The thing that the Econ 101 demand curve leaves out of the minimum wage debate is that those extra wages have side effects that impact the curve itself. Workers who are paid more at their primary job may not need to work a second job and/or will have more money to spend at other establishments that also pay their employees minimum wage, driving back up the demand for workers. Also, workers who are less stressed about affording the repairs on their car, or making the rent this month, or paying for their kid's medicine, will be better and more productive employees, generating additional value for their employers. These effects are harder to measure and imagine than a simple demand curve. They encourage more automation, sure, but automation has side effects, too. It keeps prices from growing as fast, which means people can spend the money they save elsewhere on other products or services, which increase demand for workers in that industry/establishment; if designed correctly automation can make workers' lives better even if there don't need to be as many workers; and automation itself is a product that needs to be designed, sold, purchased, installed, maintained, and upgraded, all of which drive up demand for still other jobs.
Sure, there's a point where a minimum wage would be too high and would start causing drag on the economy, and while I personally don't have a handle on the economics required to calculate an estimate of where that point is, it's clear that we aren't anywhere close to that point. Historical minimum wages have been higher, and just basic common sense tells you that so long as inflation is happening, the minimum wage should also be going up to keep pace. The "living wage" standard that a full-time minimum wage job ought to cover basic living expenses for a typical family seems like an entirely reasonable standard that has the benefit of being somewhat possible to be objectively determined.
It's unfortunate how difficult it is to have a reasonable discussion about economic policy issues. What you describe is pretty obvious - yet most people that have a say in this issue treat it like it's a binary decision ("increase vs. don't", instead of "increase how much?").
Supply and demand curves aren't observable: only their intersection, price, is observable. The curves also move about in unpredictable ways. So we've got this situation where unobservable quantities move with unknown dynamics in a noisy, unpredictable fashion.
In order to get anywhere with a statistical estimation problem as hard as that, you have to impose a lot of prior structure. I'd be surprised if, much of the time, you didn't end up effectively assuming the answer you want to see.
I'd go as far as to say supply and demand curves are a pretty useless abstraction. I've watched two economists argue over whether the 2015 oil price slump was a supply shock or a demand shock: if they can't get that right, what hope do the rest of us have?
In all fairness, you are wrong
about your first argument. Both demand and supply curves are empirically observable through auction mechanisms and market reaction tests.
I'd be happy to forward you to research on them if you are interested, but don't try and pose opinion as fact if you aren't in the field.
In some cases I agree that an auction will give you an estimate of what demand or supply would look like at different prices. Northwestern university used an interesting variant of a Dutch auction to sell its sports tickets:
But auctions are often impractical. Auction mechanisms that induce participants to bid their true preferences are complicated, and you're still forced to assume that the auction participants behave rationally and optimally.
In general, the point that I'm trying to communicate is that it's very difficult to disentangle supply and demand: much harder than most people realise.
I think OP was stating that they aren't measurable in the real economy, not that we can't construct situations in/mechanisms by which they can be observed.
TL;DR The Econ textbook model of rising prices —> lower demand is incorrect for minimum wage labor. Areas that have raised minimum wages have not reduced employment.
I believe many economists (including this author) are missing the structural changes caused by technology. The labor market is not just humans any more, and if/when human labor prices go up, the economics of automation are even more attractive. Ask any robotics startup.
As the article states, the real dollar value of minimum wage labor hasn’t gone up much in decades. This fact (combined with a relatively low unemployment rate) seems to puzzle many economists. But it makes a lot more sense when you consider the labor “market” to include robots and automation.
Funny how the same people who insist that we should raise the cost of cigarettes because, of course, it will reduce demand for cigarettes, and we should raise the cost of fossil fuels because of course it will reduce demand for fossil fuels, also insist we should raise the cost of minimum-wage jobs because...for great justice!
I like NN Taleb's skin-in-the-game take on it. The only people who get to vote on the minimum wage would be those who work at a minimum wage job or want to do so. Instead of other people getting them fired to signal their virtue, let the people who will face the consequences decide. If they decided to raise the minimum wage, I would support it, too. If they decided they'd rather not, I wouldn't insist on overriding them.
This is actually similar to what we have in sweden. The workers union negotiate with the employers, usually represented by an industry organisation.
It works fine in the sense that it means that we don't need minimum wage laws and the minimum wage therefore varies based on the job.
Usually there's a lack of representation of those who are not employed anywhere. So the union tend to prefer higher wages rather than increasing the number of jobs.
Did you read the article? Because it debunks exactly this simplistic argument.
> The argument goes like this: Low-skilled labor is bought and sold in a market, just like any good or service, and its price should be set by supply and demand.
> A minimum wage, however, upsets this happy equilibrium because it sets a price floor in the market for labor.
> More people want jobs at $7.25 than at $6, but companies want to hire fewer employees. The result: more unemployment.
Sorry to respond twice, but I wanted to catch another point you made:
> I believe many economists (including this author) are missing the structural changes caused by technology. The labor market is not just humans any more, and if/when human labor prices go up, the economics of automation are even more attractive. Ask any robotics startup.
This one is addressed in the article:
> The idea that a higher minimum wage might not increase unemployment runs directly counter to the lessons of Economics 101. According to the textbook, if labor becomes more expensive, companies buy less of it. But there are several reasons why the real world does not behave so predictably. Although the standard model predicts that employers will replace workers with machines if wages increase, additional labor-saving technologies are not available to every company at a reasonable cost. Small employers in particular have limited flexibility; at their scale, they may not be able to maintain their operations with fewer workers. (Imagine a local copy shop: No matter how fast the copy machine is, there still needs to be one person to deal with customers.) Therefore, some companies can’t lay off employees if the minimum wage is increased. At the other extreme, very large employers may have enough market power that the usual supply-and-demand model doesn’t apply to them. They can reduce the wage level by hiring fewer workers (only those willing to work for low pay), just as a monopolist can boost prices by cutting production (think of an oil cartel, for example). A minimum wage forces them to pay more, which eliminates the incentive to minimize their workforce.
> As the article states, the real dollar value of minimum wage labor hasn’t gone up much in decades. This fact (combined with a relatively low unemployment rate) seems to puzzle many economists.
It's not that puzzling if you consider the unionization has also fallen off a cliff and trade liberalization has increased.
Economic models usually assume free movement of labor when actually labor is quite restricted in its movement thanks to immigration laws. Capital is very mobile and can flow easily to where costs are low.
And not just immigration laws, but family ties, moving expenses, higher rents, etc, even within a country. There are a number of reasons it's harder to move labor than capital.
I have a Master's in Economics. In graduate classes, much of the work done in intro-level courses is tossed aside for more capable models that require a fair bit of calculus to understand. The easiest being the Solow growth model.
The intro courses delve into macro static models with at most 2 variables (think Keynsian Cross). In the graduate level, macro theory is taught as micro theory. While the deleterious effects of price controls still hold true at higher levels of economic reasoning, it's a multi-variate problem. With any price control, think of it as damage the rest of the people acting in the economy think of ways to route around. If a minimum wage increase takes place, perks can be cut without affecting overall employment levels as an example of how overall employment may stay the same.
The claim that Econ 101 does not apply to the labour market is a pretty extreme claim. If the studies aren't showing a consensus, I'm betting on Econ 101. Note that below, jasode has pointed out that the 1994 Card & Krueger study was based on phone surveys rather than payroll data.
There is some real and interesting debate on the question of should the cost of minimum living standards be borne by companies (through the minimum wage) or governments (through straight welfare). I'd love to see a compromise where it was still economic to do low-value work that is currently not done due to minimum wages.
It's not really an extreme claim. Honestly, if you're speaking on economic issues and the model you're using only has two lines: Supply and Demand, you really shouldn't be speaking.
1) The economy is everyone's business, especially when governments get involved. It is better for us all if things are discussed publicly, politely and with all views available (albeit, potentially rebutted).
2) Arguing that something that looks like a reasonably competitive market is not a reasonably competitive market is an extreme claim. Low-wage labour might not be a competitive market, but the evidence bar for showing that is still high.
3) Your article is a good read, but it has 2 bits of data that I'm already happy to agree with:
3.a) There is more going on with immigration than supply and demand; skills transfer is a big deal and I would expect migrants to have more gumption because they have shown some initiative migrating.
3.b) Raising the minimum wage obviously doesn't always have a "big immediate negative impact". The magnitude of the negative impact might be fast, slow, big or small based on how carefully the minimum wage is set. But the politics of minimum wages don't look like they are being imposed on the basis of a straightfoward economic case. They are being set first by politicians, justified second by some economists.
>2) Arguing that something that looks like a reasonably competitive market is not a reasonably competitive market is an extreme claim. Low-wage labour might not be a competitive market, but the evidence bar for showing that is still high.
Why do you believe it looks like a reasonably competitive market? Tons of studies have been done on minimum wage effects and the conclusions are at least indecisive. If this is a reasonably competitive market why is it so hard to definitively show that? It's not like it's hard to prove competitive markets - anyone can do a study where you take say gas stations, lower the price per gallon at one and watch them pull more customers.
>the evidence bar for showing that is still high.
Surely the evidence bar is just as high to show that it is a competitive market? This is another problem I have with Econ 101 - the idea that the default state of a market you don't understand is competitive is a political idea, not an economic one.
>1) The economy is everyone's business, especially when governments get involved. It is better for us all if things are discussed publicly, politely and with all views available (albeit, potentially rebutted).
Sure, I also live in the world and exist in a physical system so it's also my business which interpretation of quantum physics is correct. But I recognize that my existence in a system and my understanding of it are separate so I don't walk around lauding the Copenhagen interpretation (or walk into any other dispute in physics) because I read a few pop-sci articles on it. I feel the same way here. The challenge for scientifically minded laymen in the 21st century is that you can't "know everything." I believe that's also true for economics and a humbling here would serve everyone well.
If you walked into an econ forum and found a thread about programming and it was filled with stuff about how functions are bad, no one needs version control and a bunch of quantum computing gobbledygook, you'd probably try to correct them. And when you discovered that they held these beliefs not because they didn't know anything about programming (although they didn't) but because these beliefs somehow validated their existing political view of the world and thus they couldn't be talked out of it you might throw your hands up. My previous comment could (rightfully) be interpreted as me throwing my hands up.
>But the politics of minimum wages don't look like they are being imposed on the basis of a straightfoward economic case. They are being set first by politicians, justified second by some economists.
Is that not exactly what is going on in this thread? A bunch of people with a fundamentally political disagreement about the minimum wage desperately hunting for economic validation of their belief? In this thread we are all the politicians in your example, stumbling into subjects we know nothing about and finding post hoc rationalizations for what we already "know."
Quality response, thank you. I think most people don't choose their ideology and when the only ideology you know is the one you were given, it is very difficult to see past. This leads to some very pervasive notions, particularly in social and economic views, that are steeped in mostly unchecked ideological bias.
To be honest, that's a surprisingly poor article from Noahpinion.
The Economics 101 explanation for immigration not depressing wages is that it increases labour demand as well as labour supply (which is of course a well established fact). Shift the labour demand curve and you can make the labour supply curve as inelastic as you like (he appears to concede that in the follow up blog). I wouldn't expect any more than 1 mark out of 5 for answering an actual Economics 101 term paper and not acknowledging that effect.
You need only think about the axioms under which the traditional S/D graph holds true, to realize labor likely represents a distorted market.
1) Goods are fungible (spend 5 minutes interviewing for technology and come back and try to defend this one)
2) There exists "perfect" competition (that is to say any supplier can enter or exit the market, and there's full knowledge on the marginal utility of all goods)
The nature of labor muddies these waters and the world turns out to be a lot more complicated than econ 101 (notice that those axioms are almost never true regardless of market).
The whole point is that the Econ 101 model is deliberately simplified way beyond reality to be assimilable by people learning the topic for the first time.
The minimum wage argument assumes that corporations choose whether to hire based on an evaluation of the productivity of a worker. In reality, nearly all companies choose a wage by simply looking at their neighbors.
>They concluded, “Contrary to the central prediction of the textbook model ... we find no evidence that the rise in New Jersey’s minimum wage reduced employment at fast-food restaurants in the state.”
>Austrians argue that that empirical data itself is insufficient to describe economics; that consequently empirical data cannot falsify economic theory.
The 1994 Card & Krueger study that the journalist cited was based on phone surveys of fast food managers.
A followup 2006 study by Neumark & Wascher[1] re-examined the C&K study using actual payroll records instead of surveys and it concluded that C&K got the conclusion backwards. Payroll records showed that employment did indeed go down which matches econ101.
(Of course, someone else can look at the Neumark & Wascher study to see if they had flaws in analyzing the data so that this debate can continue without any resolution.)
So a phone survey vs. the life work of multiple Nobel economists?
As far as evidence, if you've ever run a restaurant, you know what happens when you increase labor costs by 15%? -- You don't have a restaurant anymore. Or you end up with this:
This doesn't mean quite what you think it does. The Nobel prize in economics is unrelated to the other Nobel prizes. It is not awarded by the Nobel committee. It is given by the central bank of Sweden to economists that it likes.
Is the latter a real concern for fast food outlets? That image shows an interface which is available in multiple languages, which frees up the humans in the establishment to serve the incoming orders more efficiently. In my experiences with those automated screens, there is still the option to go to the counter and order from a human if you really wanted to.
Is this universally a good thing? I don't know. It certainly reduces the role of employees to just process orders as fast as possible, where before there may have been a moderation on order flow by virtue of having to wait in line to speak to a human.
What happens when all restaurants have those costs increase at the same time, and have to increase their prices at the same time is way less clear than this.
This is partially true. Economics originated in the field of political economy, which was at the time for lack of a better word, bourgeois. The political economists existed in a sense only to advise the government and monarchies on economic policy. When Marx set out to critique this field in his magnum opus which took thirty years of study to complete, Capital, he criticised them of obsessing over superficialities and only observing appearance rather than to drop down to the essences of capitalism.
In this sense, economics is inherently political and ideological, its anathema is Marxism which is a critique of this political and ideological field, but not a substitute of its own. It is not an economic theory, nor a political economic theory, it is a method of critique which is anti-ideological.
That was an awesome breakdown. I've never heard Marxism described quite that way...but frankly, the only things I've ever heard about Marxism are the absolutely ludicrous things said by the right and the stuff I've found on my own. Certainly not a great deal of exposure.
Reading Marx (or some explanation of his work from different point of view) is interesting. I think most of his critics do not apply to this world but he do have an interesting point of view and adding some of his ideas into your personal philosophy. I found really good critics of Marx from a rather liberal philosopher. I forgot his name, it was at my college library, but i'm pretty sure that if you are interested in philosophy and in economics theory you should read some of his work.
Part of the problem is that people tend to conflate Marx's approaches to history and economics with the (often conflicting) political parties and movements that claim to fulfill his predictions, referring to all of them as "Marxism". This is by no means limited to opponents of Marxism or socialism, since various groups are fond of claiming Marx's mantle for themselves.
Certainly the elevation of particular economists is largely political. This Yasha Levine piece on the creation of the Nobel Prize in economics is interesting and relates to your point (the short of it is it's not really a Nobel and was created to push a particular set of policies). https://www.alternet.org/economy/there-no-nobel-prize-econom...
That's a lot of words intended to obscure a very simple subject.
1. Theoretically, a minimum wage will reduce unemployment, and the higher the minimum wage, the higher the impact. However, even in theory it has to be quite high to get meaningful impacts, given how noisy employment data is.
2. The minimum wage in the US is quite low, and has very rarely been increased sharply. As a result, we've never really seen any large spike in unemployment, but we also have no reason to think we wouldn't if we ever did. Nobody has ever tried a minimum wage of, say, 80% of the median wage to see what it would do.
3. Although not entirely conclusive, the data from the largest increases does seem to show spikes in the minimum wage. For example, the University of Washington released their study on the impact of Seattle raising their minimum wage from $11 to $13 per hour, and found that the reduction in hours was 3 times higher than the increase in wages, meaning minimum wage workers lost $125 per month in earnings[1]. By contrast, the best studies which show no effect covered smaller increases or increases to a lower level (as a % of median wages).
For example, one of the most famous of the "minimum wage has no effect" studies was by Card and Krueger, and covered a rise in the minimum wage in NJ from $4.25 to $5.05 in 1992. Adjusting for inflation, $5.05 is around $8.90 in 2017 dollars. It's entirely plausible that $9 might not cause any measurable impact, but $13 would. In fact, there is some data which suggests that around 50% of median hourly wages is an inflection point at which point you start to see real impacts. And median hourly wages in the US is slightly less than $25/hour, which is slightly less than twice $13, so in fact that's entirely unsurprising.
> When the University of Chicago Booth School of Business asked a panel of prominent economists in 2013 whether increasing the minimum wage to $9 would “make it noticeably harder for low-skilled workers to find employment,” the responses were split down the middle.
$9 is a level at which we'd expect to see a minimal effect. It's plausible to think that there might be SOME effect, or that there might be no measurable effect, and some studies have shown such an effect while others have not. It's not surprising that economists would split. But splitting over $9 would have an impact doesn't mean there's any debate over whether an impact exists at some level, and in fact, there is not. And it seems like $13 does have a measurable impact, and there's really no doubt that $30 or $50/hour would have a very major impact.
> The real impact of the minimum wage, however, is much less clear than these talking points might indicate.
No. There is, at most, a debate over how big an increase it would take for the impact to become clear.
>3. Although not entirely conclusive, the data from the largest increases does seem to show spikes in the minimum wage. For example, the University of Washington released their study on the impact of Seattle raising their minimum wage from $11 to $13 per hour, and found that the reduction in hours was 3 times higher than the increase in wages, meaning minimum wage workers lost $125 per month in earnings[1]. By contrast, the best studies which show no effect covered smaller increases or increases to a lower level (as a % of median wages).
The study is highly flawed. Among those flaws is that large businesses in Seattle have their minimum wage increase faster than small businesses. The UW study excludes multi-site businesses, many of which are classified as large and which contain basically half of the low paid work force. This means the UW study sees a totally expected shift of low paid workers from small businesses to large as a total decrease in employment among those low paid workers.
So are you saying that the article reports workers moving to higher-paying jobs is counted in the study as a reduction in employment? That is a serious flaw.
The study doesn't count workers moving to higher-paying jobs in general as a reduction in employment.
However:
1) The study excludes multi-site businesses because their payroll data is harder to interpret (they report all payroll as being aggregated in their headquarters).
2. Multi-site businesses are counted as large businesses for the purpose of the Seattle law, and large businesses saw their minimum wage increase faster than small businesses.
3. Some workers will have migrated from small businesses to large businesses to pursue higher minimum wages that weren't yet mandated for small businesses.
4. Some of those small businesses losing workers will just...sit there and not raise wages to compete or hire more workers to replace their losses.
5. Some of those large businesses will actually be multi-site businesses, excluded from the study.
So put it together, and there will be some workers who leave small businesses who have chosen not to raise wages, and join multi-site businesses which are paying higher wages, who will be missed by the study. At the same time, some workers will have moved the other way, which will have balanced things out somewhat, but it's plausible to think that more workers were "lost" than "gained" due to flows between multi-site and single-site businesses.
Now, the study did try to control for this factor by surveying multi-site businesses, but critics have pointed out that these efforts may be flawed, and may not have fully captured the actual flows, in which case the study may slightly overstated the negative impact on hours worked.
Yes, this letter[0] by Michael Reich (author of a competing study also analyzing Seattle's minimum wage) really digs into the UW study to find its flaws. I think the one I mentioned is the most damning.
> 1. Theoretically, a minimum wage will reduce unemployment, and the higher the minimum wage, the higher the impact. However, even in theory it has to be quite high to get meaningful impacts, given how noisy employment data is.
Er, wouldn't minimum wage have the opposite effect, theoretically? If there was a job that I would pay $1 for and someone was willing to do, but the minimum wage is $2, then that job is illegal and won't exist(well, it might, grey economy and all, but sticking to simple theory). This would increase unemployment.
Not if poor people have to work double hours to be able to live decently.
I won't go deep onto the working mother issues (single mother with two job or mother with 2 jobs and a father with one but doesn't do anything with the kids as it is a "woman job") or how people working more than 50 hours a week is a net loss in productivity and a costly public health issue, but these problems can be solved with high enough minimum wages or universal income.
I agree but those are issues orthogonal to the basic rate of unemployment, no? You can have very low unemployment and still have a very poor country if everyone's working for pennies, and that's a real problem. IIRC too low unemployment could be a sign of an unhealthy lack of economic mobility - everyone's stuck in their job and they make barely enough to scrape by, so they're terrified of dropping out of the workforce to pursue education/creative endeavors/a new career.
Correct. Minimum wage will increase unemployment but also increase the standard of living for the unemployed.
In conjunction with a functioning welfare program to catch the newly unemployed and get them back into the economy or prevent them living on the street, it can be effective against people being out of the unemployment statistic while still not being able to afford living.
The way to think about it is that the bigger the minimum wage, the closer you get to econ 101.
When you're below a certain threshold, the bargaining power effects of the firm hiring minimum wage workers having a monopsony of sorts can mean a MW with little-to-no disemployment effect. I could even see a $15 MW be reasonable in, say, the bay area. But it would be a ridiculous affair nationwide.
I completely disagree with the article's conclusion. But, this is a pretty good article. It actually cites opposing views, including linking to them, and tries to make its case logically. Great writing!
That said, I'm not an economist, but when I see an issue such as this, in which leading economists disagree with some position, I don't think the takeaway of one article should be "I now know what the truth is". I mean as the article itself says, lots of leading economists think a minimum wage is bad. So if after reading the article your position is "well clearly I now know better than people who have spent their whole lives on this topic", you're being arrogant.
Also, from the economists I do hear on a regular basis, it's pretty clear that they're all very anti-minimum-wage. Obviously this is a self-selected sample, but I get the feeling that most economists aren't particularly pro minimum wage - they're either indifferent or at most think that there are some tradeoffs that can be made in favor of the minimum wage. But there are tradeoffs, as in the econ 101 model isn't wrong. It's just worth it sometimes.
On the "empirical" question, I tend to side with Bryan Caplan here - there are studies going both ways, but since in almost every other situation basic supply/demand models are correct, there's got to be really strong evidence against assuming supply/demand models work for labor, too.
"Many companies can recoup cost increases in the form of higher prices; because most of their customers are not poor, the net effect is to transfer money from higher-income to lower-income families."
Higher income people aren't the primary customer for McDonalds (in the US.) If you raise a Big Mac price by $2, "rich" people might buy the same amount, but poor people will buy less and poor people are a much larger share of the Big Mac market than rich people, thus it would be a net loss.
"Even if a higher minimum wage does cause some people to lose their jobs, that cost has to be balanced against the benefit of greater earnings for other low-income workers."
This is just nuts. Some guy now makes $20k per year, but some other guy now makes $0 per year, instead of both making $15,000 per year. That's a net loss of $10,000 per year in economic activity. It makes one person slightly better off, while making the other person infinitely worse off.
The other interesting thing about this debate is that those arguing for higher minimum wages also tend to advocate for unrestricted immigration and so-called sanctuary city policies which necessarily results in a greater supply of lower-skilled labor. Without a minimum wage, immigration of lower-skilled workers would necessarily regulate itself as wages fall to equilibrium. You don't even need immigration law -- the free market would limit and allow immigration as wages moved. Essentially it would make the market for labor far more liquid.
Despite the article's derisive condemnation of "Econ 101," supply and demand is still a thing. An increased supply of labor means that the equilibrium price is now lower, which with the price floor of minimum wage means that there is an even greater surplus of labor.
The article seems to criticize so-called "Econ 101" while dismissing Nobel economists Friedman and Hayek. I'm pretty sure those guys were far beyond Econ 101. The author talks about how in the 1950s 1 and 3 workers were in a union, with the implication that the higher wages that resulted were good for society. However the author conveniently leaves out that the US had a poverty rate of 22.4% in 1959 and in 2015 that poverty rate was 13.5%.
Perhaps there's an argument to be made for higher minimum wages, but this article certainly hasn't made it.
Sure, there's a point where a minimum wage would be too high and would start causing drag on the economy, and while I personally don't have a handle on the economics required to calculate an estimate of where that point is, it's clear that we aren't anywhere close to that point. Historical minimum wages have been higher, and just basic common sense tells you that so long as inflation is happening, the minimum wage should also be going up to keep pace. The "living wage" standard that a full-time minimum wage job ought to cover basic living expenses for a typical family seems like an entirely reasonable standard that has the benefit of being somewhat possible to be objectively determined.