15 December 2013

The Wrong Tool



The current federal minimum wage is $7.25 per hour and hiking it to $12 would solve many of our economic problems at a single stroke.
A $12 minimum wage is hardly extreme or ridiculous. At the 1968 height of our post-war economic prosperity, the American minimum wage was over $10.50 in current dollars, and setting the rate at $12 today would represent a real rise of merely 11 percent over a 45-year period, which seems reasonable since worker productivity has grown by over 115 percent during the same period. The minimum wage in France is almost $13 while Australian workers benefit from an hourly minimum wage of around $15, together with unemployment of just 5.7 percent.
Walmart is America’s largest private employer and 300,000 of its workers have average wages of just $8.75 per hour, forcing many of them to receive food stamps and other government welfare benefits to survive. But if a minimum wage hike boosted their pay to at least $12 per hour, Walmart could cover the costs by a one-time price rise of just 1.1 percent, and the average Walmart shopper would only pay an extra $12.50 per year. Meanwhile, a $12 minimum wage would increase the incomes of America’s lower-wage work force by a total of over $150 billion each year, shifting those huge sums from the pockets of the sort of people who don’t shop at Walmart to those who do. A minimum wage of $12 per hour would be very good for Walmart’s business.

It is a given in economic theory that price is determined by the intersection of supply and demand. When demand is greater than supply, the price goes up.  When supply is greater than demand, price goes down.  Last I checked, the labor market is not exempt from the laws of supply and demand.  As such, trying to impose minimum prices by legislative fiat in order to boost wages is misguided at best, especially if it doesn’t fix the underlying problem of supply and demand.

As such, using minimum wage legislation is the wrong tool for the job of raising labor prices since, as basic price theory would postulate, a price floor tends to lead to a glut.  So, the better tool is labor regulations.  Specifically, it would be better to reduce the size of the labor market.

One specific policy that would make a considerable difference in wages would be deporting immigrants, particularly illegals, but also unskilled migrant laborers, and maybe even highly skilled migrant workers if they are working in sectors that have seen especially depressed wages since 2008.  Since apparently even smart people like Ron Unz are apparently ignorant of basic economics, I will spell out the consequences of this policy:  the supply of labor will contract more rapidly than demand for labor, leading to increased rates.  Again, in case Unz and his ilk missed this class in Econ 101: the supply of labor will contract more rapidly than demand for labor, leading to increased rates.

One other specific policy that would make a decent difference in wages would be offering tax credits for mothers who decide to drop out of the workforce to homeschool their children, since this would help to reduce women’s labor participation to 1968 levels (which, as Unz notes, is when the minimum wage was higher, as if there is some sort of correlation between price, supply, and demand in the labor market).  An added bonus of this tax policy is that not only would American PISA scores rise because most mothers can’t help but be better teachers than those who major in education, but this would also save the federal government some money in education grants.*  Since apparently even smart people like Ron Unz are apparently ignorant of basic economics, I will spell out the consequences of this policy:  the supply of labor will contract more rapidly than demand for labor, leading to increased rates.  Again, in case Unz and his ilk missed this class in Econ 101: the supply of labor will contract more rapidly than demand for labor, leading to increased rates.

By now, it should be clear that Ron Unz is either too stupid to be given any sort of authority over labor policy, or he is simply a charlatan.  Minimum wage laws simply don’t work, either because they are too low for the market (making them irrelevant), too high for the market (making them counterproductive), or the same as the market (making them redundant).  Thus, the only effective way to change wages is to tweak either supply or demand for labor.

The only mystery at this point is why Ron Unz appears to not know this.
* Hypothetically, of course, as the government never decreases funding for a program, let alone end it.