Tricky minimum wage arguments

Economics Economics Questions
1

I’m having trouble overcoming three points concerning the advantages of a minimum wage. I hope you can help me out on these:

1. While it is correct that minimum wages do not increase the chances of poorly qualified workers to gain a job, one has to consider this is not their intent. They are intended to provide access to a “living wage” for the poorly qualified who manage to get a job. Those who fail to find a job (because they are unqualified or because the job they qualified for is already overrun) should gain access to special government training programs so they can qualify for jobs in demand. That way, the downwards spiral of wage competition would be cut and everybody would have access to a job with a fair wage.

Of course, that one validates the Misesian theory of one intervention creating the need for another intervention. However, proponents of the minimum wage are not the ones hostile towards intervention. To the contrary, they praise the logic above as a textbook example of how “three-dimensional interventionism” may in fact improve peoples’ living conditions. Unfortunately, I’m somewhat unable see the fundamental weak spot in this “government creating equilibrium” system (except that it requires a strong belief in the ability of government, but I need a more precise refutation). Maybe you do?

2. The minimum wage is a necessary intervention because peoples’ wages may not be considered “market factors”. The only thing a poorly qualified person may offer is his manpower. If this manpower is in low demand, he is destined to starve. People aren’t goods. It should be the government’s job to make sure they aren’t treated as soulless market factors.

Now this point appeals heavily to compassion, but still. Isn’t is harsh of Austrians to advocate “starving wages” for those whose qualification is in low demand? In a world free of any intervention, how is a starving, poorly qualified person supposed to improve its situation? Extension studies are hard to do if you don’t have enough money to buy food. Doesn’t that prove the need for “social security” institutions and minimum wages?

3. From 1996 to 2006, unit labor costs in the United States have risen by an average of 23,4%. In Germany, this has been a 1% increase. Over the same period of time, unemployment dropped and economic growth flourished in the United States, whereas the opposite is true for Germany. This indicates that wage increases have a beneficial effect on the economy and that Germans should catch up by implementing minimum wage legislation which would increase the income of about 20% of employees.

The numbers speak for themselves. Any ideas?

And thanks in advance for your efforts.

2

“Isn’t is harsh of Austrians to advocate “starving wages” for those whose qualification is in low demand?”

Is anyone “advocating” starving wages? The advocacy is for better economic conditions and more employment.

“In a world free of any intervention, how is a starving, poorly qualified person supposed to improve its situation?”

By landing a job – menial as it may be – to gain SOME experience. His situation does not improve with a minimum wage law since this is why he’s poorly qualified in the first place. He has no experience and no skills because he can’t get work. This is coupled with the fact that the government does no favors for the poor by enforcing rent control, devaluing money, and crippling business owners with taxation that would otherwise provide for more employment opportunities.

“Extension studies are hard to do if you don’t have enough money to buy food. Doesn’t that prove the need for “social security” institutions and minimum wages?”

What about private homeless shelters, charities, and unemployment offices to ease the burden of struggling to eat? Since they are run privately, they delineate the conditions for who they take in – i.e. you have two months to find a job or you’re out, or you must maintain a job for at least 6 months to be eligible for aid, etc. Under a statist system, there is no incentive for the homeless or jobless. In a private system, the private shelter is dependent on private funding for its operation, which means its funders are counting on them helping the homeless and jobless get back on their feet, not allowing them to abuse the system.

This indicates that wage increases have a beneficial effect on the economy and that Germans should catch up by implementing minimum wage legislation which would increase the income of about 20% of employees.

Sure, the standard of living of the workers increases slightly as wages increase slightly, but the costs of inflation largely negate any of the alleged benefit. Moreoever, the wage increases of the people who have jobs doesn’t take into account the rise in unemployment from the people who now can’t find work.

Government intervention into the economy in any way, shape, or form has failed and always will fail.

3

  1. Minimum wages create unemployment. They are a price control on labor leading to surpluses of labor. And the people who become unemployed as a result are always the most vulnerable. Remember, the price of goods and services on the market are determined by supply and demand. Those prices determine the discounted marginal value product (DVMP) for all factors of production, including labor. It’s not the other way around. A business cannot “pass on” government mandated increases in factor costs to the consumer. Instead businesses have to reduce production (hire less workers) and this leads to unemployment. Government mandated training programs involve just more meddling.

  2. The surest way to ensure people “starve” is to have a minimum wage. If you’re unemployed and don’t have a job you earn precisely zero. Without a minimum wage it’s true that some people, perhaps those who are severely mentally impaired, wouldn’t earn much. But everyone who wanted to work would be able to earn at least something. At present, severely disabled people are permanently sidelined by the minimum wage. Think how much better their self-esteem would be knowing they have a genuine job that’s valued by their employer, that isn’t part of some governement make-work scheme.

  3. This is a classic example of why neo-classical empirical analysis is baloney. Labor costs rise in the US; the US has growth. Labor costs don’t rise in Germany; Germany doesn’t have growth. One implies the other; therefore all we need to do is mandate increased wages! There’s so much wrong with this I don’t know where to begin. First of all, I don’t trust the government figures on growth. Second, monetary inflation was much higher in the US than in Germany during that time period, which would lead to that sort of price inflation in wages. But third and most important the logic in the argument is all wrong. Mandating increases in wages sounds nice, but where are you going to get the money from? Presumably from the tax-payer. Ultimately, this will reduce investment, so you’re back to where you started. You can’t create something out of nothing. Otherwise, why not mandate a minimum wage of $100,000 an hour for everyone and then we’ll all be super-rich and have an economy growing like crazy. There’s no such thing as a free lunch.

4

Like Leonidia, I am skeptical of #3. Can you provide a source?

5

The people who are most effected by minimum wage are teenagers and minorities. Skipping over the minorities for a second should we put every teen into a government training program so they can qualify for a higher than minimum wage job and forget that a large part of the reason they can’t get the existing jobs is they have no prior work experience? How are they supposed to get real work experience if they are shut out of entry level jobs in the first place?

Same with minorities, how are they supposed to work their way out of poverty if they can’t get into the workforce in the first place.

Yeah, these magical government programs that exist today have done a wonderful job of getting all the people off welfare and into the workforce.

Unless you’re an entrepreneur the only thing anyone has to offer is their labor. If the argument they site in point #1 is correct then there isn’t a lack of demand for low skilled workers but they are being priced out of the market by the minimum wage law.

They admit that their intervention leads to low demand for unskilled labor and without social programs like welfare (which pays much less than minimum wage by the way) these people would starve. So by not allowing someone to work at a job that pays between what they make on welfare and the minimum wage they actually create demand for these social services instead of just providing support for someone who just fell on rough times and needs a little help in between jobs.

It’s a self reinforcing system that preys mostly on the inner-city minorities so some bureaucrats can have cushy jobs without becoming ‘soulless market actors’.

The only thing outside of ‘market factors’ is the services the government provides to make sure the people they directly put out of work don’t either starve to death or have to work outside the system like migrants in a shadow economy where they don’t pay taxes to pay for the bureaucratic salaries of the people that are trying to put them out of work.

Talk about a red herring…

Could it be that economic growth was the cause of the increasing wages and unemployment dropping instead of the other way around? Supply and demand would suggest that to be the case, as demand goes up the price (wages) increase and supply (unemployed) goes down.

Anyway, how could wages effect the economy as a whole if they aren’t ‘market factors’? Seems like that’s the only way their logic could work because increasing the price of the bottom 20% of the workers would increase unemployment as the costs rose enough to push the marginal businesses that rely on the bottom fifth of the workforce out of the market. Less business, less jobs, less growth and a lot more people who would have to rely on the State training programs to compete for the limited remaining jobs.

Maybe that’s their goal after all…to have an increased porportion of the people reliant on the government to increase jobs in the public sector.

6

#1 is based on a populist fallacy. Wages don’t ‘spiral down’ (with the possible exception of deflationary situations, but even then it is not automatically a bad thing). The argument ignores competition between employers, which means it is a severely flawed argument and thus debunked.

#2 is a silly normative argument. I advocate that it is the government’s job to make sure everyone is treated like a pretty princess. And everyone should have ponies. Preferably pink ones.

Not really. The problem with statistics is the good old ‘correlation doesn’t imply causation’ adage. Picking a few numbers and extrapolating from those is just sloppy.

7

I took the data regarding unit labor costs from a “pro minimum wage” booklet the confederation of German unions is handing out. Their sourcing is a bit misleading. I’ll give you the whole chart for better understanding:

Development of unit labor costs from 1995 (twisted the year in my OP, sorry for that) to 2006

Poland: 67,8%
Greece: 53,5%
Great Britain: 34,4%
USA: 23,4%
EU average: 22%
Sweden: 18,3%
France: 16,3%
Germany: 1%

Now the only given reference is for the EU average, and I couldn’t even find that one. The booklet claims the European Economic and Financial Affairs Council assessed that in May 2006, but as I said, their archives didn’t help either. I did, however, find that (concerning ULC changes in the US):

Depending on which fix points you use, you may indeed constitute a 23,4% increase in ULC from '95 to '06. But moving the fix points just slightly sidewards will change that to -1%. If I didn’t commit a major error here, we might have solved the statistics mystery.

But what if people do get stuck with that “starving wage”? They may improve skill-wise, but due to an overwhelming supply on the side of labor, there’ll always be somebody who will do it cheaper. Therefore, wouldn’t it be a better solution to at least grant those who do get a job a “living wage” instead of allowing wages to remain static or even fall due to uncontrollable increases in the supply of labor?

Even if there is competition among employers: If 100 people are needed, but 1000 are interested while the scale of qualification is not that large (as happens to be with most simple tasks), would that competition really result in increasing wages?

Response:

If higher prices cannot be passed on to customers, this will lead to short-term profit setbacks for all affected businesses. However, middle-term demand increases due to an increased minimum wage are going to balance those initial setbacks. Great Britain’s experience with minimum wages sustains that claim (with no source, again).

But even if a fairly large portion of workers benefited from a minimum wage, wouldn’t that hurt those who don’t in any case? As I see, the logic behind the argument is:

Compulsory wage increase → resulting price increase in products → resulting decrease in profits → higher demand due to higher wage → balance

And people who don’t benefit from the minimum wage?

No wage increase + price increases → decreasing purchasing power → artificially high demand due to artificial above-equilibrium wages → lower standard of living for everybody above minimum wage level

Did I get this right? We have two scenarios:

  1. Minimum wages increase unemployment of the unskilled. In that case, minimum wages hurt the very people they are supposed to help.

  2. Minimum wages do not increase unemployment, but decrease short-term profits to stimulate middle-term demand. If that’s true, everybody above minimum wage level is hurt.

If that’s what “social justice” is all about, I don’t know how the word “justice” slipped in there.

They are, of course, a market factor, but it is claimed they can’t be treated as pure market factors because people depend on them. For example, if everybody suddenly discovered oil springs in their yard, crude oil prices are likely to fall rapidly. Oil doesn’t care about how much it’s traded for, but humans need a fixed “living wage” to make ends meet.

So even if everybody suddenly found a willing and cheap work force in their yard, they still had to pay them a certain wage in order to not de-humanize them. Accordingly, minimum wages are a humanitarian idea (that is, the unions say so).

8

  1. Minimum wage law REDUCES the number of low wage jobs and therefore reduces the chances for the poor to gain a job.;

  2. Workers no matter how poor are victims of supply and demand and also victims of accounting. This is a fact. Accounting: Employeers are paying for the productivity of their workers. If I pay a worker $4.5 per hour and he creates $6 per hour of value then I have an incentive to hire the worker. If the government says that this worker cost anything equal to or above $6 per hour then I have no reason to hire them. Supply and demand: If there are lots of folks who want to work at $6 per hour but half of whom will work at $4.5 per hour then those folks willing to work at $4.5 are being screwed by minimum wage as they have to compete for jobs. If my job had a minimum wage of $500,000 per year then I would be screwed as I already have settled for less and would have to compete with more people unwilling to take the job at my salary.

  3. Inflation in the US has been much higher than in Europe. So wages have risen with the devaluation of the currency along with everything else. The dirty secret here is that wages do not keep up with inflation so all employees have gotten screwed here. But the same arguments in 2 remain. Minimum wage may help 20% of employees, It doesn’t, but it also hoses a number of employees as well. The sad part is that the employees that get hosed are typically minority or young.

  4. The most amazing argument against minimum wage is that minimum wage reduces the cost of racism, sexism and any other biases the employers have. Why hire a young African American when there is a Caucasian American and the government forces the two to charge the same price for their labor? Assuming the African American will work for less, minimum wage hurts that person directly.

It has always been amazing to me how the self procliamed Civil Rights Leaders want minimum wage. Maybe they really aren’t interested in helping their folks and interested in maintaining the status quo?

9

How do we define a “starving wage”? The idea of a wage that doesn’t sustain the worker is, obviously, quite improbable (the whole term is propagandist in my opinion). So are we talking about a “lifestyle maintenance wage”?

This is a very static scenario and a slightly misleading one. What good would a minimum wage do in this situation? Certainly you can’t argue that a minimum wage would increase employment.

Obviously, if you remove the minimum wage, average wage will drop initially, since less productive labor is allowed in the market. But is this somehow negative? All that happened was that you allowed less productive workers to be employed, as opposed to be unemployed.

10

What a massive collection of fallacies.

In the first place, all minimum wages do is put the unskilled out of work and/or push up the price of goods. Individuals whose productivity does not justify their higher wage will be marginalized, meaning they’ll never even be able to move out of their lower paying jobs due to an inability to acquire the skills necessary to do so.

The other bit contains a concealed ethical premise; that it’s the government’s job to insure that people have enough to live on, and that it has the right to coerce others into paying it to provide this service. This must be proven. Even the right to regulate consenting capitalist acts needs to be proven. I fail to see how government supplanting civil society will amount to any good. If these individuals are worried about the less fortunate, a minimum wage is pointless altogether. As for a supply of cheap workers, let’s grant that premise - is the solution, then, to force a whole bunch of them not to work? At least it exposes the MW for what it is - a form of protectionism.

The last bit is a classical instance of the post hoc, ergo propter hoc fallacy. It’d make as much sense to say that because a rich man buys lots of suits, that that is why he’s rich. Utterly stupid. Only dishonest or confused propagandists would wish to maintain otherwise.

-Jon

11

Saphairon, your graph seems to confirm a negative correlation between employment and wages earned. This is what we would expect if the wages were raised coercively. However, it’s hard to conclude much from this data since there’s no way to really know which caused which, and whether the relationship was caused by voluntary choices or not. At least it does not seem to support the pro minimum-wage argument, or is it meant to?

Another major problem with statistics such as these is that they are expressed in nominal (money) terms. It’s no doubt true that by holding some workers off the labor market, those who remain employed will earn higher nominal wages. With fewer workers and the same quantity of money competing for them, each will likely earn a higher money wage. But the reduced employment means that also fewer goods are produced. Prices of goods will rise about as much as wages rose as a result of the unemployment, resulting in no gain at all to the privileged (still employed) workers. Then, what about the unemployed? Are they to be left to die of starvation? That does not seem very compassionate if that was what your goal was in the first place. So those employed will apparently need to provide for those less fortunate unemployed (either through charity or through welfare), thus reducing their actual incomes regardless of any nominal (money) increases they may have theoretically enjoyed.

Now, your statistics don’t mention any units. Are they supposed to be money wages in local currency? In US dollars? In fairy dust? None of these imply anything at all about real wages. In fact real wages are entirely subjective based on the personal preferences for varying goods of varying quality of individual consumers. Real wages cannot be measured. Only increased production in those goods that consumers value and are willing to pay for can result in higher real wages. The only obvious way to achieve that goal is to allow for full employment in an unhampered economy.

12

In a truly free society, wages would be far less of an issue, and employees far fewer. This is because the current corporatist (the corporation itself is a entity created by law and therefore government) system is a tremendous block to free enterprise and entrepenurialism, and thus forces people to work for wages instead of profits. The majority of people would be self-employed, and entire market sectors that are currently closed (drug production and distribution, prostitution, etc.) would be open to the unskilled.

A person who employs unskilled labor is not advantaged by having them starve. Certain ways of compensating employees in ways that can sustain them, other than higher wages, would be available in a truly free market. Offering housing and food (purchasing them at a lower bulk rate than if they were purchased individual by individual) along with a stipend may be acceptable for some, perhaps even leaving both employer and employee with greater benefits for lower costs.

In general, with housing regulations gone, people could live in shelters that were both safe (or not, if they chose) and highly economical; “coffin” apartments and the like. It is government regulation which forces expenses up and make things like housing and food inaccessible to the very poor.

13

To which extent does inflation induce wage increases? After all, Germany did have an estimated 3% money inflation in the last 10 year as far as I know. I’m not aware of the specific figures for the US, but 1% ULC increase in contrast to 30% inflation (neglecting interest on interest here) would require a US money inflation of about 600% to make up for the circa 20% ULC increase, at least if you want comparative values.

Something’s apparently shady about these numbers.

Well, we might again compare values here.

US federal minimum wage will be set to $6,55 on July 24th. That’s about 4,15 euros per hour.

Germany’s social security system claims to be set to the minimum subsistence level with 345 euros plus free rent every month. The cheapest one-room flat I could find in a 15 miles perimeter was 220 euros per month (note that I’m living in the country). So, let’s assume for the sake of the argument that 665 euros per month come pretty close to subsistence level. With 160 hours of paid work per month, one had to earn about 4,15 euros per hour to make ends meet. Surprisingly close to the American approach.

Now, there’s a number of people who don’t make 4,15 euros per hour. Security personnel, hair dressers or butchers often earn less.

However, unions and socialist groups don’t advocate 4,15 €/hr, but rather a 7,50 €/hr minimum wage, which shows the fallacy of the minimum wage: it might be, as you presumed, a question of lifestyle maintenance rather than of “making a living”.

Advocates of the minimum wage wouldn’t agree that a starving wage results from mutual benefit or consent. If somebody is starving and craving for food, he may be willing to provide services (or put up with wages) that might seem inacceptable to him in a state of economic security.

While “starvation wages” are, philosophically speaking, of course voluntary contracts, they may in fact be a result of pressure, pressure to survive in this specific case. Minimum wage supporters (who also happen to be supporters of socialized welfare) seem to envision themselves as liberators who free “the working man” of capitalists’ pressure.

Regardless of this sort of image cultivation, however, isn’t it true that voluntariness of contract is limited by man’s natural conditions?

Since I was unable to find a graph better fit for our observations, I took the one presented above. While you’re right that the chart is probably supposed to show a negative correlation between hours worked and wages earned, I actually tried to point out the fallacies of pinning the development of ULC and other factors to fixed points within the graph:

Comparing the ULC values of Q1-95 and Q1-06, one scouts a pretty satisfiable increase, whereas, for example, a comparison between Q1-01 and “two lines behind Q1-06” will generate completely different results. That way, you can fabricate developments to match with your particular aims which doesn’t seem too scientific for me.

Great point !

Interestingly, especially small businesses often can’t afford to pay high wages in order to remain competitive. Unconfirmed hearsay claims that’s the reason why big corporations are also lobbying for the minimum wage to be implemented here.

And without a doubt, the minimum wage will be another one of the obstacles which keep people from developing an entrepreneurial spirit. Shamefully enough.

14

Sure it is consentual. He has the option to beg, to say no etc. They may wish to argue it isn’t, but unless someone has forcefully deprived him of what is his due, it is consentual. One might say one is due positive rights, but they must prove that.

How nice. Too bad they’re deluded. In a sense, all action is pressured by need. If they wish to argue no action is truly voluntary, they must subsume under this the whole range of man’s activities.

Yep, in the sense that if the person is drugged etc. they cannot consent.

-Jon

15

What form may this argument take when there is no way to assign a cost to the employee’s activity when he doesn’t produce anything, he just provides a service? (gardening, etc)

16

He’s still producing income. (And even goods are valued only for their service.)

You should read some of the free books avaliable on this site to understand what determines prices :slight_smile:

17

How much is your time worth to not have to go out there and mow the lawn?

18

Exactly. You may not know what it’s “worth,” but you certainly know what it’s worth to you. That’s your bid. Everyone else out there knows what it’s worth to him; that’s his bid. And every potential lawn-mower out there knows what it’s worth to him; that’s his asking price. When a lawn-owner finds a lawn-mower whose ask is lower than his bid, they’ll negotiate a price somewhere between ask and bid, and strike a deal. Whatever price they agreed upon is fair by definition, because they both agreed to it. Note, though, that the buyer will probably claim he’s paying too much, and the seller will probably claim he’s charging too little. We know they’re both lying, because they both agreed to the price. What they really mean is that each would always prefer to get more for less, which goes without saying. The employer assigns a cost to lawn-mowing which is exactly equal to what he agreed to pay.

Technically, that’s the whole story. There’s no such thing as a “price level” for lawn-mowing, or a “going rate.” It’s true, though, that most all the lawn-mowing agreements out there will vary within a fairly narrow range. One could take the mean of those rates and call that the “going rate.” As people learn what others are agreeing to, they will tend to ask similar amounts–or, if they desire much more than that, will go bid on some different job than lawn-mowing. Soon, the range of agreed-upon prices will narrow considerably, and instead of the average we could select the modal rate as the “going rate.”

At that point, folks who don’t even have their lawns mowed will treat the “going rate” as the cost of lawn-mowing. If they don’t hire anyone, they’ll cite that rate as the amount they save. And so on.

Secondarily, the government will treat the going rate as if it came down from on high on angels’ wings, and will attempt to freeze lawn-mowing at that price, or else to force lawn-mowing to a higher price, or perhaps to demagogue about lawn-services’ “gouging” and mandate lower prices.

–Len