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Source link: http://archive.mises.org/17087/spot-the-errors-minimum-wage-edition/

Spot the Errors: Minimum Wage Edition

May 25, 2011 by

Here are three arguments you might see in debates about the employment effects of minimum wages:

1. “I run a business and I pay my workers more than minimum wage. It doesn’t seem to hurt them, so to say that the minimum wage hurts poor people is crazy.”

2. “The poor will not be better off if their wages are lower. Therefore, the minimum wage is good for the poor.”

3. This one’s a little harder: “If the policy hurt the poor, they wouldn’t vote for it. Therefore, the policy must help the poor.”

What are the errors in these?

{ 23 comments }

Simon Maynard May 25, 2011 at 7:42 am

Unfortunately, the arguments I usually hear are a little more sophisticated than these.

Joshua Park May 25, 2011 at 10:43 am

For example?

Joop May 25, 2011 at 2:25 pm

Here’s a couple others (I don’t know if I’d call them sophisticated).

1) If the minimum wage is raised from $7.25 to $9/hr, employees earning $9/hr will get a raise as well due to a ripple effect. It benefits more than just those who are earning the minimum wage.

2) An increase in the mininimum wage will increase the purchasing power of workers. As a result, consumer spending will increase and the wage increases will easily be paid for by employers.

J. Murray May 25, 2011 at 2:41 pm

1) If the minimum wage is raised from $7.25/hour to $9/hour, I’ll evaluate the job performed and release everyone that is providing a benefit that’s between $7.25 and $9. Anyone currently being paid $9/hour and above will retain their current salaries. No one will be offered a raise because of a minimum wage hike, especially those already earning above the new set minimum because if they were worth $9/hour or more, they’d be earning that already.

2) It decreases the purchasing power of workers because all of those workers previously employed between $7.25 and $9/hour are now making $0/hour.

Joop May 25, 2011 at 3:16 pm

“if they were worth $9/hour or more, they’d be earning that already.”

I don’t fully agree with this statement. I need to go back and review theories on wages and Marginal Revenue Product, but I know that there are firms that have positions which pay certain rates and the value of the labor of different individuals within those positions can vary substantially even though their wages may be the same.

Take package handlers at a FedEx Ground terminal for example. At any given terminal, you will have a few all-star package handlers who are super-efficient, phyically strong team players who show initiative and contribute greatly to the process of sorting packages. You also have workers who exhibit below-average performance, but aren’t performing so poorly that they need to be terminated. Then there is everyone else between the extremes. All of these employees who work in a particular shift will be paid the same, perhaps $10.50/hr, even though their productivity or worth will vary. If some package handlers are paid more than others, it is often because they have been there longer. Wage increases (in my experience at FedEx Ground terminals) occur based on how long you’ve worked there, not how hard you work.

Over time, the all-stars will tend be promoted or will probably move leave for better paying positions elsewhere. The bums may be fired or the managers may give them such unpleasant work that they choose to leave. But nevertheless, at any given point in time, there is a wide range of “worth” for all the employees making $10.50/hr.

The same tends to be true at places like Target: wages are set for all of the worker bees and increases are dependent on how long you’ve been there. Yes, the all-stars are promoted and the bums are fired over time, but there is a huge range in productivity of all the bees at the same time, yet they are all paid the same.

I don’t think wage rates fully reflect productivity or that people are always earning what they are worth.

Anthony May 25, 2011 at 10:35 pm

You are certainly right that there is no perfect, instantaneous match between productivity and wages.

On the other hand, over time (through promotions, accepting better jobs elsewhere, etc.) there is a constant tendency towards people being paid directly in accordance to the value they provide (outside the government, at least).

sweatervest May 25, 2011 at 4:47 pm

1) Broken Window Fallacy. Sounds very similar to arguments involving inflation as a means to produce wealth. A real increase in wages is due only to an increase in the marginal productivity of labor. Otherwise by moving to higher wages one is merely moving up the demand curve for labor, at which there is necessarily a lower supply. The wage for a particular position might increase, but most people are forced down the curve, i.e. they are fired from their current positions and must take jobs that pay less than their original one did, or no job at all if they started off near the bottom.

2) I started thinking about this as I was answering the previous one. Businesses may anticipate that the equilibrium price of all goods will shift upward if they all simply raise the wages of their workers. Perhaps one can even accompany legislature to increase wages with legislature to increase prices! If they do this, then everything evens out, *except* for one thing: everyone’s supply of money does not increase but remains the same, and because of increased prices that money now has less purchasing power. If all of a sudden all prices and wages doubled, then that is equivalent to everyone’s bank account being slashed in half. The employers cannot begin paying the doubled wages because they do not have enough money, and will only get that money after workers have been paid higher wages to go out and buy goods at higher prices. This process cannot start without inflating the money supply (doing so will, as always, only cause wealth redistribution and cause mal-investment as prices/wages readjust). Business owners will instead lay off workers, which reduces productivity and necessitates an increase in prices anyways (but not a higher income since less units are made/sold). If a simultaneous wage doubling and price doubling is mandated without inflation, then it will force a shortening of the structures of production as business owners no longer have enough saved up money to finance their workforce and must sell off some of the capital goods (to be consumed as all companies are in this position and thus are not buying capital goods to be used as capital goods) to begin paying workers higher wages.

Joshua May 25, 2011 at 8:19 am

1. Incorrectly frames the anti-minimum wage argument as “higher wages hurt the poor”.

2. Again, incorrectly frames the anti-minimum wage argument as “poor people will be better off if their wages are lower”.

3. Supposes perfect knowledge on the part of the poor. Also, the costs to the implementation of a minimum wage are mostly unseen, pricing people out certain jobs that would exist without the price floor.

All three arguments seem to think the anti-MW argument is only about it affecting the poor negatively. In fact, the MW affects all of society.

RG May 25, 2011 at 8:23 am

1. It’s not the people working at min wage that suffer, it’s the ones that can’t find employment because the wages are too high.
2. You can’t make less than zero and that’s what happens to the people shut out of the workforce because the wage floor is higher than it otherwise would be without dictate.
3. There are plenty of economic illiterates that make much more than the minimum wage that vote. If the minimum wage was lower, it could be misconstrued that their wages would be lower as well.

J. Murray May 25, 2011 at 8:28 am

1. Spotlight fallacy. Your own business decisions aren’t representative of all business decisions.

2. Cum hoc ergo propter hoc fallacy. Minimum wage changes don’t cause downward pay changes to the currently working poor.

3. Appeal to Poverty. Just because the poor support the policy does not prove it’s benefit. Also a form of Argumentum ad Populum.

Joop May 25, 2011 at 2:02 pm

The term “spotlight fallacy” seems hit the nail on the head. Also, the more the minimum wage is raised, the more employees it affects. Though the minimum wage doesn’t currently hurt his employees, it doesn’t mean that a high enough minimum wage wouldn’t.

Goddard Lewko May 25, 2011 at 10:37 am

While arguments one and two have been handily spoken for, I might consider as a follow-up for the given errors behind argument three that some people do benefit from a higher minimum wage at the expense of others. Those who are productively employable at or slightly above the minimum wage do not face competition from those who have been priced or regulated out of the workforce, and would support such a scheme as it works genuinely toward their benefit, if no one else’s.

Labor unions during the early 20th century supported child labor laws for similar reasons. They didn’t want to compete with children for work.

sweatervest May 25, 2011 at 4:53 pm

And now we tell ourselves it’s to protect our children from their own desire to be productive.

What a shame…

Michael Richards May 25, 2011 at 11:52 am

I feel 1 and 2 are handled well, but I would like to add to the problem of three. It assumes that all poor are homogeneous and that when people vote for a candidate, they vote for only one policy. The poor can be split into two groups; employed (those who live off minimum wage) and unemployed (college students wanting student grants, homeless, and those who are laid off or fired etc.). Further, those who work are valued by the employer differently based upon age, race, personality, ability, etc. Someone who is unemployed and does not receive government funds would be more than happy to except a wage below the minimum if it means he will get a job. Those who are older or less skilled may worry about minimum wage since that may result in cut backs and thus may result in them loosing their job. Race plays a role in certain occupations that require a quota by law. So saying the poor are totally behind minimum wage is an over generalization. Lastly, the over generalization goes further in assuming that all poor people vote they way they do because of minimum wage and that the “poor” vote to begin with.

El Tonno May 25, 2011 at 12:04 pm

Someone comes on to you and says:

“I drink coffee all day so the unicorns generally munch at the salad bar”

WHAT?

I had to think hard before I even understood what the presumed causal model behind the utterances might be.

Joop May 25, 2011 at 2:05 pm

I’m going to use that line randomly next time I’m at a party. I’m curious how poeple would react.

Joop May 25, 2011 at 2:12 pm

poeple=people. would=will.

sweatervest May 25, 2011 at 1:08 pm

1. This confuses regulations on wages with its literal opposite, which is the freedom of business runners to pay any wage they want. He is presenting an example where the *lack* of wage regulation helps his workers, for he is *free* to pay him the wage he does. That he is free to pay his workers more than a set price is indeed a good thing, both for him and his workers. This is literally the opposite of the situation being considered, which is when a regulation forbids a businessman from choosing what wages to offer. If he considered that situation for his own business he would quickly see how the workers would lose from it.

2. This assumes the very conclusion that is trying to be reached, namely that minimum wage laws raise everyone’s wage above the minimum amount. Only to a statist mind will “minimum wage laws establish a minimum wage” not be laughable. The state does not have a magic wand capable of establishing a wage floor, and as always simply shift a part of the market into the “black market”, where people work under the table for less than minimum wage. As per the laws of a market economy which the state cannot undo, the rise in the minimum *legal* wage only comes with a decrease in the supply of *legal* labor, which is compensated for either by an increase in subsidized wages (welfare) or an increase in black market labor. The biggest effect this has on the economy is that black market labor can be legitimately shut down, i.e. an increase in thuggery by the state coupled with the crippling of the productive economy that such thuggery brings. One would be hard-pressed to claim that pushing poor people into welfare and/or jobs that are hunted down and destroyed by the state is good for them.

3. What evidence is there that “poor people voted for minimum wage”? The most these people can “vote” for in terms of federal minimum wage laws are politicians that have a certain position on minimum wage laws, and here we face the glaring problems of any so-called “representative” government. One must take each politician as an entire package. The one who supports higher minimum wage might also be the one that supports legalized gambling, so which one is a person voting for when he chooses this candidate? Does everyone that voted for Obama support everything Obama believes at the time or now, and has done? That anyone voted for anybody, especially when it is effectively a choice between two people, hardly implies anything about what they support. We can even assume that poor people overwhelmingly support minimum wage laws. To suggest this implies that minimum wage laws do not hurt them (as judged by themselves) is to suggest that being deceived or even mistaken in general is impossible. But the main point here is that there is no actual evidence that poor people overwhelmingly or even mostly support minimum wage laws, or especially increases in minimum wage laws. I’ll bet a lot of people (poor or not) assume all this stuff is too complicated for them to understand and delegate it to the “experts” to work it out, so their “support” is little more than a parroting of someone they trust.

Joop May 25, 2011 at 2:17 pm

“I probably became a libertarian through exposure to tough-minded professors who encouraged me to think with my brain instead of my heart.” – Walter Williams (Up from the Projects)

Walt D. May 25, 2011 at 6:18 pm

Here is a totally different perspective.
http://www.stevepavlina.com/blog/2006/07/10-reasons-you-should-never-get-a-job/
Work for yourself and write your own paycheck.

P.M.Lawrence May 26, 2011 at 9:41 am

The (or the main) error in number 1 is thinking that those workers are the poor who are adversely affected. One big adverse effect is not being employed, so this employer isn’t looking at people who suffer from that. Technically, it’s called Survivor bias. And there are knock on costs, some to yet other people.

The (or the main) error in number 2 is the same, looked at as though “the poor” and “the poorly paid” were the same rather than just looking at one employers’ workers. Again, what counts must include those not paid at all – and the knock on costs.

There are two (or two main) errors in number 3. The first one is Art Carden’s: it’s not a little harder, it’s a lot easier. The second one is obvious: the poor don’t vote for it, representatives do, and representatives don’t get chosen just by the votes of the poor alone or according to that one issue alone, but after a process that effectively disconnects the issue from the minimum wage decision – including not informing the poor properly about the issues. So the claim that “[t]herefore, the policy must help the poor” is a non sequitur. Even if it were true, it’s not the only consideration because of the knock on costs.

Note that these errors in common reasons aren’t in themselves proof that minimum wages, as such, are bad. They aren’t, if implemented in certain ways that cancel distortions, and even the usual way with distorting mandates can be of limited use under certain special circumstances. Those circumstances don’t apply in our time and place(s), but it means a Sanity check failure for any argument that mandated minimum wages are always harmful, let alone that any form of minimum wages is harmful; you shouldn’t “try to prove too much”.

If anyone is interested, I will provide links to the non-distorting method(s) of implementing minimum wages (they only work for minimum wages set at certain levels).

Core May 28, 2011 at 10:19 pm

Well as someone who earns just a bit above the minimum wage…

I’m not as educated as you guys..but from experience it sucks. When minimum wage went up, everything went up at fast food restaurants. I frequent a Hardees near my work place, well used to.

Anyways, its the government basically saying everyone is equal. I work in stock, and my job is a lot harder than the cashier.. who just takes peoples money. Yet I make the same. Its bullshit on a grand scale.

Of course, my arguments bluntness would probably fall on deaf ears in Washington.

Gerry Flaychy May 29, 2011 at 6:01 pm

In recent years, the unemployment rate has doubled in the U.S.A.: is it because minimum wages have been raised all over te U.S. ?

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