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4 Ways Employers Respond to Minimum Wage Laws (Besides Laying Off Workers) – Article by John Phelan

4 Ways Employers Respond to Minimum Wage Laws (Besides Laying Off Workers) – Article by John Phelan

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John Phelan
September 25, 2019
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Most of you will be familiar with a supply and demand graph. This shows a demand curve, which graphs the relationship between the price of something and the quantity demanded of that something, as well as a supply curve, which graphs the relationship between the price of something and the quantity supplied of that something. It is probably the most basic—and useful—model in economics.Whether the something in question is a good or a service, shoes or labor, the basic supply and demand model predicts that, ceteris paribus, an increase/fall in the price of something will lead to a fall/increase in the quantity demanded of that something—this is Econ 101.

In the context of minimum wage laws, this model predicts that setting a minimum wage above the equilibrium level or raising it will lead to a lower quantity of labor demanded. Often, people think this means fewer workers employed. So, when minimum wage hikes aren’t followed by increases in unemployment, people cite this as evidence that minimum wage hikes don’t reduce employment.

But a model is an abstraction from reality. In that messy reality, there are a number of things employers can do in response to a minimum wage hike that don’t involve laying off employees.

Remember, the simple supply and demand model says that increasing the price of labor leads to a lower quantity of labor demanded. But an employer doesn’t need to cut workers to achieve that. They can cut their hours instead.

Research from Seattle illustrates this. In 2014, the city council there passed an ordinance that raised the minimum wage in stages from $9.47 to $15.45 for large employers in 2018 and $16 in 2019. In 2017, research from the University of Washington examining the effects of the increases from $9.47 to as much as $11 in 2015 and to as much as $13 in 2016, found:

…the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent. Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016. [This was later revised to $74]

As the model predicts, the price of labor increased, and the quantity of labor demanded fell.

A follow-up paper looked at the impact on workers who were employed at the time of the wage hike, splitting them into experienced and inexperienced workers. It found that, on average, experienced workers earned $84 a month more, but about a quarter of their increase in pay came from taking additional work outside Seattle to make up for lost hours. Inexperienced workers, on the other hand, got no real earnings boost—they just worked fewer hours. Again, as the model predicts, the price of labor increased and the quantity of labor demanded fell. Instead of more money, they got more free time.

An employer could try to raise worker productivity to match the new minimum wage. One way to do this is simply to work their employees harder.

One paper by Hyejin Ku of University College London looks at the response of effort from piece-rate workers who hand-harvest tomatoes in the field to the increase in Florida’s minimum wage from $6.79 to $7.21 on January 1, 2009. It found that worker productivity (i.e., output per hour) in the bottom 40th percentile of the worker fixed effects distribution increases by about 3 percent relative to that in the higher percentiles. The author concludes:

These findings suggest that while an exogenously higher minimum wage implies a higher labor cost for the firm, the rising cost can be partly offset by the increased effort and productivity of below minimum wage workers.

Another recent study by economists Decio Coviello, Erika Deserranno, and Nicola Persico looks at the impact of a minimum wage hike on output per hour among salespeople from a large US retailer. “We find that a $1 increase in the minimum wage (1.5 standard deviations) causes individual productivity (sales per hour) to increase by 4.5%,” they note.

Importantly, tomato harvesting and sales are labor-intensive work. Any increase in output per hour can be assumed to come from increased physical effort.

Supporters of higher minimum wages talk almost exclusively about wages. But this is only one part of a worker’s total remuneration. The cost of an employee to the employer is not just the wage but total remuneration, including benefits such as health insurance. If legislation increases the wage, the employer can keep overall remuneration the same by reducing other elements.

A new paper from economists Jeffrey Clemens, Lisa B. Kahn, and Jonathan Meer finds that this is what happens in practice. The authors “explore the theoretical and empirical relationship between the minimum wage and fringe benefits, with a focus on employer-sponsored health insurance.” They find:

[There is] robust evidence that state-level minimum wage changes decreased the likelihood that individuals report having employer-sponsored health insurance. Effects are largest among workers in very low-paying occupations, for whom coverage declines offset 9 percent of the wage gains associated with minimum wage hikes. We find evidence that both insurance coverage and wage effects exhibit spillovers into occupations moderately higher up the wage distribution. For these groups, reductions in coverage offset a more substantial share of the wage gains we estimate.

Simply put, as the minimum wage rises, other elements of worker compensation fall.

If a business that plans to add 10 jobs over a year cancels these plans on the passage of a minimum wage hike, those 10 jobs have been destroyed without ever showing up in the data.

Economists from Washington University in St. Louis use wage data on one million hourly wage employees from over 300 firms spread across 23 two-digit NAICS industries to estimate the effect of six state minimum wage changes on employment. They find “…that firms are more likely to reduce hiring rather than increase turnover, reduce hours, or close locations in order to rebalance their workforce.”

As we look at responses over time, we also see the possibility that employers can substitute capital inputs for labor inputs.

Economists Grace Lordan and David Neumark analyze how changes to the minimum wage from 1980 to 2015 affected low-skill jobs in various sectors of the US economy, focusing particularly on “automatable jobs – jobs in which employers may find it easier to substitute machines for people,” such as packing boxes or operating a sewing machine. They find that across all industries they measured, raising the minimum wage by $1 equates to a decline in “automatable” jobs of 0.43 percent, with manufacturing even harder hit.

They conclude that

groups often ignored in the minimum wage literature are in fact quite vulnerable to employment changes and job loss because of automation following a minimum wage increase.

Minimum wage hikes are bad public policy. Economics, like all social sciences, has difficulty testing its models against data, but even where we can, the evidence bears this out.

John Phelan is an economist at the Center of the American Experiment and fellow of The Cobden Centre.

This article was originally published by the Foundation for Economic Education (FEE).

Why Robots Won’t Cause Mass Unemployment – Article by Jonathan Newman

Why Robots Won’t Cause Mass Unemployment – Article by Jonathan Newman

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The New Renaissance Hat
Jonathan Newman
August 5, 2017
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I made a small note in a previous article about how we shouldn’t worry about technology that displaces human workers:

The lamenters don’t seem to understand that increased productivity in one industry frees up resources and laborers for other industries, and, since increased productivity means increased real wages, demand for goods and services will increase as well. They seem to have a nonsensical apocalyptic view of a fully automated future with piles and piles of valuable goods everywhere, but nobody can enjoy them because nobody has a job. I invite the worriers to check out simple supply and demand analysis and Say’s Law.

Say’s Law of markets is a particularly potent antidote to worries about automation, displaced workers, and the so-called “economic singularity.” Jean-Baptiste Say explained how over-production is never a problem for a market economy. This is because all acts of production result in the producer having an increased ability to purchase other goods. In other words, supplying goods on the market allows you to demand goods on the market.

Say’s Law, Rightly Understood

J.B. Say’s Law is often inappropriately summarized as “supply creates its own demand,” a product of Keynes having “badly vulgarized and distorted the law.”

Professor Bylund has recently set the record straight regarding the various summaries and interpretations of Say’s Law.

Bylund lists the proper definitions:

Say’s Law:

  • Production precedes consumption.
  • Demand is constituted by supply.
  • One’s demand for products in the market is limited by one’s supply.
  • Production is undertaken to facilitate consumption.
  • Your supply to satisfy the wants of others makes up your demand for for others’ production.
  • There can be no general over-production (glut) in the market.

NOT Say’s Law:

  • Production creates its own demand.
  • Aggregate supply is (always) equal to aggregate demand.
  • The economy is always at full employment.
  • Production cannot exceed consumption for any good.

Say’s Law should allay the fears of robots taking everybody’s jobs. Producers will only employ more automated (read: capital-intensive) production techniques if such an arrangement is more productive and profitable than a more labor-intensive technique. As revealed by Say’s Law, this means that the more productive producers have an increased ability to purchase more goods on the market. There will never be “piles and piles of valuable goods” laying around with no one to enjoy them.

Will All the Income Slide to the Top?

The robophobic are also worried about income inequality — all the greedy capitalists will take advantage of the increased productivity of the automated techniques and fire all of their employees. Unemployment will rise as we run out of jobs for humans to do, they say.

This fear is unreasonable for three reasons. First of all, how could these greedy capitalists make all their money without a large mass of consumers to purchase their products? If the majority of people are without incomes because of automation, then the majority of people won’t be able to help line the pockets of the greedy capitalists.

Second, there will always be jobs because there will always be scarcity. Human wants are unlimited, diverse, and ever-changing, yet the resources we need to satisfy our desires are limited. The production of any good requires labor and entrepreneurship, so humans will never become unnecessary.

Finally, Say’s Law implies that the profitability of producing all other goods will increase after a technological advancement in the production of one good. Real wages can increase because the greedy robot-using capitalists now have increased demands for all other goods. I hope the following scenario makes this clear.

The Case of the Robot Fairy

This simple scenario shows why the increased productivity of a new, more capital-intensive technique makes everybody better off in the end.

Consider an island of three people: Joe, Mark, and Patrick. The three of them produce coconuts and berries. They prefer a varied diet, but they have their own comparative advantages and preferences over the two goods.

Patrick prefers a stable supply of coconuts and berries every week, and so he worked out a deal with Joe such that Joe would pay him a certain wage in coconuts and berries every week in exchange for Patrick helping Joe gather coconuts. If they have a productive week, Joe gets to keep the extra coconuts and perhaps trade some of the extra coconuts for berries with Mark. If they have a less than productive week, then Patrick still receives his certain wage and Joe has to suffer.

On average, Joe and Patrick produce 50 coconuts/week. In exchange for his labor, Patrick gets 10 coconuts and 5 quarts of berries every week from Joe.

Mark produces the berries on his own. He produces about 30 quarts of berries every week. Joe and Mark usually trade 20 coconuts for 15 quarts of berries. Joe needs some of those berries to pay Patrick, but some are for himself because he also likes to consume berries.

In sum, and for an average week, Joe and Patrick produce 50 coconuts and Mark produces 30 quarts of berries. Joe ends up with 20 coconuts and 10 quarts of berries, Patrick ends up with 10 coconuts and 5 quarts of berries, and Mark ends up with 20 coconuts and 15 quarts of berries.

Production Trade Consumption
Joe 50 Coconuts (C) Give 20C for 15B 20C + 10B
Patrick n/a 10C + 5B (wage)
Mark 30 qts. Berries (B) Give 15B for 20C 20C + 15B

The Robot Fairy Visits

One night, the robot fairy visits the island and endows Joe with a Patrick 9000, a robot that totally displaces Patrick from his job, plus some. With the robot, Joe can now produce 100 coconuts per week without the human Patrick.

What is Patrick to do? Well, he considers two options: (1) Now that the island has plenty of coconuts, he could go work for Mark and pick berries under a similar arrangement he had with Joe; or (2) Patrick could head to the beach and start catching some fish, hoping that Joe and Mark will trade with him.

While these options weren’t Patrick’s top choices before the robot fairy visited, now they are great options precisely because Joe’s productivity has increased. Joe’s increased productivity doesn’t just mean that he is richer in terms of coconuts, but his demands for berries and new goods like fish increase as well (Say’s Law), meaning the profitability of producing all other goods that Joe likes also increases!

Option 1

If Patrick chooses option 1 and goes to work for Mark, then both berry and coconut production totals will increase. Assuming berry production doesn’t increase as much as coconut production, the price of a coconut in terms of berries will decrease (Joe’s marginal utility for coconuts will also be very low), meaning Mark can purchase many more coconuts than before.

Suppose Patrick adds 15 quarts of berries per week to Mark’s production. Joe and Mark could agree to trade 40 coconuts for 20 quarts of berries, so Joe ends up with 60 coconuts and 20 quarts of berries. Mark can pay Patrick up to 19 coconuts and 9 quarts of berries and still be better off compared to before Joe got his Patrick 9000 (though Patrick’s marginal productivity would warrant something like 12 coconuts and 9 quarts of berries or 18 coconuts and 6 quarts of berries or some combination between those — no matter what, everybody is better off).

Production Trade Consumption
Joe 100C Give 40C for 20B 60C + 20B
Patrick 45B n/a 16C + 7B (wage)
Mark Give 20B for 40C 24C + 18B

Option 2

If Mark decides to reject Patrick’s offer to work for him, then Patrick can choose option 2, catching fish. It involves more uncertainty than what Patrick is used to, but he anticipates that the extra food will be worth it.

Suppose that Patrick can produce just 5 fish per week. Joe, who is practically swimming in coconuts pays Patrick 20 coconuts for 1 fish. Mark, who is excited about more diversity in his diet and even prefers fish to his own berries, pays Patrick 10 quarts of berries for 2 fish. Joe and Mark also trade some coconuts and berries.

In the end, Patrick gets 20 coconuts, 10 quarts of berries, and 2 fish per week. Joe gets 50 coconuts, 15 quarts of berries, and 1 fish per week. Mark gets 30 coconuts, 5 quarts of berries, and 2 fish per week. Everybody prefers their new diet.

Production Trade Consumption
Joe 100C Give 50C for 15B + 1F 50C + 15B + 1F
Patrick 5 fish (F) Give 2F for 20C + 10B 20C + 10B + 2F
Mark 30B Give 25B for 30C + 1F 30C + 5B + 2F

Conclusion

The new technology forced Patrick to find a new way to sustain himself. These new jobs were necessarily second-best (at most) to working for Joe in the pre-robot days, or else Patrick would have pursued them earlier. But just because they were suboptimal pre-robot does not mean that they are suboptimal post-robot. The island’s economy was dramatically changed by the robot, such that total production (and therefore consumption) could increase for everybody. Joe’s increased productivity translated into better deals for everybody.

Of course, one extremely unrealistic aspect of this robot fairy story is the robot fairy. Robot fairies do not exist, unfortunately. New technologies must be wrangled into existence by human labor and natural resources, with the help of capital goods, which also must be produced using labor and natural resources. Also, new machines have to be maintained, replaced, refueled, and rejiggered, all of which require human labor. Thus, we have made this scenario difficult for ourselves by assuming away all of the labor that would be required to produce and maintain the Patrick 9000. Even so, we see that the whole economy, including the human Patrick, benefits as a result of the new robot.

This scenario highlights three important points:

(1) Production must precede consumption, even for goods you don’t produce (Say’s Law). For Mark to consume coconuts or fish, he has to supply berries on the market. For Joe to consume berries or fish, he has to supply coconuts on the market. Patrick produced fish so that he could also enjoy coconuts and berries.

(2) Isolation wasn’t an option for Patrick. Because of the Law of Association (a topic not discussed here, but important nonetheless), there is always a way for Patrick to participate in a division of labor and benefit as a result, even after being displaced by the robot.

(3) Jobs will never run out because human wants will never run out. Even if our three island inhabitants had all of the coconuts and berries they could eat before the robot fairy visited, Patrick was able to supply additional want satisfaction with a brand new good, the fish. In the real world, new technologies often pave the way for brand new, totally unrelated goods to emerge and for whole economies to flourish. Hans Rosling famously made the case that the advent of the washing machine allowed women and their families to emerge from poverty:

And what’s the magic with them? My mother explained the magic with this machine the very, very first day. She said, “Now Hans, we have loaded the laundry. The machine will make the work. And now we can go to the library.” Because this is the magic: you load the laundry, and what do you get out of the machine? You get books out of the machines, children’s books. And mother got time to read for me. She loved this. I got the “ABC’s” — this is where I started my career as a professor, when my mother had time to read for me. And she also got books for herself. She managed to study English and learn that as a foreign language. And she read so many novels, so many different novels here. And we really, we really loved this machine.

And what we said, my mother and me, “Thank you industrialization. Thank you steel mill. Thank you power station. And thank you chemical processing industry that gave us time to read books.”

Similarly, the Patrick 9000, a coconut-producing robot, made fish production profitable. Indeed, when we look at the industrial revolution and the computer revolution, we do not just see an increase in the production of existing goods. We see existing goods increasing in quantity and quality; we see brand new consumption goods and totally new industries emerging, providing huge opportunities for employment and future advances in everybody’s standard of living.

Jonathan Newman is Assistant Professor of Economics and Finance at Bryan College. He earned his PhD at Auburn University and is a Mises Institute Fellow. He can be contacted here.

The Evidence Weighs in Favor of Immigration – Article by Luis Pablo de la Horra

The Evidence Weighs in Favor of Immigration – Article by Luis Pablo de la Horra

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The New Renaissance HatLuis Pablo de la Horra
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In a previous article, I analyzed the economics of immigration from a theoretical perspective. I concluded that economic theory clearly supports immigration-friendly policies since they benefit all parties involved. In this article, I will examine the empirical evidence on the effects of immigration on host countries and immigrants themselves.

Effects on Employment, Wages, and Public Finances

High immigration rates are often associated with rises in unemployment. The logic behind this (flawed) reasoning is straightforward: if an economy can only absorb a fixed number of jobs and the labor force increases, the unemployment rate will inevitably rise. What’s wrong about this statement? Simple: the economy is not a zero-sum game.

In other words, the number of jobs available increases as the economy grows. After World War II, the US labor force increased dramatically due to immigration and the massive entry of women into the labor market. It moved from 60 million in 1950 to around 150 million workers in 2007. And yet, the unemployment rate in 2007 was as low as 4.6 percent, near full employment.

In a survey paper on the economic effects of immigration, published in 2011, Sari Pekkala Kerr and William R. Kerr concluded that the long-term impact of immigration on employment is negligible. In their own words,

The large majority of studies suggest that immigration does not exert significant effects on native labor market outcomes. Even large, sudden inflows of immigrants were not found to reduce native wages or employment significantly.

As suggested by the research conducted by Giovanni Peri, professor of Economics at UC Davis, immigration has positive effects on productivity since it expands the productive capacity of the economy, which in turn results in higher wages in the long run. Nonetheless, there are certain disagreements on how immigration affects native, low-skilled workers (mainly high school dropouts).

Different studies point at a wage decline between 0 (no effects at all) and 7 percent for this segment of population. Even when assuming the worst-case scenario of a 7 percent decline (which does not consider the investment in capital undertaken by companies to compensate for a decline in the capital-labor ratio), low-skilled immigration has net positive economic effects for host societies, allowing native workers to perform more productive jobs and increasing the specialization of the economy.

One of the most popular arguments against immigration is the issue of welfare benefits. Immigrants are believed to pose a burden on the host economy. Their net fiscal impact (defined as taxes paid by immigrants minus public services and benefits received) is thought to be overwhelmingly negative when compared with the fiscal impact of natives. Yet the evidence does not support this idea. As pointed out by Kerr and Kerr,

It is very clear that the net social impact of an immigrant over his or her lifetime depends substantially and in predictable ways on the immigrants’ age at arrival, education, reason for migration, and similar […] The estimated net fiscal impact of migrants also varies substantially across studies, but the overall magnitudes relative to the GDP remain modest […] The more credible analyses typically find small fiscal effects.

Therefore, there are no good reasons to impose tough restrictions on labor mobility in the name of fiscal sustainability.

The Place Premium: How to Reduce Poverty by Lowering Immigration Barriers

Wage differentials among countries can be explained by drawing on the concept of Place Premium, that is, the increase in earnings that a worker automatically experiences when moving to a high-productivity country. This increase is due to several factors: differences in capital stock, infrastructure, proximity to other high-productivity workers, etc.

The Place Premium of potential immigrants moving to the US has been estimated for a few countries. A Haitian worker that were to relocate to the US would see her PP-adjusted earnings automatically rise by 700% when compared to the same worker in Haiti performing an equivalent job (or a job that requires the same skills and education). Similarly, a worker from Guatemala or Nicaragua would more than triple her earnings, while a Filipino would increase her purchasing power by 3.5 times. In other words, relaxing barriers and letting more immigrants into higher-productivity countries seems to be one of the most effective ways to improve the life of millions of people worldwide.

All in all, the economic benefits of immigration seem obvious for both host countries and immigrants. The data shows that restrictive immigration policies have adverse effects on host economies and prevent would-be immigrants from increasing their income by migrating to higher-productivity countries. Thus, the path to take is clear: we should gradually reduce immigration barriers so that more and more people can take advantage of the benefits of capitalism.

Luis Pablo de la Horra is a Spanish finance graduate from Vlerick Business School.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Our Economic Malaise Is Impacting Young Workers the Most – Article by Ryan McMaken

Our Economic Malaise Is Impacting Young Workers the Most – Article by Ryan McMaken

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The New Renaissance Hat
Ryan McMaken
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In the wake of the 2007-2009 recession, 78 months passed before employment returned to where it had been before the crisis. This was, by far, the longest period needed to recover from job losses in decades. The second-longest period needed to recover jobs occurred after the 2002 recession when about 50 months were needed to recover lost jobs:

economic_malaise_young_people_1

Moreover, we see that in recent cycles, job growth during each recovery has been getting weaker and weaker over time:

economic_malaise_young_people_2

Some observers of the rose-colored-glasses-wearing variety have attempted to explain away the most recent malaise in job gains by claiming that fewer jobs are needed because so many Baby Boomers are aging out of the work force, and because people are so much wealthier, they argue, workers are leaving the labor force for non-economic reasons. That is, people are leaving the labor force for reasons other than being discouraged workers.

These claims are plausible, but the empirical data we have does not support them.

Keep in mind that ever since the 2007-2009 recession, the U-6 unemployment rate, which includes underemployed workers (i.e., involuntary part timers) and discourage workers, has reached multi-decade highs in recent years, and even now, is only at levels seen during the worst of the last recession:

economic_malaise_young_people_3

This is not simply a matter of fewer jobs being created because workers are going away.

To get a sense of the situation, we have to first look at the demographics of the working age population and the labor force.

(This demographic data on the working-age population is only currently available through the first quarter of 2015, so the time series ends in early 2015.)

economic_malaise_young_people_4

The top line is the total working age population (ages 15-65) published by the OECD and the World Bank. According to this measure, there is no decline in the working age population.

If people were aging out of the work force in droves to the point of driving a net exodus, we would see a downturn in the blue line. We don’t see that. In fact, from the beginning of the last recession at the end of 2007 to the first quarter of 2015, the working age population increased by 7.5 million people.

During that same period, the US economy added 801,000 jobs. That is, after the initial loss of 10 million jobs, the US economy began to add jobs again, but after more than seven full years, had only added a net of 801,000 jobs.

But maybe only 801,000 jobs were added because very few of those 7.5 million people wanted to be in the work force.

Well, it’s a safe bet that not all of them wanted to be in the work force, but we do know that using the standard BLS measure for the work force that 2.4 million people entered the work force during the period when only 801,000 jobs were added. (See the green line above.) That means over that time period, you had 1.6 million new people in the labor force while half that many jobs were added.

And this labor force measure only takes into account active job seekers and employed people. It ignores discouraged workers and involuntary part timers.

So we find that both the official labor force and the working age population were increasing at levels substantially above the employment levels.

Indeed, the only way we can find a number that suggests more jobs were added than workers is to look at the working-age population for ages between 25 and 54. That is, if we exclude all potential workers under 25 and all above 54, then yes, the working age population did decline by 1 million jobs. (See the red line above.)

In real life, though, the work force includes quite a few people who are, say, 22 years old, and quite a few who are 60 years old. If those people are included, the working age population is growing considerably.

Meanwhile, workforce participation has been falling for a number of years, and is now at some of the lowest levels that have been seen in more than 30 years. From 2014 to 2016, work force participation ranged from about 62 percent to 64 percent. That’s the lowest participation rate seen since the the early 1980s.

economic_malaise_young_people_5

Many have assumed this means that many older workers are leaving the work force. Unfortunately, it seems that it is young workers who are most likely to leave the labor force, which is problematic for future productivity. For young workers in the 20-24 age range, work force participation has been falling for more than a decade, and fell off significantly during the last recession:

economic_malaise_young_people_6

Meanwhile, labor force participation for 55-and-older individuals has held steady:

economic_malaise_young_people_7

It appears unlikely that it is now unnecessary to add jobs at a rate comparable to past recoveries because so many older workers are leaving the work force. Nor is it likely that young people are leaving the work force because they are so prosperous. It’s more likely that young people are leaving the work force as discouraged workers.

This supposition is further strengthened by the fact that the unemployment rate in the 16-24 age range has been above 10 percent for the past nine years. It was especially high even before the last recession.

But, unemployment among over-55 workers is among the lowest of all demographic groups, with a rate between 3 percent and 4 percent in recent years.

In other words, older workers are sticking around and doing relatively well. It appears that younger workers, meanwhile, are more likely to be unemployed, underemployed, or even totally out of the workforce as discouraged workers.

One phenomenon that gives us a reason to think this is the fact that the number of young people living with their parents has reached historic highs in the United States. As Pew recently reported:

In 2014, for the first time in more than 130 years, adults ages 18 to 34 were slightly more likely to be living in their parents’ home than they were to be living with a spouse or partner in their own household.

Living at home is more likely for men than for women, but in both cases, more young people are living with their parents than during any other period since World War II:

economic_malaise_young_people_8

Those who attempt to spin the current job numbers as simply the effects of people happily leaving the work force appear to be mistaken in assuming that older workers are leaving, and that younger workers need not work because they’re so unusually productive.

If young workers were so productive, is it too much to believe that they would choose to rent an apartment rather than live with their parents?

Once we look a the demographics behind the current job numbers, we actually find the situation is more alarming that we might have thought otherwise. We seem to be in a situation where younger workers are participating in the work force less, and putting off acquiring essential job skills that will lead to more productivity later.

Older workers are still sticking around in numbers large enough to keep the overall labor force number growing.

However, while both the working age population and the labor force are growing, overall job creation simply is not keeping up.

At some point, those 30-year olds living with their parents are doing to need full-time work, but will they have the job experience necessary (and thus the productivity) necessary to support the lifestyle to which they have become accustomed?

Or, will they simply enter the workforce with few job skills following a decade of part-time work or no work forced on them by our weak economy? When that happens, we’re likely to see a continued decline in the household and personal incomes.

Ryan W. McMaken is the editor of Mises Daily and The Free Market. He has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre. 

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Demagoguery vs. Data on Employment in America – Article by Tyler Watts

Demagoguery vs. Data on Employment in America – Article by Tyler Watts

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The New Renaissance Hat
Tyler Watts
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Demagogue politicians love to play on popular fears that low-wage foreigners are “stealing” good-paying American jobs by way of outsourcing and globalization. The claim is made by nativists and protectionists of all political stripes, whether leftists complaining of a “rigged economy” or rightists speaking of other countries “beating us” economically.

A sound economic analysis of the claim about job losses due to international trade should address two questions: First, is it true that the US has lost jobs due to trade (or other factors)? Second, is this phenomenon good or bad overall for the US and world economies?

On the first point, it can appear as though the US has lost jobs. For example, as Figure 1 shows, manufacturing employment in the US has declined by about 2 million from pre-Great Recession levels, and is down by over 7 million, or 37 percent, from the all-time high reached in 1979.

Figure 1: Total Manufacturing Employment, 1940–2016

watts1

The problem, though, is that by looking at manufacturing in terms of jobs, we’re missing the full picture of industrial production.

Nevertheless, the demagogues still argue that, even though high-paying service sector jobs have more than replaced lost factory jobs, “we don’t make things here anymore” and we should lament this. This oft-heard refrain is patently false. We don’t make certain things, such as garments, toys or electronics, because global free trade and technological advances tend to shift America’s output into those industries in which our comparative advantage is greatest. But Americans do indeed make things — quite valuable things.

This can be seen in Figure 2, which shows the US Industrial Production Index for the “de-industrialization” period. After the expected steep decline following the Great Recession of 2008–2009, US manufacturing has slowly bounced back and is now producing more products, in value-added terms, than ever before. Indeed, this index, which consists mainly of manufacturing, has grown by over 100 percent since the 1979 peak in manufacturing employment.

Figure 2: Industrial Production Index for the United States, 1979–2016

watts2

In other words, thanks to productivity gains, we need fewer workers to make more stuff.

From an economic perspective, nothing could be better news. US manufacturing creates 100 percent more value with 37 percent fewer workers. Creating more value with fewer workers means we’re more efficient than ever, or put another way, more productive than ever. These awesome productivity gains have many sources, especially in the form of technological advances in areas like software, robotics, and communications. Globalization and outsourcing have also played a role, as they allow American workers a greater degree of specialization in those sectors where our productivity edge is largest.

The good news gets better, though: not only have we gained jobs on net, but jobs have grown faster than the population over time. Since the 1979 peak in manufacturing employment, the US adult population grew by 53 percent, whereas employment grew by 59 percent, as shown in Figure 3.

Figure 3: Population Growth vs. Employment Growth Since 1979

watts3Source: Federal Reserve Economic Data

Despite these generally positive facts, some still contend that we’ve replaced “good” manufacturing jobs with lousy service sector jobs. Well, of course it must be true that, if we’ve lost manufacturing jobs, but gained jobs overall, then all of the job gains must have come from non-manufacturing sectors. And indeed the service sector, broadly defined, has seen employment growth of 90 percent since our 1979 benchmark. But beware of making hasty earnings assumptions about a sector that employs nearly 124 million people. To see whether the newly-created “service sector” jobs really don’t pay as well as the vaunted manufacturing jobs, we need to drill down into the employment and earnings data. What we’ll find is that a large majority of the new service sector jobs pay just as well or much better than manufacturing jobs.

Table 1 presents Bureau of Labor Statistics data on the 15 largest sectors and sub-sectors of the US economy, which together represent over 96 percent of the total net increase in payroll employment for the post-peak manufacturing jobs era (1979 to 2016). This might come as a surprise to the anti-globalization crowd: despite the loss of 7 million manufacturing jobs (and some mining, logging, and utilities sector jobs), we’ve seen a net increase of nearly 53 million total jobs. Of these net new jobs, fully 62 percent of them feature, as of January 2016, average hourly earnings equal to or greater than current average hourly manufacturing earnings. In other words, most of the 53 million new jobs pay the same or better wages than the demagogues’ benchmark “good” manufacturing jobs. So we lost 7 million good jobs, only to gain about 32 million equal or better-paying jobs, along with about 19 million lower-paying jobs (about 38 percent of net new jobs pay less than manufacturing).

Table 1: Employment Changes and Current Earnings by Sector

watts4Source: Bureau of Labor Statistics

We’ve established that, despite a major decrease in employment in the manufacturing sector, we’ve gained many more jobs than we’ve lost in the past 35 years or so, and that most of these new jobs pay better to boot. Economic changes, while painful in the short run, have brought gains in output and employment not only for the US, but for the rest of the world as well. Overall, this is good news for the US and world economies.

So, as the campaign season heats up, let’s not be misled by baseless arguments about America “losing jobs” or other countries “beating us” at trade. Trade is a positive sum game, and the benefits for both the US and world economies are, shall we say, “yuge.”

Tyler Watts earned his PhD in economics at George Mason University in 2010. He currently teaches economics at East Texas Baptist University and runs the Institute for Economic Education (see YouTube channel here), a public outreach focused on integrating economics with a Biblical worldview and providing unique teaching tools for high school and college economics students.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Low-Skilled Workers Flee the Minimum Wage – Article by Corey Iacono

Low-Skilled Workers Flee the Minimum Wage – Article by Corey Iacono

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The New Renaissance HatCorey Iacono
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What happens when, in a country where workers are free to move, a region raises its minimum wage? Do those with the fewest skills seek out the regions with the highest wage floors?

New minimum wage research by economist Joan Monras of the Paris Institute of Political Studies (Sciences Po) attempts to answer that question. Monras theoretically shows that there should be a close relationship between the employment effects of raising the minimum wage and the migration of low-skilled workers.

When the demand for local low-skilled labor is relatively unresponsive (or inelastic) to wage changes, raising the minimum wage should lead to an influx of low-skilled workers from other states in search of better-paying jobs. On the other hand, if the demand for low-skilled labor is relatively responsive (or elastic), raising the minimum wage will lead low-skilled workers to flee to states where they will more easily find employment.

To test the model empirically, Monras examined data from all the changes in effective state minimum wages over the period 1985 to 2012. Looking at time frames of three years before and after each minimum wage increase, Monras found that

  1. As depicted in the graph below on the left, those who kept their jobs earned more under the minimum wage. No surprise there.
  2. As depicted in the graph below on the right, workers with the fewest skills were having an easier time finding full-time employment prior to the minimum wage increase. But this trend completely reversed as soon as the minimum wage was increased.
  3. A control group of high-skilled workers didn’t experience either of these effects. Those affected by the changing laws were the least skilled and the most vulnerable.

monrasp17a

These results show that the timing of minimum wage increases is not random.

Instead, policy makers tend to raise minimum wages when low-skilled workers’ real wages are declining and employment is rising. Many studies, misled by the assumption that the timing of minimum wage increases is not influenced by local labor demand, have interpreted the lack of falling low-skilled employment following a minimum wage increase as evidence that minimum wage increases have no effect on employment.

When Monras applied this same false assumption to his model, he got the same result. However, to observe the true effect of minimum wage increases on employment, he assumed a counterfactual scenario where, had the minimum wages not been raised, the trend in low-skilled employment growth would have continued as it was.

By making this comparison, Monras was able to estimate that wages increased considerably following a minimum wage hike, but employment also fell considerably. In fact, employment fell more than wages rose. For every 1 percent increase in wages, the share of a state’s population of low-skilled workers in full-time employment fell by 1.2 percent. (The same empirical approach showed that minimum wage increases had no effect on the wages or employment of a control group of high-skilled workers.)

Monras’s model predicts that if labor demand is sensitive to wage changes, low-skilled workers should leave states that increase their minimum wages — and that’s exactly what his empirical evidence shows.

According to Monras,

A 1 percent reduction in the share of employed low-skilled workers [following a minimum wage increase] reduces the share of low-skilled population by between .5 and .8 percent. It is worth emphasizing that this is a surprising and remarkable result: workers for whom the [minimum wage] policy was designed leave the states where the policy is implemented.

These new and important findings reinforce the view that minimum wage increases come at a cost to the employment rates of low-skilled workers.

They also pose a difficult question for minimum wage proponents: If minimum wage increases benefit low-skilled workers, why do these workers leave the states that raise their minimum wage?

Corey Iacono is a student at the University of Rhode Island majoring in pharmaceutical science and minoring in economics.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Do We Need the Fed? – Article by Ron Paul

Do We Need the Fed? – Article by Ron Paul

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The New Renaissance HatRon Paul
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Stocks rose Wednesday following the Federal Reserve’s announcement of the first interest rate increase since 2006. However, stocks fell just two days later. One reason the positive reaction to the Fed’s announcement did not last long is that the Fed seems to lack confidence in the economy and is unsure what policies it should adopt in the future.

At her Wednesday press conference, Federal Reserve Chair Janet Yellen acknowledged continuing “cyclical weakness” in the job market. She also suggested that future rate increases are likely to be as small, or even smaller, than Wednesday’s. However, she also expressed concerns over increasing inflation, which suggests the Fed may be open to bigger rate increases.

Many investors and those who rely on interest from savings for a substantial part of their income cheered the increase. However, others expressed concern that even this small rate increase will weaken the already fragile job market.

These critics echo the claims of many economists and economic historians who blame past economic crises, including the Great Depression, on ill-timed money tightening by the Fed. While the Federal Reserve is responsible for our boom-bust economy, recessions and depressions are not caused by tight monetary policy. Instead, the real cause of economic crisis is the loose money policies that precede the Fed’s tightening.

When the Fed floods the market with artificially created money, it lowers the interest rates, which are the price of money. As the price of money, interest rates send signals to businesses and investors regarding the wisdom of making certain types of investments. When the rates are artificially lowered by the Fed instead of naturally lowered by the market, businesses and investors receive distorted signals. The result is over-investment in certain sectors of the economy, such as housing.

This creates the temporary illusion of prosperity. However, since the boom is rooted in the Fed’s manipulation of the interest rates, eventually the bubble will burst and the economy will slide into recession. While the Federal Reserve may tighten the money supply before an economic downturn, the tightening is simply a futile attempt to control the inflation resulting from the Fed’s earlier increases in the money supply.

After the bubble inevitably bursts, the Federal Reserve will inevitably try to revive the economy via new money creation, which starts the whole boom-bust cycle all over again. The only way to avoid future crashes is for the Fed to stop creating inflation and bubbles.

Some economists and policy makers claim that the way to stop the Federal Reserve from causing economic chaos is not to end the Fed but to force the Fed to adopt a “rules-based” monetary policy. Adopting rules-based monetary policy may seem like an improvement, but, because it still allows a secretive central bank to manipulate the money supply, it will still result in Fed-created booms and busts.

The only way to restore economic stability and avoid a major economic crisis is to end the Fed, or at least allow Americans to use alternative currencies. Fortunately, more Americans than ever are studying Austrian economics and working to change our monetary system.

Thanks to the efforts of this growing anti-Fed movement, Audit the Fed had twice passed the House of Representatives, and the Senate is scheduled to vote on it on January 12. Auditing the Fed, so the American people can finally learn the full truth about the Fed’s operations, is an important first step in restoring a sound monetary policy. Hopefully, the Senate will take that step and pass Audit the Fed in January.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Congress Fiddles While the Economy Burns – Article by Ron Paul

Congress Fiddles While the Economy Burns – Article by Ron Paul

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The New Renaissance HatRon Paul
September 14, 2015
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Reports that the official unemployment rate has fallen to 5.1 percent may appear to vindicate the policies of easy money, corporate bailouts, and increased federal spending. However, even the mainstream media has acknowledged that the official numbers understate the true unemployment rate. This is because the federal government’s unemployment figures do not include the 94 million Americans who have given up looking for work or who have settled for part-time employment. John Williams of Shadow Government Statistics estimates the real unemployment rate is between 23 and 24 percent.

Disappointingly, but not surprisingly, few in Washington, DC acknowledge that America’s economic future is endangered by excessive spending, borrowing, taxing, and inflating. Instead, Congress continues to waste taxpayer money on futile attempts to run the economy, run our lives, and run the world.

For example, Congress spent the majority of last week trying to void the Iranian nuclear agreement. This effort was spearheaded by those who think the US should waste trillions of dollars on another no-win Middle East war. Congressional war hawks ignore how America’s hyper-interventionist foreign policy feeds the growing rebellion against the dollar’s world reserve currency status. Of course, the main reason many are seeking an alternative to the dollar is their concern that, unless Congress stops creating — and the Federal Reserve stops monetizing — massive deficits, the US will experience a Greek-like economic crisis.

Despite the clear need to reduce federal spending, many Republicans are trying to cut a deal with the Democrats to increase spending. These alleged conservatives are willing to lift the “sequestration” limits on welfare spending if President Obama and congressional democrats support lifting the “sequestration” limits on warfare spending. Even sequestration’s minuscule, and largely phony, cuts are unbearable for the military-industrial complex and the rest of the special interests that control our federal government.

The only positive step toward addressing our economic crisis that the Senate may take this year is finally holding a roll call vote on the Audit the Fed legislation. Even if the audit legislation lacks sufficient support to overcome an expected presidential veto, just having a Senate vote will be a major step forward.

Passage of the Audit the Fed bill would finally allow the American people to know the full truth about the Fed’s operations, including its deals with foreign central banks and Wall Street firms. Revealing the full truth about the Fed will likely increase the number of Americans demanding that Congress end the Fed’s monetary monopoly. This suspicion is confirmed by the hysterical attacks on and outright lies about the audit legislation spread by the Fed and its apologists.

Every day, the American people see evidence that, despite the phony statistics and propaganda emanating from Washington, high unemployment and rising inflation plague the economy. Economic anxiety has led many Americans to support an avowed socialist’s presidential campaign. Perhaps more disturbingly, many other Americans are supporting the campaign of an authoritarian crony capitalist. If there is a major economic collapse, many more Americans — perhaps even a majority — will embrace authoritarianism. An economic crisis could also lead to mob violence and widespread civil unrest, which will be used to justify new police state measures and crackdowns on civil liberties.

Unless the people demand an end to the warfare state, the welfare state, and fiat money, our economy will continue to deteriorate until we are faced with a major crisis. This crisis can only be avoided by rejecting the warfare state, the welfare state, and fiat money. Those of us who know the truth must redouble our efforts to spread the ideas of liberty.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

The Fed’s Confusion Over the “Natural Rate” of Unemployment and Inflation – Article by Frank Shostak

The Fed’s Confusion Over the “Natural Rate” of Unemployment and Inflation – Article by Frank Shostak

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Frank Shostak
July 20, 2015
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In May, the US unemployment rate stood at 5.5 percent against the rate of 5.3 percent for the “natural unemployment,” also known as the Non-Accelerating Inflation Rate of Unemployment (NAIRU).

According to the popular view, once the actual unemployment rate falls to below the NAIRU, or the natural unemployment rate, the rate of inflation tends to accelerate and economic activity becomes overheated. (This acceleration in the rate of inflation takes place through increases in the demand for goods and services. It also lifts the demand for workers and puts pressure on wages, reinforcing the growth in inflation).

By this way of thinking, the central bank must step in and lift interest rates to prevent the rate of inflation from getting out of control.

daily july 17 350

Recently, however, some experts have raised the possibility that the natural unemployment rate is likely to be much lower than the government official estimate of 5.3 percent. In fact, earlier this year, economists at the Chicago Fed argued that the natural unemployment rate since October last year has fallen to 4.3 percent.

The reasons for this decline are demographic changes and an increase in the level of education. (The natural unemployment rate tends to fall, so it is held, with the rising age of the labor force and with its education.)

Experts are of the view that these factors should continue to lower the natural unemployment rate for at least the remainder of the decade.

It is held that a lower natural rate may help explain why wage inflation and price inflation remain low, despite the actual unemployment rate recently reaching 5.5 percent.

Advocates for a lower natural rate also claim a lower rate would mean the Fed can keep interest rates lower for longer without worrying about lifting the rate of inflation.

Why NAIRU Is an Arbitrary Measure

The NAIRU however, is an arbitrary measure; it is derived from a statistical correlation between changes in the consumer price index and the unemployment rate. What matters here for Fed economists and others is whether the theory “works” (i.e., whether it can predict the future rate of increases in the consumer price index).

This way of thinking doesn’t consider whether a theory corresponds to reality. Here we have a framework, which implies that “anything goes” as long as one can make accurate predictions.

The purpose of a theory however is to present the facts of reality in a simplified form. A theory has to originate from reality and not from some arbitrary idea that is based on a statistical correlation.

If “anything goes,” then we could find by means of statistical methods all sorts of formulas that could serve as forecasting devices.

For example, let us assume that high correlation has been established between the income of Mr. Jones and the rate of growth in the consumer price index — the higher the rate of increase of Mr. Jones’s income, the higher the rate of increase in the consumer price index.

Therefore we could easily conclude that in order to exercise control over the rate of inflation the central bank must carefully watch and control the rate of increases in Mr. Jones’s income. The absurdity of this example matches that of the NAIRU framework.

Inflation Is Not Caused by Increased Economic Activity

Contrary to mainstream thinking, strong economic activity as such doesn’t cause a general rise in the prices of goods and services and economic overheating labeled as inflation.

Regardless of the rate of unemployment, as long as every increase in expenditure is supported by production, no overheating can occur.

The overheating emerges once expenditure is rising without the backup of production — for instance, when the money stock is increasing. Once money increases, it generates an exchange of nothing for something, or consumption without preceding production, which leads to the erosion of real wealth.

As a rule, rises in the money stock are followed by rises in the prices of goods and services.

Prices are another name for the amount of money that people spend on goods they buy.

If the amount of money in an economy increases while the number of goods remains unchanged more money will be spent on the given number of goods i.e., prices will increase.

Conversely, if the stock of money remains unchanged it is not possible to spend more on all the goods and services; hence no general rise in prices is possible. By the same logic, in a growing economy with a growing number of goods and an unchanged money stock, prices will fall.

Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies.

This article was originally published by the Ludwig von Mises Institute. Permission to reprint in whole or in part is hereby granted, provided full credit is given.

Slogans or Science? – Article by Sanford Ikeda

Slogans or Science? – Article by Sanford Ikeda

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Sanford Ikeda
May 20, 2014
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The debate over raising the legal minimum wage (LMW) to $10 an hour has people on both sides saying things they should know better than to say. For example, a friend recently posted the following meme (which isn’t the worst I’ve seen) on Facebook:

One year ago this week, San Jose decided to raise its minimum wage to $10/hour.

Any jobs disappear?

The number of minimum wage jobs has grown.

Any businesses collapse?

The number of businesses has grown.

Any questions?

Yes, several, but I’ll get to those in a bit.

Memes like these are just as silly and misleading as the simplistic arguments they’re probably attacking. In fact, the economic analysis of significantly raising the minimum wage says that, other things equal, it will reduce employment below the level where it would otherwise have been. It doesn’t say that that employment will fall absolutely or businesses will collapse.

A little thinking can go a long way

Have a look at this chart published in the Wall Street Journal. At first, it seems to support the simplistic slogans. But it’s important to compare similar periods, such as March–November 2012 (before the increase was passed) versus March–November 2013, (just after it went into effect). The LMW increase wasn’t a surprise, so in the months before it was passed, businesses would have been preparing for it, shaking things up. Comparing those two periods, which makes the strongest case for the meme’s assertions, the total percentage increase in employment (the area under the red line) looks pretty close, going just by my eyeballs and a calculator. In fact, the post-hike increase might actually be smaller, but you’d need more data to be sure. So if you compare similar periods, the rate of employment growth seems not to have been affected very much by the hike. So is the meme right?

According to that same chart and other sources, hiring in the rest of California and the country, where for the most part there was no dramatic increase in the LMW, was also on the rise at pretty much the same time. Why? Apparently, the growth rate of the U.S. economy jumped in 2012, especially in California. So the demand for inputs, including labor, probably also increased. I’m certainly not saying this correlation is conclusive, but you could infer that while hiring in San Jose was rising, it wasn’t rising as fast as it might have otherwise, given the generally improving economy.

That’s a more ambiguous result, and of course harder to flit into a meme.

You are stupid and evil and a liar!

Those strongly in favor of raising the LMW cast opponents as Republican apologists for big business. Take this post from DailyKos, which apparently is the source of the above meme. The author writes, “Empirically, there’s no clear negative effect that can be discerned. The concerns of Teahadists like Paul Ryan and Marco Rubio is [sic] rather unfounded in academic literature and in international assessments of natural experiments.”

Now, the overwhelming conclusion of years of economic research on the effects of a minimum wage on employment is that it tends to increase, not lower, unemployment. As this article from Forbes summarizes, “In a comprehensive, 182-page summary of the research on this subject from the last two decades, economists David Neumark (UC-Irvine) and William Wascher (Federal Reserve Board) determined that 85 percent of the best research points to a loss of jobs following a minimum wage increase.”

So, saying there is “no clear negative effect” is an outrageously ignorant claim. And there’s not one mention of the economic evidence that significantly raising the LMW will hurt the very people you wish to help: the relatively poor. But why address solid scientific research when there’s sloppy sloganeering by politicos to shoot down?

Attacking easy targets is understandable if you want to vilify your opponents or win an easy one for the cause. In that case, you take the dumbest statement by your rival as the basis of your attack. Such is the way of politics. In intellectual discourse, however, you may win the battle but you’ll lose the war. That is, if your goal is to learn from fruitful intellectual discussion, you must engage your opponent’s best arguments, not her weakest ones.

Let me use a counterexample. The sloganeering approach to attacking those who oppose raising the LMW is the equivalent of someone saying: “Well, this past winter was one of the coldest on record in the Midwest. So much then for global warming!” That may be “evidence” in a mud-slinging contest, but it’s not science.

What’s the theory?

While weather is complex and unpredictable, economic systems are even more so. Does that mean there are no principles of economics? Of course not. In fact, it’s because of such complexity that we need whatever help economic theory can offer to organize our thinking. And it doesn’t get any more basic than this: The demand curve for goods slopes downward.

That is, other things equal, the costlier something is, the less of it you’ll want to buy.

Note that the caveat—other things equal—is as important as the inverse relation between price and quantity demanded. That’s why my earlier back-of-the-envelope analysis had to be conditional on more data. Unfortunately, those data are often very hard to get. Does that mean we abandon the theory? Well, that would be like letting go of the rope you’re hanging on to for dear life because you’re afraid it might break.

So what exactly is the theory behind the idea that raising the LMW will increase hiring low-wage workers and boost business? If raising wages will actually increase employment and output, then why not also mandate a rise in interest rates, rents, electricity rates, oil prices, or the price of any of the other myriad factors of production that businesses ordinarily have to pay for? I would hope that this idea would give even the meme promoters pause.

As far as I know, the only situation in which forcing people to pay a higher wage rate will increase employment is when there is a dominant employer and there are barriers to competition. Economists term this “monopsony,” a situation that might occur in a so-called “factory town.” There, the dominant employer (of labor, capital, land, or whatever) can lower what she pays for inputs below the revenue that an additional unit of input earns the company. I would love to hear that argument and challenge it, because it’s the strongest one that standard economics can offer in favor of coercing businesses to raise wages. But so far I’ve not come across it, let alone any discussion of the economic literature on monopsony in the labor market, most of which questions its relevance. Some almost random examples are here and here.

Margins of analysis

Finally, economics teaches us that we can adjust to a particular change in different ways. In a thoughtful article on the effect of the LMW increase in San Jose that all sides of the debate should read, we get the following anecdote:

For his San Jose stores to make the same profit as before the wage increase, the same combo meal would be $6.75. “That would chase off a large percentage of my customers,” Mr. DeMayo said. He hasn’t laid off San Jose workers but has reduced their hours, along with some maintenance such as the drive-through lane’s daily hosing, and may close two unprofitable stores.

Employers can adjust to higher costs in one area by cutting back on spending in others. That might mean less unemployment than otherwise, but it doesn’t mean that raising the LMW has no negative employment effect at all. It means that the effects are harder to see. There’s that darn “other things being equal” again!

Slogans and memes are no substitute for science, or even clear thinking.

Sanford Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.
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This article was originally published by The Foundation for Economic Education.