Thanks to Micha Gisser for sending the following comments:
Some Comments on Minimum Wage laws
Minimum wage laws at the federal level have a long history. In 1938 Congress legislated a statutory minimum wage rate as part of the Fair Labor Standards Act. Initially, the federal minimum wage rate was established at $0.25 an hour. Since then, to adjust for the inflation erosion, it was raised many times. For example, the minimum wage was $3.35 in 1981 and $4.25 in 1991, and it has been $5.15 since 1997. The U.S. Labor Department estimated that this increase in the minimum wage rate between 1981 and 1991 led to a loss of 100,000 jobs, mostly women and teenagers in two-or three-earner families. Since most skilled workers earn wages above the minimum wage, they are not directly affected by it. Thus, most of the effects of the minimum wage fall upon unskilled workers. Early on, Jacob Mincer (1) demonstrated that the imposition of a minimum wage rate reduced the employment of all teenagers, of males 20 to 24 years of age, of females in general and the employment of males 65 years and over. He also demonstrated that the minimum wage law discouraged many workers from remaining in the labor force.
Most of the economic empirical research supports the theory that clearly shows that imposing statutory minimum wage rates results in unemployment among women, minorities and teenagers. However, more recent studies by David Card and Alan Krueger (2), claimed that New Jersey data did not support reduction in employment after the 1990 and 1991 federal minimum-wage increases. In New Jersey the increase was minimal, from $3.35 to $4.25 an hour, in contrast to the increase in Santa Fe. More importantly, studies by Donald Deere, Kevin M. Murphy, and Finis Welch (3), David Neumark and William Wascher (4), and other researchers demonstrated that the research methods used by Card and Krueger are flawed.
The major negative impact of minimum wage laws is unemployment among unskilled workers—mainly teenagers, women, and minorities—leading to heavy welfare losses to these groups. But there are other economic disruptions that are less visible. An example is the reduction of fringe benefits to mitigate the higher wages that must be paid to unskilled labor. Also, minimum wage laws suffer from poor targeting, e.g. tipped employees and employees from one-or two-family earners. On that, a detailed analysis is provided by Finis Welch. (5).
The ceteris paribus issue is relevant for statistical studies. For example, employment in Santa Fe may have increased recently because employment in New Mexico probably increased recently, and Santa Fe is an integral part of New Mexico’s economy.
Raising the federal minimum wage may cause cost-push inflation, followed by a demand push inflation if the Fed attempts to ease the money supply.
(1) Jacob Mincer, “Unemployment Effects of Minimum Wages,” Journal of Political Economy, vol. 84, August 1976. Pp. S87-s104.
(2) David Card and Alan Krueger, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania,” American Economic Review, September, 1994.
(3) Donald Deere, Kevin M. Murphy and Finis Welch, “Employment and the 1990-1991 Minimum Wage Hike,” American Economic Review, Papers and Proceedings, May 1995.
(4) David Neumark and William Wascher, “The Effect of New Jersey’s Minimum Wage increase on Fast-Food Employment: A Reevaluation Using Payroll Records,” American Economic Review, Papers and Proceedings, May 1995.
(5) Finis Welch, “Minimum Wage Issues and Evidence.” American Enterprise Institute for Public Policy Research, Washington, D.C., 1978.
If there is a principle which unifies the last three hundred years of economic research it is this: When two adults voluntarily consent to trade, each gain. To take a concrete example, if you hire me to cut your lawn for $5 an hour and I agree to that wage, we are both better off for having made the agreement. I must value the $5 more than I dislike the work, otherwise I wouldn’t have agreed to it. Conversely, you must value a trimmed lawn more than the $5 otherwise you wouldn’t have parted with your money. I may prefer that I make $15 an hour and you may prefer to pay me zero. But since neither of us is permitted by law to coerce the other, each of us will have to compromise. And when we do, we both stand to gain. Sometimes I think that this principle might be so simple it evades people. That seems to be the only explanation for perennial attempts to raise the minimum wage.
A minimum wage law–sometimes called a “living wage” or a “fair wage”–tells mutually consenting adults that though they have found a price which is agreeable to both, they cannot trade at that price. For those of us concerned about civil liberty, this is quite distressing. It is a blatant violation of our most basic (and ancient) right of voluntarily association with our fellows.
To the economist interested in social justice, a minimum wage law is more than distressing. It is a travesty. This is because minimum wage laws end up hurting the very people they were designed to help.
To understand how, we must begin with an important corollary to the “gains from trade” axiom. This corollary is the principle that market prices and wages have a tendency to naturally settle at those values which maximize the number of mutually beneficial trades. That is, the market wage rate will tend to maximize employment given the willingness of people to hire employees and the willingness of employees to work.
To be sure, this “equilibration” process does not work perfectly. It works best, however, when left alone. When minimum wage laws interfere in the process by raising wages above the equilibrium rate, employers and employees who would otherwise come to an agreement fail to do so. That means people who would otherwise be employed cannot find work.
Think of how employers make decisions. Even the most benevolent employer on the planet needs to make a profit. That means she can’t spend more money on her employees than they make for her business. There are low skilled workers (usually young workers with little experience or training) who are willing to work for low wages to get a start in life. If a law forces a potential employer to pay her employees more than they can make her, the employer will not take a loss for the sake of humanity. Instead, she will hire fewer workers. She may be able to automate some of her work (substitute capital for labor in the parlance of the economist). She can also move her business somewhere else where minimum wage laws are not so far above equilibrium. If none of those options are available, she may even go out of business. (It is worth noting that large employers tend to have greater resources and can do without the employees more easily than smaller businesses.)
Just as employers and employees stand to gain from trade, both stand to lose when minimum wage laws obstruct it. The sad thing is that employees are the worst hit because they lose everything.
It would be nice if we could wave a wand and raise everybody’s wages without decreasing employment. But the fact is that ours is still a free society (thankfully) and employers aren’t obliged to hire any number of workers at any price. Mutual gains would be possible for all of us if more well-intentioned politicians knew this.
I wonder why so many politicians and voters actually think that a social security “trust fund” actually exists. Are they that dumb? Or, are they deliberately misleading? It has to be one or the other.
Here is the best piece of writing — clear and short — I have seen explaining how social security affects overall spending and taxing.
A few years back my brother passed along what I thought a delightfully fun fact: Jimmy Buffet is Warren Buffet’s nephew. Since then, I’ve been passing this little nugget along to all who would listen (and probably a few who didn’t want to but did anyway).
Unfortunately, yesterday’s Wall Street Journal (subscription required) made liars out of both us—not to mention all the people we told (okay, so none of them cared enough to keep the fun fact going, but if they had, they would be liars too). It turns out that Jimmy and Warren might be related…but only distantly. Warren’s sister is an amateur genealogist and contacted Jimmy and hundreds of other Buffets years ago in hopes of piecing together her family tree. Jimmy responded (after a year) and actually became good friends with Warren’s sister. Soon Jimmy and Warren were good friends. Warren refers to the singer as “Cousin Jimmy.” Jimmy calls the financier “Uncle Warren.”
All of this has led me to question another fun fact that I’ve been passing around. Is New Mexico’s George Buffet (the man behind the candy cane) really related to Warren?
Here is what I think a fascinating article. It is long, but so worth it. It is about “The Constitution in Exile” movement.
For one thing, it’s fascinating to hear the author describe standard Lockean arguments upon which our republic was founded. He writes with a tone which indicates that he thinks these are crazy new ideas:
“As Epstein sees it, all individuals have certain inherent rights and liberties, including ”economic” liberties, like the right to property and, more crucially, the right to part with it only voluntarily. These rights are violated any time an individual is deprived of his property without compensation — when it is stolen, for example, but also when it is subjected to governmental regulation that reduces its value or when a government fails to provide greater security in exchange for the property it seizes.”
Or try this one:
“[Epstein] insists that if the government wants to reduce the value of an individual’s property — with zoning restrictions, for example — it has to compensate him for the lost value.”
I also like the movement’s occasional skepticism of states-rights, which I have shared for a long time:
“One of Greve’s goals at the American Enterprise Institute is to convince more mainstream conservatives that traditional federalism — which is skeptical of federal, but not state, power — is only half right. In his view, states can threaten economic liberty just as significantly as the federal government.”
Finally, the article talks about a few Supreme Court Nominee possibilities that would be awesome. For example, Judge Janice Rogers Brown, who has referred disparagingly to ”the dichotomy that eventually develops where economic liberty — property — is put on a different level than political liberties.”
Thanks to Alex Tabarrok for the pointer.
According to Council On State Taxation (COST) New Mexico ranks 46th lowest (see Table 4, page 8) out of the 51 (states and DC) for effective tax rate on business in FY04. Since the GRT rate has gone up substantially over the past year, our business friendliness is likely to erode even further. So much for being open for business in NM.