On various right-wing blogs, I found segments of the debate last night between Democrat John Fetterman and Republican Mehmet Oz in their race for Pennsylvania’s open seat in the U.S. Senate. Not surprisingly, they focused on Fetterman’s often-awkward answers to questions. I was curious about their views on the minimum wage, which, in Pennsylvania, is still the federal $7.25 an hour.
Here’s a 4-minute segment, uncut, that nicely summarizes their views. Although Fetterman does state the issues awkwardly, I at least understood his point. I thought some of the conservative sites did Oz a disservice by not showing his cogent reasoning on the minimum wage. Watch the whole thing. As I said, it’s only 4-minutes long.
I think that one thing Fetterman said didn’t make sense, and I think it had nothing to do with his recent stroke, because I’ve seen many “stroke less” Democratic politicians say similar things. The questioner says:
What do you say to small business owners who have told us that if the minimum wage were increased to $15 an hour, it would put them out of business?
Parenthetical comment before we get to Fetterman’s answer, similar to the one asked in the movie Butch Cassidy and the Sundance Kid when they are being relentlessly chased by a large number of people on horses: “Who are those guys?” I’ve never seen such a balanced and informed pair of questioners. They actually seem to want to get answers. And the “if … were” formulation is grammatical icing on the cake. Their performance is better than that of any questioners I’ve seen in presidential contests in the last 30 years.
Now to the part of Fetterman’s answer that I found interesting:
You can’t have businesses being subsidized simply by not paying individuals that just simply can’t evade [I’m pretty sure he means “afford”] to pay their own way.
I’ve heard a number of people say that paying low wages amounts to a subsidy to businesses. I don’t see it. You might say “Well, they can pay lower wages than otherwise because of things like welfare and Medicaid that go to low-income people.” But many of these programs reduce the supply of labor, making wages higher than otherwise. And to the extent some government programs, like the Earned Income Tax Credit, do increase labor supply, making wages lower than otherwise, an attempt to judge the well-being of those wage earners without taking account of their gain from the EITC makes no sense.
Check out how Oz lays out the idea of market forces driving wages and the importance of unblocking market forces, especially in the energy sector. I think he overstates the resulting wage rates, but he makes a good point. He also makes the point that $15 an hour has already been achieved in Pennsylvania by market forces. I bet that’s a bit of an exaggeration, but not much. Moreover, where you find people earning substantially less than $15 an hour, you should worry that a $15 minimum wage would wipe out their jobs.
By the way, I do wonder what the names of the questioners are. A few searches on Google didn’t give it to me.
READER COMMENTS
Jared
Oct 26 2022 at 1:45pm
Moderators:
https://www.abc27.com/author/dennis-owens/
https://www.wpxi.com/author/lisa-sylvester/
Have a good day!
David Henderson
Oct 26 2022 at 3:57pm
Thanks.
Jon Murphy
Oct 26 2022 at 2:26pm
According to the BLS, it is a bit of an exaggeration. Not terrible, however. According to the BLS, the lowest average hourly wage in PA is $10.02/hr (shampooers). There are a decent number of occupations below $15, but also a good many hovering right around $15.
It’s worth noting that the data I liked two are from May 2021, which is the most recent data. The numbers are likely higher now.
David Henderson
Oct 26 2022 at 3:58pm
Interesting because shampooers often get substantial tips. It’s quite easy to imagine that a large majority of shampooers get at least $15 an hour, inclusive of tips.
And, as you say, the numbers are probably higher now.
Aaron
Oct 31 2022 at 7:19pm
Specifically a large amount of cash tips not reported to the government.
vince
Oct 26 2022 at 7:09pm
“I’ve heard a number of people say that paying low wages amounts to a subsidy to businesses. ”
Sounds like a vocabulary problem. Subsidy. n. Financial assistance given by one person or government to another.
Maybe they mean to say that low wages are a violation of an employee’s civil rights.
Brandon Berg
Oct 27 2022 at 2:57am
No, the claim is that businesses which pay low wages are being subsidized by means-tested welfare benefits which make up the difference between wages and cost of living.
This is nonsense for several reasons:
The basic problem is that they’re not thinking in terms of supply and demand. They have a crude mental model in which workers must, one way or another, have a certain income, and that employers would have no choice but to pay that much if welfare programs weren’t available.
Obviously that’s not at all how labor markets work. Curiously, when I suggest to people who make this claim that we eliminate welfare programs in order to stop subsidizing employers of unskilled labor, they never seem interested in doing this.
Brandon Berg
Oct 27 2022 at 2:59am
The third paragraph should have been a numbered list. It seems like maybe there’s a problem with the formatting.
[Fixed–Econlib Ed.]
David Henderson
Oct 27 2022 at 9:43am
Very nice post, Brandon. Thank you.
Good point about the EITC.
vince
Oct 27 2022 at 12:34pm
Then one could say that businesses paying low wages are subsidizing welfare. What a convoluted mess. Maybe UBI isn’t so bad, if it eliminates all those programs.
Art K
Oct 29 2022 at 11:08pm
For businesses operating in a competitive market (which the lowest-paying businesses usually are), reductions in costs are passed on to customers, not realized as profits.
I feel this is key, many businesses do not operate in a competitive market. What is the appropriate response then?
Jon Murphy
Oct 30 2022 at 8:56am
The amount that a rise in costs can be passed on to consumers depends on elasticity of demand. Even a monopolist cannot pass on 100% of an increase in costs to consumers (unless they face a perfectly inelastic demand curve). Likewise, the firm only eats 100% of the cost increase if they face a perfectly elastic demand curve. So, the appropriate response is the same no matter what: welfare programs reduce the supply curve.
Now, I find the claim “many businesses do not operate in a competitive market” to be odd. There are thousands and thousands of independent firms in the US. Even in just my small mountain town, average wages (even for low-skilled) are considerably high. The local Sonic is offering $17/hr (legal minimum wage is $7.25). It seems that, even in this geographically isolated area, there is a competitive market. So, what do you mean by “many businesses do not operate in a competitive market”?
vince
Oct 31 2022 at 2:18pm
In a competitive market with no excess profits, costs always pass to consumers. If not, the business owner has an economic loss.
Jon Murphy
Oct 31 2022 at 6:30pm
No. In a competitive market with no excess profits, how much of the cost will depend on the elasticity of demand. Unless the firms face perfectly inelastic demand curves, some percentage of the cost will be borne by the companies and some by consumers. Some firms will face economic losses (and shut down), thus shifting the market supply curve to the left. But not 100% of costs will be passed on to consumers precisely because the market is competitive.
vince
Oct 31 2022 at 9:06pm
Company A sells a product for $100 and the owner makes $10 of fair profit for his risk and efforts. The cost goes up to $95. Owner still needs to make $10 as a fair return for his efforts. If he can’t pass along the cost and sell the product for $105, he has an economic loss and shuts his business down rather than accept $5 for $10 worth of risk and work.
Jon Murphy
Oct 31 2022 at 9:22pm
Perhaps, but as you rightfully note, he’s in a competitive market. That firm may shut down, but others (who do not pass on the entire cost increase) remain open.
The marginal firm will shut down. But others will remain.
Jon Murphy
Oct 31 2022 at 10:17pm
Let me put it this way:
As you correctly note, if costs rise, some firms may not be able to cover the higher costs and thus go out of business.
So, the natural question is: why are some firms unable to obtain higher prices and thus go out of business?
The economic answer to that question is elasticity of demand: depending on how sensative consumers are to changes in price, firms will not be able to raise prices the entire amount of the increased cost and will have to eat some of the higher costs.
If I am reading you right, you reject that argument. So, why do firms go out of business?
vince
Oct 31 2022 at 10:21pm
“The marginal firm will shut down. But others will remain.”
Yes, but the remaining firms also demand the fair return of $10 per item. Firms will remain only if they can sell for $105 and earn the fair return by passing the cost to the consumer. I agree that there will less consumers and therefore less cost passing to them–not all consumers will accept the price increase.
The original poster said price reductions will pass to the consumers. Given his assumptions, he’s right.
Jon Murphy
Nov 1 2022 at 6:27am
My point is that not all of the cost will be passed on. It will depend on the elasticity of demand. Indeed, it is conceivable that none of the cost is passed on depending on elasticity of demand.
They can demand all the return they want. That doesn’t mean they are going to get it. Prices are not determined by “cost + markup.”
vince
Nov 1 2022 at 12:32pm
“They can demand all the return they want. That doesn’t mean they are going to get it. Prices are not determined by “cost + markup.””
In a way, prices *are* determined (offered) by cost plus markup–a fair markup for risk and effort. Of course a business may not get that price. If it can’t, it’s a closed business. If it can, cost passes to the consumer. And that includes decreases in cost, as the original poster wrote.
Jon Murphy
Nov 1 2022 at 5:46pm
No. Price is determined by the intersection of supply and demand (indeed, in the original hypothetical, note that there was no mark-up!).
vince
Nov 1 2022 at 7:35pm
Sure, supply and demand–with a fair profit.
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