The Minimum Wage and Moral Hazards Posted by: Jon Henke
on Tuesday, May 13, 2008
I agree with Megan McArdle's point about the minimum wage; it is bad policy, because it is very inefficient, poorly targeted, and places the burden for social welfare in the labor market on the people most likely to hire low-skill workers. On the other hand, any "unemployment effect [due to] US-sized changes in the minimum wage is too small to be detected amidst statistical noise." [More good points here on the impact of elasticity over the short and long term]
[T]he 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.
There is also a cross-elasticity moral hazard to consider here. If jobs for low- and un-skilled workers suddenly begin paying appreciably more, then low- and un-skilled workers will find those jobs more enticing relative to their alternatives. What is a primary alternative to entry-level jobs for low- and un-skilled workers? Education.
So, a legislated increase in the minimum wage makes low- and un-skilled workers more likely to drop out of school and forgo educational opportunities. More efficient, direct social welfare programs would not necessarily require that kind of an either/or choice.
Even the most efficient conceivable social welfare program possible is not going to lift *everyone* to a higher standard of living, something that shallow thinkers on the left never seem to consider. Some people are not capable of anything more and some people, while capable, don’t want anything more.
"What is a primary alternative to entry-level jobs for low- and un-skilled workers? Education. "
Education or crime. I would rather have people working in entry-level positions then sitting around getting in trouble. Where do the majority of foot soldiers in jihad or other violent groups (gangs) come from? Young people sitting around with nothing better to do.
In our country, people who want to can further their education if they wish but there are a number of young people who simply can’t sit around in a classroom any longer then they already have at age 18 and listen to things they are not interested in. They need jobs also. Hopefully, after a few years of struggling they will decide to further their education but maybe not.
At age 15 I had enough of school. I was becoming a problem the teachers could not handle physically or mentally. I wasn’t a bad kid I simply could not sit there any longer and was physically grown enough they couldn’t make me. Time to goto work! At entry level positions I learned mechanic, carpentry, welding, heavy machine operation and a number of other skills which made me a commodity that was in demand. Sitting in a classroom listening to someone lecture who I had no respect for would not have given me that ability.
(tho to be fair, I could probably structure a sentence better if I had stayed in but lost the other skills)
"...it is bad policy, because it is very inefficient, poorly targeted, and places the burden for social welfare in the labor market on the people most likely to hire low-skill workers..."
It is "bad policy" because it forcibly invalidates individuals’ judgments over their own private affairs, Henke.
Not that a principle has ever fixed your attention on these matters.
I did not suggest that was all of the reasons that it is bad policy, Billy. You think it’s pointless to discuss any point past the coercion premise, but I chose to address another aspect of the policy.
>> If jobs for low- and un-skilled workers suddenly >> begin paying appreciably more, then low- and un-skilled >> workers will find those jobs more enticing relative to >> their alternatives.
Consider this hypothetical situation. Say that a $7.00/hr job instantly becomes a $10.00/hr job as a result of minimum wage legislation. It goes without saying that a low-skilled worker will become "enticed".
However, say that this low-skilled worker is only capable of adding a marginal value of $8.00/hr to the company’s production stream. This means that the company would make money by hiring the individual at $7.00/hr, but would lose money hiring him at $10.00/hr. So, this particular worker will not get the job. Or, if he does get it, he will not stay in it very long because the cost to keep him as an employee is greater than his marginal contribution to the production stream. (Of course, I’m simplifying things here by neglecting other, non-wage costs.)
I guess the point I’m making is that being "enticed" to pursue a higher-wage job is not sufficient to put the low-skilled worker in that job for the long term. Higher wage rates might very well make his job opportunities narrower by setting a price for his services higher than the actual dollar value of his services.
So, this particular worker will not get the job. Or, if he does get it, he will not stay in it very long because the cost to keep him as an employee is greater than his marginal contribution to the production stream.
Or, companies raise their prices and pass the cost along to consumers, making everything more expensive, and reducing the buying power of peoples salaries. Why do these politicians think their decisions have no negative outcomes?
it is bad policy, because it is very inefficient, poorly targeted, and places the burden for social welfare in the labor market on the people most likely to hire low-skill workers
.
But doesn’t it make far more sense to consider the other problems you and McArdle list as secondary to the rpinciple of the thing? That those reasonos you orrectly list are a product of thet priciple being ignored? That shy of the principle of the thing being applied, there’s no cure for the other ills as you mention?
companies raise their prices and pass the cost along to consumers, making everything more expensive, and reducing the buying power of peoples salaries...
There is a name for that feedback process: Inflation!
There are none so blind as those who refuse to see.
"That shy of the principle of the thing being applied, there’s no cure for the other ills as you mention?"
The thing is far worse than that, Eric.
Look: read the three objections that I quoted-back, above. Essentially, they all boil down to one thing: "It doesn’t work right."
I’ve said it before and I’ll say it as often as necessary: as long as the argument is taken up on a triviality like that, the proponents will be only too happy to keep chasing the thing around until they can get it to work right. This is an endless argument, and it’s because people like Henke and McArdle have no argument. They don’t have a single principled moral or political leg to stand on, and the socialists — being what they are — will gladly burn down the rest of your life, and your childrens’ lives, ad infinitum, at trying to make it work right.
Pop quiz: anybody here ever heard anything like this before? Here’s a hint: Khrushchev’s denunciation of Stalin and the rise of the "New Left" in the West.
CR:
"There is a name for that feedback process: Inflation!"
Nonsense. That is not inflation. It’s not even a symptom of inflation (which is what rising prices are when inflation is actually in progress). "Inflation" is a very specific thing, and that is not it.
Noone has said the magic word yet. Unions. They increase the min wage but cause inflation witch negates the increase and prices themselves out of a global market.
I have always wondered why our economic policy is controled inflation? If we had a little defaltion wouldn’t it bring the dollar and the wages in par with the world making US goods and jobs better?
It would hurt while it happens but better in the long run?
Decreasing supply will also increase the wages paid at the low pay/low skill end of the labor market and do it more judiciously than an uniformly mandated minimum wage.
So few people actually make the min. wage that I doubt it matters. Econtalk podcast says the figure is 1% of Americans. Ask your average person and they think 20% of Americans make the minimum wage.
Now, if Walmart has monopsony power, why don’t they only pay the minimum wage?
Yeah, well, that’s just me being gentle. You didn’t see what ended up on the cutting room floor. I think I’ve made the point, however.
Essentially, they all boil down to one thing: "It doesn’t work right."
Boil it still further, Billy, to the level of simple pragmatism. I’ve always had the notion that principles are merely long- view- pragmatism. What I’m suggesting is that principles... at least the ones that last... become such for a reason. Man learns over time what works and what doesn’t and those things get called principles. And that’s precisely because the reason you mention... working outside those principles, doesn’t work.
Which is not to say that a lot of nonsense doesn’t get the ’principle’ label. The phrase ’Social Justice" for example....
