Supply & Demand ...
... not just a good idea, it's the law.
Minimum wage laws are aggravating unemployment.
Duh.
Minimum wage laws are aggravating unemployment.
Young people typically find it hard to get established in the labour market because of their lack of experience, which makes them especially vulnerable in downturns. But even before the recession Britain’s youngsters had been faring worse than their counterparts elsewhere. Between 1998 and 2005, the jobless rate for 16-24-year-olds in Britain was lower than the average for the OECD, a club of mainly rich countries, but since then it has been higher. The unemployment gap between that age group and 25-54-year-olds widened from 2004 to 2007 in Britain while staying broadly the same across the OECD.Now, why would that be:
The timing of the deterioration points to two possible explanations. A commonly held view is that British youngsters have been displaced by the influx of youthful migrants from eastern Europe since 2004. But this is the “lump-of-labour” fallacy—that a job for a Polish cleaner means one fewer for a native worker. Research by Sara Lemos, an economist at Leicester University, and Jonathan Portes of the Department for Work and Pensions last year found that the wave of migration had not increased youth unemployment.
A more likely explanation, though still disputed, is that the minimum wage was pushed up too much a few years ago. When it was introduced in April 1999, the main rate was set at £3.60 ($5.80) an hour, a fairly modest amount. There was a lower floor of £3 for 18-21-year-olds, because young workers’ chances in the labour market were recognised to be especially sensitive to pay.
Since then, however, both rates have risen by 59% and outstripped average earnings, which have gone up by 45% in the past ten years. The increases were particularly big in the four years to 2006, adding to the suspicion that the minimum wage was implicated in the rising rate of youth unemployment over that period.
Duh.
posted by Hey Skipper at 5:58 AM
42 Comments:
Why doesn't anybody ever worry that high executive salaries crowd out middle level positions?
It is the law, after all.
Nobody worries about that because the correlation, if any, is in the opposite direction (i.e. a rising tide lifts all boats or the trickle down effect).
What correlation?
In the past 2 decades,CEO pay has increased by an order of magnitude (and the related wealth transfer to hedge fund operators more than doubles that), yet profits have not increased at all.
There must have been crowding out, no?
Besides, we have the example of dozens of takeovers in which highly leveraged plutocrats recouped their arguably excessive compensation by closing profitable divisions and dismissing workers.
Isn't that crowding out?
Harry Eagar wrote: "There must have been crowding out, no?
No, because in the last two decades, GDP also grew substantially. You're claiming that in two decades, the sum of all profits by all corporations has not increased at all?
Let's keep in mind that part of the rise in CEO compensation is due to government regulation, specifically disclosure laws. CEO pay used to be shrowded, including to other CEOs and Boards of Directors. Now it's all open so any CEO can see what everyone else is getting. This creates a strong upward pressure due to status competition.
One reason people don't worry about it is because you can always start your own business which, according to Mr. Eagar, is risk free.
Minimum wage laws don't cause unemployment through "crowding out." Minimum wage laws cause unemployment by mandating a wage that is in excess of the value received from the worker or of the cost of some alternative. Since that is an unsustainable state of affairs, the worker loses his job, being replaced by a more skilled worker, by automation, or by no one.
That has no implications for CEO compensation, which is relatively modest. US CEOs have surprisingly low wages, particularly when considered as a percentage of sales or profits. The huge numbers reported are usually the result of a misreporting of the value of options.
If someone wants to suggest a couple of specific CEOs of public companies, I'd be glad to analyze their compensation over at the Secret Blog and we can see if it still seems outrageous when we're done.
'excess of the value received'
A point already made at Restating the Obvious. It would be possible to impose a minimum wage that would crowd out, but it has not been done in the US.
Skipper thinks it has been done in the UK.
There is unquestionably crowding out due to imposition of health care, either by law or by competition for labor.
I thought you guys were always arguing that offshoring is good because it shifts low return labor off on the poor countries, allowing us to employ labor efficiently.
You cannot have it both ways, but I agree with you -- tasks that do not return a value of more than $6.25 probably should be done.
Careful how you respond to that one. I have something up my sleeve.
I have a few CEOs to suggest to David: Duke Power, Bank of America, Four Seasons Hotels.
It has happened in the United States, mostly to black teenagers. The history of automation at McDonalds is basically the history of raising the minimum wage.
I don't know what point you're making on out-sourcing. Out-sourcing is good when it allows companies to get something done for less. It also has a positive externality, in that it raises wages and living standards in poor countries. It also has some implications for theories of the firm, which has to do with why firms exist and why certain functions are kept inside the firm and other functions are kept outside the firm. The fundamental issue is, when do you want to use bureaucracy and authority for resource allocation and when do you want to use the market.
I'll take a look at your examples, but they seem pretty easy to justify.
As I pointed out at Restating the Obvious, we ran an experiment on crowding out here in Hawaii 3 years ago. Mickey D wages were 150% of minimum and no Mickey Ds closed.
The San Francisco Federal Reserve study found no crowding out either.
However, if you want an example of actual minimum wage crowding out, I'll give you one -- StarKist in American Samoa.
Yep, and there's a reason that all the special pricing ads say, "hot applicable in Alaska and Hawaii."
If you want to link to the SF Fed study, I'd be glad to look at it, but it doesn't say what you suggest. The effect of minimum wages on black teenage unemployment aren't at all controversial.
Here, for example, is a 3004 Fed study of 17 OECD nations, confirming that minimum wage laws cause youth unemployment, particularly where there is no special sub-miminum wagw for youth, where there is heavy unionization, or where there's a relatively free labor market.
That would be 2003. The 3004 report would be devastating to your argument, but I don't dare change the timeline.
It would be possible to impose a minimum wage that would crowd out, but it has not been done in the US.
Any wage imposed by fiat in excess of what the employment market would provide ensures a lower demand for labor.
I am surprised The Economist did not cite France, which started down this same road a good dozen years ago.
One reason previous studies have not shown much of an effect is that they were conducted in the midst of a robust labor market.
Not so now.
In any event, the thesis that increasing the minimum wage will not increase unemployment is indefensible.
I don't like poverty. I have an idea, let's make the minimum wage $30/hour.
Why not?
I thought you guys were always arguing that off shoring is good ...
Besides the freedom and moral arguments, and those that David has already made, don't forget -- it doesn't make any sense to talk about wages without also mentioning prices.
It's always amusing when people who understand perfectly the effect of, say, a tariff on sugar claim that a tariff on wages will have a completely different result.
What tariff on sugar?
We use import quotas to manipulate the sugar supply. That would be more akin to what France did, too.
The link to the FRBSF report is in the column, which is linked in the post here
This sugar tariff.
So,I've read the SF Fed report, which doesn't support your argument at all. It finds that the Hawaii health insurance mandate (which we'll assume is like a minimum wage) caused employers to shift from full-time employees to uncovered part-time employyes -- which is exactly like employers giving a minimum wage boost to some employees and firing others.
'Most countries have the low-tier tariff waived'
You are misreading the RB report. It does not say there is less work offered. It says there are fewer full-week jobs offered.
More people work several short-week jobs rather than one full-week jobs.
And, what it does not say, there's a big off-the-books labor market.
How can there be a big off the books labor market? Are not the workers better for all these regulations? Why avoid them? You may say, "it's the employers, the workers have no choice" but clearly they have a choice as to whether to work or not. That they work demonstrates what the workers think makes them better off.
P.S. It's hard to see the value in arguing that a law isn't a problem because so many people evade enforcement.
The point, Harry, is that the health insurance mandate has caused employers to shift to temporary workers who work less than 20 hours per week, because those workers are not covered by the plan.
Thus, people might work several part-time jobs but don't get health insurance.
In other words, raising the price of labor causes employers to substitute away from employees, a fact so obvious that it's hard to believe that you're arguing with it.
As is the case with the sugar tariffs, which obviously are used to keep cheap sugar out of the country, for the benefit of all those Hawaiian cane fields. The result, over time, has been candy companies moving production to Canada, which has a free sugar market because as government imposes price increases, people work to avoid them.
Canada doesn't have a free sugar market. It lets in extravagantly subsidized European sugar.
Europeans subsidize sugar, in my opinion, because as little boys the men who ran Europe didn't have sugar, and they don't want that to happen again. Sugar raises extremely emotional reactions, more even than gasoline, among consumers.
Sugar certainly offers the greatest example of any commodity for a study of rent-seeking, but no scope at all for a study of free markets. There has never been a free market in sugar.
Nevertheless, sugar is cheap and abundant.
It is, in fact, the cheapest form of calories.
Sugar is the principal reason I think the free-market fanatics must be missing something. It contradicts just about everything they say.
(Not to mention the free v. slave sugar problem, which markets make worse, not better.)
David, the employers are not substituting away from employees. The total amount of work offered is the same. They are looking for loopholes. Surprise!
In Hawaii (less so elsewhere if a similar law were enacted, perhaps), they are offered a pool of young, careless workers who don't care much about health insurance but do care about short hours and flexible days and so are willing to accommodate the employers.
Hawaii is no doubt a wildly distorted labor market, but it is not nearly so simple as you make it. The RB bank study explicitly says the state minimum wage did not depress work offered.
As for McDonald's and the black kids, it is hard to imagine a free market that isn't color blind, so some other factor must be at work.
We know what it is, too. The offshoring of jobs for adults that don't require a lot of education distorted the entry market for inexperienced workers.
Lousy educational attainments didn't help, either.
Fast food pay differences regionally are really the most obvious example that minimum wages, as set in the US, do not depress jobs, since the fast food operators are sometimes forced to pay well above minimum wage and still fail to go out of business.
The RB bank study explicitly says the state minimum wage did not depress work offered.
No, it doesn't. It explicitly says:
We did not find reliable statistical evidence for corresponding reductions in wages or overall employment probabilities. This may indicate that the shift to low-hour employment was the mandate's primary labor market effect, although it may simply be that any adverse effects on wages and employment are too small to detect using our data and methodology.
This what we call "proving the null," trying to argue that the failure to see a difference means that there is no difference. You can't prove the null, however. Just because there's no significant difference in your data doesn't mean that there is no difference. Given their methods here, I don't think that their failure to find a difference means much, but statistically it means that you can't draw any conclusions.
"Canada doesn't have a free sugar market. It lets in extravagantly subsidized European sugar."
That implies that there isn't a free market anywhere. Either there are local distortions or free trade lets external distortions.
"Nevertheless, sugar is cheap and abundant."
So cheap that soft drink manufacturers all switched away to save money. So cheap that candy makers fled.
So, "Sugar certainly offers [...] no scope at all for a study of free markets. There has never been a free market in sugar." *BUT* "Sugar is the principal reason I think the free-market fanatics must be missing something. It contradicts just about everything they say." How can it do that if it ofers no scope for a study of free markets?
Above I noted, without explanation I am surprised The Economist did not cite France, which started down this same road a good dozen years ago.
France did significantly elevate its minimum wage (IIRC) in the early nineties.
Subsequently, The Economist noticed that unemployment among low-skill workers sky-rocketed, and attributed it directly to the minimum wage increase.
It appears I read their magazine more carefully than they do.
Why that is pertinent here is that the experiment has already been run. Employers will avoid employing low-skill workers to the extent it is expensive to do so
The impact of small increases can get explained away, or lost entirely, in the background noise.
Harry, care to hazard a guess at what would happen should the minimum wage double?
The resolution of the study was fine enough to detect the employer reaction to mandatory health insurance.
Skipper, that's a strange hypothetical. No one is proposing to double the minimum wage. We know, however, that the minimum could rise at least 50% before any changes would be noticed.
Anybody care to retrodict what happens when you raise CEO pay 1000%?
According to you guys, as I understand it, nothing.
At most 3% of world sugar production trades in unregulated ways. At current, allegedly outrageously high US prices, the cost of the sugar in a 75-cent candy bar is about 3 to 5 cents. Going to Canada might knock a penny off.
If you're selling billions of candy bars, that's a lot of pennies, but it is not so obvious that the net cost is less.
There hasn't been a sugar spike in 38 years. Relative to almost any other commodity, the price of sugar has been going down, not up.
Considering the emotional reaction to the last spike -- which was one of the first business stories I covered -- that's something.
If you want to consider market effects on a cheap commodity, you might do better to consider steel or scrap paper. Scrap paper is especially interesting.
* * *
The argument for intervention in labor markets is not that intervention prevents offering $1.00 jobs to likely 13-year-olds (particularly since intervention didn't stop that), but that you want to prevent employers from offering only $1.00 jobs to 38-year-old qualified mechanics.
Just as there is no free market in sugar, there was no free market in labor, either. You have to be wilfully blind to doubt it.
My first hourly job was picking up garbage in the drive-through lot of a Shoney's Big Boy restaurant. It paid 75 cents, plus a 75-cent meal credit per shift.
At the time Shoney's sold a Big Boy sandwich for 50 cents and a milkshake for 25 cents, or a bowl of beef stew for 75 cents.
No bennies, other than unlimited iced tea.
Per unit effort or per hour, I probably made more than 75 cents mowing lawns, but I couldn't get as many lawns as I wanted, and that was seasonal.
Since the garbage did have to be picked up, I don't think Alex Schoenbaum was being ruthlessly exploited by a socialist government to be required to offer me as much as 75 cents.
Fact is, he had only 3 employees on minimum wage per restaurant. Everybody else worked for tips or got more.
Skipper, that's a strange hypothetical. No one is proposing to double the minimum wage. We know, however, that the minimum could rise at least 50% before any changes would be noticed.
You are right, no one is proposing to double the minimum wage. Why? Because the consequences would be so profound as to stop even the most foolish from proposing it.
It beggars belief to presume there is some change in the min wage below which it is free, and above which it isn't. There is no such thing as a free increase.
Increasing the min wage by even a nickel means one or more of less profit, higher prices, or lower employment.
France raised its min wage by 50%, and got mass youth unemployment in return.
The argument for intervention in labor markets is ... that you want to prevent employers from offering only $1.00 jobs to 38-year-old qualified mechanics.
Just as there is no free market in sugar, there was no free market in labor, either.
How about doing a survey of local auto repair establishments. Find out how much they pay their mechanics. I'll bet the average is many multiples of the minimum wage, despite the complete absence of any intervention in the mechanic labor market.
Now, having done that, set up your own auto repair business, and try hiring mechanics at half the going rate.
I guarantee you won't have to worry about your employee health care plan.
++++
Anybody care to retrodict what happens when you raise CEO pay 1000%?
I don't know. I think many companies overpay for CEO talent, and I certainly don't get golden parachute packages. Other than providing disgruntlement fodder though, I don't think companies have enough CEOs to materially affect the bottom line.
Otherwise, some company would figure out how to pay less.
It is kind of like the argument that women are under paid. If that was the case, then companies would be hiring women like crazy.
++++
re: sugar. The Everglades have been nearly destroyed due to our sugar policies.
Amazon, too. And the bluestem prairies have been exterminated (along with the bison) by our propensity to eat food. Your point?
Many multiples? Helicopter mechanics where I live make just about 210% of local minimum wage. That's one multiple. I was startled to find out what the rate for helo mechanics was.
'Increasing the min wage by even a nickel means one or more of less profit, higher prices, or lower employment.'
Less profit, of itself, does not scare me. Offshoring jobs to generate more profit, without some counterbalancing effort to replace those jobs, does.
Maximal profit turns out not to be such a good idea, as we have seen repeatedly lately.
Sugar price supports subsidized farming in the Everglades:
In 1981, the U.S. Congress passed the Farm Bill establishing
a full system of sugar price supports. Under the bill, the
government loans money to the sugar mills, accepting sugar in the
case of default. It also set an artificial selling price for
sugar called the "market stabilization price." In 1982, Congress
established quotas and tariff levels on sugar to keep domestic
prices high in order to guarantee the industry against losses.
When prices dropped below the artificial MSP in 1985 the mills
forfeited the sugar in order to keep the loan money. To avoid
any more expensive forfeitures the government now severely
restricts imports to keep sugar prices artificially high.
The current import quota system allows entry at the rate of
0.625 cents per pound, except sugar from the Caribbean Basin
Initiative countries and the Generalized System of Preferences
countries, that enter duty free. Any non-quota sugar entering
the U.S. for consumption is subject to a duty of 16 cents per
pound. However, with the passage of the new GATT agreement it
will be raised to 17 cents per pound in 1995 and then pushed dow
to 14.45 cents per pound over 6 years. Because of the sugar
program Americans are force to pay higher prices on virtually
every product that contains sugar.
Many multiples?
210% is two multiples. Car mechanics get 4-8 times minimum wage.
In either event, raising the minimum wage won't price skilled workers out of a job, just the unskilled.
Less profit, of itself, does not scare me.
It should. Profit is what allows expansion and reinvestment. It is also what additional workers are hired from.
Lower profit enough, and employment will disappear.
On Maui, helicopter mechanics get $16/hr, which is slightly over twice the local minimum wage.
Auto mechanics get about the same, more if they work for the plantation and are unionized.
So that's not many multiples. It about a multiple.
There is nothing that says it is good for the economy or society or for a business if labor is driven down to the lowest share of the business's income consistent with not starving. (Ricardo's Iron Law).
In an economy like ours, a labor force without disposable income is a drag. This was the insight of Rex Tugwell. You cannot sell a Ford to a man who cannot buy food.
On Maui, helicopter mechanics get $16/hr, which is slightly over twice the local minimum wage. (Any place I have lived, car mechanics, none unionized, get at least $30/hour.)
Fine. My point remains, raising the minimum wage won't price skilled workers out of a job, just the unskilled.
Further, your assertion that a min wage will prevent employers from offering $1/hr jobs to qualified mechanics is still empty. Sure, employers could offer that deal, but no one would take it. You are a business writer -- hypothesize how many mechanics you would be able to hire for 150% of the min wage.
There is nothing that says it is good for the economy or society or for a business if labor is driven down to the lowest share of the business's income consistent with not starving.
Labor is just like any other commodity. Competing businesses can no more drive down the cost of labor than they can drive up the cost of their products.
If they could, your helo mechanics would be getting $8/hr.
However, the government can drive up the cost of labor. Which means businesses will buy less of it.
France proved the point in the 90s, and England is proving it now.
It isn't the skilled that are getting hurt, it is the least skilled, and the least employable.
' Sure, employers could offer that deal, but no one would take it.'
I was referring to the South before antidiscrimination laws (and, although I was not thinking so much of this) of women everywhere.
Notoriously, Ovitz said that 'You give everything to the top 2 guys.'
In the real world, companies find that it perfection along that line is hard to attain, but they have made some progress.
The great labor question in America, since we went global after World War I, has been to maintain the standard of living differential with the rest of the world. For a while, both parties tried to maintain it, but the Republicans got destroyed by tariffs, so since 1930 they have either acquiesced in or (since Reagan) promoted driving US wages down to coolie levels.
American buyers of sugar are warning the government that we're going to have a sugar shortage shortly unless the tariffs are dropped.
Yes, but they're lying.
Since US prices are higher than spot, all that world free market sugar will flow here and there will be no shortage.
Unless, of course, the idea that there is a lot of unregulated sugar around was a lie all the time.
Don't you believe markets work?
I realize that you think that's what they are saying, because they posed their statements artfully, but what they actually are saying is that they will have to pay more, because unusually the world price will be over the US supported price, which they dislike to do.
The shortages will be experienced elsewhere. It's weather, not tariffs.
"Since US prices are higher than spot, all that world free market sugar will flow here and there will be no shortage."
Isn't that precisely because of tariffs? If that price difference is less than the tariff, the sugar won't flow.
Harry: There are two levels of tariffs. Mexican sugar can come in without tariffs in unlimited supplies. Other countries get a quota of low tariff sugar. Then, a higher tariff, meant to be so high as to block importation (as is commonly the case with tariffs) kicks in.
What the food companies are saying is that there is not enough sugar at either the lower tariff or (in Mexico) tariff free to satisfy demand because Mexico will sell into the high world market. The high tariff (which is necessarily added to the high world spot price) will still prevent importing more sugar.
To put some numbers on it, the current world price of sugar is about 22 cents/pound. The low tariff is .6 cents/pound. The high tariff is about 16 cents/pound. What the food companies are saying is that they can't get enough no-tariff sugar plus low tariff sugar to fill domestic demand, and they can't pay 38 cents/pound and stay competitive.
If, as the SUG thinks, the price goes to 40, your problem is solved.
If, as the producers say, there will not be a shortage, your problem is solved.
Only if the price lies between 22 and 37 is there a problem. And maybe not even then.
The great labor question in America, since we went global after World War I, has been to maintain the standard of living differential with the rest of the world.
This is a question begging question. Why does the US have to maintain a standard of living differential with the rest of the world?
Republicans got destroyed by tariffs, so since 1930 they have either acquiesced in or (since Reagan) promoted driving US wages down to coolie levels.
That is pure cant.
It is impossible to "drive" wages down. Just as it is impossible, as nearly two billion workers have moved from under the ossified hand of socialism, to keep wages up in the face of that huge increase in labor supply* over the last 20 years.
Absent huge tariffs and import quotas, there are no alternatives to supply and demand. Of course, those tariffs and quotas would only serve to prove that point.
It is also worth keeping in mind here that the flip side of wages is prices.
++++
* The CRA was the virus that infected the mortgage industry. Chinas export led growth strategy provided the fuel. Demand and supply.
++++
I have an idea. Let's put sugar trade restrictions in the same ditch the rest of our economy would end up in if it was run that way.
Why is it impossible to drive wages down?
It's an asymmetrical market. When we negotiated our latest contract, our wages were driven down 10%.
We acquiesced, because we were threatened with layoffs. Since we don't see the books, we don't know whether it was bluff or not. We blinked.
My remark is not cant. The Reagan Republicans were frank, among friends, in admitting that offshoring was intended to drive US wage rates down to Chinese levels. They didn't say it on the campaign trail, but they said it.
Harry, I was/am a Reaganite and I spoke both privately and publicly to many other Reaganites and never did I hear anything said that even remotely touched on driving U.S. wages down to Chinese levels. The notion is preposterous.
If your union leaders weren't convinced that it was justified, why did they accept a 10% salary cut for their members. Why not do what they usually do, call a strike and demand higher wages and more benefits?
Harry:
You just fundamentally don't get how tariffs work. They are a tax, paid to the government, by importers. If the world price goes to 40 cents per pound, US users will have to pay 56 cents, 40 to buy on the world market and 16 for the tariff.
Your wage paranoia is nuts, too, but for different reasons.
I am surprised that you discount entrepreneurialism. Sugar is fungible.
Importers will simply import sugar into Mexico and re-export it tariff-free to the US.
How do I know this? Because the same thing was done with crude oil back in the '60s. Tankers unloaded at Vera Cruz, and trucks moved the oil to Brownsville to avoid import quotas.
All legal.
Knowing stuff like this is the penance I pay for following business as actually practiced for so long. It would be a lot easier to swallow market theories if I didn't know this stuff.
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