The Most

A while back I explained this in a post titled, “The Minority Case Against The Minimum Wage“, see here. Economist Steven Horwitz makes the same argument with less verbiage:

During his campaign for the presidency, Barack Obama promised that, in contrast to his predecessor, his presidency would be a “science presidency.” In his first year, Obama may well have taken some science more seriously than his predecessor, but one set of settled scientific research he has chosen to ignore has been the economics of the minimum wage. The result has been a nightmare for young workers, especially young workers of color.

Economic theory predicts that raising the minimum wage will cause those employees who are least productive to lose their jobs. If we raise the minimum wage from, say, $6 to $7, it’s the same thing as saying “any worker who cannot produce $7 worth of value each hour is not worth hiring.” Younger workers are, of course, among the least skilled in the economy. In addition, thanks to poor schools and historical discrimination, young workers of color are over-represented in this category. Higher minimum wages should disproportionately affect young workers and especially ones of color.

The empirical evidence to support this theoretical claim is abundant. Hundreds of studies of this relationship have been done by economists and they are nearly unanimous that higher minimum wages are associated with some level of increased unemployment among lower-skilled workers. Whatever consensus there might be among climate scientists about global warming, that among economists about minimum wage laws is at least as great. Despite what the science says, the Obama Administration supported a minimum wage increase last July.

The results are as theory predicts: unemployment among whites age 16-19 is at by far the highest rate in 10 years: 25.3% in October, up 28% from 6 months earlier and 36% from a year ago. Among African-Americans of the same age group, the unemployment rate is an intolerable 41.3%, up 19% from April and up 25% from a year earlier. The Hispanic or Latino youth unemployment rates are 35.6% (October), 26.5% (April), and 28.3% (October 2008).

The full article can be found here.

Quote Of The Day

“What is the essential informational imperfection in our labor market example? Workers have attributes—innate skills, adaptability and maturity, preferences between shirking versus expending effort—that are difficult for employers to observe. As a consequence, employers look for signals about these things. Professor Neumark offers one such signal: If you are an adult and still in a minimum wage job, chances are you have those attributes that are associated with low productivity. If you are a teenager, on the other hand, there is still a chance you are a high-productivity type. Faced with a government mandated hike in the wages paid to workers in minimum-wage jobs, the percentages dictate you go with the teenager. Which leaves in the cold the people we probably most want to help.” — David Altig, senior vice president and research director at the Atlanta Fed

Quote Of The Day

“Despite a few exceptions that are tirelessly (and selectively) cited by advocates of a higher minimum wage, the bulk of the evidence — from scores of studies, using data mainly from the U.S. but also from many other countries — clearly shows that minimum wages reduce employment of young, low-skilled people. The best estimates from studies since the early 1990s suggest that the 11% minimum wage increase scheduled for this summer will lead to the loss of an additional 300,000 jobs among teens and young adults. This is on top of the continuing job losses the recession is likely to throw our way. The reduction in jobs for youths might be an acceptable price to pay if a higher minimum wage delivered other important benefits. Many people believe, for instance, that it helps low-income families. Here, too, the evidence is discouraging. There is no research supporting the claim that minimum wages reduce the proportion of families living in poverty. Research I’ve done with William Wascher of the Federal Reserve Board and Mark Schweitzer of the Cleveland Fed indicates that minimum wages increase poverty.” — David Neumark, professor of economics at the University of California, Irvine, and the author, with William Wascher, of “Minimum Wages” (MIT Press, 2008).

Quote Of The Day

” When you make lending to high-risk people less attractive, the result is not worse terms for low-risk people who have been profitable all along.  The result is that high-risk people get less credit.  They used to be able to get credit despite their credit-unworthiness by paying extra; if the law forbids this, why lend to them?” — Bryan Caplan, professor of economics on the Real Unintended Consequences of New Credit Card Regulations

The Economics Of The Minimum Wage On Teenagers

Charlene Kalenkoski and Donald Lacombe, both Associate Professors of Economics at Ohio University, have a new paper on the effects of the minimum wage on teenagers. They write:

Abstract:The relationship between minimum wage increases and youth employment is investigated using county-level data and spatial econometric techniques. Results that account for spatial correlation indicate that a 10% increase in the effective minimum wage is associated with a 3.2% decrease in youth employment, a result that is 28% higher than the corresponding estimate that does not control for spatial correlation. Thus, estimates that do not take into account spatial correlation may significantly underestimate the negative effect of the minimum wage on teenage employment. Improperly controlling for factors that vary systematically over space can lead to incorrect inferences and misinform policy.

This is of course similar to the affects the minimum wage has on Blacks, see here.

Link via Market Power.

Quote Of The Day

“There are countries in Europe that would love to have their unemployment rate fall to the 5.7 percent unemployment rate to which ours has risen. Yet those who seem to want us to imitate European economic and social policies never seem to want to consider the actual consequences of those policies. “Unacceptable” is one of the big weasel words of our time– almost always said when the person who says it has no intention of doing anything, and so is accepting what is called “unacceptable.”" — Thomas Sowell

The Minimum Wage In A Slowing Economy

In a growing economy the effects of the minimum wage will be harder to see, not so in a slowing economy.

Economics professor Perry writes, “Accoding to BLS data on unemployment rates by age, it looks like almost all of the .50% increase in May unemployment to 5.5% from 5% in April was due to increases in the jobless rates for young workers in the 16-24 year age group, especially the 16-19 year group (see chart above). For workers 25 years and over, the jobless rate has remained pretty stable at around 4%, compared to large increases from April for 16-19 year workers (+3.3% to 18.7%, the highest rate since 1993) and 20-24 year olds (+1.5%). “