Opposite Day: Tyrone on the minimum wage

by on March 10, 2006 at 7:14 am in Economics | Permalink

As you might expect, the rather surly Tyrone prefers to write under the fold...

"Minimum wage, bah humbug.  It is easy to defend.  Tyrone snorts at you.

First let us clear out some garbage.  The minimum wage should not be $50 an hour, and simply citing this possibility does not serve as an effective reductio.  And yes racist South African labor unions supported minimum wages, but wouldn’t you expect them, vile as they may have been, to support higher wages in any case?

We know the empirical evidence on minimum wages is mixed.  I am familiar with the Card-Krueger smackdowns but at the end of the day you have to work hard to get a big effect on employment.  Most importantly, all of these studies miss the longer-run effects that make a legally binding minimum wage such a good idea.

Don’t obsess over static neoclassical economics, where you start with a firm, a competitive market, and a set of marginal products already in place.  Think dynamic and look at the longer-run.  If you ban jobs beneath some hourly wage, you will end up with more jobs above that wage.  Ex ante, companies can set up their production to mesh with high-wage rather than low-wage jobs.  Surely we should prefer an economy with higher marginal products, higher wages, and higher median income.  Yes this redistributes a bit of wealth from capital but what an efficient way to do so.  And we all know that long-run dynamic gains tend to swamp one-time static losses.

Don’t expect to pick up these effects in any study with a short time horizon.

Furthermore there is more slack in the system than many economic models would indicate.  As a young’un, I worked in a supermarket.  When they raised the legal minimum wage, they raised my wage as well.  I was happy.  No one fired me.

Minimum wages probably lower the net amount of government intervention in an economy.  Lower minimum wages would mean higher welfare payments to make up the difference.  Ever heard of EITC?  In reality, minimum wages and EITC work together to keep the poor at decent standards of living.  More importantly, they keep poor workers in the private sector rather than letting them become wards of the state.  Try living on the minimum wage (much less beneath it), and without the safety net of your parents, if you don’t get my point.

Perhaps you think the minimum wage is an excessively blunt policy instrument, given that many near-minimum jobs are held by upper middle class teenagers.  Fair enough, but this also means that the minimum wage doesn’t put many of those people out of work.  We can go back to focusing on the net effects on the poor.

Tyler, what is really your problem with the minimum wage?  Free market economists love to bash it because they can posture as friends of the poor.  They can pretend that basic economics has great relevance.  They can claim to know something useful, rather than facing the fact that opposition to big government really means opposition to massive income transfers.  Since the American public is not willing to go this route, free market economists have to focus their yapping on the minimum wage and the (actually quite small) benefits of free trade.

Tyler, don’t you agree?  Tyrone signs off."

There he goes again.  As a child, he would never even sit straight at the dinner table.  Readers, if you now wish to refresh yourself, try this, or perhaps even this.  And maybe someone over at CrookedTimber is up for Opposite Day, but on some other topic…?

1 Luis Enrique March 10, 2006 at 7:42 am

this is wonderful

2 Martin March 10, 2006 at 10:22 am

Rich

C’mon – Tyrone is just Tyler writing with a conscience. Too close to home for Alex. A real proponent would have made more than an emotinal case anyway and had data to support the claim that “jobs are not lost.”

3 michael vassar March 10, 2006 at 11:38 am

If the intention is to portray a hypothetical Tyrone of roughly Tyler’s level of ability, this isn’t even close. It’s not a parody, but it’s not a serious attempt.
Rather than a Tyrone who dismissed “static neoclassical economics” I’d like one who attempts to convince a reasonably rational observer with a generally moderate but significant conviction in the utility of neoclassical economics but who also cares about alleviating suffering more than about enabling opportunity and efficiency and who is only 95th percentile good at seeing the big picture rather than 99.9th percentile.

4 DF March 10, 2006 at 11:52 am

Tyrone: Free market economists love to bash it because they can posture as friends of the poor. They can pretend that basic economics has great relevance.

Right on, bro!

Tyrone: They can claim to know something useful, rather than facing the fact that opposition to big government really means opposition to massive income transfers.

Whoa, Tyrone! It sounds like Tyler snuck in here and messed you up. The real Tyrone would say “rather than facing the fact that opposition to big government equals cheerleading for big business.” As you well know, Tyrone, big business is just as big a threat to Americans’ well-being as big government!

Later, dude.

5 ModalHubby March 10, 2006 at 12:54 pm

Interesting idea — perhaps a two-part policy “taxing” capital by enforcing a relatively high minumum wage, but then compensating the businesses to bring them back up to (or slightly above) their pre-min-wage profits could be a good policy. Think of it like a compensated price change for labor. It’s certainly more interesting than most of the min-wage arguments…

If you believe in dynamic scoring, such a compound tax/subsidy policy would be an intertemporal Kaldor-Hicks improvement; the amount earned by the gov’t would swamp the required subsidy to the capital owners.

There is some published stuff in the insurance literature on this type of tax/subsidy policy (cf. Crocker and Snow, SEJ 1985) and a working paper examining a related Pigou tax idea by two other guys.

Of course, in real min-wage debates, you’ll never hear the prospect of an efficiency-enhancing capital-owners subsidy being floated. It’s hard to argue (even on Opposite Day) that there is an ongoing subtext of redistribution from capital owners to wage earners.

6 Huggy March 10, 2006 at 1:10 pm

I agree that it’s a great post. I believe he put forth the arguments the other side would put forth. Not necessarily the best arguments logically but very persuasive politically. I think France is a bad counter example. I have the impression that France has a vast underground economy. I think that always happens when over regulation happens. Prohibitions are great examples.

7 Steve Sailer March 10, 2006 at 2:58 pm

Tyrone is right that low wages make more for more government interventions in the economy, but the way to deal with that problem is not the minimum wage, but to enforce the laws against illegal immigration. Without the vast “reserve army of the unemployed” entering the country each year, the normal workings of supply and demand would drive up wages for unskilled work to levels more acceptable to the American public.

You can have libertarianism in one country or you can have a globalized labor market, but you sure won’t get both. Controlling the borders is the simple solution.

8 Barbar March 10, 2006 at 5:22 pm

Shouldn’t libertarians be advocating for unrestrained immigration, actually? Libertarians aren’t defined by an interest in minimizing unemployment.

Half Sigma, doesn’t a lot of the minimum wage debate depend on whether or not the minimum wage is above the true value of labor?

9 Don March 10, 2006 at 6:08 pm

“Furthermore, Tyrone ignores the issue that the market wage is less than the true value of labor on account of the fact that employers have unequal bargaining power.”

I’m curious about this “fact”. How would one measure this bargaining power, in order to verify this fact?

10 Matthew March 10, 2006 at 6:53 pm

Interesting idea — perhaps a two-part policy “taxing” capital by enforcing a relatively high minumum wage, but then compensating the businesses to bring them back up to (or slightly above) their pre-min-wage profits could be a good policy.

What about the opposite of that idea? Let’s ensure that when governments are handed ridiculously large subsidies, they are then forced to jack up their employees’ wages as well.

Take a look at the poor, migrant workers who cut sugar cane in Florida. “Big Sugar” is fat with subsidies at the state level and the federal level. Sugar cane growers get the benefits of import tariffs (last I read, Canadian sugar cost about half of American sugar, and it was driving candy manufacturers to set up shop north of the border) the benefit of the ability to dump phosphate-laden sludge in public watercourses, not to mention the flood control efforts of the Army Corps of the Engineers. (I’m rattling these off from the top of my head. If I’ve made any errors, or forgotten anything, please say so.)

If minimum wages were tied to subsidies, cane growers would probably have to pay their employees up to $20 an hour, plus overtime.

Seriously, of the two (supposed) evils of subsidies and the minimum wage, which should be attacked first? The one that lines the pockets of connected kleptocrats, or the one that keeps poor people off the street? Let’s worry about the minimum wage after the corporate welfare binge ends.

11 Slocum March 11, 2006 at 8:24 am

“Bureau of Labor Statistics show that nearly half (982,000 out of 2,003,000) of hourly wage workers earning at or below minimum wage are 25 and over.”

But of the over 25’s, how many are either a) pensioners, or b) spouses of higher-earning workers? That is to say, workers who, in general, aren’t working full time and don’t depend exclusively on that income?

My parents used to have many middle-class women working (mostly part-time) at or near near-minimum wage. Why did the women do it? Because it was pleasant, low-stress, respectable, sociable low-paid work (and they liked the employee discounts). Almost all of these women could have earned more if they had sought out ‘real’ full-time jobs, but that wasn’t what they wanted.

If the the minimum wage is raised modestly, the effect will be that employers will have to figure out how to structure their businesses so that each position generates productivity to justify the higher wage. That will likely mean unemployment for some who are simply not capable of doing more difficult and more valuable work.

But it’s also a loss for people who could, *but prefer not to*, make such a tradeoff. Many people enjoy working in small, local book shops, for example. I’d bet that many pensioners and teenagers would be willing to do such work for even less than the current minimum wage if they were allowed to do so. The higher the minimum wage, the less such shops are able leverage the pleasantness of the working conditions against the greater efficiency of the big chain bookstores (And the less the chains are able to compete against online vendors).

For the governement to say, “You must work harder and more productively–or not at all” is a genuine loss of freedom. See, for example:

http://www.coyoteblog.com/coyote_blog/2005/03/case_studies_on.html

12 Alan Brown March 11, 2006 at 3:54 pm

Sorry. Business should NOT be burdened with it.

13 Half Sigma March 11, 2006 at 7:08 pm

GamblingEconomist: “I think it is clear that minimum wages are beneficial to poor workers. Is there anybody who is legally allowed to work in this country, is not severely mentally unstable, is not severely physically disabled, and is unable to find minimum wage employment? Yet, since many people who fit in this category earn exactly the minimum wage, we know that the minimum wage impacts wages favorably and given the prevalence of minimum wage jobs available it does not seem to impact the unemployment rate.”

This is a brilliant observation! If the economy actually worked the way certain anti-minimum wage people claimed, you’d see only a tiny number of people making exactly the minimum wage; either their value would be slightly below the minimum wage and they’d be unable to find work, or their value would be slightly above the minimum wage and they’d be getting paid a wage commensurate with their labor’s value (ha ha).

14 radek March 12, 2006 at 12:34 am

“The basic argument, that by banning very-low-productivity labor, the government encourages automation and capital investment, seems fairly reasonable”

This is a pretty old idea and some union leaders in the 40’s and 50’s while conceding the standard economic arguments against minimum wages/union wages (higher wages price the low skilled out of the market) made precisely this point. Can’t remember exactly who but I think the guy who ran KoL did. In the 60’s econ lit it got half-formalized by Habakkuk, and since has been sometimes known as “the Habakkuk hypothesis”. In somewhat different context it has been revived by Acemoglu and Zilibotti more recently.

15 Peter Jackson March 12, 2006 at 9:17 am

First let us clear out some garbage. The minimum wage should not be $50 an hour, and simply citing this possibility does not serve as an effective reductio.

Yep, once you’ve gotten past those pesky laws of supply and demand, making the rest of the argument is easy =8^]

Rock on Tyrone,

yours/
peter.

16 wkwillis March 13, 2006 at 7:46 am

One of Singapore’s policies was to continuously raise the minimum wage
and force out low wage industries to free up factory space for
higher paid industry. Don’t know how that policy would work here. They
did forbid illegal immigration.

17 Eric H March 13, 2006 at 6:06 pm

Is there *any* government policy X for which someone has not made the argument, “X is good because if we had not-X or less-X, then we would have *more* government intervention in the economy in the form of Y”? (Subject for future post!) We have the mix of policies that we have now because each was advanced along the lines of “this will help us avert or delay what the opposition really wants to do”, up to and including armed insurrection by the oppressed masses. In other words, this argument is extortion. That does not make it any less true, but we shouldn’t credit it with being more profound because it seems minarchist on its face.

Alex is right – it will take a long time to sort through the Tyrone-induced sophistries and half truths.

18 David in NY June 21, 2006 at 2:49 pm

Lots of anecdotal stuff about minimum wage raising unemployment here, but I think Tyrone is right that the evidence for a significant effect is not strong, as shown by the actual studies of the matter (whatever we think anecdotally about Denmark and France, where multiple factors no doubt affect the employment rate, even assuming that they measure unemployment in the way we do).

And it seems to me the point by Half Sigma is quite interesting. Doesn’t the bulge of people just earning the minimum wage suggest that it has the effect of raising the wages of those whose market wage value falls below the minimum to that level?

19 sandra October 9, 2006 at 7:28 am
20 Anonymous October 14, 2008 at 12:53 am

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