Sunday, April 24, 2016

Minimum Wage - Good and Bad

I was writing a comment to Bayou Renaissance Man: Yes, this is the unacceptable face of capitalism

It's one of my regular daily stops, highly recommended.  This post concerns the issue of Minimum Wage - and mostly references this article by Fred  

So what happened was, as usual, I got long winded, and pedantic, and well - Me.  So I decided to post it here rather than clutter up Peter's comment section with my lengthy response. 

Speaking as an economist (well sort of - I only have a BA in Econ which is the next best thing to useless).

Economics makes a lot of assumptions - it has to, without those simplifying assumptions we're lost.  We've learned to deal with how regulation affects the free market to some extent. There are a lot of assumptions about the free market that are, well...not quite accurate in real life. Often people who are advocates of Free Market Capitalism (of which I am one).  Don't really think though what those assumptions are and what they mean. 

I've studied the effects of minimum wage quite a bit.  In general, it's possible to pick a minimum wage which is supportable by the general economy. What that minimum does is force business owners into meeting the price of the labor market at large.  If you've got the only jobs in a small town, without minimum wage, you get to take advantage of people who have no mobility. With perfect mobility, the workers can simply pick up and move to a place that's paying the market wage.  But we don't have perfect mobility, we have in many cases captive labor markets.  Less so today than in the years before anyone ever considered the notion of a minimum wage.  But, still, it's an issue, although not a large one.  

Another assumption is near perfect information.  The assumption that an individual will "magically" figure out what the market is paying for the labor of which they are capable.  That doesn't happen either, although I can't decide if it's because may people lie about how much they make, or because everyone knows what the minimum wage is. Or, is it that people hate talking about it. Still - without that minimum, how would an unskilled person know how much was fair?  There's the assumption that if you accept the deal then you think it's fair - which is also not completely accurate. If you need to eat, and this is the only job in town, then you either take it or starve - unless you and everyone else happens to know that you can walk to the next town and do better.   If you don't know that, then you have a problem.   

There are a lot of assumptions.  The unskilled labor market may fit a few of them; and can probably deal with a few more, but certainly not all of them. Even with the help of the internet and it’s not quite ubiquitous ubiquity and its perfectly imperfect information.  

So, a minimum wage solves some issues avoided by a number of free market assumptions. It does this by establishing the labor market price via regulation - no it's not the most efficient method in a perfect world but we don't live in a perfect world.   But, if you do the work to figure out what the labor market can bear - the going rates for labor and you set the minimum wage to that amount (And for God's sake, not at the federal level) give or take a little bit, then it has minimal effect on the efficient allocation of resources.   Hardly ideal, but in a world that his far from ideal, it's maybe the most compassionate way to solve the problem. 

Where things go wrong is when Politicians get involved and "Decide" what the market price should be.  They're not doing the research to determine what it should be, they're just Feeling It -or more likely feeling what it will do for the re-election campaign.    That's when we get stupid ideas like $15 an hour in places that can't support it.   Maybe San Francisco can support it (although anecdotal information indicates that it can’t) Settle really can't - $12 maybe... Perhaps Manhattan can - we'll see. Can Fresno?  Or Bakersfield?   Or Danube, NY with its population of 1039, and a median household income of $31,815?   I'm betting - NO.  

Then there is the question of weather a minimum wage job is supposed to be a "Living Wage".  I would argue that it's not.   If it is, then there are NO entry level jobs for the completely unskilled and inexperienced - To support a "living minimum wage" we raise prices on everything - a lot - and all of a sudden your "Living Wage" isn't - again.  It's complicated - seriously complicated; people hate complicated - but it's what we've got and simple solutions are often worse than doing nothing (not always but often).  

So, I don't really have a problem with a minimum wage that is a reasonable attempt at nailing the fair market value of unskilled labor - it's more than a high-school kid at his first ever job might be worth, but not enough for a person to feed a family - and yeah you might need roommates to make it livable.  Therein lies the incentive to move beyond the minimum wage - to move up, to get out of poverty.   We can probably legislate everyone out of poverty - but in the process we'll legislate a larger number of people into "damn near" poverty.    How will that help? 

I don't like blaming everything on Capitalism, that's too easy.  I also don't like the typical Capitalist response of a Free Market assures Fairness - it doesn't - and it's too easy.   More government is pretty much the WRONG answer to any question - it just replaces Capitalism with Cronyism and that is MUCH worse.   

So is it Fair? No. Why?  Fair is a stupid useless word that's why. There is no "Fair".  Capitalists - if you want less government - be as compassionate as you can afford to be.  And workers - unless you're looking forward to a life of a dollar over the poverty line - stop asking the government to solve all your problems. 

And if all of the #NEVERWHOEVER people stick to their guns and don't vote for that Asshat (which ever one that might be) then we'll get someone who will push for and get a Federal $15 minimum wage - then we're screwed, well and truly screwed.


  1. Thanks for posting you addy over at BRM.

    I appreciated your take on this gnarly issue. It is a tangled mess. As late as the 80's, folks were arguing against increasing the minimum wage. They knew that it would hurt those it's supposed to help. Like the 500 who lost out on a minimum wage at UC Berkley.

    This explanation was good, way better than BRM's respost IMHO. You're on my list of read-every-day now. Thanks!

  2. Raising the minimum wage paid is easy, allow people to work without penalizing them for doing so and stop requiring licenses to do or sell things.

    1. Yes removing a lot of the regulatory burden and taxes would be a much better way to approach the problem. But for many people it seems counter intuitive. How can lowering taxes increase tax revenue? How can it increase the pay of employees? I can't decide if humans have two completely different types of brains - I can explain the theory, I can show examples, I can point to historical cases where it works; but they just don't get it. It's maddening.

      Remember most license requirements came about for one of two reasons. 1 - unionization, although not necessarily through forming a union - medical licenses fall in to this category - the licensing was established to stifle competition and raise prices (because you couldn't make a living as doctor - how weird does that seem?)

      The other is someone got cheated - (well usually lot's of someone ones) - I'm fairly sure the contractors license is one of this type.

      Both cases are good examples of the government stepping in to "fix" a problem and creating several new ones with their solution.

      Maybe a nice negative reinforcement - every time you hear someone say - there ought to be a law - smack them upside the head.