Joe Biden has suggested that as our next president, among his first acts would be to boost the minimum wage level to $15 per hour.
In so acting he will be relying on the theory that this law is akin to a price floor. Raise it, and the compensation of all those now standing on it (those now being paid less than this amount, often at the $7.25 level mandated by present federal legislation) will in effect be able to hitch-hike on the increase, and now be paid at the rate of the aforementioned $15. Not that this level of remuneration is anything to write home about, but at least it beats the roughly half that amount, presently proscribed by law.
Why do most dismal scientists dismiss this justification as blithering economic illiteracy? This is because, if it were but the case, why stop the elevator at the 15th floor? Why not raise the minimum wage, instead, to $150 per hour, or $1,500, or $15,000? If this theory were correct, if people could be made wealthy beyond the dreams of avarice by mere legislative enactment, why in bloody blue blazes settle for $15? If this theory were true, the entire case for foreign aid would vanish in smoke. Instead of shipping goods and services and money abroad, all we need to do is advise present recipients to implement a minimum wage law, and keep raising its level until poverty were ended in these countries. Yet no one, not even Bernie Sanders, advocates any such crazy thing.
Clearly, this theory is nonsense on stilts.
What then is the correct way to look at this matter? It is to see such legislation not as a rising floor, but rather as a hurdle over which a person has to jump in order to be employed in the first place.
Why is this? What determines wages?
In a word, productivity. LeBron James and Michael Milken earn high wages because they are tremendously productive. Hire one of them, and your revenues shoot through the roof. Middle class people also contribute to the GDP, but at a much more modest level. And the person who asks if you “Want fries with that?” or pushes a broom? He or she also does so, but again less so. Suppose a firm has 100 workers, and shows receipts of $10,000 for a certain time period. They hire the 101st employee, and total revenue rises to $10,010. The company properly attributes this rise to that additional member of the staff. His productivity is thus $10/hour.
What will his wage likely be? Well, there are only three possibilities. Either he will earn more than that, say, $12 per hour, exactly that amount, e.g., $10 per hour, or less than that, for example, $4 per hour. We can easily eliminate the first possibility. Any business paying $12 hourly to all their employees who bring in only $10 will face bankruptcy; they will lose $2 every hour, multiplied by their entire staff. But the $4 wage is not sustainable either. The firm will then garner a pure profit of $6 from his labor. Some competitor will offer $4.25; another $4.50 and we will be off to the races. No, the only equilibrium wage rate will be $10. This gives rise to the economic law that compensation tends to equal productivity. Will all those who contribute at that level earn exactly that amount? No, of course not. This theoretical bidding war is not costless. But there is a continual grinding market force that pushes wages in the direction of productivity. The two cannot long remain too far apart.
With a minimum wage of $7.25, will this person who can improve your bottom line by $10 get a job? He certainly has a good chance to do so. But what will ensue with a minimum wage of $15? Any firm foolish enough to hire him will now lose $5 per hour. Bankruptcy will ensue for such an employer, and unemployment for the would-be market participant. This legislation does not undergird wages, precluding very low compensation. Productivity, alone, does that. Before the advent of this law in 1938, people were earning compensation in accordance with their contribution to the bottom line.
It is no accident that the unemployment rate for teenagers is double that of people in their middle years. The former can undoubtedly jump higher over physical hurdles than the latter, but the reverse is true for economic barriers such as productivity levels. Also, black unemployment due to this law is twice that suffered by whites. Joblessness for black teens is quadruple that of white middle-agers. This has nothing to do with “privilege.” These statistics did not exist before this legislation was passed.
Should the minimum wage remain where it is at $7.25? No. Because the exact same analysis applies to those (mainly the mentally handicapped, but some severely physically handicapped), whose hourly productivity is $2, $4 or $6. They are now in effect totally frozen out of the labor market.
Why does this law exist given that it is so deleterious for the weakest economic actors? Northerners favor it since it enables them to better compete with lower skilled southerners. Labor unions support minimum wages since they can use it to compete with the unskilled more effectively. Racists want it since it plays havoc in the black community. The “educated” suffer from invincible ignorance on this matter since instead of enrolling in economics 101, they took courses in sociology, history, philosophy, political “science,” et cetera.
The minimum wage is a vicious, nasty, depraved law. It negatively impacts the “least, last and lost” amongst us. It ought to be repealed, and salt sowed where once it stood.
Walter E. Block is Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University New Orleans
READER COMMENTS
john hare
Nov 29 2020 at 12:24pm
I would suggest one major component of the cry for $15.00 from the well educated is that they are out of touch with the realities of low income people. They literally don’t understand that some people are simply not worth $15.00, or even $7.25 for that matter. I have had employees so bad that it cost more to control them than they produced even if they were working for free. (One started sweeping trash into the concrete we were pouring, which is beyond useless.)
It is roughly how I am out of touch with home prices not having purchased in well over a decade. I simply can’t relate to an entry level new house being in the mid 200s in this somewhat rural county. Or how I can’t relate to the problems with people with substance problems as I don’t work around them anymore, unlike several decades back when there was no drug testing for employment and what you did on your own time was none of my business.
So from personal experience, I suggest looking into the level of disconnect from those advocates.
Mark Z
Nov 29 2020 at 3:05pm
Most people who support $15 federal minimum wage seem to live in high cost of living regions (especially cities) so I imagine there’s a big disconnect over what the cost of living is in other parts of the country. People in San Francisco or Boston see that it’s basically impossible to live in those cities on $<15 an hour and reason from that, but perhaps aren’t aware that the cost of living, and market wage, are much lower in Alabama and Oklahoma.
This is why federalism is important. You could probably raise the min. wage in a lot of big coastal cities to $15 without having an effect because hardly anyone there earns less than that already, and even fewer earn much less than that. But a policy that’s innocuous in SF can be very harmful elsewhere. It would be like letting Alabamians design a national rent control law based on their local understanding of what a ‘too expensive’ apartment is.
john hare
Nov 29 2020 at 5:59pm
To me, one of the largest problems with the minimum wage debate is the meme that everyone deserves to make a decent living and therefore you deserve a good wage. Leaves aside the question of why you deserve a good wage, especially if you choose to not improve yourself. So it leaves too many with the idea that the only reason they do not make a living wage is because someone else is preventing them. I doubt that as much as 10% of the people making under $15.00 an hour right now couldn’t seriously improve their situation within the next year or two.
Apply yourself diligently at the job you have and study hard on how to get a better one. Use some of your TV and social media time to develop skills that have value. While many know this and choose not to, there are also many that have not gotten the message that their future is largely in their own hands. There will be exceptions, and there will be failures/shortcomings, but not near as many as when it is believed that it is someone else preventing you from getting ahead.
Also, if you are in a high expense area with poor wages available, move.
I believe that the well off and disconnected are responsible for a goodly portion of the problem by well meaning but misguided actions.
Vivian Darkbloom
Nov 30 2020 at 3:43am
“To me, one of the largest problems with the minimum wage debate is the meme that everyone deserves to make a decent living and therefore you deserve a good wage.”
I don’t necessarily disagree with that statement and what follows; however, any discussion of this issue needs to also address better alternatives. Does anyone who does *not* “deserve” a good (read “minimum”) wage “deserve” food stamps, earned income tax credits, etc? Those programs, while they might be more efficient, have costs, too. “Deserve” might be a loaded word in this context so perhaps another choice such as “allowed” or “given” (in the sense of charity) might be better. I’m fairly sure that your answer would be yes, they do “deserve” in at least one sense of that word, support from the rest of society. When discussing the issue of the minimum wage, opponents of it often sound callous, overly moralistic and uncharitable and thus risk losing support for otherwise sound technical policy arguments regarding this difficult social problem. I think this is one of the reasons many, if not most, Americans have more sympathy on this issue with, say, Joe Biden than, say, Walter Block.
john hare
Nov 30 2020 at 4:14am
I may be a bit incoherent while still on my first cup of coffee, but work beckons shortly.
There are some that clearly need support. IMO there are far more that need to find some direction from within. Having been part of a group that tries to help some people forward, I can say with some confidence that the motivation cannot come from without. The ones that are going to do something with the help are in motion just as soon as they can get a little traction. The ones that are not stall out as soon as we stop pulling them. I am proud of the successes, even though they barely needed us. I am saddened by the 80% or so failures that need something we didn’t or couldn’t supply. And they regularly need far more help than the self motivated. IMO they need to find their own motivation and part of the problem is the constant rhetoric that it is someone else’s’ fault.
As you say, there are some that should get help from the rest of us when they actually cannot pull themselves up. And the ones that are trying deserve the respect and help we can give. I am just frustrated by the ones that could do something if they would just try.
Liam
Nov 29 2020 at 2:27pm
Wait, what?
Jon Murphy
Nov 29 2020 at 3:27pm
The minimum wage was originally created to keep minorities and women out of the workforce (see here). By pricing them out of the labor force, it keeps jobs for whites, as the argument
James
Nov 29 2020 at 6:07pm
When I was in school, the professor had a problem where under normal supply and demand curves, a minimum wage led to greater unemployment but the total amount being paid to workers increased at the expense of employers. For people who see policy analysis as being about benefits and costs to groups or classes rather than individuals, the minimum wage might be very appealing even if it does have the predictable effect of pricing many people out of the work force.
So it’s not nonsense. Joe Biden just has different goals from some of us. From a political point of view, it is easy to picture a world where the people who are unemployed due to a minimum wage are unlikely or unable to vote (teens, ex convicts, the mentally ill, etc) and the people who benefit are more numerous and more likely to vote.
Matthias
Nov 29 2020 at 11:38pm
That’s indeed possible in some models. But the conditions are rather, well, interesting.
What’s definitely happening in the real world is that people take their compensation in multiple different forms. Eg money, more flexible working arrangements, more breaks, or some side benefits etc.
For many people their total productivity is high enough for the company to spend eg 17 USD an hour on them in total, even if only eg 10 USD of that is wages.
A minimum wage of 15 USD an hour will essentially force a cut of side benefits from 7 USD to 2 USD for that person.
That’s especially annoying when the benefits previously enjoyed were worth more than 7 USD to the recipient.
But the proponents of minimum wage will see the raise in take home pay and declare victory.
Jon Murphy
Dec 1 2020 at 11:20am
If that tradeoff were discussed by Biden and others, then I would agree with you. But their pronouncements indicate they are unaware of the tradeoff, James.
Thomas Hutcheson
Nov 29 2020 at 7:25pm
If you want to argue by analogy instead of doing cost-benefit analyses of policy alternatives, I’d suggest a floor that shrinks slightly (or maybe holes develop in it) as it rises. So when the minimum wage rises from $7 to $15 dollars employers have to find ways to make their employees more productive and they will fail in some cases; the size of the floor (net of the holes) shrinks and some former employees wind up with $0 dollars. Economist call this shrinkage the “elasticity of demand for labor” and a lot of work goes into estimating it at different times and places.
Depending on how many one values the additional income to the people who remain on the flo0r compared to the loss of income by those how fall off or fall through the floor, the incomes of employers (whose rents may fall) and the customers of the employing firm (who may pay higher prices) one can make a judgement about whether the increase is a good idea or not.
Those who are most concerned about the loss of income by those who fall off prefer increases in the EITC (and reforms of the EITC to make it more like a strict wage subsidy) over increases in the minimum wage.
MarkW
Nov 30 2020 at 7:25am
Yes, of course it’s nonsense on stilts. I’ve read this same collection of (correct) arguments more times than I could remember. I think I could have written a reasonable equivalent of this post and I suspect so could most folks here. Which isn’t to say that these same arguments don’t need to be made often — they do. But they seem insufficient. Momentum has been in the wrong direction. In the 1990s, the NY Times editorialized that the correct minimum wage was $0. This month the people of Florida (Florida!) voted overwhelmingly (61 to 39 percent) to raise the minimum wage to $15 over the next five years.
What do those 61% of Floridians believe? I think it’s something like the following:
Everybody deserves a living wage. Businesses (especially large corporations) are wealthy and selfish — they can afford to pay a living wage to all employees, but won’t do so unless the government forces them to. Competition may work for NBA teams bidding on superstar free agents, but not for ordinary people who are powerless in negotiating with their employers. Any business that can’t afford to pay a living wage is a crappy business that should go under. Anybody who cannot find a job at a living wage should be provided a UBI. People like Walter Black are also generally wealthy & hard-hearted, and their arguments are in bad faith, since they have been proven wrong by studies showing minimum wage increases have no negative effect on employment. Being in favor of $15/hr for poor people is simply a sign of basic human decency — being opposed displays a lack of it (libertarians oppose it, and we know what they’re like — shudder).
This, I think, is what we’re up against. And it’s worse than that because these folks generally won’t change their beliefs based on convincing arguments and evidence when it would put them at odds with their peer group and political tribe. We here are the weirdos who feel a strange compulsion to follow arguments and evidence at the cost of holding (and often hiding) beliefs that are at odds with our families, friends, and neighbors.
MarkW
Nov 30 2020 at 1:32pm
I hate to reply to myself, but if we want to persuade populists and people on the left that high-minimum wages are bad, how about something like this:
Why a $15 minimum wage will help Amazon destroy what’s left of small, local businesses
A $15 minimum wage is the best gift you could possibly give to large, global, impersonal corporations who put profits above people. Corporations like Amazon have a relentless focus on profits and efficiency. They drive their workers hard to wring out their last ounce of efficiency, watch them like a hawk, and don’t hesitate to get rid of them when not needed. As a result, they are already able to pay $15 to their miserable, overworked distribution center slaves. If an Amazon distribution center (rather than, say, a local independent hardware store) is your ideal of the future of work, by all means keep pushing for ever higher minimum wages!
MarkW
Nov 30 2020 at 3:16pm
And while I’m thinking about it, how about some slogans:
If you hate to buy local…
fight for $15!
If you prefer mass-produced over hand-crafted…
fight for $15!
If you think an Amazon warehouse is the ideal workplace…
fight for $15!
If you think small-town downtowns should die and blow away…
fight for $15!
If you think workers should be driven hard and then kicked to the curb…
fight for $15!
If you prefer huge corporations over small businesses…
fight for $15!
If you think rural Americans should have to move to cities to find work…
fight for $15!
If you hate local, independent book stores…
fight for $15!
If you think Americans with disabilities should not be able to find jobs…
fight for $15!
If you think restaurants should reheat factory-produced food…
fight for $15!
If you like worker surveillance…
fight for $15!
If you think retirees should not be able to find jobs…
fight for $15!
john hare
Dec 1 2020 at 4:16am
If you don’t want your son to get his first job and learn responsibility…
Fight for $15!
If you like the idea of your daughter still living at home when she’s 30…
If you enjoy paying taxes to support those frozen out of the workforce…
If you want even more barriers to your son-in-law getting a job
MarkW, if you can make it personal, it hits harder. Learned this with trainee construction workers a few decades back. Language of instruction likely not acceptable on this site.
Thomas Hutcheson
Dec 1 2020 at 1:47pm
Someone needs to persuade those well-meaning Florida voters that a higher EITC is a much better way to transfer income to low-income workers.
MarkW
Dec 1 2020 at 4:01pm
Yes, but that’s difficult because the left has turned against the idea of employers having workers who receive government benefits of any kind to supplement their low incomes. ‘All jobs should pay a living wage!’ (even, apparently, when it’s a single earner working part-time in a household with several dependent children).
They hate the idea of Walmart and McDonald’s employees being on Medicaid but also love the idea of Medicare for all. Go figure — but this is what we’re up against.
Mark Z
Dec 1 2020 at 7:59pm
Whether raising the minimum wage to $15 is a good or bad idea is independent of whether raising EITC is a good idea, and I’m skeptical of the notion that raising EITC would take wind out of the movement to raise the minimum wage in any case. I don’t think voters are just turning one dial because it hasn’t occurred to them to turn a different dial.
MarkW
Dec 1 2020 at 7:16am
“MarkW, if you can make it personal, it hits harder. ”
Maybe. That works in some cases, so perhaps:
If you think your son should spend more time gaming and less time working…
If you think your daughter should spend more time on TikTok and less on the job…
If you think an inner-city kid’s first paying job should be ‘drug dealer’ …
But that won’t work in all cases where the idea is to give people the idea that $15 will help things they hate (Amazon, Walmart, big corporations generally) and hurt things they love (independent local stores, restaurants, craftspeople).
I think this one is a loser, though:
“If you enjoy paying taxes to support those frozen out of the workforce…”
I’m afraid that would sound like selfishness to the target audience.
john hare
Dec 1 2020 at 6:06pm
It’s the idea that I was trying to get across more than having specific examples that couldn’t bear scrutiny. As an inventor, I am well aware that most ideas are…less than stellar, so trash one or several of my examples is improvement on the meme. Thanks.
One that sounds even vaguely selfish to the target audience is a loser. I have a strong preference for positive messages so I am uncomfortable with using their hate. Unfortunately, that would be the most effective strategy much of the time.
MarkW
Dec 2 2020 at 11:01am
I have a strong preference for positive messages so I am uncomfortable with using their hate. Unfortunately, that would be the most effective strategy much of the time.
One of the historical puzzles for me is how the Corn Laws in Britain were ever abolished. How were people persuaded to support free trade? I haven’t looked really closely, but my sense it that was only possible because it was relatively easy to cast the gentry landowners as evil and the poor paying high grain prices as their victims, not because there was a general outbreak of understanding and appreciation of Ricardo’s theory of comparative advantage.
Steve
Dec 1 2020 at 2:48pm
Workers with disabilities can be exempted from minimum wage.
https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs39.pdf
Vox celebrates a decline in the number of “subminimum” workers, and is considerate enough to ask what happens to those who leave sheltered workshops: “They seemingly disappear.”
Charlie
Dec 2 2020 at 2:01am
Not to rain on the parade, but your theory has been disproven, numerous times, experimentally.
To repeat, raising minimum wage does not adversely affect employment.
https://research.upjohn.org/cgi/viewcontent.cgi?referer=https://www.theatlantic.com/business/archive/2017/01/economism-and-the-minimum-wage/513155/&httpsredir=1&article=1220&context=empl_research
Jon Murphy
Dec 2 2020 at 8:26am
Charlie-
Not to rain on your parade, but your statement is too strong. Even research done by pro-minimum wage researchers like Arin Dube find disemployment effects. Various surveys of the research and metastudies find disemployment effects. In the handful of cases where they do not, the authors state (like in your article) that disemployment effects are not statistically significant but are economically significant.
Part of the issue here is poorly designed studies. Almost all the studies I’ve seen claiming to find no disemployment effects make an econ 101 mistake: they see an increase in the mw but fail to ask if the mw is above the prevailing market wage (a minimum wage would only have disemployment effects of above the prevailing wage).
While it is possible to design an experiment where minimum wage has no disemployment effects, empirically they do.
MarkW
Dec 2 2020 at 8:51am
And have any of the studies examined instances where minimum wages were more than doubled (as would be the case if the Federal minimum were increased from the current $7.25 to the proposed $15)?
Jon Murphy
Dec 2 2020 at 10:51am
No, but that’s mainly because there’s never been such a doubling before. ALthough various minimum wage supporters, like Dube, argue such an increase would be, on net, harmful.
Mark Z
Dec 4 2020 at 12:29am
This is a preposterous claim. Sure, there are studies finding no disemployment effects. There are also studies finding disemployment effects. Neumark and Wascher of course wrote a book length meta-analysis of minimum wage studies finding the preponderance found statistically significant disemployment. Jeffrey Clemens’s research has found disemployment effects as well. A recent large study in Germany – which just introduced its first minimum wage a few years ago – found disemployment effects and reductions in hours worked (https://www.iza.org/publications/dp/12043/the-causal-effects-of-the-minimum-wage-introduction-in-germany-an-overview).
You can’t just go dig up a few studies finding conclusions you agree with and summarily conclude that your position has been empirically proven. The reality that there are many studies finding opposite results has to be dealt with either by comparing the quality of the studies or finding out why minimum wage increases would have different effects in different places or times.
Nicholas Decker
Dec 7 2020 at 2:09am
I am in complete agreement with the validity and truth of the theory. However, being of an empirical mind, what is the direct empirical evidence that a minimum wage produces negative results (where a negative results is a reduction in actual pay of the lower classes – as the marginal utility of adding the first dollar to none is far greater than adding the hundred and first thousandth to a hundred thousand, I can deal with some reduction of total surplus in order to transfer wealth downwards. Further, even if we were to say a dollar’s a dollar and we should maximize total surplus, that would be a supremely self destructive attitude to adopt in today’s politics.)
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