Minimum Wage Vicious Cycle

[Xerographica]

The Nobel Prize liberal economist Paul Krugman recently argued that we need more government because people tend to make poor education/career decisions. Shortly after reading Krugman's case for bigger government, I read an article in the LA Times about how some people in the Philippines were lured to America with the false promise of high wages.

Somewhat inspired by this very popular blog entry... A Week of Shorter Rod Drehers... I patched together some relevant snippets from Paul Krugman...

Krugman: The world economy is a system -- a complex web of feedback relationships -- not a simple chain of one-way effects
Krugman: Wages, prices, trade, and investment flows are outcomes, not givens
Krugman: Wages are a market price--determined by supply and demand
Krugman: Money still talks — indeed, thanks in part to the Roberts court, it talks louder than ever
Krugman: Raise minimum wages by a substantial amount
Krugman: The price of labor--unlike that of gasoline, or Manhattan apartments--can be set based on considerations of justice, not supply and demand, without unpleasant side effects
Krugman: Your decision to stay in school or go out and work will shape your lifetime career
Krugman: Now, the fact is that people make decisions like these badly
Krugman: Bad choices in education are the norm where choice is free
Krugman: He and his unwary readers imagine that his conclusions simply emerge from the facts, unaware that they are driven by implicit assumptions that could not survive the light of day

If you'd like the context, just click the links. As you can see... Krugman used to be an opponent of minimum wages... but now he's a proponent.

From my perspective, a minimum wage is a problem because it doesn't accurately communicate the demand for unskilled labor in any given area. This increases the chances that people will make really bad career/education decisions. Here's how I've illustrated this...

And here's another attempt...

My drawing skills aren't that great... but hopefully you should get the idea that, in this drawing, the US has more than enough people pushing brooms (unskilled labor). In economics... "more than enough" means that there's a surplus. Usually when there's a surplus of something the price will accurately communicate this information to the entire world. A low price says "hey, we have more than enough!". This important information helps people make informed decisions. When this important information changes, people's decisions will change accordingly. So in order for the US to have ended up with such a massive surplus of unskilled labor... something must have gone wrong with the price system. And that something is the minimum wage. A minimum wage says, "hey, we don't have enough unskilled labor!".

A minimum wage creates a vicious cycle. When wages falsely signal that the US has a shortage of unskilled labor... this increases the chances that people will make big mistakes. Students are more likely to make the big mistake of dropping out of school and unskilled immigrants are more likely to make the big mistake of risking their lives to move here. The logical consequence of so many people making big mistakes is an increase in poverty... which is then used to justify an increase in the minimum wage.

So what would happen if we eliminated minimum wages? I'm guessing that wages for unskilled labor will decrease. And I'm sure that proponents of a minimum wage would guess the same thing. Right? Because if we eliminated the minimum wage... and wages didn't decrease... then there wouldn't be a need for a minimum wage.

If proponents of a minimum wage want to guess that eliminating the minimum wage would result in a huge decrease in wages... then, assuming that they are correct, this huge decrease would reveal that there is indeed a huge surplus of unskilled labor in the US. This would conclusively confirm the problem with lying to people about the demand for unskilled labor (aka "a minimum wage").

Would chaos ensue if we learned that there actually was a huge surplus of unskilled labor in the US? Well... no. Take China for example. They used to have a huge surplus of cheap labor... but now they don't...

Costs are soaring, starting in the coastal provinces where factories have historically clustered (see map). Increases in land prices, environmental and safety regulations and taxes all play a part. The biggest factor, though, is labour. - The Economist, The end of cheap China

Wages in China really didn't skyrocket because of a minimum wage... they skyrocketed because of the massive demand for cheap labor...

While corporations may look elsewhere for still cheaper labor, there are no more Chinas out there. Other countries that establish themselves as low-wage havens will soon be overwhelmed by the inflow of capital from the United States, Europe, Japan, and now China. They cannot possibly have the same dampening effect on wages in the United States over the next three decades as did China and other developing countries in the last three decades. - Dean Baker, Living in the Short-Run: Comment on Capital in the 21st Century

In case you didn't actually dig through all those Krugman articles that I shared earlier, I'll point out that he vociferously argued against the idea that the massive increase in the global supply of cheap labor had anything to do with wages stagnating in the US. Eventually he acknowledged that perhaps there were some issues with his "implicit assumptions".

Let's review! Here are two possibilities of eliminating the minimum wage here in the US...

1. Wages don't plummet. Then there's really no point in having a minimum wage.
2. Wages do plummet. Then the US "will soon be overwhelmed by the inflow of capital from the United States, Europe, Japan, and now China".

We really don't help anybody by giving people bad directions. If you truly want to help poor people... then start a business. Give poor people a better option (builderism). Especially if you have a strong theory that some existing business is making a stupid mistake. Put your strong theory to the test by starting a business that doesn't make the same stupid mistake. Maybe you want to argue that starting a business is too difficult? Well there you go. You've successfully identified a huge problem. It's a huge problem when it's too difficult to give poor people better options. Please figure out how to make it easier for somebody as intelligent as yourself to start a business. And if you can't figure it out... then please have some respect for anybody who does manage to successfully start and run a business that employs/serves any amount of people.

 

[Zippyjuan]

From my perspective, a minimum wage is a problem because it doesn't accurately communicate the demand for unskilled labor in any given area. This increases the chances that people will make really bad career/education decisions.

Did you make your career decision based on what the minimum wage was? Did you decide not to go to school so you could have a minimum wage job? Do you know of others who have?

(note that about two percent of all workers receive the Federal Minimum wage)

 

[Spikender]

Did you make your career decision based on what the minimum wage was? Did you decide not to go to school so you could have a minimum wage job? Do you know of others who have?

(note that about two percent of all workers receive the Federal Minimum wage)

The unavailability of unskilled jobs in an area might cause someone to seek higher education that doesn't have the will for it. Happens all the time. If the minimum wage helped cause this shortage, then clearly there is an issue.

Also, how many workers receive just barely over the minimum wage? What does your point about the amount of people on minimum wage even mean? What relevancy does it hold?

 

[oyarde]

Did you make your career decision based on what the minimum wage was? Did you decide not to go to school so you could have a minimum wage job? Do you know of others who have?

(note that about two percent of all workers receive the Federal Minimum wage)

And that two percent should be kids living with parents for the most part .

 

[PRB]

Did you make your career decision based on what the minimum wage was? Did you decide not to go to school so you could have a minimum wage job? Do you know of others who have?

(note that about two percent of all workers receive the Federal Minimum wage)

plenty of people made the decision to take loans based on govenrment propaganda that any education is worth the debt.

 

[Zippyjuan]

So if we had lower wages, fewer people would want an education.

 

[erowe1]

Did you make your career decision based on what the minimum wage was? Did you decide not to go to school so you could have a minimum wage job? Do you know of others who have?

(note that about two percent of all workers receive the Federal Minimum wage)

I don't see the connection between your questions and what you quoted and bolded.

Do you dispute what he said?

The biggest effect of the minimum wage isn't just in the number of people who work for that wage, it's in the much larger group of people who aren't working at all because the MW makes it illegal for them to sell their labor at a low enough price for others to want to purchase it.

 

[Zippyjuan]

If just two percent of all jobs pay the Federal Minimum Wage, changing that minimum (unless it was raised significantly) will not have much impact on the total number of jobs available.

 

[PRB]

So if we had lower wages, fewer people would want an education.

Why? Doesn't shit wages motivate getting a degree? Oh wait, are you telling me people are smart enough to know they can't pay back their debt and see through the lies that any education is better than none or all education will lead to higher pay?

 

[PRB]

If just two percent of all jobs pay the Federal Minimum Wage, changing that minimum (unless it was raised significantly) will not have much impact on the total number of jobs available.

you assume raising minimum wage won't affect people who are currently paid more than MW.

Example, if MW is $7 now. And there are people paid $8, $10, $12, $15.

If liberals get their way and magically made MW $15, what do we do to people who are making $8, 10, 12, 15? Keep paying them $15? Does that mean people will jump to work those $7 jobs today because it's "easier" work for the same pay?

What if we paid everybody more, $7 guy gets $15, $15 guy gets $23. How would that NOT affect employment?

 

[angelatc]

Did you make your career decision based on what the minimum wage was? Did you decide not to go to school so you could have a minimum wage job? Do you know of others who have?

(note that about two percent of all workers receive the Federal Minimum wage)

You are perhaps ignoring the unemployed in the equation?

Price ceilings create shortages, and price floors create surpluses. A minimum wage creates a surplus of unskilled labor.
.

 

[Weston White]

I think these theories on wages really only apply in an agrarian society, being that the non-agrarian are afforded no options other than to work for their own competency, regardless of what their level of wages are—realizing only that the lower their wages the longer they must work each day and the more jobs they will beholden to. Of course social justice programs effects the equation of this as well.

These theories do not really consider the modern practice of exporting manufacturing and assembly occupations or telemarketing and Internet tech to low wage competing nations, or the rise of machine automation, only the local point-of-sale service and processing industries.

The notion that Americans are not working because their pay is too low, instead favoring immigration so that they may instead sit at home in protest is baseless.

This is why China is has been increasing its wages, which were extremely low, and in comparison to the United States still is (i.e., $4,755 annual average)—China is forcing its farmer dwelling peasants to become urban factory grunts: China’s Great Uprooting: Moving 250 Million Into Cities

 

[erowe1]

If just two percent of all jobs pay the Federal Minimum Wage, changing that minimum (unless it was raised significantly) will not have much impact on the total number of jobs available.

I don't see how that follows. Even if that 2% were the only people it affected, is that not a lot?

And I still can't tell what your point is.

 

[heavenlyboy34]

I don't see how that follows. Even if that 2% were the only people it affected, is that not a lot?

And I still can't tell what your point is.

I can tell you this much-I'm beginning to question zip's claims of having a degree in economics...

 

[Zippyjuan]

We can look at recent examples. In 2006, the minimum wage was $5.15 an hour. http://money.cnn.com/interactive/economy/minimum-wage-since-1938/
By 2008, that was raised in steps to $6.55 an hour.

In 2006, there were 133 million jobs in the country. https://research.stlouisfed.org/fred2/series/PAYEMS

In 2008, there were 138 million jobs. (But then the effects of the recession hit).

Today there are 141 million jobs and the Federal minimum wage is $7.25.

Did the number of jobs go down after the minimum wage was raised?

1995- 1997, Federal Minimum wage was raised from $4.25 to $5.25. People employed went from 116 million in 1995 to 131 million by 2000 (allowing time for the wage changes to take effect).

1989- 1991, Federal Minimum Wage raised from $3.35 an hour to $4.25 an hour. Employed people went from 107 million to 112 million by 1993.

 

[erowe1]

We can look at recent examples. In 2006, the minimum wage was $5.15 an hour. http://money.cnn.com/interactive/economy/minimum-wage-since-1938/
By 2008, that was raised in steps to $6.55 an hour.

In 2006, there were 133 million jobs in the country. https://research.stlouisfed.org/fred2/series/PAYEMS

In 2008, there were 138 million jobs. (But then the effects of the recession hit).

Today there are 141 million jobs and the Federal minimum wage is $7.25.

Did the number of jobs go down after the minimum wage was raised?

That's hard to tell from your post, since you didn't give numbers that correlate with MW increases. Just from those numbers we can see that with the lower MW, the number of jobs went up by 5 million in 3 years. And after it was raised, that number only went up 3 million in 7 years. So all else being equal, the MW looks like it was harmful for the economy. And conspicuously you say as an aside, as though it has nothing to do with the topic, "(But then the effects of the recession hit)."

The recession isn't a cause. Raising the MW is a cause. Recession is an effect.

 

[Zippyjuan]

The recession isn't a cause. Raising the MW is a cause. Recession is an effect.

Are you claiming that the economic crisis (resulting from the bursting housing bubble and bad lending practices) was actually caused by increasing the minimum wage?

Note that I also updated to provide more data on previous minimum wage increases.

 

[Xerographica]

Are you claiming that the economic crisis (resulting from the bursting housing bubble and bad lending practices) was actually caused by increasing the minimum wage?

If the minimum wage isn't a problem then neither are free-riders...

Let's try and visualize things...

Is this a better market? Gabe (the gay) is paying Alex (the atheist) for a cake. Isaac, who's wondering what to do with his life, is observing this exchange take place. Because neither Alex nor Isaac are omniscient... they can't see how much Gabe values the cake. All they can see is how much he pays for the cake. Only Gabe knows that he values the cake a lot more than he's paying for it.

By sharing the wrong information, Gabe increases the chances that Isaac will do the wrong thing (not supply cakes). Garbage in, Garbage out.

Is this a better market? In this scenario Gabe is paying a lot more than he values the cake. Gabe is lying again. This increases the chances that Issac will do the wrong thing (supply cakes). Garbage in, Garbage out.

X < Y = free-rider problem
X > Y = forced-rider problem

A minimum wage is an example of the forced-rider problem.

Let's think about water. Is Isaac always going to value water equally?

In the Sahara... Isaac is suffering from a severe shortage of water (dehydration). In Niagara... Isaac is suffering from a severe surplus of water (drowning). Therefore, he values water very differently in these two very different circumstances...

Y1 > Y2

Whether it's water, cake, labor, a Netflix show or national defense... what we pay should accurately communicate our valuations. This increases the chances that other people will do the right things. Otherwise, we all end up with more of what we want less and less of what we want more.

Accurate information = treasure in, treasure out
Inaccurate information = garbage in, garbage out

Coincidentally, Alex Tabarrok recently shared some relevant thoughts in his review (Is Capitalism Making Us Stupid?) of Joseph Heath's new book Enlightenment 2.0...

Advertising may sometimes trick us into buying products that don’t serve our interests, but the more we are tricked the greater the incentive to become informed. In the market, we can act on information to improve our purchasing decisions. In politics, it doesn’t pay to be informed because as individuals we have nearly zero power to improve collective decisions. In the market, information is power. In politics, information is impotent.

Also...

Heath’s conservatism makes him unwilling to suggest radical ideas. But big problems often need radical solutions. Voting, for example, reduces the cost of ignorance and irrationality. Raise the cost and people become more informed and rational. When pollsters ask Democrats and Republicans factual questions such as did inflation fall during Reagan’s presidency or were weapons of mass destruction found in Iraq, they answer in a highly partisan manner. But partisan bias greatly diminishes when voters are told that they will be paid if they answer correctly. Betting is a more reliable guarantor of objectivity than voting. Or, as I once wrote, “A bet is a tax on bullshit.”

 

[erowe1]

Are you claiming that the economic crisis (resulting from the bursting housing bubble and bad lending practices) was actually caused by increasing the minimum wage?

Of course raising the minimum wage had a negative effect on the economy and had to be a factor in causing and worsening the recession.

And what is it you're trying to claim? You point out that it's actually true that the raising of the minimum wage did precede a major recession, and somehow that counts as evidence that raising the minimum wage is not bad for the economy because you point to some other cause for the recession?

So where is your evidence that raising the minimum wage is not bad for the economy?

 

[PRB]

I don't see how that follows. Even if that 2% were the only people it affected, is that not a lot?

And I still can't tell what your point is.

his point is that there's only 2% directly affect, if that were true, I'd say it's not a lot, not at all. But the reality is, it's not just the people paid only min wage that are affected, it's people who are MW now, and people paid between $1-5 if not $1-10 more that will also be affected.

If somebody makes MW+$5 today, and MW is raised by $5, are we going to pay him the same? Or a few bucks more?