September 09, 2013
Social Justice, Economic Literacy, and the Minimum Wage
One of the challenges to achieving social justice by including a significant measure of government regulation of the private sector is to ensure that the secondary economic effects are considered in advance and do not threaten to undermine the primary effects sought to be achieved. Until recent years, the bishops in the United States had a tendency to endorse government-centric platforms for social justice with little attention to or awareness of economic incentives, disincentives, collateral consequences, etc. In more recent years, the bishops have appreciated the necessary prudential judgment that goes into evaluating the right mix of public and private, government and charitable, regulatory and market elements toward the end of reducing poverty and enhancing human thriving.
Yesterday's guest column on the economic consequences of increasing the minimum wages in the Minneapolis Star Tribune by Michael J. McIlhon, who teaches economics at Augsburg and Century Colleges here in the Twin Cities, ought to be required reading for anyone who aspires to "economic literacy" in public policy discussions.
McIlhon cites the "11th Commandment" in economics, which is "Thou shalt ever do only one thing." The point is that by doing one thing, one inevitably does another as well (and another and another). If the government mandates that employers provide health insurance to full-time employees, especially an expensive menu of prescribed coverage, while the result may be that some employees receive health care who did not have it previously, the other result will be that employers to remain competitive in labor costs will move more employees to part-time status and hire fewer full-time employees. If the government requires that employers provide guaranteed leave for health or childbirth reasons, fortunate employees may enjoy that new benefit, while the employer likely will have to make adjustments in benefits or salaries or in overall number of employees to offset that cost.
And if the government increases the minimum wage that must be paid to employees on the lowest end of the pay scale, who overwhelmingly are those with less education and lower skill sets, some employees will receive higher wages while other employees will be laid off and still other potential employees will never be hired. Indeed, as even advocates of a minimum wage generally must acknowledge, the calculation for the benefits to some of the increase always must include the number of jobs to be lost and not created as a consequence of increasing the cost of unskilled, low productivity labor.
Thus, while economists tend to differ about a lot of things, there is near unanimity that, as McIlhon describes it, "a minimum wage is a very bad antipoverty tool, poorly focused with some ugly side effects":
The National Bureau of Economic Research recently published work in which the authors find “no compelling evidence” that minimum wages raise household incomes. They found that the “disemployment effects” on some household incomes (the loss of a job or the inability to find a job at higher mandated wages) more than offset the income effects in other households of higher wages for those who manage to keep their jobs. Since both these effects are concentrated in lower-income households, the authors conclude that minimum wages simply redistribute income among low-income families, that they “help to raise the level of income above the poverty line in some families, but push income below the poverty line in others.”
Indeed, the problem with a raise in a minimum wage is worse than the immediate effect of simply redistributing income among the poor. By thereby suppressing the labor market for uneducated, low skill workers, many people and especially teenagers will be left unemployed and deprived of the experience and skills training of a low-wage job as "the first rung on the productivity ladder."
Again, you can read the rest of this lesson in economic literacy here.
I think minimum wage is one of those shiny-objects distractions; the real issue is the erosion of jobs that pay well as business owners siphon off more and more of business revenue to themselves and “outsource” what used to be middle-income jobs to consultants and part-time workers.
Posted by: sean samis | Sep 9, 2013 4:46:43 PM
The last year that the black unemployment rate was lower than the white unemployment rate was the year the first federal minimum wage law was passed.
The purpose of minimum wage laws is to drive entry level workers out of the market and give their jobs to union thugs.
Posted by: JoeThePimpernel | Sep 9, 2013 5:40:57 PM
"Thou shalt ever do only one thing."
The minimum wage laws are an attempt to compensate laborers for their work. If the 11TH commandment in economics is "thou shalt ever do only one thing" and thus "Let the chips fall where they may", no wonder the economy is not able to flourish and serve the common Good.
Posted by: Nancy | Sep 10, 2013 10:09:16 AM
How does this analysis apply to child labor laws?
Posted by: Ellen Wertheimer | Sep 10, 2013 11:35:55 AM
The same effect applies when there are regulations re safety in workplace or standards of quality or purity of drugs, etc.
Posted by: t.gracchus | Sep 10, 2013 3:21:39 PM
The difference with health and safety regulations is that, while, yes, there will be externalities there too, those secondary effects tend not to directly reverse the primary effects. Thus, while health and safety regulations increase costs and thereby increase the price for goods and services and decrease employment and economic growth, the primary effect of improving health and safety are not directly undermined. While we should of course be aware that health and safety regulations are not cost-free, and thus not be too quick to impose regulations on dubious evidence, the primary effect of improved health and safety may well outweigh the secondary effects of higher prices and lower employment.
By contrast, with a raise in the minimum wage, the secondary effects rather directly cancel out the primary effects of enhancing working wages for low-education and unskilled workers. While a lucky segment of workers on the low-end of the wage skill take home higher pay, another unlucky segment lose their jobs or are never hired. At best, then, in terms of improving worker incomes, it is a wash. In reality, it is made worse because so many people never get the chance to get on the first step of the wage ladder. In sum, then, the minimum wage fails to achieve its primary effects because of a failure to appreciate the secondary effects.
Posted by: Greg Sisk | Sep 10, 2013 6:55:49 PM
It’s not so much as “let the chips fall where they may,” as knowing that “chips will fall” and realizing that pretending otherwise just means even more people get hurt. Economics, as a form of collective psychology, identifies certain natural courses that cannot simply be wished away. We can and should appeal to the better nature of human beings and encourage voluntary and altruistic behavior. The Church has much to say here. But that is a very different thing from using government to decree certain preferred outcomes for the mass of people, without giving close attention to the externalities that will follow.
As for saying that the “minimum wage laws are an attempt to compensate laborers for their work,” I appreciate that is the understandable intent of proponents. But, in the end, that statement either avoids or begs the question. No one suggests that a worker should go unpaid altogether – that would plainly be unjust. The crucial question is what wage rate is owed and how we evaluate that wage rate. While we can postulate abstract notions of a fair wage or a living wage, those concepts remain just that, abstractions disconnected from the real world of labor markets. We can try to enforce an ideal wage rate by government regulation, but we then have to understand that unexpected consequences may undo what we are trying to do.
If an uneducated, unskilled worker’s labor adds value to the employer at Sum A, then using government to artificially boost that wage to the higher amount of Sum B will have inevitable secondary consequences. We know from repeated economic studies that the unavoidable secondary consequence for raising the minimum wage is fewer entry-level jobs being created and more entry-level workers being laid-off, higher unemployment rates for teenagers and other younger workers, and especially higher unemployment rates for teenagers and young workers in minority communities. We can wish it weren’t so, but, as the old saying goes, if wishes were horses, then beggars would ride.
Beyond the immediate consequence of lost jobs, the continuing consequence then is that individuals who would increase the value of the labor they provide through the experience and training that comes with an entry level job may not get one or be delayed in getting one. And the negative effects cascade on down the labor market and over the years.
In sum if we select a particular hourly rate as mandated for reasons of fairness, we then have to expect that the labor markets will be affected negatively. We can debate as to how much of a negative impact (i.e., greater unemployment) is an acceptable trade-off for a higher minimum wage (for those fortunate to secure or hold on to such employment), but we cannot avoid the externality of increased unemployment simply because we don’t like it or are offended by it. We may as well be offended by the decline in the labor market for farm workers in Minnesota because of the advent of winter.
In terms of enhancing the lives of workers generally, we instead should be asking if there are other approaches that are more effective – and honest – than the economically illiterate approach of raising the minimum wage. And there are many, although they are not as easy as snapping fingers and declaring a higher minimum wage. Tax incentives for employers may be one example, which then alleviate the effect of paying newer and unskilled workers more than the value added. There is an externality here too, in terms of reduced tax revenues, but that may be offset in part by increased revenues over time from workers who are employed and move up the wage ladder. Another approach may be to reduce other regulations of a business area so that enterprises expand and add more jobs, including those at the lower end of the scale.
Best of all, of course, would be to reform education so that we have more educated and skilled workers, who in turn may demand a higher wage on the market. And that would mean moving toward greater choice for families in education, including vouchers for private schools and breaking the stranglehold of the teachers’ unions on K-12 education. But that’s an issue for another day.
Posted by: Greg Sisk | Sep 10, 2013 7:04:31 PM
" At best, then, in terms of improving worker incomes, it is a wash." An empirical claim, not a matter of Econ 101. The claim is always made in connection with all mandates. It has no special connection to minimum wages or health insurance. When one focuses on it is a matter of political inclinations.
Posted by: t.gracchus | Sep 10, 2013 8:18:36 PM
The problem with externalities is that they occur with any course of action, including the absence of a minimum wage. Poorly paid workers do a poor job and are unable to spend much, dragging down the economy. This is part of why our current “recovery” has been so lack-luster; most of the wages are going to management and those who already have more than they can spend.
Higher wages paid to underpaid employees are almost universally turned into additional spending by those employees to purchase goods and services they otherwise cannot afford. This additional spending increases economic activity and employment opportunities. As Henry Ford said, “It is not the employer who pays the wages. Employers only handle the money. It is the customer who pays the wages.” More customers with more money means more wages.
Posted by: sean samis | Sep 11, 2013 1:18:50 PM
That's simply not what the empirical evidence shows. A higher minimum wage does not translate into overall additional spending in the economy, thus lifting economic activity. Instead, economic research confirms again and again that a higher minimum wage puts more in the pockets of a few workers on the lower end of the wage scale while simultaneously taking money out of the pocket of other workers through loss of a job (and depressing job opportunities) and leaving things overall in a worse state. In the end, the minimum wage proves to be a well-intended but regressive policy that impoverishes as many low-end workers as the numbers that are (slightly) enriched by it, while weakening the economy by suppressing job growth and by undermining progress on wages through preventing creation for many of that first job with the valuable benefit of experience and training.
More importantly, it is time to move beyond stale old approaches that rely on government programs and government regulation, with at best mixed results, and look for more creative solutions that address the real problems of poverty with a clear-eyed understanding of public policy and economic realities. In particular, the best way to avoid a low wage for an uneducated, unskilled worker is to convert those into educated, skilled workers. And that requires education reform, which admittedly is a much tougher nut to crack than permitting politicians to legislate a higher minimum wage and pat themselves on the back as having accomplished something, when we know better.
Social justice to be meaningful has to become "smart" social justice.
Posted by: Greg Sisk | Sep 11, 2013 4:30:54 PM
There is nothing that precludes us from creating an economic system that serves the common good through innovation, technological forcasting, systematic development,research, education,and integration, that includes a just compensation,a safe working enviroment,increased production,and room for advancement...what needs to be addressed is the growing gap between buisness accomplishment and human progress so that through mutual effort,and a respect for integrity,we can create a robust economy and look forward to a future that will, hopefully, be one of human flourishing, which, in the order of things, begins with respect for Marriage and The Family.
Posted by: Nancy | Sep 11, 2013 7:03:58 PM
The question then becomes: if all statutory requirements produce the downward risks that Professor Sisk is talking about (including safety laws, child labor laws, laws limiting working hours, etc.), why select the minimum wage for special criticism?
Incidentally, a lot of pressure could be removed from manufacturing if we had a reliable, government-administered and taxpayer-funded universal health care, pension, and disability system. Prices for goods produced in this county might well go down if health care and pensions were provided by the government and manufacturers did not have to include them when pricing what they sell. That in itself might well lead to more jobs, if fuller employment is a goal (which I assume it is). A further effect might be an actual decline in education costs, because teacher health care and pensions would be taken care of. Taxes would go up, of course, but the burden would be imposed across society, with the greater burden falling on the wealthy, which is surely where it should be (although tax reform would be necessary as well to return our system to a more functionally progressive one).
Posted by: Ellen Wertheimer | Sep 12, 2013 8:20:17 AM
The minimum wage is the focus here because it is on a collision course with its own raison detre. The minimum wage is singled out because here the evidence long has been (and now is empirically confirmed again) that raising the minimum wage simply fails of its purpose. The secondary effects (lost jobs, lost job growth, lost training opportunities, etc.) pretty directly cancel out/offset the benefits (higher wages for those who do not lose the job). Moreover, we should be wary when politicians tell us that a simple solution (decreeing a higher market rate for labor) will resolve a complex problem -- especially when politicians elide the evidence of the downsides of that solution.
But the primary point here is that public policy makers, and those of us concerned about social justice, poverty and human thriving, cannot be effective if we ignore the problem of unintended consequences. The most idealistic of public policy initiatives may have secondary effects that generate other serious problems or even reverse the benefits sought to be achieved.
Safety laws, for example, cannot be considered as an unalloyed virtue in every case. On many occasions, we may conclude that the tradeoff is more than justified, that the loss in economic growth by additional costs is offset by protecting people from harm and indeed avoiding the damage to economic progress by the costs of injured and disabled people. But when a safety regulation proposal promises rather minimal benefits, we should not mistakenly pretend there's no downside in pushing it forward anyway, thereby overlooking the secondary effects.
In sum, the suggestion here is not a movement toward strict libertarianism or unrestrained laissez faire capitalism. Rather, the primary point is that government intervention has negative as well as positive impacts. And we are fooling ourselves is we pretend otherwise and fail to fully consider all the effects.
Posted by: Greg Sisk | Sep 12, 2013 3:26:31 PM
Professor Sisk: You raise some excellent points in your response. It is, of course, important to bear in mind that successful opposition to government initiatives can have unintended consequences as well. We clearly live in a world that requires balancing of competing concerns, with all of us ready to accept some negatives in order to attain a greater good.
Posted by: Ellen Wertheimer | Sep 12, 2013 3:46:51 PM
Greg; I don’t dispute that studies conclude as you say about the minimum wage, but since this outcome is counter-intuitive, I am confident that the empirical evidence is not so clean and neat. I may be wrong, but something seems amiss here. Is there evidence that the minimum wage actually hurts sales revenue more than briefly?
The studies you mention may be seeing an effect, but the questions should be “what is the cause? What is actually going on?” Are jobs lost simply because businesses are unwilling to endure temporary losses while the economy grows? Given the recent data that shows that the top 10% make almost 50% of all wages paid, and the top 1% taking almost 20% of all wages, this short-term greed seems a better explanation; it’s at least not counter-intuitive.
The current economic rule seems to be that paying employees adequately hurts business, but paying management exorbitantly is good for business.
Your description of the process envisions an unstated “grand bargain”; entry level workers “get the chance to get on the first step of the wage ladder” with jobs providing unsustainable wages but valuable work experience. These unsustainable jobs are supposed to be followed by higher-paying jobs. But this is not what is happening any more. The middle class is being squeezed out of existence, low paying jobs even for experienced workers are the new norm. All this is seems to be for the purpose of funding the boss’s greed.
You are correct that we need to reboot our educational system, but the wage-inequity that now characterizes our economy will not be fixed with better education; college graduates are already struggling to find sustaining employment.
Whatever solution exists, it is found in straight talking. Greed is the enemy.
Posted by: sean samis | Sep 12, 2013 3:50:50 PM
Sean, I don't think we are truly far apart on the fundamental issue -- which is that we need to pay attention to the empirical evidence. A policy should be grounded in reality as well as aspirational ideals. Turning to the McIlhon piece cited in the original post, you can find sources to the most recent study, which focuses on the minimum wage raise as simply redistributing wealth from some on the lower end to others on the lower end.
The recent data about percentage of earnings allocated by earning level should give us all pause, but we should think carefully before jumping to conclusions. We cannot conclude that the increase in earnings by the wealthy necessarily translates into loss of earnings below that level (as the economy is dynamic and this is not a zero-sum allocation). Nor should we assume that these wealthy individuals were earning money the old-fashioned way through high wages, as opposed to cashing in on stocks as the market rises rapidly in recent months.
Most importantly, I worry that when political measures are proposed to cut the so-called 1 Percent and the Big Corporations down to size, the impact often seems to fall most heavily on the middle class and on smaller employers. The wealthy are always well-positioned to weather economic ups and downs and to adjust to (and use clever accounting to avoid) new or higher taxes. Big Corporations likewise are better able to accommodate to more government intervention and regulation through legislative fixes, economies of scale in operations, and ready access to legal counsel and human resources professionals to take most advantage of changes. Instead, the whack of government taxation and regulation lands hardest on the middle class taxpayer and the small business employer. Even today, the small business remains the engine of economic growth and sources for new jobs.
In sum, I do fear that by governing by impression or stereotype, rather than by economic empirical evidence, is often counterproductive. We too often are tempted to take steps that we think will "make the wealthy pay their fair share" and force Big Corporations "to pay a fair wage," without appreciating that the negative impacts of such policies fall more powerfully on the non-wealthy and small employers. Big Government and greater regulation tend to help Big Corporations to flourish while strangling other sectors of the economy.
In yet another Minneapolis Star-Tribune piece, a small business owner today explains the obstacles he faces in creating jobs and paying workers more due to the litany of government rules he must follow:
Posted by: Greg Sisk | Sep 12, 2013 6:16:47 PM
Greg, an adequate response to all your comments would be too long for this venue, so I shall have to be brief.
The empirical evidence about different economic policies might be insufficient; but that does not change the fact that policy decisions still have to be made. What is often overlooked is that a decision to “stay the course” is just another policy decision for which the empirical evidence would be insufficient. “Staying the course” is not a rational default currently because current policies are unsustainable and unjust.
You question whether the direction of income to the top 1 or 10 percent is the cause of the loss of income to the middle and lower classes. The economy is not necessarily a zero-sum process, but in the lack of empirical evidence of some other source of income to the already-wealthy, assuming that their gain comes at the cost of income to others is quite reasonable. If you think there’s another explanation, you should explain that. Barring that, we must rely on rational explanations; the most rational being that the wealthy are being excessively compensated at the expense of everyone else.
Ironically, you commented that wealthy are “well-positioned to weather economic ups and downs .... to use clever accounting to avoid new or higher taxes ... to accommodate ... through legislative fixes, ... ready access to legal counsel...”
In short, the wealthy and corporate management sabotage efforts to institute any kind of social or economic justice. On this matter there is recent empirical evidence of the malevolent effects of becoming wealthy. Something as simple as an aggressive tax on exorbitant incomes would be a step in the right direction.
As I wrote at the beginning, this is not the venue for a long, detailed exposition of all these points. A minimum wage is a good idea, but it needs to be implemented in a way that diverts income from the over-compensated to the under-compensated and not just from one poor person to another (as the wealthy would prefer).
Posted by: sean samis | Sep 16, 2013 10:49:11 AM
The start of a good idea:
Posted by: sean samis | Sep 18, 2013 3:23:10 PM
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