Here is an example of a different type of error, from the part on Minimum Wages:
The first thing that happens, for example, when a law is passed that no one shall be paid less than $106 for a forty-hour week is that no one who is not worth $106 a week to an employer will be employed at all.
There is plenty of empirical evidence against this from countries that actually have introduced minimum wage laws. Even worse, not having minimum wage laws perverts economic incentives. Here's an example.
In Germany, people earning below a certain amount receive a basic subsidy from the state. It is a pitiful amount, but it allows them to pay the rent and survive. The problem is that this causes low-end employers to consciously pay their workers a ridiculously low amount, fully aware of the fact that their employees will receive additional income from the state.
In effect, the government subsidizes employers that practice wage dumping. That is clearly inefficient.
Now people react to this in two different ways. One camp says that the government subsidy should be abolished. But the latter is short-sighted, because society always pays somehow when people do not earn enough to make a living. Ideally, they pay via social safety nets, but if such nets do not exist, society pays in the form of increased black market employment and crime.
The other camp (me included) argues that this abuse of the system should be prevented via a minimum wage law. That would cut into the employers profits, but there's nothing wrong with that. It also wouldn't eliminate jobs, because we're talking about low-end sectors where demand is highly inelastic anyway, such as cleaning services. Hotels will still pay for the cleaning service, even if it costs them twice as much.
The main argument he is making in the book is that economics is a complex system and is hard, and that we always need to look at the forgotten man. Those that think policy decisions are simple - have a minimum wage or not - will cause a whole host of unintended side effects as your post describes.
So you are saying that an employer would hire someone that only produces $96 worth of value per week for $106 per week?
The correlation between wages and employee productivity is pretty loose.
I would expect the correlation between wages and production to be much stronger at the low-income levels and for hourly positions. Regardless, it's what the employer thinks the employee is worth (or will be worth). If the employer doesn't expect at least $106+X dollars of productivity, they won't hire at $106.
This is pretty basic microeconomics; supply and demand. Even if you're right that the first employee nets more than $106, that might not be true for the tenth one. The demand curve for employees is downward-sloping, right?
Sure, intuitively you'd expect some very marginal employment opportunities to disappear, but the empirical evidence shows that companies prefer other options; raising prices, cutting profits or non-labour costs, increasing worker productivity where possible adjusting opening hours etc. so the effect on net unemployment is often minimal or non-existent.
The argument is a little more complex than that. No business will operate at an outright loss. But the minimum wage can cut into a business's profits. A hotel likely won't go bankrupt and shut down if it payed its workers a higher than market rate. And it still needs to pay for cleaners. But a higher-than-market cleaning rate will skew the market from the optimal. For example, a higher cleaning wage would make robot cleaners comparatively more attractive to a hotel. Investing in a robot might not make sense if wages were at market, but if they are raised too much, then it might be worth it to pay for an expensive robot that can replace a large portion of the cleaning staff.
In general, the minimum wage encourages capital investment. If people are expensive, then you should try to replace them with machines.
Sure, part of the burden of minimum wage falls on the employer, and part on the potential employees that aren't hired.
While what you say sounds plausible -- a hotel running a 20% profit every year might bear the entire burden of the higher wages and may still hire the same number of people. But there are many businesses (in the hotel industry or elsewhere) that will end up scaling back rather than pay higher wages.
While minimum wage may encourage the building of machines, workers versus machines is a false dichotomy. Sure, those are alternatives, but there's another alternative as well: no machine and no worker, just a smaller business (or less service).
To say that the same number of people will be hired at the higher wage is to say that the demand curve for employees is perfectly flat near the lower wages. I would have to see some evidence of that.
Hazlitt uses the whole book to drive home the most important lesson about economics, and that is: One must consider not just what is seen, but also unseen.
Let's apply this to the case for minimum wage for hotel workers. Sure, the minimum wage helps hotel workers. Sure, hotels will still pay for cleaning services. That is all seen. That is the naive analysis. What is unseen? What is the unseen result of a higher-than-market hotel-cleaning wage?
Workers who would best be employed in other tasks will now be employed cleaning hotels. Other goods and services that are more valued won't be produced because the people who would produce them are busy cleaning hotels.
In general, the low-productivity employment sector will be made less efficient, because of lack of price information. For example, suppose the minimum wage is $7/hr, and the market wage for hotel cleaning is $5/hr while the market wage for cooking is $6/hr. A worker who could do either should, in a free market, choose cooking, because it is more valued (hence the higher wage). But a minimum wage hides this information. So if the worker chooses cleaning, the economy will be $1/hour poorer than it would otherwise have been.
Also, the sector of the economy that employs large number of low-wage workers will become comparatively less efficient because of the high-than-market wage costs. This will encourage capital to flow out of this sector and into other sectors. The unseen effect of the minimum wage is a missing low-wage industry.
This was made very obvious when the US Congress raised the minimum wage on the small pacific island of American Samoa. The result was that major employer on the island left the island and instead built a more mechanized plant in the state of Georgia. A lot of low-tech, low-wage jobs in American Samoa disappeared and were replaced by a lot fewer, higher-wage jobs in Georgia. This was the direct and visible effect, but over time, the unseen effect is the same: industries and jobs that won't exist because the minimum wage makes them illegal.
In this particular scenario, do you believe that a person chooses between cleaning (an unskilled job) to cooking (a skilled job) based on the wage that is paid?
Either the person is unskilled; then they have no choice. Or they have the skill to be a cook; then they presumably have the skill because they like being a cook, and will certainly prefer to do that over cleaning even if both are paid the same (in fact, they will probably prefer cooking even if it were slightly higher paid; wages only start coming into consideration when the difference is larger).
Now you might argue that people will be deterred from even learning to become a cook in the situation you have outlined. That is doubtful, because again, price plays a much smaller role than you might think. But even if it were the case, the wages of cooks would eventually rise above the minimum wage if demand for cooks is high enough.
It is a mistake to assume that there is always a God-given market price that is the "right" price for goods to have. The development of prices is always a negotiation within society. In the case of the minimum wage, society says that labour should have at least a certain price, because that is the morally right thing (and also avoids certain externalities that opponents of the minimum wage like to ignore). If society agrees on that, then minimum wage is efficient by definition.
I would think that wage differences would be most important when wages are small. The difference between $5/hr and $6/hr is a lot more important than the difference between $50/hr and $51/hr.
> It is a mistake to assume that there is always a God-given market price that is the "right" price for goods to have. . . . In the case of the minimum wage, society says that labour should have at least a certain price, because that is the morally right thing . . .
I'm not sure what you're trying to say in your last paragraph. There is no such thing as a "morally right" wage. Wages are just prices set by the market unless they are interfered with.
For example, unless you're being paid a government-mandated minimum wage, your wage is set by a mutual agreement between you and your employer. At the time of the agreement, you thought the proposed wage was the best of your options and so did your employer. Had your employer offered you less, then presumably you would have had a better option and would have chosen a different employer. Had you demanded more, presumably your employer would have had a better option and would have chosen a different employee. This is a market wage.
The market, all the people together each choosing as they see best among their various options, this is what generally determines all prices including wages. The market is efficient because each actor chooses what is best for them given the choices of the other actors. Whenever the market is intervened with by government-imposed price controls, like minimum wage, the result is inefficiency (waste): the market acts differently than it would if each actor were free to choose.
Another fallacy of mainstream economics is that markets exist without government. In reality, it is government which creates markets. And yet another fallacy is that markets do not have morality associated with them. Yet markets are intertwined with moral taboos about debt, even in cases where the powerless owe debts to the powerful. (Like with rotten healthcare systems.) David Graeber discusses the history interestingly in _Debt: The First 5000 Years_.
Since the linked article is right-wing, here's a left-wing one which discusses some of these fallacies. (http://www.zcommunications.org/debt-slavery-and-our-idea-of-...)
BTW, if I had to choose between being a well-paid coal miner and a significantly lesser-paid doctor, I'd choose the lower pay.
This seems like a obviously false statement. The norm is for people to trade. Just watch children play: it's extremely common to see them trade toys with each other.
The "black markets" enabled the soviet union and the communist-block countries to survive as long as they did.
The reality is that it is governments are the destroyer of trade and markets through taxation, embargoes, price controls, and trade restrictions.
A significant portion of America's prison population are drug offenders: essentially people who tried to operate in an illegal market.
If governments were necessary for markets, why are there all these markets existing despite governments' attempt to stamp them out?
More abstractly, there are situations where it is in the individuals' self interests to behave in a certain way that will lead everybody to end up in a place where they are worse off than if everybody coordinated to achieve an outcome that is not a Nash equilibrium.
If you define "efficiency" as being "the outcome that you get when there is no cooperation between actors", then you're basically saying "efficiency = Nash equilibria with no cooperation". Then government action (which is simply one possible form of cooperation between actors) is inefficient by definition. But then that's simply a tautology, and a useless one at that. After all, whether the outcome is a Nash equilibrium or not is not a moral category.
If you define "efficiency" as being "the outcome is optimal according to some welfare function" (e.g. social optimality, Pareto optimal, sum of logs, or whatever), then Nash equilibria and efficient outcomes are not the same thing, unless you can somehow exclude the possibility of Prisoner Dilemma-type situations.
Do you have an argument against the existence of Prisoner Dilemmas when it comes to price-setting dynamics?
Edit: And to answer your question about a "morally right wage", I think there was simply a misunderstanding between us. There is a moral argument that human labour should be given some appropriate value. This is similar to more general arguments for human dignity and human rights. This is a question of morality and ethics, and it can be the basis upon which a society decides to introduce a minimum wage law. My personal understanding of morality is in line with such a view, but I am not trying to persuade you to change your system of values, if it happens to be different.
Society agreeing on a minimum wage does not make it efficient by definition. First of all, "society" is only the majority of voters. Voters pass things that are inefficient all the time. Secondly, efficient has a specific meaning in economics. It means that goods are allocated to where they are most highly valued and produced where they are can be most cheaply made. Given the definition, the minimum wage clearly does distort people incentives to work and leads to economic inefficiency.
Minimum wage laws in effect outlaw functional poverty. We hear much of shady businesses who hire those who work under-the-table for less than minimum wage, and in the next breath decry high above-the-table unemployment. The work is there, the laborers are there, but alas it is illegal to pay what some jobs are worth.
Another consequence, little noted, is that minimum wage laws in effect create a "mundane labor" based currency. Instead of fixing a dollar to a weight of gold, or floating the currency outright, the value of a dollar is fixed to ~8.3 minutes of menial work. A gallon of gas thus costs about a half-hour of work ... and regardless of what minimum wage is, supply-and-demand realities mean that a gallon of gas[1] will _always_ cost about a half-hour of menial work; raise the minimum wage by fiat, and the price at the pump will rise to match. Sub-minimum-wage living becomes legally unviable precisely because low-end prices rise to match the absence of legal sub-minimum-wage incomes - at which point the government becomes obligated to confiscate and redistribute wealth to rescue those who are drowned by the consequences of minimum-wage laws.
[1] - assuming oil itself is in consistent supply and consistent demand.
Excellent point. The minimum wage creates a need for welfare for the unskilled because it makes it outlaws their jobs and it raises prices on them.
Like all social redistribution schemes, it can be good if wealth isn't distributed equally enough for healthy market interaction, and harmful if wealth is distributed too equally for market incentives to exist.
Why would that be the case unless the overall worldwide demand of gas was gated by the ability of minimum wage workers in a particular jurisdiction to buy gas? Even this, this would appear to assume that their demand was completely elastic, such that cheaper gas would cause them to buy enough more until it was that expensive again?
And why gas? Is the price of all staples (bread, milk, etc.) inescapably tied to the minimum wage? If so, I'd love to concrete evidence for that claim -- it seems like quite a surprising conclusion to me.
(Keep in mind we're talking in short posts, not peer-reviewed treatises. The ability to extrapolate to reasonable consequences is assumed.)
Consider an extreme case. A popular retort to minimum wage laws is "well, just set the minimum to $1000/hr and everyone will be rich!" Doesn't work that way because paying someone $1000 to sweep a floor for an hour means $1000 represents no greater value than sweeping a floor for an hour. Given that $1000/hr for any/all menial jobs does not mean that all workers can run out and buy ~300 gallons of gas after working an hour - supply-and-demand will kick in and the sudden demand for "cheap" gas of limited supply means prices will shoot up to ~$500/gal to match "normal" sales/usage. Ditto other prices, commodities in particular. If the clerk behind the gas station register is making $1000/hr, the gas sure won't go for $3.25/gal.
Why would the conclusion be surprising? It's supply and demand. The currency acts as a ratio modifier adapting the value of one thing to the value of another; whatever the units of that ratio are, a gallon of gas will (given current social norms) always be worth about half an hour of menial labor. Raise the minimum wage, the dollars available to the mundane laborer will increase, the supply of goods/services remains about the same, so the price of goods/services will rise to match the availability of dollars earned thru mundane labor. Prices rise to what the market will bear; ensuring everyone earns more currency means it will take more currency to buy.
> There is plenty of empirical evidence against this from countries that actually have introduced minimum wage laws.
Few employers run at a loss for very long.
So, if they pay $y for something that is only worth $x, where y > x, they make up the difference somewhere.
The four options are the salary for other employees, money for supplies, profits, and price of goods/services sold.
Customers will walk if they're not getting value. Service providers will sell to the highest bidder. Other employees will go elsewhere, but not all employees are portable.
That leaves stranded employees and employers.