HELP: How do minimum wage laws harm people?
The concept of minimum wage is one I’m rather attached to. I have dozens of arguments for why it helps people, improves the world, etc. etc. I suspect this view is shared by most of this community, although I haven’t seen any discussion of it.
I don’t have much understanding of the harms that minimum wages cause; and at what level of minimum wage those harms become relevant (ie. a minimum wage that would not be a living wage even working 24 hours a day is unlikely to have any of the same problems that a minimum wage sufficient to buy an aircraft carrier an hour would have)
So what are the harms that such laws cause?
The single most important idea in economics is as something gets more expensive people tend to do less of it. So increasing the cost of hiring means on average firms will do less hiring.
Also, if a minimum wage creates a surplus of labor firms lose little by treating their employees poorly. I might prefer (1) a nice boss who provides me with training and pays me $5/hour to (2) a mean boss who will give me no training and pays me the minimum wage. A firm might also prefer (1) but a minimum wage law prevents the firm and individual from agreeing to (1).
Finally, if a minimum wage creates a surplus of labor firms will hire the most qualified people they can who are willing to work at the minimum wage so low quality workers will never get jobs even if the jobs would have provided workers with the skills needed to someday get above minimum wage jobs.
There’s also a line of reasoning that criticises minimum wage as a means of unaccountable wealth redistribution, the idea being that regardless of your opinion on wealth redistribution, it should at least be a transparent and accountable process.
Basically the idea is the minimum wage reduces employment (http://modeledbehavior.com/2010/10/12/what-the-new-minimum-wage-research-says/). Another criticism is that the benefits don’t necessarily go to someone who needs the help (for example it may go to teenagers getting their first job). I find it hard to understand having a good grasp of economics and having an intuition that minimum wage laws are good. Are price floors in general a good idea? At the very very least, they’re a very kludgy and indirect method of helping poor people.
My understanding of the evidence is that minimum wage laws is that they are not especially harmful, but they’re not especially helpful either (I have this link in my notes from when I did a bit of digging on this topic for the same reasons as you but from the opposite direction http://www.jstor.org/pss/1942818). Basically, minimum wages aren’t a huge problem, but if your goal is tp help poor people, there are better ways to do it (for example the Earned Income Tax Credit seems to work pretty well).
A problem with the earned income tax credit is that as your income increases you get less of it which creates a high effective marginal tax rate (especially when combined with other means tested government programs) which discourages people from leaving the lower working socioeconomic class.
Of course. I didn’t mean to imply that the EITC was perfect; the only perfect redistribution program is going to be uninfluencable lump sum transfers. My understanding was that wage subsidies were found to be pretty effective at boosting poor people’s spending power without doing too much to incrementally discourage work.
Even lump sun transfers reduce incentives to work because as most people get richer they prefer to work less.
Is this necessarily a bad thing?
Imagine a utopian future. How much time would you expect people to spend working, more or less than they do currently?
It might not be bad, but it does result in their wealth being increased by less than the lump sum amount received.
This may be of interest: http://harrisschool.uchicago.edu/about/publications/working-papers/pdf/wp_07_20.pdf It describes how the EITC works and discusses the empirical evidence on its effects, including labor supply effects. I haven’t read it, so I can’t vouch for it, but it looks interesting.
This links to some other research: http://modeledbehavior.com/2010/10/26/why-the-minimum-wage-should-go/
This says that the EITC doesn’t seem to ever reduce the number of hours people work.
Imagine there are 100 manufacturers of cars, who discover that a byproduct (lets call it weberfoam) of the process of making cars is useful in making planes. Each manufacturer makes between 1 and 2 tonnes of weberfoam, of varying quality per month. 10 plane manufacturers want weberfoam, because it makes planes lighter. They’re willing to pay quite a bit for it (up to $1,000 a tonne) but at that price will want only 1 tonne each. At $1 a tonne they’ll buy 2 tonnes each.
What should the car manufacturers do? Would them getting together and agreeing a minimum price they’ll sell weberfoam for be in there interests?
Of course, putting it that way makes me realise the harmful effects more clearly. Cheers :-)
Why do you suspect this, despite your avowed lack of evidence bearing on the matter?
The Wikipedia article gives the theoretical argument against, which is basic microeconomics, and some empirical studies on the matter, and describes some alternatives. The studies are all statistical and appear to be of marginal significance, making relevant the now well-known criticism of medical studies.
Does anyone have anything to add beyond that article?
2 reasons:
1) Due to a general correlation between the views I have seen displayed here, and the views of those I know are supportive of minimum wage laws
2) Because a) I view this community as more-rational-than-average and b) I have not yet been exposed to many arguments against the minimum wage that were not either irrational, or based on completely different moral principles to those I have seen here.
Obviously, by posting this discussion post, I hope to discover whether my beliefs are inaccurate, by deliberating exposing myself to more rational arguments AGAINST the concept.
Interestingly, I had the exact opposite intuition as you. I saw basic economics as suggesting minimum wages were not a great idea, and I saw this community as being more versed in economics than average.
I had the exact opposite intuition because I expected lots of people here to have a reasonable exposure to economics.
RichardKennaway just gave you a link containing economic discussions about minimum wage, doesn’t that count? Or does that fall under “completely different moral principles”?
I don’t think you can tell much about someone’s rationality from the views he holds—a more important factor is how he reached those views (peer pressure? confirmation bias? signaling?), how much he is willing to change them upon encountering new evidence (see One Argument Against An Army), etc.
I responded prior to reading that link, as I had posted that statement prior to being sent to that link. Giving myself additional time to fabricate a reason for my statement would seem disingenuous.
Provisionally, some of the arguments seem to fit in those categories, but others may not. Unfortunately, there’s not really much in the way of support for many of the claims, due to the fact it’s Wikipedia, and full arguments are never likely to be presented there. So I’m going to follow some of the links.
Indeed, but it is not simply the views, but observing the debate patterns, that has made me believe this site to be at least slightly more rational than average.
Hence, when seeking rational reasons to abandon a belief that I know may be irrational, I decided this was a good port of call.
That makes sense; I had interpreted the conversation more like:
-- “I never saw a good argument against minimum wage”
-- “Well, here’s a complex economics analysis on Wikipedia that points some theoretical problems with minimum wage”
-- “Hmm, I still haven’t seen a good argument against minimum wage.”
On minimum wage, my personal position is to suspend judgement until I take the time to understand the economics (which are complicated) and the ethics (which are complicated in a different way). Seems that economics analysis indicates that minimum wage is overall negative, but that the actual data doesn’t confirm what the theory predicted. I don’t feel a very strong need to decide that one side is wrong and one side is right, and am satisfied with staying somewhat ignorant until I have the time and need to dig deeper into the problem (so this thread is somewhat interesting).
Here’s a good Cafe Hayek post on the subject of arguments for and against (not about minimum wages directly, there’s one level of meta for safety.)
Specifically, they link to this list, summarising the (vast) number of economic studies revealing negative consequences of minimum wage laws, including some non-obvious ones, like
Hashimoto (1981, 1982), Leighton and Mincer (1981), Ragan (1981).
If you think about it, the most predictable harms should come from the same mechanisms as the benefits. And the mechanism? Complicated economics. Or at least that’s the mechanism I’d like to emphasize, since it’s harder to quantify the other ones.
And what do I mean when I say complicated economics? I mean http://en.wikipedia.org/wiki/Monopsony#Minimum_wage . Look at the diagram to the right. It took me about an hour of actual work to understand what that diagram means to the minimum wage, so no rush.
I think one thing is this: minimum wage jobs might discourage people from hiring people to do jobs that are potentially high risk and have a chance of producing no positive results (but these same jobs might be funner since they’re more creative—or they might use untested labor).
Lots of people are now willing to work for “free”—it’s called crowdsourcing (as documented in many books). It might be an extra incentive for them if they have a limited monthly income less than the minimum wage.