Terrible, horrible, no good, very bad ideas about the minimum wage

Both at Crooked Timber, and in my own beloved comment threads, the suggestion has been made that the minimum wage is really swell because it gets rid of low-productivity jobs that only pay the minimum wage.

This sounds lovely--if you are the kind of person who has the skills to get one of the higher productivity jobs. Not so great if you're a high-school dropout with no appreciable credentials. In effect what you're talking about is a massive transfer from the weakest members of society.

Let's say raising the minimum wage makes them unemployable, while creating new, higher skilled jobs making and maintaining the equipment that replaces them. Good for skilled workers. Possibly good for society in some sense, though raising unemployment is rarely a net boon. Definitely awful for the lowest skilled workers, who now can't get a legal job.

Helping the moderately paid worker by forcing the least skilled out of the legal job market is a very, very bad policy. Whether or not you think that the government ought to be in the business of transferring wealth from one segment of society to another, I hope we can all agree that at least the transfers oughtn't to go upwards.

Comments

I hope we can all agree that at least the transfers oughtn't to go upwards.

No, we can't. At least, I agree, but the Social Security system has too many fans of transferring wealth from poor young people to rich old people to say that we "all" agree.

Posted by Rob Lyman | May 12, 2008 4:49 PM

I hope we can all agree that at least the transfers oughtn't to go upwards.

I'm not for transfers period. They rarely accomplish what they intend to.

But I'll play devil's advocate here; since the issue has been brought up relative to immigration. If someone doesn't contribute a significant fraction of the government services that they consume, isn't it in the best interests of a particular state or country to try and get them to leave, just as how a person with sufficient resources can leverage those to become a citizen?

And more importantly, if the minimum wage is really the primary reason that they can't get work, why isn't there incentive for some such people to emmigrate to places where they can work for less than the minimum wage and enjoy a lower cost of living?

I've known people who worked for minimum wage, and were still mobile enough to go from one place to another. Unless we're talking about mentally handicapped folks or those reliant on local support networks I'm not sure I see the reason. There should be some folks to whom that doesn't apply.

Well, let the mud fly.

Posted by Ryan W. | May 12, 2008 5:04 PM

It seems like I'm in bizarro world.

I admit to not having read the comments in the other threads or even the Crooked Timber piece, but haven't you (and I guess the Crooked Timber guys as well) just made the other side's argument when discussing free trade?

I mean, free trade certainly at times displaces low-skilled workers for the benefit of those higher up on the skill ladder. And you seem to be ok with that as you would argue (I think rightly) that the benefits to society over the long run (and even to the lower-skilled though possibly not equally) outweigh the displacement of the specific low-skilled workers.

But now, you claim that Crooked Timber's argument is awful because it advocates a policy that benefits the higher-skilled at the expense of the less-skilled.

I guess then it's just the government distortion of markets you don't like (and I'd probably agree), but I would think that you would at least have to explain why the high-skill/low-skill tradeoff is ok in one context but not the other.

Cause otherwise it seems like there is an inconsistency here.

Posted by zidane09 | May 12, 2008 5:07 PM

There is evidence that unemployment is one of things that decreases people's happiness the most. Masses of poor, stupid, unhappy people should not be a goal. See the Paris suburbs...

Posted by GU | May 12, 2008 5:07 PM

That's only true if you ignore the workers who emigrate . . .

Posted by Megan McArdle | May 12, 2008 5:18 PM

In fact, reading the post again, if you substitute "free trade" for "minimum wage" in the first two paragraphs, it seems to sound like any number of protectionist commentators I've read.

In fact, why don't I do it:

"....the suggestion has been made that [free trade] is really swell because it gets rid of low-productivity jobs that only pay the minimum wage.

...

Let's say [engaging in free trade] makes them unemployable, while creating new, higher skilled jobs making and maintaining the equipment that replaces them. Good for skilled workers. Possibly good for society in some sense, though raising unemployment is rarely a net boon. Definitely awful for the lowest skilled workers, who now can't get a legal job."

Again, not saying that I disagree, just confused on the reasoning. Or am I missing something?

Posted by zidane09 | May 12, 2008 5:28 PM

Goodness, as Rob indicates, opposing transfers upwards is probably among the most damaging activities that a member of Congress could engage in, career-wise.

Posted by Will Allen | May 12, 2008 5:31 PM

No, we can't. At least, I agree, but the Social Security system has too many fans of transferring wealth from poor young people to rich old people to say that we "all" agree.

Not to mention poor black men to relatively wealthy Asian women.

Posted by secret asian man | May 12, 2008 5:37 PM

Again, not saying that I disagree, just confused on the reasoning. Or am I missing something?

Yes, you're missing the fact that there are a LOT of low-skilled jobs that fundamentally cannot be replaced by trade/outsourcing. Shall I provide a short list?

Bus-boy, gardener, house-cleaner, house-painter, dog-walker, janitor ...

And all of the above pay much better in wealthy, global-trading countries than in poor countries. Which is why millions of Mexicans come to the U.S. perform such jobs (the wages for low-wage, undocumented jobs in the U.S. are much better than what's available at home).

Posted by Slocum | May 12, 2008 5:38 PM

Nice post. One additional thing worth mentioning is that the main skill that a lot of beginning workers need is the ability to show up for work just about every day and to get through the day without cursing at the boss or the customers. Take away the minimum-wage jobs, and the main training camp for learning those skills goes with it.

I work with kids who, in some cases, have dropped out of school. The reason employers like high-school grads isn't because of what kids learn in school--which is mostly garbage, these days--it's because finishing school shows something about your ability to play the game. If the low-wage jobs go, there won't be any other way to show that except maybe the army. But a lot of people who finish school can't make it in the army these days.

Posted by Alan Gunn | May 12, 2008 5:39 PM

Both at Crooked Timber, and in my own beloved comment threads, the suggestion has been made that the minimum wage is really swell because it gets rid of low-productivity jobs that only pay the minimum wage.

I think that what those commentators have in mind is business investment such that a low-skilled, low-productivity worker will be transformed into a high-productivity worker without learning any skills merely because he or she will be standing in front of an awesomely productive machine that requires little skill to operate.

But the worker will become massively more 'productive' by virtue of pushing a big yellow button occasionally. Of course, the productivity gains derived from the machinery, not the yellow-button pusher and often enough, the machine inventors figure out how to do without most or all of the low-skill operators. And even if the operator isn't completely eliminated, the reward of this productivity boost go mostly to the company that makes the awesome machines, not the button pusher.

Posted by Slocum | May 12, 2008 5:48 PM

Slocum,

Look, I agree with your last paragraph completely and can show you my rabid pro-free-trade card if you'd like. But I'm not sure about your first.

I mean say in a hundred years advances in robot technology displace the jobs of those you say are irreplacable. If I were a betting man, I'd bet you'd be against withholding those advances to protect those jobs -- and you'd be right. But then, you can't, as Megan has, rest your argument against the Crooked Timber folks solely on the complaint of it causing a benefit to the high-skilled at the expense of the low-skilled.

And you can't tell me that the effects of free trade and the minimum wage on low-skill labor aren't at least sometimes similar to that of the minimum wage(i.e., they result in low-skilled workers being priced out of the market with the associated benefits going to the higher-skilled).

Again, I dig the free trade, but I just don't think a free-trader can be against (and even seem to be appalled by) the argument the Crooked Timber guys are making re: minimum wage solely because of the resulting low-skill/high-skill tradeoff, since they are willing to tolerate it in other instances.

Posted by zidane09 | May 12, 2008 5:54 PM

Slocum: Yes, you're missing the fact that there are a LOT of low-skilled jobs that fundamentally cannot be replaced by trade/outsourcing. Shall I provide a short list?
Bus-boy, gardener, house-cleaner, house-painter, dog-walker, janitor ...

Totally false.

Consider the use of expensive technology such as electric random-orbit floor waxers, dishwashers, riding mowers, gas-powered edging tools, etc in America. The average landscaper has access to a literal truckload of labor-saving devices and electronic communication tools, not to mention the truck itself.

Now ask yourself, why don't they use labor-saving devices to nearly the same extent in India?

You can't replace a landscaper with a machine, but at the right price point, you can replace two landscapers with one landscaper and one machine.

Posted by secret asian man | May 12, 2008 6:11 PM

"I mean, free trade certainly at times displaces low-skilled workers for the benefit of those higher up on the skill ladder. And you seem to be ok with that... But now, you claim that Crooked Timber's argument is awful because it advocates a policy that benefits the higher-skilled at the expense of the less-skilled.
zidane09, your point is an intersting one. One crucial difference is that free trade enhances efficiency, while a minimum wage law creates inefficiencies."-zidane09

zidane09, your point is an interesting one. One crucial difference is that free trade enhances efficiency, while a minimum wage law creates inefficiencies.

Thus, while both free trade and the minimum wage create winners and losers, with free trade the gains for the winners are greater than the losses to the losers. This means that, in principle, the winners could compensate the losers and everyone could be made better off. That just isn't true with the minimum wage. The gains to the winners from the minimum wage are unlikely to offset the losses to the losers

This is closely related to the idea of Pareto Optimality, which is the probably the most important criterion in evaluating the effects of economic policies on welfare.

Posted by rwe | May 12, 2008 6:13 PM

I just want to add that, while it's true that low-skilled workers in the US tend to be hurt by free trade with Mexico, for example, low-skill Mexican workers benefit from free trade with the US. This follows from the Stolper-Samuelson Theorem.

So, globally, it isn't at all clear that free trade resdistributes wealth from poor to rich. As the Stopler-Samuelson Theorem implies, the poorest workers around the world are likely to be among the greatest beneficiaries of freer trade.

Posted by rwe | May 12, 2008 6:30 PM

I think one of the points a lot of the commenters (commentators?) are missing is that employers, because of the minimum wage, will seek to employ someone worth what they have to pay them. What this means is that it's the high school seniors and college graduates who are getting these jobs, rather than immigrants or low skilled laborers.

As far as the immigration argument goes, Ryan W. says "If someone doesn't contribute a significant fraction of the government services that they consume, isn't it in the best interests of a particular state or country to try and get them to leave, just as how a person with sufficient resources can leverage those to become a citizen?"
1. The minimum wage encourages the migration of unskilled labor to the country with a high minimum wage. It increases supply of labor, but it doesn't increase the available positions, and so increases competition for those positions. The employers then pick the cream of the crop, often leaving the lowest skilled laborers out of a job, or forced to turn to illegal employment. Illegal immigrants will come to this country in the 'hope' of getting a job, because they have an informational disadvantage of not knowing that there aren't any legal jobs that they have the skills to get. This increases illegal immigration, and illegal unemployment -- a black market, clearest indicator of an inefficient market.
2. Illegal immigrants actually pay more to government services than they receive. [Source: http://www.msnbc.msn.com/id/24054024/ and plenty of others] This is due to tax withholding, and other factors.

The free trade argument is actually the same one as the minimum wage argument. The majority of those who oppose free trade argue that the US, Capitalists, etc exploit cheap labor in third world countries. The minimum wage is supposedly to stop people from exploiting cheap labor in the US.
Zidane09 - What you're proposing is exactly what Megan McArdle is talking about: Why the minimum wage is bad. McArdle's sarcastic tone causes me to smirk, but it shouldn't be misread.

Posted by Felix Sargent | May 12, 2008 9:41 PM

Yes, you're missing the fact that there are a LOT of low-skilled jobs that fundamentally cannot be replaced by trade/outsourcing. Shall I provide a short list? Bus-boy, gardener, house-cleaner, house-painter, dog-walker, janitor ...

Most of these jobs are also not replaceable by advanced equipment. This suggests that there is an irreplaceable reservoir of unskilled jobs that can't be replaced by machines and that, if the gains from replacing low-skilled workers with machinery are properly distributed, will create new service-industry employment for those low-skilled workers displaced by technological investment.

In general, employers have a structural advantage in bargaining with workers, especially low-skilled workers: the worker usually needs that job more than the employer needs that worker. If you allow employers to exploit this advantage unrestrained, you will end up at an equilibrium where low-skilled workers are paid only as much the opportunity cost to the employer of finding another low-skilled worker for that job. If you set a limit to how low employers can drive wages, you will end up at a higher equilibrium, perhaps at one where low-skilled workers actually earn a living wage.

It may be hard, for middle-class people in the US, to remember how this works. It's helpful to look at how it works in the industrializing economies of the third world. Minimum wages in third world countries, where they exist, make the difference in many factories between immiseration and a living wage.

Posted by brooksfoe | May 12, 2008 9:47 PM

brooksfoe makes some excellent points. When viewed from the perspective of the worker a minimum wage makes a lot of sense. It allows them a more livable wage, and higher standard of living.
The problem occurs when an employer is employing 7 people at minimum wage when he could be paying 10 people at free market wage. What brooksfoe isn't seeing are all the jobs that are lost due to the minimum wage. Those three other people will now be earning nothing, and may likely resort to illegal employment - often with a standard of living far below what is considered a 'living wage.'

Posted by Felix Sargent | May 12, 2008 10:31 PM

This suggests that there is an irreplaceable reservoir of unskilled jobs that can't be replaced by machines and that, if the gains from replacing low-skilled workers with machinery are properly distributed, will create new service-industry employment for those low-skilled workers displaced by technological investment.

I've done some work in AI, and I'm an intelligent robot pessimist. I don't believe we're likely to see 'table busing robots' in our lifetimes. Nor, if they could be produced, would they necessarily be cheaper than the human alternative.

In general, employers have a structural advantage in bargaining with workers, especially low-skilled workers: the worker usually needs that job more than the employer needs that worker.

I don't believe this is true. It happens that I have relative who employs a number of young, low-skilled, low-paid workers. Is it easier for her to find another employee or her employees to find new jobs? Experience suggests it's the latter. For one thing, over the years, many employees have capriciously walked off the job with little or no notice -- whereas she does not capriciously dismiss employees. And trying to find and train a new employee who will show up reliably, get along with other employees, treat customers well, actually work instead of goof off, and not give out freebies to their friends--and also stick around for a length of time ... well, it's difficult. Much more difficult than for he employees to find another comparable job.

It may be hard, for middle-class people in the US, to remember how this works. It's helpful to look at how it works in the industrializing economies of the third world. Minimum wages in third world countries, where they exist, make the difference in many factories between immiseration and a living wage.

I don't believe that either. Wealth cannot be created by fiat. If people cannot produce enough productivity to match the minimum wage, then the jobs won't be there. The result will be more misery in the form of unemployment. But it will be of the 'unseen' variety -- people who are miserable because they cannot find jobs at an inflated minimum wage.

What raises the wages in poor countries is economic growth not wage controls -- wages in the dynamic parts of China have been rising rapidly for some time (and not because of increases in the minimum wage).

Posted by Slocum | May 12, 2008 10:50 PM

"Wealth cannot be created by fiat. If people cannot produce enough productivity to match the minimum wage, then the jobs won't be there."-Slocum

Slocum has it right. Productivity determines living standards over time. The great success stories in development economics in recent decades have mostly been in East Asia; but wages have risen in East Asia because of rising labor productivity, not because of wage legislation.

"Minimum wages in third world countries, where they exist, make the difference in many factories between immiseration and a living wage."-brooksfoe

I wonder what Brooksfoe would say to this report form the IMF, which explains how labor market regulations--including minimum wage laws--have led to massive unemployment in South Africa. The official unemployment rate there is now 23%, though the true rate is probably much higher.

Posted by rwe | May 12, 2008 11:31 PM

Fiat (see Slocum above). The Demeocrats are the fiat party. The minimum wage is an archaeological example and of course to do without it would be to ban some kind of sacred ancestor idea worship inherent in the party. OTOH, the Germans have kind of gotten by with it haven't they? Other examples of 'fiat' solutions in the party are 'getting into direct negotiation' as a solution to the nuclear potential of Iran. I loved Senator McCain's comment on this, 'There are all kind of ways to communicate. You can use Blackberry...' Heck, booksfoe (that handle belies his attitude of, 'I've got all the answers. You haven't seen p.21 have you' but all the same tells; perhaps The Book foe is more apt) and I can hardly negotiate our way into commenting on the same blogpost. 'Fiat this!' with regard to 'negotiating' with Iran to give another example of fiat.

Posted by Michael | May 12, 2008 11:56 PM

If people cannot produce enough productivity to match the minimum wage, then the jobs won't be there.

When the jobs are there, the reason why some factories pay higher wages and others pay lower wages has to do with employer attitudes and character. In Vietnam, good employers like Nike and Timberland have long-term relationships with factories that pay well above the national minimum wage. Their profit margins are high enough to keep them happy employers in Vietnam. Factories owned by Taiwanese and Korean owners who compete for short-term individual orders tend to race each other to the bottom on prices, driving workers' wages down and hours up, and leading to abusive workfloor treatment by supervisors. Where the workforce comes from distant villages, and is housed in company-controlled dormitories, bosses can let wages deteriorate against inflation, demand unpaid overtime, or decline to give expected holiday bonuses without fear that workers will leave.

This is why Vietnamese workers have demanded and received periodic increases in the national minimum wage. It sets a floor beneath which abusive employer treatment cannot go.

There may be countries with unrealistically high minimum wages. That's not what I've seen. I've seen countries in which, as the work pours in, cutthroat competition between unscrupulous factory managers pushes down the share of revenue allotted to the weakest link in the production chain -- the worker.

Posted by brooksfoe | May 13, 2008 2:57 AM

If people cannot produce enough productivity to match the minimum wage, then the jobs won't be there.

That is true. However, where people do "produce enough productivity" to match the minimum wage, nothing guarantees that their employers will actually pay them the minimum wage. Nothing, except the minimum wage law.

Posted by brooksfoe | May 13, 2008 3:07 AM

Re: Definitely awful for the lowest skilled workers, who now can't get a legal job.

Is it really the case that anyone who is not severely disabled or severely addicted cannot get a job? I mean, cannot get a job ever, not just during a bad spell in the economy? I rather doubt that. There are day labor places that will take any able-bodied person who is not drunk and is willing to work for the minimum wage.

Posted by JonF | May 13, 2008 7:07 AM

Brooksfoe, you've still got the same hidden cost problem: at the lower wages, would there have been more jobs available? If so, the minimum wage laws benefit people with factory jobs at the expense of people who have even worse jobs. The people with the jobs are visible, so it looks like we're doing a good thing, but if we could actually see all the jobs that didn't get created, it might not look so hot.

Posted by Megan McArdle | May 13, 2008 7:17 AM

That is true. However, where people do "produce enough productivity" to match the minimum wage, nothing guarantees that their employers will actually pay them the minimum wage. Nothing, except the minimum wage law.

This is obviously false. The minimum wage law no more guarantees the payment of a wage matching a worker's productivity than the market, as the existence of under-the-table employment demonstrates. Without a minimum wage law, the illegality of slavery "guarantees" a minimum wage, to the extent that workers are free to take their services to an employer paying higher wages.

The minimum wage doesn't increase wages in the aggregate. It increases them for some workers, while reducing them (via an increase in unemployment) to zero for others.

Posted by Mercury | May 13, 2008 9:19 AM

Mercury,
Where is this place where employers aren't hiring enough workers because of the minimum wage?

Most places that pay minimum wage don't have a budget for salaries, they have a set amount of work that needs to be done. They will pay whatever it takes to get it done, as long as it doesn't go over the amount of profit they get from the work.

If you have strawberries that have to be picked, you are going to pay people the lowest amount you can. If the price of strawberries doubles, you aren't going to double the wages to your employees. If the price of wages doubles, you are going to pay it (unless strawberries don't pay well).

Sure, there are some cases where employers are barely breaking even and can't afford a minimum wage hike, but those cases are few and far between.

Posted by DR | May 13, 2008 9:55 AM

Minor point, Megan, but I thought you took the line that the minimum wage primarily goes to people like teenagers, rather than the "weakest." Not that teenagers always have it amazing, but they're more likely to be working the job for spare scratch, rather than trying to support a family.

Posted by Justin | May 13, 2008 11:16 AM

Yes, you're missing the fact that there are a LOT of low-skilled jobs that fundamentally cannot be replaced by trade/outsourcing. Shall I provide a short list?

Bus-boy, gardener, house-cleaner, house-painter, dog-walker, janitor

How has nobody noticed the obvious thing this list has in common? These jobs tend to become paid-in-cash, under the table jobs, not subject to any labor laws, including the minimum wage. Perhaps bus-boy at a chain restaurant owned by a large national company, and janitor as a similarly large company, are standard payroll jobs with benefits and such. But small businesses service jobs, and certainly gardener, house-cleaner, and house-painter, are likely paid in cash at whatever rate the two parties agree on.

Probably the absence of proper paperwork and benefits and taxes shrinks the marginal cost of that worker, so they might even end up being paid more than minimum wage, but it has nothing to do with the minimum wage law, and expanding gray-market jobs is probably not a good thing when considering national policies to benefit society.

Posted by Geoff | May 13, 2008 11:33 AM

... the suggestion has been made that the minimum wage is really swell because it gets rid of low-productivity jobs that only pay the minimum wage.

Speaking as a person who formerly employed a steady stream of minimum wage workers, this is one of the dimmest suggestions ever -- especially if you want to help the poor.

The minimum wage is a training wage, a trial wage, for people who haven't worked before. People who get it and do a good job get bumped up in pay quickly, because they are worth more. People who show they aren't worth even that much get bumped back into the unemployed, because if you aren't worth even that much you are pretty much unemployable.

As an employer, the amazing thing to me was how many people simply don't know how to work, even at minimum-wage level job. They don't show up when their work hours start ... they blare their radio or music producer of choice over customers and other workers ... they disappear mid-work for hours at a time, etc.

I once had one rent out a commercial space he was "watching" to a TV-show production crew to film an episode -- entirely without authorization of the building owner -- and pocket 80% of the money they paid himself, remitting 20% to the building owner. The owner showed up and there was a film crew shooting in his buidling. WTF???

The minimum wage "watchman" said "I'm supposed to watch the space and I am, and I got you a few bucks too, you should thank me, so I keep most of it, I earned it!" He was entirely honest -- he just had no clue about what it means to be an "employee", how one is not supposed to pocket money for renting out another person's property, etc.

A lot of people on their first jobs don't know how to work. Nobody's born with an instinct to regularly work business hours starting around age 18. They have to learn.

The lower their starting wage is, the more leeway and slack they get from the employer during their learning process. The higher the wage, the more intolerant the boss will have to be.

This guy above, the watchman, had an entreprenuerial bent and was smart enough and wanted to do well. Once we explained a few things to him, and they sank in, he did do well. We kept him on for years paying him a heck of a lot more than he started at, and eventually he left to go to better things.

But if he'd been making $20 an hour I'd have fired his butt then and there, and his resume would say: "One job, fired as a watchman for graft", and what would his next job have been then?

So everybody who argues about short-term "transfers" and equilibrium effects, "higher pay for some is worth unemploying a few others" and stuff like that is missing the point, those effects are trivial.

The seriousl effect is that if you eliminate low-pay, training-level, first jobs for people who need to learn how to work, you'll increase the number who never learn how to become employable at better jobs, and youth unemployment will go up seriously over the long run, with "youths" getting older and older into middle age with no offsetting benefit. There are ample studies that confirm my anecdotal experience in this regard, for anyone who wants to look them up.

Posted by Jim Glass | May 13, 2008 5:21 PM

Most places that pay minimum wage don't have a budget for salaries, they have a set amount of work that needs to be done. They will pay whatever it takes to get it done, as long as it doesn't go over the amount of profit they get from the work.

No. There is not a "set amount of work that needs to be done," and there certainly is not a set amount of work that needs to be done by employees.

The employer can decide that a particular job isn't worth the higher price and not do it at all. The employer can mechanize the job. The employer can do the job himself rather than paying someone to do it. The employer can shift the work from employee to customer.

Posted by David Nieporent | May 14, 2008 3:32 AM