Economists agree: Raising the minimum wage reduces poverty
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http://gregmankiw.blogspot.com/2006/06/sperling-on-minimum-w... http://cafehayek.com/2009/09/new-study-casts-doubt-on-card-k... http://rjwaldmann.blogspot.com/2009/12/in-which-i-disagree-w...
But the best reasoning I've seen on the subject is Bryan Caplan's:
"Suppose you have a weak prior about the disemployment effects of the minimum wage. Suppose further that you think that the best empirical work in economics is very good indeed. Doesn't existing evidence then oblige you to admit that the minimum wage has roughly zero effect on employment?
"Hardly. Why not? Because there is far more 'existing evidence' than meets the eye. Research doesn't have to officially be about the minimum wage to be highly relevant to the debate. All of the following empirical literatures support the orthodox view that the minimum wage has pronounced disemployment effects:"
http://econlog.econlib.org/archives/2013/03/the_vice_of_sel....
So even proving beyond a doubt that minimum wage causes an increase in unemployment isn't enough to abolish the institution if there isn't a better solution to the problems at hand. Plus, unemployment percentage is not a robust enough metric to base the entire conversation on.
I liked Bryan Caplan's piece but to me it was predicated on the idea that minimum wage is based on errors in logic and not based on distortions in markets (especially in his conclusion.) I'm yet to see a better idea for addressing the downward effect of unemployment and oligopolization on low end wages. Caplan's solution seems to be deregulation but to me that's a bit like letting the wolves and the sheep work it out for themselves.
But as the article points points out, there is excellent and robust empirical evidence that the current minimum wage (and even earlier minimum wages in America, which were much higher) are too low to significantly affect total employment. Wikipedia has an excellent writeup of the scholarship on this topic:
Unemployment has a downward effect on wages because there's more competition for every job, just like competition between firms for employees will increase wages. Ideally these things will all even out. Unfortunately in our current economy we have high market concentration (so low competition between firms for employees which decreases wages) and high unemployment (so high competition for each job which also decreases wages). So we see lower wages from what they would be under Perfect Competition (or an ideally functioning free market) where I'm told it's impossible for these things to persist.
Minimum wage laws put a limit on how much firms can wield this market power given to them by market conditions. Without minimum wage/collective bargaining of some sort (and without technological advances, etc.) history and economic theory agree that firms will tend to push wages down to subsistence levels in order to maximize profits. Minimum wage is not the greatest tool, and I don't actually like it - but I do think it should be higher. We have a lack of good options at the moment so we're left picking the best of the bad.
But why do I call it a distortion? Large enough unemployment, coupled with lack of competition between firms for employees causes such a shift that the free market is barely distinguishable from slavery for those at the bottom (subsistence wages are literally only enough to survive and keep working.) So I throw around the word distortion because I'm trying to communicate that unemployment gives such a large amount of market power to employers that the market becomes fundamentally different from what we expect in a Free Market.
http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/200...
Three things to observe from the graph on page 31 (adobe reader page 33):
* There is publication bias in favor of the hypothesis that minimum wage increases decrease employment.
* If one takes the liberty of selecting only a handful of studies to argue with, one can find "strong" support for either side of this argument.
* Neither the "true mean" (mean at large y) nor the "biased mean" (mean at small y) of the studies lies anywhere near the break-even point (x value of -1) where the proposal of raising the minimum wage begins to hurt poor people in aggregate (i.e. the sum total of money flowing to poor people is less than it was before the raise).
Also, observe that the graph on page 33 (adobe reader page 35) suggests a trend in elasticity over time which has a plausible argument to back it up. Signed elasticity should increase (minimum wage increases become more beneficial) when labor is overabundant. In this case, labor tends to be sold nearer to the minimum price laborers will sell at and further from the price at which employers will stop purchasing so that a minimum wage increase results in more "win" scenarios (wages are increased without being pushed over the "cliff" that results in negative productivity) than "loss" scenarios (where wages are pushed over the cliff). This is consistent with the narrative of American employees losing leverage over time.
If both the narrative and its theoretical+observed impact on elasticity are true, minimum wage increases are becoming more beneficial over time.
The EITC is not itself, and does not make the US federal income tax system, a strictly progressive system, since the EITC creates both progressive and regressive ranges.
(that being the normal outcome of a hiked minimum wage)
It's a distraction in other words. A way to stop people demanding for a minimum wage hike.
It's usually riddled with methodological flaws, however, or not in the slightest bit empirical (as your last link so perfectly demonstrates - the guy doesn't even WANT empirical data!).
Neumark/Wascher, while empirical, was a crock of shit that restricted and modified Card/Krueger's data set in an attempt to change the outcome.
Card/Krueger has also, incidentally, been repeated across multiple state borders and has held up.
Of course there is a very good reason why there is a consistent effort to push the idea that hiking the minimum wage causes unemployment despite it being clearly false...
It's SAVAGE towards profits:
http://164.36.50.178/lowpay/research/pdf/NMW_profits_and_pri...
This is why Mankiw and other intellectual frauds in the hock of corporate lobbyists will always push this lie.
What actually tends to happen, is that first, a city/county/state/country's economy improves to the point that everyone is making a certain wage, just because of competition for workers. And then, policy-makers notice this, realize that there's an upside (better civic image) and no downside (workers out of jobs) to raising the minimum wage... and so they do.
Thinking of minimum wage as an adjustable variable, rather than an indicator, is trying to use the tail to wag the dog.
The trouble is stopping just short of the level at which (by minimum wage earner standards) they begin to live in opulence. That meaning, in this case, not so much when they're able to afford a yatch, but when they begin to consider putting on more debt than they can actually afford -- debt that won't get repaid. In that case, a vicious circle creeps in, because the ups and downs in excess debt levels contribute to inordinately sized booms and busts, e.g. like we have now.
So the real conclusion should be, since most people in developed countries earn barely more than the minimum wage itself: having a large consumer class benefits everyone in the economy provided that it is solvent.
What happens in practice is that banks extend loans first and worry about their reserves later. By virtue of that, the enterpreneur gets a buck to invest in whatever he's doing, and part of that buck lands as extra pay (and thus economic activity) in the hands of workers who will spend every last bit of it for all intents and purposes.
Classical economist's explanation: bank has 100, lends you 90 so as to keep 10 in reserves. 90 gets spent and part of it lands in the bank. Rinse, repeat.
What actually happens: bank has 10, lends you 100. It gets spent and part of it lands back in the bank. If it's not enough to post proper reserves, bank begs central bank for a buck or two to make things work. Rinse, repeat.
It's not an opinion by the way: it's by the own admittance of the SEC. See Steve Keen's research for more details.
Do you have a citation on this? A raise of the minimum wage actually having an effect at the margins, in either direction, is unusual, because places don't tend to raise the minimum wage until it wouldn't have an effect anyway.
Raising the minimum wage does serve as a ratchet, to prevent productivity from slipping down to previous levels. But this basically mirrors the other way in which places transform to exclude low earners: gentrification.
The trouble is if you increase it to $50/hour. (Assuming the businesses survive, which is indeed a big if...) In this case you buy everything you ever needed or wanted, and...?, then what? You save it, put on debt to buy a huge mansion that you'll never actually be able to afford in the end, or otherwise contribute to some random asset bubble, snd you get booms and bust cycles. (See Steve Keen's research on the latter point, fwiw.)
The Fed, seeing this collapse, would massively inflate the dollar. Anyone with savings would have their savings destroyed, and the churn would make everyone poorer than before, quite specifically the same people you were trying to help.
That may happen to some workers, but many others will simply find themselves out of a job. Even if 90% of the workers simply see a good wage increase, is it really appropriate to put the other 10% out of a job to do it?
> There's a virtuous circle in there.
Sounds like a vicious circle to me.
You can only raise salaries so high; eventually you'll reach a point where the company isn't profitable anymore. Then you either have to keep salaries at a lower rate, or raise prices to the consumer (and that's already at the point where the company makes no profit). Between the employees, company (or owner or stockholders) and consumers, someone has to make a sacrifice.
As an Australian who spent a couple of years in Asia (where minimum wages are much lower than Australia's $16/hour), one of the most stinking things I noticed was how much easier it was to find work there. I have 'unskilled' Australian friends who have spent months looking for work, without luck, whereas in Singapore for instance it seemed rare for somebody to take more than a week or two to find work.
While the quality of the work may be lower than that of minimum-wage work in Australia, it at least provides unskilled individuals with an opportunity to develop the experience, skills and confidence necessary to move onto better jobs, while their Australian counterparts are still sitting around at home feeling dejected at being unable to find work.
It took me a LONG time, and the work I ultimately found was much lower paid than it would be in Australia, the US or Europe.
Singapore is a perfect example of what happens if you have no minimum wage. The majority of the country's wealth gets diverted towards profits. Wages all around are lower.
The only reason it doesn't cause massive social instability in SG is because the government keeps housing, health care and education affordable by rigid price fixing.
There is still a few major problems with it as policy:
1) For those that do lose their jobs, their effect is extremely negative.
2) For those with little to no work history, the possibility of being priced out of an entry level job is a huge problem, leading to the prospect of reduced earnings for the rest of their life. [1]
3) For those who do not lose their jobs, the fact that they didn't lose their jobs is indicative of more major problems...they either don't understand the value of their labor, or they don't know how to negotiate with their employers. A minimum wage increase for these people is like treating the symptoms instead of the disease, and without addressing these issues, these people will likely be underemployed for a long time.
For those reasons alone, the minimum wage is a terrible way to reduce poverty. A serious answer is three-fold:
1) Use real programs to reduce poverty. This means a robust welfare system or a negative income tax or a universal basic income. These cost money, but at least their costs are known, as opposed to the mostly invisible costs of the minimum wage.
2) Promote wage transparency laws (which help those who are underpaid to know the true value of their labor). These prohibit employers from firing or retaliating against employees for discussing wages, which is a tactic to keep information asymmetrical in the favor of the employer.
3) Abolish the minimum wage.
Raising the minimum wage does not lead to higher unemployment.
>For those who do not lose their jobs, the fact that they didn't lose their jobs is indicative of more major problems...they either don't understand the value of their labor, or they don't know how to negotiate with their employers
That's paternalistic bullshit. In reality, they can't afford to have a long term time horizon. They usually need a job quickly and cannot afford to hold out for a better one.
Oh, they understand perfectly well about negotiations. Here's the employer reaction when they try to negotiate: "Well, I guess I'll fire you and hire this unemployed person instead."
The employer reaction when the minimum wage is raised is to say, well, guess I now have to pay those guys more.
So a minimum wage increase helps people perfectly well. You could argue that it would be even better if we as a society decided to eliminate unemployment by making sure that demand for labor was always high enough.
You left out a more likely option - that they effectively didn't WANT a higher wage and are being made worse off by the change - their job is now crappier and less desirable than it was before DESPITE paying more than it did before. Changing any single term of a contract by fiat usually makes both parties worse off - the fact that they could have negotiated for that outcome but chose not to suggests it's part of a suboptimal equilibrium.
What makes a job good isn't just the wage. If you force employers to pay more in MONEY per hour worked they will pay less in other ways to compensate. Less benefits. Less flexibility. Less training. Less "slack"/tolerance. Less willingness to take a chance on less qualified applicants. And so on.
Applying this to the low end of the labor market is pushed in a lot of Econ 101 classes but it requires so many assumptions to be true that the model only has a passing resemblance to reality.
To use your own logic, you can't say that raising the minimum wage won't also change other variables important to the model but assumed to be constant (maybe it causes companies to outsource, maybe it causes workers to emmigrate, maybe it raises worker productivity) - so if economists are truly constrained to ceteris paribus situations then they have nothing to say about the effects in reality from a minimum wage increase.
Here's a question. Both market concentration (as in oligopoly) and unemployment have significant downward effects on wages especially in the low end of the labor market. I don't like minimum wage and I wish we didn't have it but it's the best solution I've seen to these problems. Do you have a solution to these problems?
But I don't follow how solving that problem addresses markets becoming concentrated and member firms using that advantage to push wages down towards subsistence levels. That I think requires some sort of collective bargaining, which minimum wage is a type of (although it's likely not the best.)
Markets work to coordinate prices for both consumers and producers. Those who resist the laws of markets pay eventually. Might not happen right away but it happens-always.
My point is that low wages are never good exactly but they can be better if those wages pay for more year over year. It's like getting a raise without having to negotiate or even do anything for it.
He also didn't think wages would make it to subsistence: https://en.wikipedia.org/wiki/Iron_law_of_wages#Socialist_cr...
Wake me when there's an affordable machine that can clean my office as well as a human. And no, I don't mean a Roomba - they're toys.
This capitalist techno-utopianism is totally divorced from the real world. Even automated checkouts (which have been around for over a decade) still haven't eliminated cashiers and for good reason - because people suck at using them.
This attitude that empirical study doesn't matter, that only the accepted dogma of the economic establishment matters is primarily responsible for the disastrous state of the world economy.
People with your staunch beliefs would do better studying at a theological college where less harm will be done.
But the real reason minimum-wage advocates want to increase the minimum wage is to increase the pay of union members, who's pay is indexed to the minimum wage.
That's the voting block that matters to politicians, not the near poor, who barely vote and certainly don't have the time (or skills) for political activity (unlike the unions).
However, corporate lobbyists do - they largely control Congress and the executive branch.
Wanna know why they're against a higher minimum wage? Because it's inversely proportional to their profits.
You draw the line when you start getting inflation at about 10-12%. That's when inflation starts to have an effect on economic growth.
It could be raised gradually until that point.
Also the author does not do justice to the subject, implying much more agreement than actually exists. I didn't want to go into the political mess of this, however, simply point out that I was a bit confused as to what I was reading.
Let's say a farmer buys some extra land and instead of hiring 50 people to work on it he buys a fancy tractor.
- Would it be right for those 50 people to demand from the tractor factory to stop making tractors because they are out of work?
- Would it be right for them to demand from the government the wages they would have received if the tractors were not made in the first place?
- Would it be right for everyone to pay a higher price for food because farmer had to hire 50 people instead of a tractor?
Well, it doesn't. In fact, I would generally be skeptical about any claim that starts with "Economists agree...", such is the nature of the profession.
Also, if we actually admit the effect on poverty to be true, the most obvious way to reconcile this is that newly-unemployed (and hence poor) workers move to places with lower minimum wage, where they can find work. Fewer poor people => less poverty.
Heh.
The author of this piece, Mike Koczal, is an ideological blogger. You can catch him on Salon, MSNBC, TNR, etc. The main economist mentioned, Arin Dube, is not mainstream. He is actually sympathetic to Soviet central planning[7]. And the UMass Amherst Economics department has a well know for its "offbeat" views (e.g. numerous courses that take Marx seriously), not mainstream, not concensus.
The truth is this is a controversial, basicly idealogical, issue and if any consensus exists it is that the results will be mixed: some better and some worse off (i.e. unemployed).
[1] http://www.intellectualtakeout.org/library/chart-graph/econo...
[2] http://economix.blogs.nytimes.com/2013/03/04/what-economists...
[3] http://en.wikipedia.org/wiki/Minimum_wage#Surveys_of_economi...
[4] http://www.princeton.edu/~tleonard/papers/minimum_wage.pdf
[5] http://www.epionline.org/studies/epi_minimumwage_07-2007.pdf
[6] http://www.intellectualtakeout.org/library/chart-graph/econo...
[7] http://economistsview.typepad.com/economistsview/2012/10/a-n...
Right, how could anybody possibly take one of the most important thinkers in the history of political economy seriously!
Marx has important but inconvenient things to say even today. He may not have been right about everything, but a lot is spot on. It's just that lucid writing about class struggles is rather uncomfortable to those who are winning these class struggles. In any case, those who ignore him do so at their own (intellectual) peril.
They're both awful at making predictions. They're both highly ideological. They're both highly unscientific (making non-disprovable assertions).
When applied religiously, both lead to horribly broken economic outcomes.
And, ultimately, they both perform similar roles for the dominant power structures of their day. Marxism was taught in the Soviet Union to promote the Soviet State and economic system. Neoclassical is the intellectual justification of our neoliberal system.
Both have interesting parts which it is possible to learn from, but they're basically both the ideological opinion forming apparatus of the state.
It's not wise to point this out in polite company, however. People get upset.
The UMass Amherst economics department describes itself as a center for "heterodox" economics[1]. Look up the definition of that word and tell me again how they are mainstream.
BTW - I found Engles to be much more lucid than Marx's rather archaic prose. He is still almost completely wrong but at least his meaning is clearer.
Technically, minimal wages are paid where supply of labour greatly exceeds demand for labour. It is theoretically possible to see high skilled jobs pay low wages and low skilled jobs pay high wages, and you do see it happen sometimes, though the reverse is definitely more common.
If you think corporate profits are too low (fwiw they're at record highs right now), and corporations deserve more profit you shouldn't support a raise in the minimum wage.
If you're interested in what happens to prices if the minimum wage is hiked, read here:
http://164.36.50.178/lowpay/research/pdf/NMW_profits_and_pri...
"Our analysis of retail prices in 3 catering industries (canteens, restaurants and takeaways) does not indicate that prices in these industries were differentially affected according to their exposure to the minimum wage. Surprisingly, the only evidence of any price effect is found in the canteen industry where prices rose by a modest 1% in April 1999. "
No one can live off of $7.25 an hour and $10.10 is definitely a fair/decent wage.
Sure the cost for things will go up when it's increased, but with taxes decreased I'm more then happy to pay the higher costs. A higher cost that keeps people working and earning a living rather then not working and sitting around living off the peoples' tax dollars.
If poverty reduction in short term is the only objective then I am pretty sure increasing minimum wages will bring some people above the poverty line set at a time before increasing the wages. But whether that reduction ins poverty is sustainable over a decade or so is the important question.
Granted, the lack of poverty in those countries is not solely caused by a humane minimum wage - but it's a huge factor, and a positive indicator.
I lived in the US for 7 years and could never fathom how the country as a whole could tolerate such a system.
[credible citation needed]
http://en.wikipedia.org/wiki/Human_Poverty_Index http://en.wikipedia.org/wiki/List_of_minimum_wages_by_countr...
Or perhaps countries with less poverty are able to support higher minimum wages?
One end pushes the other end, sure, but you've got to start it somewhere.
People and politicians took action and improved laws, businesses still kept going and the cycle repeats upwards.
I don't see that happening in the US. I don't mind if the change isn't minimum wage (not going to happen in America), but at least do /something/ positive.
I agree that it isn't "magical fairy dust" that increases wages. What do you think it generally is?
Raising a very little bit of the minimum wage reduces a very little bit of poverty in the short run, without discussing any negative impacts to the society (in the short run or in the long run).
It is very different from "raising the minimum wage reduces poverty".
By then, everyone advocating this price control is long gone. Its a time bomb that explodes in the faces of low wage workers, preventing them from repricing their services to mer the new conditions.
Of course, smaller, smarter countries like Ireland figured that out and cut their minimum wages in response to the lowered demand.