Minimum Wage

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The minimum wage and living wage warriors seem reluctant to accept the economic realities: price and wage controls almost never work. There are extremely rare cases where they can work (or do minimal damage) in one small location for short amounts of time, but there's no magic wage that's right for everywhere and everywhen at once. Thus wage controls start out bad and get worse over time.

A few discredited studies (like Card & Krueger) show that raising minimum wage doesn't have large impacts, in a few situations for short periods. But each study like that has dozens of rebuttals and refutations that show the flaws in their methodology, and counter studies that it does impact employment (and wages), in the wrong way, over time. (Many listed below).

Thought Experiments

I like to use thought experiments and the socratic method to try to get min-wage supporters to think. Not that you'll ever get good answers, but it shows the absurdity of their positions:

  • What's a fair wage for both NYC and B.F. Idaho?
  • If $15/hr is good, why not $150/hr? (Every answer why $150 is bad also applies to $15)
  • If I raised your salary by 5%, but the cost of everything you buy by 10%, would you come out ahead? (Costs of labor/overhead are added, with margins, at many stages in a supply chain)
  • If price and wage controls worked (fundametnally what a minimum wage is), why didn't they work in Cuba, North Korea, Russia, China, or the U.S. and U.K. during WWII and in the 70's? (They only succeeded in blossoming black markets).
  • If only 9% of minimum wage workers are below the poverty line (and 91% are not), wouldn't giving money directly to that 9% be at least 11x as effective as raising minimum wage? Why don't we do that instead?
  • If minimum wage is a starting salary, why should it have an ending value (be a livable wage)?
  • If I’m willing to pay someone $10 to do something, and they’re willing to take $10 to do it, what business is it of the government or voters? Where in the Constitution does it say that anyone else gets a say in that transaction?
  • Who knows more what's a fair labor value for a job, in every market in the U.S.: the employer and employee involved, or a bureaucrat in D.C. or voter in Barstow? Why?

And so on. To understand minimum wage arguments, read on.

Money is a token of output, not desire

The first thing to understand is that money is derived from the product of work (productivity/results), and the value someone places on that, not based on what you paid for it. Thus wages aren’t based on “need” or “want”, but on value (output/returns). Raising the costs for something by paying more, slows the economy. Lowering the costs, means you can afford more and improves the economy. If you don’t understand this, please go read about the broken window fallacy. There are many more consumers than producers, so drops in labor costs help more people than it hurts (net win), and raising labor costs raises the cost of goods by at least as much (plus margins at many levels of manufacture and distribution), hurting far more people than it helps. Thus “needs based” economics, isn’t economics, it’s long disproven socialist rhetoric that helps the few by hurting the many.

Key Concepts

Goldilocks and the 3 wages

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Minimum wage is like Goldilocks, there are three ways you can set minimum wage: too low, too high, and just right. Too low, means it's doing nothing of value. Too high means it's hurting employment and growth. And since just right can never apply to two different people, places or moments in time, there's really only one way to set minimum wage: and that's at the wrong level.

Does minimum wage impact employment?

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This is of course hotly contested, but it breaks down into two camps: (1) "No" (2) Those who have a clue as to what they're talking about.

The problem is (of course) that it doesn't always, and doesn't always immediately impact it. So there's some plausible deniability for the economics deniers out there to find edge cases and say, "see". But as soon as you look deeper than the surface, you find that it does suppress growth, or increase a decline, sometimes ahead of the law and sometimes well behind it but it happens, and it especially hits certain segments and groups of people harder than others (like teens, starting out, part time work, and so on). Let's dive into the evidence.

Minimum Wage: Poverty

Minwage.jpg

Poverty (and who makes minimum wage) gets even more complex:

  • 75% of it is due to underemployment (which is more insidious than unemployment)
  • Most poverty is short term (short term unemployment that effects people in one year).
  • Most of the rest is due to under-education, immigration, fatherless families, and finally bad social program programs (which holds more people down than they helps people up).

Explain to me how raising minimum wage helps with any of those things?

I can explain how fewer teenage jobs means more teenagers doing other things, like getting pregnant. Fewer opportunities for the less educated and immigrants doesn't help them out. And so on. So target the right people, instead of offering blanket subsidies to the wrong ones. Instead of raising the minimum wage, Congress should look at other ways to aid the working poor that actually focus on providing help to those who need it.

And that' the first rule of economics: do no harm. If you can't show how you're making something better, and the other side can show how you're not, then you're wrong. Or don't knock down fences without understanding why they're there.

Minimum Wage: Cost basis

CostBasis.jpg

I hear all the time, that McDonald’s can afford to pay a “livable wage” without raising costs, or "it’s just a few cents a burger", by people that don’t understand basic economics, or business.

Here’s some notables taken from the average McDonald's balance sheet:

  • The average McDonald's generate about $2.5 million in gross revenue, but then they have a lot of expenses like rent/mortgage, taxes, utilities, food, taxes, and labor (and their taxes).
  • The average McD's Employs 61 people in operations and restaurant management positions, and spend nearly $507,595 on wages (about $800K or 32% of gross revenue, when you factor in benefits, tax liability, and other costs around employment).
  • A McDonald's ends up with an average net profit after those expenses of 6%. Or about $150K/year in net revenue (for about $2M in initial investment/risk).
  • A jump from $7.25->$15/hour means $264K in increase wage costs, on profits of about $150K…. so they’re now losing $114,000.00 on each store per year. How many new McDonald’s will open with that as their forecast, how many will close because of it?

The store (and chain) must respond, or the average store will go out of business. They must: raise prices, trim staff, automate (or some balance of these), or shut down.

Livable Wage

Livablewage.jpg

Ignoring the stupidity that there's one magic "livable wage" that would be equally fair on both sides of the same city, let alone country, the left tries to sell the gullible that setting a salary minimum will set a salary minimum, but it doesn’t.

Progressives often see the choice as: (a) A livable minimum wage (b) A lower minimum wage.
But that's a fantasy. The real choice is: (a) What the market will bear (b) Unemployment ($0/hour).

The choice isn't pulling people out of poverty or not, it's about what value an opportunity is worth to an employer, before they skip the job, automate, outsource, or just give up.

Minimum wage hasn’t kept up with inflation

There is a popular falsehood among the uninformed and gullible that minimum wage hasn’t kept up with inflation. This is based on the fallacy that it should keep up with inflation (or that minimum wage is a good thing at all). Since many on our left and their media allies seem culturally incapable of checking a fact, this serves a great political purpose at getting them worked up on the injustice of their ignorance. But that doesn’t make it any more true, or worse, a more valid an argument that it should. But the facts are that minimum wage was about $4.00/hr originally (adjusted to 2102 dollars), if it’s over that now, then you know their claim is false.

Removing minimum wage

Quite often, I hear the argument, "I suppose you think minimum wage should be $0". It's not me, it's the NYT, many economists and so on, that think that. The uninformed think that means that people would work for $0/hr. But of course they would not. In many places the least you can pay is $15, in others it's $5. That's not counting that many people can get paid more for not working than working (social programs). This is why when unemployment benefits expire, the number of employed goes up. The point is again, Goldilocks and the three wages, too low, does nothing. Too high hurts jobs. And just right doesn't exist. So if you let the market decide, everything fixes itself, far more than politicians and voters know what the right wage is for everyone, everywhere, for every time.

In the free market, everyone works for what they're willing to work for, you get full employment, then demand exceeds supply of labor, and wages go up. It's self balancing. When you raise the minimum wages, jobs disappear, then supply exceeds demand, and wages and conditions go down to meet the floor you set legislatively. The market bears more than the minimum wage in most cities, which is why minimum wage raises don't matter or hurt/help. If the average wage is already higher, then raising it does nothing for most people. But if you apply that same rate to a poorer area, where the wages are much lower, you don't help people out -- you make it unaffordable to hire.

Politics behind minimum wage

Politicians are professionals, who have large staffs of people to inform them on policies. They either know this stuff below, or they have no smart people on their staff -- thus I think most likely their support of minimum wage is a calculated decision to put politics (and their needs) over other people. All you have to do is follow the money, and who supports it the most, and think, "why?".

The real genius in the campaign to increase the minimum wage is that it provides the left with a platform to once again proclaim solidarity with the downtrodden (funded of course with other peoples' money), and they get to vilify anyone that defends the economy, which they know the right will do. This is a win politically for the left, because to their base, they sound like they care. When the inevitable reduction in entry-level jobs occurs because of minimum wage hikes, the result will be many more citizens (voters) who become dependent on the largess of the government (democrats). As they say, "Before they raised minimum wage, I was living paycheck to paycheck. Now I'm living welfare check to welfare check." Two positive results from one initiative (vilifying the other side, and creating more dependent voters), if you ignore the consequences to people.

Most of all, the Federal Minimum Wage is a way for larger/richer States (blue states) to attack/tax labor in smaller developing states and rural areas (red states) by artificially driving up the rural areas costs of labor to more closely match their own. This is why blue politicians (California, Massachusetts, etc) fight for increases in minimum wage (blue politicians), especially nationally -- where it's none of their business. While the Red states know that it is their lower costs of labor that is attracting jobs and growth away from the red states, and helping their areas to grow. Thus there's no egalitarianism in the min-wage supporters campaigns (at least not the politicians), they're trying to hurt other states/areas, or they'd just raise their own minimum wages and not worry about what other areas or states are doing.

So whenever you hear a Sanders or Warren talking about raising the minimum wage, remember it's not to help poor appalachians or working poor in steel towns, they're out to harm them. Reducing the differential labor costs, and respective costs of living, hurts the red states and helps the blue states. Thus, the minimum wage is a proxy fight to disguise blue politicians harming other states, as "help for the poor". Thus supporting the minimum wage is just a vote to let the most populous and rich states bully and bureaucratize the more agile, competitive and smaller states, all in the name of the greater good.

Conclusion

The universe, math and economics doesn’t care about your situation, it cares about net value to the economy. So you have an ailing Mom, or 19 kids and counting, in the real world your value to the employer is based on your output/productivity: what you do, and how much it costs to do it. If you cost more than the returns, you’re unemployed (and that will make your situation much worse). If you cost more than a worker in China, or a robot that can do half your job, you’re unemployed. It’s nothing personal. If you care about those people, then you want to help them get jobs and stay employed, and raising the costs to hire them does the opposite.

Economics is the science of incentives. Yet the anti-economists that support minimum wage think that if a price is too high (think housing rents), the government can push it down and nothing bad will happen, or if a price is too low (think wages), government can push it up and nothing bad will happened. This defies science of economics and logic, and that people adapt to incentives, not mandates.

Why would they do this (support programs that make the problem worse)? Well, there’s the truly ignorant that don’t know better and have ignored all the research (e.g. they really are that uninformed). But worse is those that know better; if you’re the party that get votes by the people on the bottom, nothing will build your base faster than making sure there’s more people on the bottom… especially if the least educated they think you’re helping (when you’re just making more of them). If democrats fixed the problems with, they’d lose their base — thus there’s incentives for them to only make the problems worse. Thus the science of incentives says that there’s an incentive for democrats (minimum wage supporters) to be liars, and the only thing resisting that is those that oppose the people harming policies of the left.

References

Minimum wage and job growth:

Minorities, Poverty and Minimum Wage

Youth Unemployment and the Minimum Wage

Seattle Washington

California

D.C.

Sanders

Other

Anecdotal evidence

  • Minimum wage increase are not the ONLY factor in the decision for Sports Authority to close all 464 of it's stores, but it's named as a key one, “With the minimum wage going up to $15... [that] money has to come from somewhere.”... And now we discover what the real minimum wage is $0/hour (unemployment). Econ101: when the cost of workers exceeds the benefits/returns they provide, the solution is the unemployment line -- now instead of work experience and a salary, they learn what supporting minimum wage means. And amongst the minimum wage supporters, not a fuck was given for the lives harmed in the making of their political utopia: http://www.pasadenastarnews.com/business/20160427/why-sports-authority-is-throwing-in-the-towel-and-closing-all-of-its-stores

Flawed Studies:

  • CBO says a slight increase in minimum wage, will only have a slight increase in unemployment. But it will magically raise 1M out of poverty, even though there’s only 25K (1/40th that number) in poverty who are full time minimum wage workers. That math/logic escapes me (for each employed person, it’ll help 39 unemployed ones?).
  • Hyper partisan American Progress, wasn’t able to find evidence that minimum wage costs jobs, by citing long discredited studies (where even the authors disagree with them): https://www.americanprogressaction.org/issues/labor/news/2014/02/18/84257/evidence-shows-increasing-the-minimum-wage-is-no-threat-to-employment/
  • Katz and Krueger (1992) - The Effect of the Minimum Wage on the Fast-Food Industry:
    • https://ideas.repec.org/p/nbr/nberwo/3997.htmlhttp://www.nber.org/papers/w3997.pdf
    • Doing a fast food survey (poll) in Texas, they found that during 1990-1991 minimum wage increases, that meal prices increased, but they don’t think it was related to minimum wage increases. And employment increased anyways, though there was salary compression (new workers were paid more, but senior workers got paid less), and they’re not sure if that was related to minimum wage or not. In the end, two surveys and comparing differences in reporting, doesn’t tell us much, since regulations had required compliance, so of course they’re going to change what they say over the phone. It’s not often cited because it’s so bad in methodolody.
  • Card and Kruger : Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania
    • (1994) http://davidcard.berkeley.edu/papers/min-wage-ff-nj.pdf
    • A telephone survey (poll) compared New Jersey and neighboring Pennsylvania (in 1992) after New Jersey raised their minimum wage. Flaws: It looked at a single franchise (Burger King), didn’t look at before/after growth rates, did head count (but not hours worked), didn’t look at total compensation per worker, didn’t try to factor in how many stores were opened/closed or not opened because of the policy, and so on. It just said that burger prices didn’t change and headcount stayed about the same, after a modest increase in minimum wage.
    • (1998) - http://davidcard.berkeley.edu/papers/reanal-ff-nj.pdf
    • http://davidcard.berkeley.edu/papers/njmin-aer.pdfhttp://www.nber.org/papers/w4509The first paper was criticized, so they revisited the same study, using the same flawed methodology (and blind spots), but they used BLS data instead of a survey (broadened the sample, slightly), to try to cover a moldy donut in powdered sugar. They came to the same conclusions (and ignored the same flaws). In that one area, and time, with a modest increase, compared to a declining economy, they saw a negligible impact.
    • Card said in interviews that "It doesn't mean that if we raised the minimum wage to $20 an hour we wouldn't have massive problems… economists who objected to our work were upset by the thought that we were giving free rein to people who wanted to set wages everywhere at any possible level. And that wasn't at all the spirit of what we actually said. In fact, nowhere in the book or in other writing did I ever propose raising the minimum wage”. And,“Realistically, of course, the U.S. is never going to enforce a draconian minimum wage.”
    • Krueger defended the study by saying that a small increase in the minimum wage would not affect employment adversely, but of course a large increase would. http://www.pbs.org/newshour/businessdesk/2013/02/the-man-behind-the-minimum-wag.html
    • So even the most cited studies by the left, has both authors admitting that large increases in minimum wages are a bad idea.

Refutation of Card and Kruger

  • J. Angrist and J. Piscke, Mostly Harmless Econometrics observed that Philadelphia-area fast-food industry was trending downward (relative to New Jersey) before the minimum wage increase. Thus by comparing the two, the continuing downward trend in Philly masked New Jersey’s decline.
  • David Neumark and William Wascher examined written records of the number of hours worked in New Jersey and Pennsylvania restaurants and found that the New Jersey minimum wage increase reduced labor demand by 4 percent (a very significant decline)
  • Saul Hoffman and Diane Trace examined the employment of low-productivity workers in New Jersey and Pennsylvania when the 1996 federal minimum wage increase eliminated the difference between the two states’ minimum wages. The Hoffman-Trace study examined more evidence over broader areas than Krueger-Card, and over more time and concluded: it reduced the employment of low-productivity workers in Pennsylvania.

Dube, Lester and Reich

  • (2010) - Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties: http://www.irle.berkeley.edu/workingpapers/157-07.pdf
  • (2011) - Do Frictions Matter in the Labor Market? Accessions, Separations and Minimum Wage Effects.
  • (2013) - Minimum Wage Shocks, Employment Flows and Labor Market Frictions: http://www.irle.berkeley.edu/workingpapers/149-13.pdf
    • This paper starts by saying "We find that minimum wages have a sizeable negative effect on employment flows but not on stocks”. In english that means that job mobility stagnated, but head counts remained loosely the same.
  • Allegretto, Dube and Reich (2011) - Do Minimum Wages Really Reduce Teen Employment? Accounting for Heterogeneity and Selectivity in State Panel Data
  • Basically, the raw data in all these shows that there was a depression of labor in places that raised minimum wages. So they put the data through a complex statistical model that first pairs, “like counties”, and does corrections based on many factors. The post corrected data shows no significant decline (that they can’t attribute to something else). Criticisms are that over-parameterizing (i.e., adding too many controls to) just stifles the true employment-discouraging effects of minimum-wage increases.