100930_minimum_wageYesterday I mentioned that translating economic principles into intuitive concepts is one of the most urgent and necessary tasks to prevent such evils as harm to the poor. Today, William Poole provides an excellent example of what is needed with his “common-sense thought experiment” on minimum wage increases:

Suppose Congress were to enact a minimum wage $50 higher than the current one of $7.25 per hour. Would a minimum of $57.25 reduce employment? I know of no economist who would assert a zero effect in this case, and recommend that readers ask their economist friends about this thought experiment. Assume that the estimate is that a minimum of $57.25 would reduce employment by 100,000. The actual number would be far higher but 100,000 will do for this thought experiment. Now, consider several other possible increases of less than $50. The larger of these increases would have substantial effects, the smaller ones smaller effects.

But is there reason to believe that a minimum of $10 would have no effect? I have never seen a convincing argument to justify that belief. If you accept as a fact that a minimum wage of $57.25 would reduce employment, and you accept as a fact that some workers are currently paid $7.25 per hour, then logic compels you to believe that a small increase in the minimum wage above $7.25 will have at least a small negative effect on employment.

The only escape from this logic is to believe that there is a discontinuity in the relationship between the minimum wage and employment. No one has offered evidence that there is a discontinuity at a certain minimum wage such that a minimum above that has an effect and one below does not.

Far too often, advocates of minimum wage increases tend to dismiss such thought experiments before giving them due consideration. I think I know why. I don’t mean to cast aspersions on their motives (it certainly sounds like I’m about to cast aspersions on their motives, doesn’t it?), but I suspect they fear that admitting the undeniable logic of this reasoning will cause them to lose the moral high ground.

As I’ve said before, almost everyone on both sides of this issue share a common objective — helping the working poor. But there is something about putting more money into the pockets of the working poor that just feels more noble. It also feels wrong to tell a minimum-wage earner you oppose a government-mandated pay increase.

Of course when it comes to their own money, their feelings give way to rational economic self-interest. Here’s an example of what I mean. Since the median household income in America is around $51,000, almost every middle-class household could technically afford to pay someone $10 an hour to do 10 hours of work a week ($100 a week, $5,200 a year).

Now let’s say you and three of your friends decide to chip in to hire a worker. Each of you will pay for 10 hours of her labor so that she gets 40 hours of work a week. The total pay ($20,800) would be enough to bring a single mother with two kids above the poverty line. Sounds like a great deal for everyone, right? So why don’t you do that?

I suspect you’ve already started churning out a list of reasons why such a plan isn’t feasible. Some of those reasons probably include:

“I don’t have any work that needs doing that is worth $10 an hour.”

“I’d rather spend $100 a week on my own family.”

“The time it’d take to supervise and manage the worker wouldn’t be worth the hassle.”

“Once you factored in the payroll taxes the cost would be much more than $10 an hour.”

All of these excuses are legitimate and rational. For most of us, not hiring a minimum-wage worker is in our best interest. Yet many individuals seem to think business owners will act completely differently. The assumption is that there is something unique about owning a “business” that causes people to look at time and value in a completely different manner. Of course, that isn’t the case, which is why most business owners would simply do what all of the rest of us do – not hire people when we find the price of labor is higher than the value of the labor.

And who are the workers that won’t get hired at the higher labor cost? Those who most need the work – the poor, untrained, uneducated, and unskilled. Supporters of minimum wage increases are saying that those people should remain without a job so that other workers can get a pay raise. But are minimum wage advocates willing to tell that to those who can’t get a job? As Poole asks, “Will those advocating a higher minimum wage be willing meet face to face with disadvantaged members of society, who are willing and able to work, and explain why their employment needs to be sacrificed for higher wages for those who remain employed?”

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  • JohnE

    It’s not an argument you hear very often: minimum wage increase means higher wages for some, unemployment for others. Most often, “for some, unemployment for others” is omitted. A business that can’t do without minimum-wage workers would seem more likely to keep those who are more skilled, permanent, and who don’t need to work full time — such as those earning a second income for the household. Low-skilled seasonal workers such as students will have a more difficult time. Those who are stuck in a minimum wage job are more likely to see hours cut, lessening the effect of the minimum wage increase. It would seem the rich get richer and the poor get poorer — exact opposite of the higher minimum wage supporters’ noble goals.

    • http://flamingfundamentalist.blogspot.com/ Curt Day

      John,
      Why would increasing the minimum wage mean unemployment for others when nothing is said about increasing the pay any other kind of employee? The only way that increasing the minimum wage will increase unemployment is when all others keep asking for more without regard for those below.

      If minimum wage is that tied to unemployment, then why not decrease the minimum wage so that more people can be hired? There is a sound economic reason why not. It will mean more minimum wage employment will mean more gov’t assistance for full-time employees. That means that as we keep the minimum wage below what a living wage would be, tax payers are subsidizing part of the private sectors payroll. And what we will also find is that some of that private sector whose payroll is subsidized are doing what they can to avoid paying taxes.

      • Marc Vander Maas

        Why would increasing the minimum wage mean unemployment for others when nothing is said about increasing the pay any other kind of employee? The only way that increasing the minimum wage will increase unemployment is when all others keep asking for more without regard for those below.

        Or perhaps there’s some other simple reason that you’re simply unwilling to entertain because it would undermine your worldview.

        • HONKYSAUCE

          Great point.

      • JohnE

        You’re saying that wage increases for other employees — the ones who aren’t earning minimum wage — would also apply the same pressure to decrease employment? I agree. It’s a decision that managers have to weigh. Is the employee valuable and productive enough to increase his pay? Will not paying him more mean greater risk that other companies will be more attractive to him? Essentially the decision means “are his skills and services already worth a higher wage?” Luckily there are no other types of government-mandated minimum wages. Imagine the effect on unemployment if the government mandated a minimum salary for college graduates.

        Of course, increasing the minimum wage would necessarily increase the minimum wage for more experienced workers. Imagine working for a company for a few years and finding that new hires are receiving the same pay due to a minimum wage increase. Employers would have to increase wages up the scale, so the effect is even greater than just increasing the wage for employees on the bottom rung.

        If it’s true that decreasing the minimum wage would increase employment, but taxpayers would still have to subsidize them, at least they would only being partially subsidized rather than fully subsidized through unemployment and welfare.

  • Mark Byron

    The problem with your last paragraph is that it’s hard to point out the people who will get laid off or not hired at all when a higher minimum wage is instituted. If Joe Burger-Flipper is told his shift will get cancelled if a minimum-wage increase is installed, he’d likely prefer the status quo, but we don’t know that down to the particular person going in.

    Given a choice of a $2.75 an hour pay raise with a unknown chance of getting fired and getting nothing or the status quo, risk-adverse folks might opt for the status quo. However, the rhetoric of the wage-raise-fans neglect that chance.

  • wibble

    If you drank 50 gallons of water would this kill you? Therefore using stunningly stupid right wing logic, drinking 2 cups when you are thirsty will kill you, and in fact what you need is less water…

  • Ronco

    “I suspect you’ve already started churning out a list of reasons why such a plan isn’t feasible.” How about an obvious one…OK, maybe a somewhat obvious reason: spending 100 bucks on your own family or saving that amount over a certain period and then spending a larger amount will surely keep someone/ someones employed at supporting an activity, or building something which you’ll buy, or maintaining something which they and their employer hope you will come see or use. Capitalism isn’t just a rising tide lifting all boats (although that’s an apt way of describing one of its effects.) Capitalism’s essential macro effect is to provide the risk-takers and business owners an opportunity to employ not just people, but to apply their sense of optimism about the short term or long term future, and give – yes, Virginia, Give! – opportunity a chance to take root and grow. Capitalism is growth and expansion. Some capitalists are scourges and many are amoral, but despite individual flaws the body of Capitalism is about consideration and Caritas, brother!

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  • Roger McKinney

    Curt Day’s is the most common reason people see no connection between the min wage and unemployment. They think that management makes such high salaries and the profits are so great that a tiny reduction in either will be sufficient to double the wages of those at the min. No amount of data, evidence or logic will change their minds. It’s the old “gospel of abundance” socialism vs the “gospel of scarcity” economics. People like Curt think that the problems of inequality and poverty are about nothing but the distribution of wealth. If we distribute wealth equally there will be plenty to go around and there will be no poverty. They refuse to learn any economics and not even a direct revelation from God will change their minds.

  • Roger McKinney

    Tangled up in the issue is the socialist’s low esteem for management. They think anyone can be a manager and managers don’t earn their pay; the line workers to all the heavy lifting while management lives off their sweat. If management would accept wages equal to their worth, the line level employees could earn more.

    Of course, that’s why things like the Obamacare web site fail miserably. Socialists despise management so they refuse to learn management skills.

    The truth is that good managers are rare as pro athletes and that’s why they earn the big bucks. Socialists can disagree only because of self-inflicted ignorance about management and economics. Besides, you could fire all of management and give their salaries to line level workers, but the line level workers would not notice the pay increase because it would be so small. Also, the business would run as well as the Obamacare web site.

  • Bill Hickman

    The entire thought experiment relies on this statement – “I have never seen a convincing argument to justify that belief” – in which Poole just waves away research tending to show that small minimum wage increases would not create a net increase in unemployment. If you accept all of Poole’s premises, the thought experiment works great. But what if the premises are wrong? Reminds me of Keynes’ alleged criticism of one of Hayek’s books as “an extraordinary example of how, starting with a mistake, a remorseless logician can end up in Bedlam.”

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  • Bill Hickman

    Here’s good article explaining why Econ 101 models and thought experiments like Joe’s lead to wrong answers about the minimum wage.

    http://www.newrepublic.com/article/116608/silicon-valley-labor-scandals-prove-minimum-wage-hikes-dont-cost-jobs