Wednesday, April 7, 2010

Labor Pains

Acting on your best behavior
Turn your back on Mother Nature
Everbody wants to rule the world
--Tears for Fears

My sister and I were discussing the validity of minimum wage laws last nite. Reaching decisive conclusions on such an issue using moral or ethical arguments is unlikely, because we know that people vary in their beliefs of what is right and just. For example, some people believe that it is right that individuals should be free to decide how to deploy income earned from their labor, while others believe that it is right that some of an individual's income should be appropriated to satisfy the needs of others.

A decision to implement a minimum wage law is therefore a political one, dependent on a group's ability to get its brand of justice enacted via the political system.

What we can do is evaluate minimum wage rules from an economic standpoint--to see if policies proposed by special interest groups actually lead to the results that their advocates desire. As a body of scientific thought, economics is incapable of rendering ethical or political judgement. But because economics is grounded in laws that govern nature and human behavior, it is quite possible to assess minimum wage rules, or any other social arrangement for that matter, in light of predictable economic and social consequences.

Minimum wage laws are a form of triangular intervention. Triangular intervention occurs when an invader compels a pair of people to make an exchange or prohibits them for doing so. In the case of minimum wage laws, the triangular intervention takes the form of a price control, where the State prohibits the exchange of labor below a certain price. The State enforces this 'price floor' by police action, inflicting penalty on all violators.

In free markets, each person's wages tend to be valued relative to the individual's potential for uniquely adding to an operation's productivity. A minimum wage law means that those whose marginal value is below the legal minimum are prevented from working. The worker is willing to take the job, and the employer wants to hire the worker. But the decree of the State prevents exchange from taking place.

The effect is compulsory unemployment. Compulsory unemployment removes competition for marginal workers and raises the wage rates of the workers remaining.

Although the commonly articulated aim of minimum wage law is to improve the condition of marginal workers, the actual effect is just the opposite. Minimum wage laws render marginal workers unemployable at legal wage rates. The higher the minimum wage rate relative to free market rates, the greater the resulting unemployment.

There are other, longer run issues to consider as well, such as the influence of minimum wage laws on a) an employer's propensity to move elsewhere in search of cheaper labor, b) potential for higher prices of goods and services as consumers absorb higher labor costs, and c) capacity of those workers whose job is protected by minimum wage laws to adapt to environmental change.

However, the direct effect should be clear enough. Put a floor under gas prices at, say, $4/gallon, and it is likely that less gas will be bought. Put a floor under labor at the current legal rate of $7.25/hr, and it is likely that less labor will be bought.

If the purpose behind minimum wage laws is to protect or enrich special interest groups (e.g., labor unions, political parties, etc), then there is a case to be made that the policy will be effective--at least in the short run.

However, if the purpose behind a minimum wage policy is to improve the condition of the marginal worker, then this policy is sorely ineffective, because these workers will be largely unemployed.

4 comments:

katie ford hall said...

Sister here.

I don't pretend to have the economic knowledge base that you have, so I don't feel like I can feedback on this data. I look at most situations from the point of view of equality and justice. I stand by what I said last night -- companies hold profit as their ultimate motive. They will take advantage of their workers in order to maximize their profit.

One example --- in the retail world, a person may be promoted from supervisor to manager. She is then put on salary (instead of hourly) which allows the company to force her to work overtime without paying her for it. It's pretty common in retail and all first line management positions.

Your point was that a person can then choose to walk away. I believe that if we were all equally educated and had access to the same opportunities, that might be true. However, it's the marginal worker who might not have the skills to look for a new job (resume, interviewing, etc). She might not have the transportation or day care to go on interviews. Or, she might be so disillusioned with systemic inequality that she doesn't see the point in trying. These are the workers that an employer can take advantage of.

So I guess what I am saying is that there are bigger problems than just minimum wage laws. I think we would be better served in society to understand who these marginalized workers are and how to help them improve their own education and marketable skills.

fordmw said...

Nice response Katie. An advantage to examining things from an economic perspective is that it can provide useful info for determining whether a policy can actually do what advocates want it to do. Plus, you don't need a PhD to think economically. You just need a willingness to learn thru reason and to confront the personal biases that inevitably get revealed along the way.

I know it's helped me think more objectively.

Employing that economic perspective, if the objective is to improve the condition of the marginal worker, it is hard to see how minimum wage laws achieve that end. Compulsory unemployment of these folks appears a direct outcome of this policy. Seems the classic 'killing w/ kindness' situation.

The strange thing I've found is that many 'interventist' programs (e.g., price controls, production restrictions, subsidies) seem produce these perverse outcome profiles.

I've personally found that using POVs of equality, justice, freedom, natural rights, etc. are effective for figuring out what I believe is 'right', but these perspectives are less helpful in reaching a decisive endpoint with others on policy matters. This is because people vary in their beliefs. One person views equality as uniform treatment under the law while another views equality as income leveling. These two views tend to be incompatable in matters of public policy. The endless political debates on TV, blogs, etc are at perpetual impasse largely because the debates hinge on personal bias.

Oh, to your point about superior bargaining power of employers and the value of unions. I cracked Henry Hazlitt's (1946) classic 'Economics in One Lesson' and it appears he agrees w/ you. He suggests that individual workers may not possess enough info to know true value of their services. Moreover, if an individual decides to jump ship in search of better opportunities, there is immediate risk to that person's livelihood but not to the employers'. Because if these assymetries, Hazlitt concludes, unions may help equalize bargaining power and reduce the risk of mistakes.

Finally, I'm wondering how your idea about boosting the capacity of marginal workers can be operationalized in a manner that achieves favorable outcomes. Any ideas?

katie ford hall said...

Matt,

Thanks. I guess we're both better at writing, huh?

Anyway, as far as boosting marginal workers... I am no expert on this either, but it makes intuitive sense to me.

I heard someone say once that there are certain jobs that have gone overseas, like making combs, that we really don't want in this country. No one will ever have an acceptable standard of living in the US with those jobs, so they are better left where labor is cheaper. According to this person, what we need are jobs that require education and an educated work force to fill them.

I do understand that we will always need people to do low wage tasks.

Also, I think that the deeper problem is our education system. I don't know how to fix that, but I'm guessing you have some ideas.

K

fordmw said...

My first real appreciation for the value of writing came from my industry days. We had a bunch of old school mgrs who kept telling us anxious upstarts, who wanted to make decisions based on lively mtg discussions, to write things down in reports/memos ('There's a certain precision to writing...' one of them would always say) so that both of us could better understand and think things thru before making decisions. It took me a while to get it, but am grateful for that lesson today.

Certainly there are those who believe that key jobs in the US are those 'high value added' jobs that requires lots of education. Seems reasonable. Essentially it's the specialization of labor concept: we specialize in the high skill stuff that pays a lot; let others specialize in comb production. And both sides mutually benefit thru trade.

Over the last yr or so, I've been wondering about the limitations of the specialization argument. In calm environments, for example, specialization seems a good bet. But in changing environments, doesn't specialization seem risky? What if a new technology comes along and obsoletes your trade? Kind of like the proverbial putting all eggs in one basket.

I wonder whether a healthy 'portfolio' of skills and industries doesn't make more sense. It would spread risk. Moreover, seems more consistent with the 'natural law' of diversity which any economic system must cope with--i.e., people have different skills, interests, risk tolerances, etc.

I also wonder how much of the 'low skill' manufacturing that has drifted away over the yrs is due to, you guessed it, gov't interference. For example, if a form of intervention fixes the price of a low skilled job above the market, then doesn't it stand to reason that over time that job migrates to a different geography? Would we rather have that low paying job here or in China? And as global markets continue to open, it seems harder to keep the toothpaste in the tube.

Altho it's prolly no surprise, can't help but think that more of those 'low paying' mfg jobs have been lost than 'should' have been. And perhaps more people would be working today if we had them, metro areas would be in better shape, and we'd be more resilient to economic shocks like we've just experienced.

Re the school thing, maybe we'll have to start a new page for that one ;-)