Tuesday, December 16, 2008

Minimum Wage, Maximum Folly

MIT PRESS -- Minimum wages exist in more than 100 countries, both industrialized and developing. The U.S. passed a federal minimum wage law in 1938 and has increased the minimum wage and its coverage at irregular intervals ever since; in addition, as of the beginning of 2008, 32 states and the District of Columbia had established a minimum wage higher than the federal level, and numerous other local jurisdictions had in place "living wage" laws. Over the years, the minimum wage has been popular with the public, controversial in the political arena, and the subject of vigorous debate among economists over its costs and benefits.

In a new book from MIT Press (pictured above), economists David Neumark (UC-Irvine) and William Wascher (Federal Reserve) offer a comprehensive overview of the evidence on the economic effects of minimum wages. Synthesizing nearly two decades of their own research and reviewing other research that touches on the same questions, Neumark and Wascher discuss the effects of minimum wages on employment and hours, the acquisition of skills, the wage and income distributions, longer-term labor market outcomes, prices, and the aggregate economy. Arguing that the usual focus on employment effects is too limiting, they present a broader, empirically based inquiry that will better inform policymakers about the costs and benefits of the minimum wage.

Based on their comprehensive reading of the evidence, Neumark and Wascher argue that minimum wages do not achieve the main goals set forth by their supporters. Specifically, minimum wage laws:

a) reduce employment opportunities for less-skilled workers and tend to reduce their earnings;

b) they are not an effective means of reducing poverty; and

c) they appear to have adverse longer-term effects on wages and earnings, in part by reducing the acquisition of human capital.

The authors argue that policymakers should instead look for other tools to raise the wages of low-skill workers and to provide poor families with an acceptable standard of living.

HT: Ben Cunningham

23 Comments:

At 12/16/2008 11:02 AM, Anonymous poor boomer said...

O Brilliant Ones (not to be confused with OBloodyHell):

If minimum wages are not an effective means of reducing poverty, what's YOUR solution?

How exactly would a lack of minimum wages constitute an effective means of reducing poverty? How reducing someone's wage from minimum to, say, $4 per hour, will reduce poverty is surely a conundrum to contemplate.

 
At 12/16/2008 11:11 AM, Anonymous poor boomer said...

And how it is that excessive housing and land use regulation - which arguably contributes far more to poverty than do minimum wages - remains the uncited elephant in the room, confounds me.

I pay two-thirds of my income for housing - far more than I would prefer - and would be much better off under free markets in housing and land use than under a free market in labor.

 
At 12/16/2008 11:19 AM, Anonymous Anonymous said...

Something messed here.

We are asking our Middle Class Work Force to compete with third world labor for jobs and wages. We are told by our Government that there are ONLY 12 million illegal aliens in this Country. That may be the case when looking at working illegal aliens. The total should be more like 28 to 30 million.

The Socialist (d) tell us we do not have enough water to wash our cars or water our lawns in California. Enough gas to drive our cars, We do not have enough energy to heat or cool our homes, We do not have enough money to run our schools, and we have to much pollution so we can not drive the cars we choose, to many Cars on our roads, to many poor people, To much garbage, Not enough affordable rentals, Hospitals going broke from un-paid bills, and to many un-insured. How do those we elect to office solve these problems listed above? Bring in 3rd world Labor and cut the legs out from under our American Blue Collar work force. Yet when it comes to the Citizens of Mexico. We are the land of plenty in the eyes of elected office holders who sell American Citizens out to replace the voting blocks they aborted. All of a sudden we seem to have enough to make anyplace south of Sacramento look like America's version of Tijuana.

Howrod.
Sacramento Republic of.

 
At 12/16/2008 11:22 AM, Anonymous Anonymous said...

We ask our 18 to 25 year olds to compete with third world labor at an age of 35years old.

At 15 I had a job at a gas station. Those days are gone for our young people.

Why hire a kid and train him when you can have a 35 year old worker?

Hotrod.
Sacramento Republic of.

 
At 12/16/2008 1:10 PM, Anonymous Anonymous said...

poor boomer...

I don't know anybody who works for minimum wage that is over 18 or literate. Labor is a good that has a price set by the market. If you are literate, dependable and hardworking you can easily make double what the current minimum wage is in MOST regions of the country.

Businesses NEED workers. They WANT to keep the best qualified, most dependable workers to better compete within their industry.

Just as there are EFFICIENCY WAGES to keep workers in place there are companies that pay INEFFICIENCY WAGES because they are poorly managed and do not yet realize all the economic costs to constantly retraining and rehiring workers.

Companies that are around a long time don't pay minimum wage. Besides the government (no competition) who needs to be told that they have to pay more than minimum wage in the long run?

 
At 12/16/2008 2:45 PM, Anonymous Anonymous said...

Poor Boomer: a more efficient way would be direct transfer (welfare) or if you actually wanted to do something about it you could look at the education side of it. Minimum wage legislation decreases skill aquisition on the part of marginal students. They would probably be better served if they continued their education and got a technical education - instead the price signal in the form of theminimum wage handicaps them for their working careers.

C is why minimum wage legislation is a bad idea. "human capital" = education and increases in the minimum wage have been shown to decrease graduation rates etc.

The minimum wage serves no real purpose except to give fewer opportunities to high school aged students as employers cut jobs. If you have at least some skills you will not be making the minimum wage - you'll be doing much better.

 
At 12/16/2008 4:49 PM, Blogger Marko said...

Poor Boomer:

The obvious solution to poverty is to raise everyone's wages to $50.00 per hour. Wouldn't that be great? No more poverty!

You know, when we talk about freedom, and rights, and liberty and all that, people forget that the same should be applied to employers. If you start a business, shouldn't you be free to pay whatever you want? Think about it. A vast majority of the work force makes well over minimum wage (including most illegal aliens), but if you have a really simple job that could be done by a 16 yo that would be happy with a little extra cash, you can't pay them 5 bucks an hour. How is that freedom?

 
At 12/16/2008 8:43 PM, Anonymous poor boomer said...

Marko said:

"
The obvious solution to poverty is to raise everyone's wages to $50.00 per hour. Wouldn't that be great? No more poverty!"


Very funny. Increasing the minimum wage has an explicit cost to those who must pay it, and not-so-explicit costs to those whose standard of living declines relative to that of workers earning minimum wage. This harm increases with the extent of the increase - prevailing politics suggest that an occasional, moderate increase in MW to roughly stay even in real terms is acceptable, while an outsize increase is not acceptable. I am also aware of a problem of ineffective price signaling, which I will leave to the economists to address.

(For example, if MW is $6 and you earn $6.50, an increase in the MW effectively makes you worse off.)

A free market in labor would be reasonable if we also had a free market in housing and land use, but I don't see that happening anytime soon, and I don't even see much support among those who would liberate labor markets.

 
At 12/16/2008 8:51 PM, Anonymous poor boomer said...

Anon 1:10 -

Where I work we have a couple dozen people earning minimum wage, with ages well-distributed from twenties through fifties.

Not only that, at any given time, roughly 20 percent of our hourly employees have college degrees.

Why pay more when you don't have to?

 
At 12/16/2008 8:53 PM, Anonymous poor boomer said...

Anon 2:45 said:

"C is why minimum wage legislation is a bad idea. "human capital" = education and increases in the minimum wage have been shown to decrease graduation rates etc."


Not to worry! Where I work, every minimum wage employee is a high school graduate, and roughly one in five has a college degree.

Heck, around these parts, minimum wage isn't just for teens (or dropouts) any more

 
At 12/17/2008 5:10 AM, Blogger OBloodyHell said...

> If you are literate,

That's a large part of boomer's problem, he's not. Especially not economically literate.

He doesn't grasp the overall effect of price controls on markets, which any study of the history of would show how they f*** up everything. Hint: look at the 1970s, when price controls were rampant.

And wage controls -- i.e., "minimum wage" -- are nothing but a form of price control applied to labor, which, as anon points out, is a good for sale on a market.


Note how poboo says:
> If minimum wages are not an effective means of reducing poverty, what's YOUR solution?

Demonstrating poor boomer's overall problem. He wants everything handed to him on a silver platter: "What? Read the book!?!? Can't be bothered! Tell me the answer!!"

Hence, he'll never get the intellectual skills needed to actually figure things out on his own, and he's stuck parrotting exactly what he's been told in 30-second blurbs by the talking heads on the Idjit Box.

Right about now he's started typing about that only means he's stuck parrotting the book, never grasping that the entire point is to listen to the observations made by the book, and weigh the arguments made in favor of its propositions against other known data and common sense, and to glean some, not all, of his own positions on things as a result of the knowledge gained.

But that would be work... "Just tell me the answer!!"

.

 
At 12/17/2008 5:15 AM, Blogger OBloodyHell said...

> At 15 I had a job at a gas station. Those days are gone for our young people.

a) partly because they've been priced out of the market by wage controls and constraints. The headaches and limitations of hiring a 15yo aren't worth it any more, esp. when you add in all the crap overhead the government has tacked onto any hire at all.

b) The jobs themselves haven't disappeared, just shifted. There are still jobs at supermarkets, restaurants, and fast food joints (McD's anyone?) which are bastions of "first jobs" for teens.


> Why hire a kid and train him when you can have a 35 year old worker?

For one thing, if you didn't have the minimum wage, you could probably get and justify the kid as cheaper.

Also, there are a lot of "high rollover" jobs for which there's no difference in advantage for the older person, and which a 35yo (who is looking for stability even at low pay levels) won't want.

 
At 12/17/2008 5:18 AM, Blogger OBloodyHell said...

> Poor Boomer: a more efficient way would be direct transfer (welfare) or if you actually wanted to do something about it you could look at the education side of it.

The socialist "negative income tax".

Not a fan of it, but it would be far better, especially if tied to educational programs, than a minimum wage is.

It would also make the cost of the program more visible.

 
At 12/17/2008 5:23 AM, Blogger OBloodyHell said...

> Heck, around these parts, minimum wage isn't just for teens (or dropouts) any more

a) for how long?
b) there's a simple solution for many people: MOVE. I hear Arkansas, Oklahoma, and West Virginia are hiring.

No, that's not an option for everyone, but, amazingly, if people did it, it would help the ones who don't, too.

If you're a steel worker in the Rust Belt, it's time to look for another friggin' job in another state. That's not always an easy decision, but it is the one which tends to work in the long run better than whining.

The Universe doesn't owe you anything. It was here *first*.

 
At 12/17/2008 9:58 AM, Anonymous poor boomer said...

Anonymous said:
"poor boomer...

I don't know anybody who works for minimum wage that is over 18 or literate. Labor is a good that has a price set by the market. If you are literate, dependable and hardworking you can easily make double what the current minimum wage is in MOST regions of the country.

Businesses NEED workers. They WANT to keep the best qualified, most dependable workers to better compete within their industry.

Just as there are EFFICIENCY WAGES to keep workers in place there are companies that pay INEFFICIENCY WAGES because they are poorly managed and do not yet realize all the economic costs to constantly retraining and rehiring workers.

Companies that are around a long time don't pay minimum wage. Besides the government (no competition) who needs to be told that they have to pay more than minimum wage in the long run?"


You should check out the REAL WORLD where many employers pay minimum wage, take it or leave it, regardless of performance. (Where I work, the most productive employees are paid the same as the least productive employees - superior performance won't get you a raise or promotion, and mediocre performance won't get you a pay cut.

Some markets have a labor surplus, and employers don't have to pay more then minimum wage. Why pay more when you can get well-qualified college graduates for minimum wage?

Businesses need profit. My employer spends roughly one-third the year (two-four weeks at a time) globetrotting, while his employees toil for minimum wage. Why? Because he can. Doesn't matter what the employees are "worth".

My employer has some superior locations which afford him the ability to charge high prices while paying low wages. Works for him.

 
At 12/17/2008 10:05 AM, Anonymous poor boomer said...

Anonymous said:

"Poor Boomer: a more efficient way would be direct transfer (welfare) or if you actually wanted to do something about it you could look at the education side of it. Minimum wage legislation decreases skill aquisition on the part of marginal students. They would probably be better served if they continued their education and got a technical education - instead the price signal in the form of theminimum wage handicaps them for their working careers."


I could "look at" the education side of it all I want, but as a poor person who cannot get financial aid, looking at it is about the best I can do - I certainly can't AFFORD to PAY up front for education.

The rest of you might find it worthwhile to "look at" the market distortion caused by government and college fuinancial aid policies. All that financial aid readily available to others has priced me out of education.

 
At 12/17/2008 10:10 AM, Anonymous poor boomer said...

OBloodyHell -

Yes, I have read the book. I've even taken a year of undergraduate econ (macro and micro).

Guess it's time to come clean:

In response to the political rent seeking which drives up the price of housing, I have chosen to engage in my own rent seeking in the form of minimum wages.

If that means college graduates displace teens from minimum wage jobs, I'm willing to accept that. After all, I have to work for a living, the teens don't.

I still don't understand why people support free markets in labor but not in housing and land use.

 
At 12/17/2008 10:12 AM, Anonymous poor boomer said...

OBloodyHell said:

"Not a fan of it, but it would be far better, especially if tied to educational programs, than a minimum wage is."


I'm in favor of educational programs. Where do I sign up?

 
At 12/18/2008 10:11 AM, Anonymous Anonymous said...

"I'm in favor of educational programs. Where do I sign up?"

http://www.collegeboard.com/student/csearch/

 
At 12/18/2008 12:42 PM, Anonymous poor boomer said...

Anonymous said:

""I'm in favor of educational programs. Where do I sign up?"

http://www.collegeboard.com/student/csearch/"


Looks like you didn't read the entire thread.

I have no difficulty finding an education program for which I'd like to sign up.

What I lack is the money to proceed. Educational programs have this funny insistence of cash up front - maybe they lack confidence in the value of their product - which I cannot meet.

 
At 12/18/2008 12:58 PM, Anonymous poor boomer said...

In response to someone else's previous reply, OBloodyHell said:

> Poor Boomer: a more efficient way would be direct transfer (welfare) or if you actually wanted to do something about it you could look at the education side of it.

The socialist "negative income tax".

Not a fan of it, but it would be far better, especially if tied to educational programs, than a minimum wage is.

It would also make the cost of the program more visible.


As I understand the negative income tax, it contained no provisions for earned income. The Earned Income Tax Credit addressed earned income, subsidizing earned income but not - as does the negative income tax - unearned income.

So I think we can agree that some variety of EITC is preferable to a negative income tax.

 
At 12/20/2008 1:29 PM, Blogger Arman said...

Bloody hell!
You guys are extremely WARPED!! You think welfare, especially fine tuned with TONS of government bureaucracy, trusting GOVERNMENT to put the money into the right places is an ALTERNATIVE to a very simple and direct limit to the natural exploitation of business practice?
ALL wages are dependent on the minimum wage, adding on allowance for education and experience! All jobs are dependent on the spending of customers, some who actually make minimum wage. All employment would be negatively impacted by a reduction (let alone a removal) of the minimum wage.
The stagflation of the 80s came about when inflation had eroded the buying power of the public, and reduced the effect of minimum wage in real terms. THAT is what your stupid propaganda is pushing for... serious injury to the American economy! Sometimes I wish stupidity could be outlawed.

 
At 1/04/2009 3:05 PM, Anonymous t jefferson said...

We need to eliminate the minimum wage laws and replace it with a livable wage. Then the spending would trickle up because of the additional spending. The high salary people tend to just invest their money in financial instruments. People with money can only buy so many luxuries such as yacths, planes, vacation homes, and jewelry. That type of spending doesn't tend to stimulate the economy because of the lack of scale.

 

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