L’Etat, C’est Ro

Louis XIV, pictured above, the king of France from 1643 to 1715, famously said, “L’Etat, C’est Moi.” Thus the title of this post.

Ro Khanna, a Democratic member of the House of Representatives, was recently asked what his plan was for the small businesses that might be hurt by the Democrats’ (and some Republicans’) proposal to raise the minimum wage from its current $7.25 an hour to $15.00 an hour by 2025.

The interviewer asked:

I’m wondering what is your plan for smaller businesses? How does this, in your view, affect mom-and-pop businesses who are just struggling to keep their doors open, keep workers on the payroll right now?

Khanna answered:

Well they shouldn’t be doing it by paying people low wages. We don’t want low-wage businesses.

What does Mr. Khanna mean by “we?” Many small businesses want to pay what he would regard as low wages. Many workers would like to work at those low wages if the alternative is higher wage rates but fewer hours, being worked harder, getting fewer benefits, or, in the limit getting zero hours. Many customers would like to buy goods and services produced by businesses paying wages less than $15 an hour.

But none of these people count, in his view.

His “we” means “he” or, more inclusively, people like him who are willing to ignore the desires of those three groups.

Thus the title of this post.

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The Effect of the Minimum Wage on Employment and Unemployment

In a comment on my blog post about the proposed $15 federal minimum wage, frequent (and careful) commenter KevinDC quotes my statement:

Here’s what they found. The vast majority of studies, 79.3 percent, found that a higher minimum wage led to less employment.

He then comments:

I like the precise wording here by using the term “less employment.” One thing I’ve tried explaining to people is that is possible for increases in the minimum wage to decrease employment without increasing unemployment, because economists are bad at naming things in a way that make intuitive sense to people outside the field. (“Public goods? Obviously that means goods provided by the public sector, right?” “Market failure? That’s whenever I personally don’t like a market outcome, isn’t it?”) So, even in the case where  particular study doesn’t find increased unemployment after a minimum wage hike, that doesn’t actually mean that the increase in the minimum wage didn’t decrease employment.

Well said, Kevin.

I want to add that the CBO study I cited makes this distinction also. Here’s a key paragraph:

Taking those factors into account, CBO projects that, on net, the Raise the Wage Act of 2021 would reduce employment by increasing amounts over the 2021–2025 period. In 2025, when the minimum wage reached $15 per hour, employment would be reduced by 1.4 million workers (or 0.9 percent), according to CBO’s average estimate. In 2021, most workers who would not have a job because of the higher minimum wage would still be looking for work and hence be categorized as unemployed; by 2025, however, half of the 1.4 million people who would be jobless because of the bill would have dropped out of the labor force, CBO estimates. Young, less educated people would account for a disproportionate share of those reductions in employment.

 

 

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Adam Smith in the Workplace

Jonas Grafström and I chat about Adam Smith in the workplace. The chat is based on a paper “Adam Smith and Human Resources” by me, published by the American Enterprise Institute (and in Swedish in Ekonomisk Debatt).

 

How can the thinking of Adam Smith help with challenges in work and employment? What skills should employers look for?

Smith discussed what we may call sympathetic deftness, akin to social intelligence or soft skills. There are two sides to sympathetic deftness: The amiable side is deftness in entering into the situation of another. The respectable side is deftness in enabling others to enter into your situation.

But continuing upward in virtue calls for deftness in both the amiable and the respectable. Work, business, and trade are schools of virtue.

Smith is therapy, self-help. He affords a rich understanding of sentiments, sympathy, and virtues. Here the focus is on the workplace. The video gives some introduction, but the paper says more about using Adam Smith to improve your career, productivity, and sense of meaning –and your love of life, which David Hume mentioned as one of the calm passions.

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The Opportunity-Killing Minimum Wage

Among non-economists and politicians, the minimum wage is one of the most misunderstood issues in economic policy. President Biden and almost all Democrats and some Republicans in the US Congress advocate increasing the federal minimum wage from its current level of $7.25 an hour to $15 an hour over four years. They argue that many of the workers earning between $7.25 and $15 will get a raise in hourly wage. That’s true. But what they don’t tell you, and what many of them probably don’t know, is that many workers in that wage range will suffer a huge drop in wages—from whatever they’re earning down to zero. Other low-wage workers will stay employed but will work fewer hours a week. Many low-wage workers will find that their non-wage benefits will fall and that employers will work them harder. Why all those effects? Because an increase in the minimum wage doesn’t magically make workers more productive. A minimum wage of $15 an hour will exceed the productivity of many low-wage workers.

This is from David R. Henderson, “The Opportunity-Killing Minimum Wage,” Defining Ideas, February 18, 2021.

Another excerpt:

Employers don’t hire workers as a favor. Instead, employers hire workers to make money. They hire people only if the wage and other components of compensation they pay are less than or equal to the value of the worker’s productivity. If an employer pays $10 an hour to someone whose productivity is $15 an hour, that situation won’t last long. A competing employer will offer, say $12 an hour to lure the worker away from his current job. And then another employer will compete by offering $13 an hour. Competition among employers, not government wage-setting, is what protects workers from exploitation.

We all understand that fact when we see discussions on ESPN about why one football player makes $20 million a year and another makes “only” $10 million a year. Everyone recognizes the twin facts of player productivity and competition among NFL teams. The same principles, but with much lower wages, apply to competition among employers for relatively low-skilled employees.

Also, see how I discuss the last 28 years of literature on the minimum wage.

And finally:

The University of Chicago’s Booth School has an Initiative on Global Markets (IGM) that occasionally surveys US economists on policy issues. Possibly because of the surveyors’ understanding that the $15 minimum wage would hurt some states more than others, the IGM recently made the following statement and asked forty-three economists to agree or disagree: “A federal minimum wage of $15 per hour would lower employment for low-wage workers in many states.” Unfortunately, the question did not specify what is meant by “many.” Is it ten, twenty, thirty? Some economists surveyed pointed out that ambiguity. That ambiguity could explain why a number of the economists answered that they were uncertain. But of those who agreed or disagreed, nineteen agreed that it would cause job loss in many states and only six disagreed.

One economist who disagreed, Richard Thaler of the University of Chicago, gave as his explanation this sentence: “The literature suggests minimal effects on employment.” No, it doesn’t. As noted earlier, the federal government has never tried to raise the minimum wage by such a large amount and so there is no scholarly literature on such an increase. Would Thaler say that if putting a cat in the oven at a temperature of 72.5 degrees Fahrenheit doesn’t hurt the cat, then putting a cat in the oven at 150 degrees wouldn’t hurt the cat either?

Read the whole thing.

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Free trade and free labor markets

This caught my eye:

[Arindrajit] Dube responds that “one has to be honest about not knowing what would be the impact in every place.” But he points to 2019 research by Anna Godoey and Michael Reich of the University of California at Berkeley, who found that increases in state minimums didn’t hurt employment even in low-wage counties where the new floor equaled 82% of the prevailing median wage. And even if a high minimum wage does kill some jobs—as many studies, though not Dube’s, show it would—it can still be worthwhile if it raises incomes of low-wage families overall, he says. Some experts say that as with free trade, which helps more people than it hurts, any losers could be made whole with government assistance.

Yes, free trade is an excellent analogy for labor market policy, but not for the reasons cited by Peter Coy in this Bloomberg article.

Economists typically evaluate issues from both an equity and efficiency perspective.  Many economists favor policies that maximize efficiency (making the pie as large as possible), combined with some redistribution to compensate the losers.  Thus they favor free trade, combined with a program to help workers that lose their jobs due to import competition.

Oddly, Peter Coy seems to think this analogy points in the direction of boosting the minimum wage.  Exactly the opposite is true.  If we wanted to match the standard economic approach to international trade, we’d abolish the minimum wage and replace it with some sort of subsidy for low wage workers.  Even if that were politically impossible, you would definitely not want a $15 minimum wage.  A much superior policy would be a $10 minimum wage combined with a $5/hour wage subsidy, where the subsidy phases out at the rate of 50 cents/hour for each $1/hour pay raise, ending entirely when pay reaches $20/hour. (Teenagers could be excluded from the subsidy, if they are not living independently.)

I’m not saying this would be ideal (I’d prefer no legal minimum), but it would be much more in the spirit of the “free trade plus compensating the losers” analogy that Coy uses to justify a higher minimum wage. It would be aimed at making the pie as large as possible, while compensating the less fortunate.

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Redford on Qualified Immunity and Moral Hazard

 

A few weeks ago, Virginian Audrey Redford, an assistant professor of economics at Western Carolina University, learned that the Virginia House of Delegates solicited open comments on a bill to end qualified immunity in Virginia. The comments would be read aloud to the delegation. So she wrote a comment.  The bill failed by a considerable margin, but she got some satisfaction from knowing that someone read her statement to the delegates. Here it is.

Qualified immunity completely alters the incentive structure for law enforcement officers. It presents a significant moral hazard problem to the community. The inability to punish an officer who misbehaves and harms members of the public creates significant distrust in the community. In no other occupation is an individual protected for “doing their job” when they wantonly step outside of what is permissible. If policymakers are at all concerned with “weeding out the bad apples” in policing organizations, this is the way to do it. The claim that policing is so dangerous that it requires officers to sometimes act in egregious ways is false. The BLS and other non-partisan organizations consistently show that many occupations are significantly more dangerous than policing, including garbage collecting. [DRH note: also farming.] Yet the same immunity is not offered to them. In reality, policymakers afford law enforcement officers such an exception because they are a powerful interest group. They lobby effectively and raise significant funds for their preferred elected officials. To the many delegates who claim to not be in the pocket of any interest group, I implore you to examine the true motivations of why you might be opposed to passing such a bill that protects villains with badges in the community. Law enforcement officials ask ordinary citizens all the time, “if you’re not breaking the law, what do you have to worry about?” Now is the time to hold them to the same standard. Who, if not you, will guard the guardians? I suspect that if legitimate means to resolve this imminent issue are not taken, the community will step in and find a way to solve it for themselves. However, delegates, that may mean they find alternatives outside of the political sphere to stand up for themselves, and we know the government doesn’t like competition.

 

 

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The Beatings Will Continue Until Morale Improves

How to slow the recovery.

The Biden plan should provide enough relief to carry the economy through the worst of the pandemic. One concrete example is the supplemental unemployment benefit, which Mr. Biden proposes to increase from $300 a week to $400. More important, the extra benefits will last at least through September, then phase out automatically as the labor market improves. Both changes are wise. (emphasis added)

This is from Alan S. Blinder, “Biden’s Stimulus Hits All the Right Notes,” Wall Street Journal, January 20, 2021 (print edition.) The article is gated.

With federal benefits of $400 per week, this translates into $10 an hour for a 40-hour week. That’s on top of state unemployment insurance benefits, which are typically somewhere between $250 and $500 per week. Take even the low end of $250 and that translates into $6.25 per hour for a 40-hour week. So that’s $16.25 an hour. Although unemployment benefits are subject to income taxation, they are not subject to payroll taxes. The employee’s share of payroll taxes is 7.65 percent. So to break even by taking a job, a worker getting $16.25 per hour for not working would have to get at least $16.25/(1 – 0.0765) = $17.60 for working. And if the worker wants to net at least, say, $3 an hour before tax (but after payroll tax) for working, he would have to be paid at least $20.84 for working.

But that very fact means that a few million people, especially those making below $20 an hour, will take their time getting a job. That means that the labor market improvement that Blinder depends on, though it will happen, will be slower than otherwise precisely because of the extra $400 per week. Thus the title of this post.

Blinder claims that this policy is wise; it is anything but.

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Appreciating Walter Williams

 

On December 2, just hours after teaching his last class at George Mason University, economist Walter Williams died. He was eighty-four. That same day, I wrote a short appreciation of Walter that led to something unprecedented in my twelve years of blogging: comments by dozens of people, almost none of whom I knew, all complimentary. Our blog, EconLog, is one of the best at weeding out nasty, abusive comments. This time, though, there was nothing to weed out.

It’s easy to see why because Walter was an attractive person in so many ways. He had an inquisitive mind, a powerful work ethic, incredible courage, a great sense of humor, a strong sense of justice, and an ability not just to teach economic understanding but also to sell economic freedom. He did so in hundreds of syndicated columns written over four decades. If you want to understand what was so compelling about the man, you could do no better than read his 2010 autobiography, Up from the Projects. But Walter would have been the first person to remind you that your time is your most valuable resource. So if you’re in a time crunch, read my article instead.

These are the opening two paragraphs of David R. Henderson, “Appreciating Walter Williams,” Defining Ideas, January 22, 2021.

Another excerpt about Walter’s mischievous but also courageous streak:

Walter showed courage and creativity, along with a mischievous streak a mile wide, as a young man dealing with racism. Some of the most impressive and humorous parts of his book are his stories of his time as an Army draftee, from 1959 to 1961, in Georgia and South Korea. At Fort Stewart in Georgia, Walter quickly learned that although the Army was formally desegregated, the best jobs went to white men. When he was assigned to an Army motor pool, he had to wash trucks and jeeps rather than working as a mechanic or mechanic’s helper. A sergeant who caught him reading on the job ordered him to paint a truck. Although Walter knew that the sergeant meant for him to paint the flat bed, he saw his opportunity. “The whole thing?” he asked. The sergeant answered “yes,” but regretted it. After Walter started painting the window and the tires, a lieutenant asked him what the [expletive deleted] he was doing. Walter writes, “I responded, in my best Southern Stepin Fetchit accent, ‘Boss, de sergeant told me to paint de whole truck; Ah’s just doin’ what he say.’ ”

Also, a note about Walter following the logic to wherever it leads:

Walter also followed economic analysis to sometimes surprising conclusions. My favorite example is a 1997 column titled “Extortion or Voluntary Exchange.” In it, he tells of a young woman, Autumn Jackson, who asked Bill Cosby for $40 million “in exchange for her silence about being his illegitimate daughter.” Jackson was convicted of extortion. But Walter points out that she simply offered an exchange that Cosby was free to reject. Walter notes that we should worry about extortion when people threaten violence. If we did, he argues, we would put our attention not on Ms. Jackson, but on the US Congress, which, with legislation, regularly threatens us with violence. He gives the example of Social Security and Medicare. If you don’t pay those taxes, he writes, they will threaten to take our property and/or put us in jail. If we resist, they will authorize their agents to use violence. If Autumn Jackson had offered Cosby such a deal, writes Walter, he would say, “Jail her for life!”

Read the whole thing.

 

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Supply and aggregate supply are unrelated concepts

The AS/AD model that we teach our students is misnamed, as it has nothing to do with the supply and demand model used in microeconomics. To take one simple example, the vast majority of industry supply curves are almost perfectly elastic (horizontal) in the long run. The long run aggregate supply curve is almost perfectly inelastic (i.e. vertical.) These are just completely unrelated concepts.

This can help us to evaluate some issues raised by Tyler Cowen:

If you think “stimulus” is effective right now, presumably you think supply curves are pretty elastic and thus fairly horizontal. That is, some increase in price/offer will induce a lot more output.

If you think we should hike the minimum wage right now, presumably you think supply curves are pretty inelastic and thus fairly vertical.  That is, some increase in price for the inputs will lead not to much of a drop in output and employment, maybe none at all.  The supply curve is fairly vertical.

What matters for stimulus is the short run aggregate supply curve.  What matters for the minimum wage is the long run industry supply curve.  These two curves are especially unrelated.

[There also the question of whether industry supply curves even exist. Minimum wage proponents usually deny it–claiming that industries are monopolistically competitive.  The evidence suggests that industry supply curves do exist.]

I oppose both fiscal stimulus and minimum wage laws, but for reasons mostly unrelated to supply elasticities.

If you favor a minimum wage hike because you think the demand for labor is inelastic, does that mean you don’t see “downward sticky wages” as a big problem?  After all, the demand for labor is inelastic, right?

Minimum wage laws should be evaluated on the basis of their long run effects.  Proponents probably believe that a good chunk of the higher minimum wage will come out of the pockets of other workers (via higher prices.)  I’ll have to pay more for fast food.  And the empirical evidence supports that claim.  So minimum wage proponents would claim no inconsistency in their views on minimum wages and sticky wages.  But this is one problem with the argument for higher minimum wages.  If they raise prices then they probably also cost jobs.  (My own view is that the bigger problem with minimum wage laws is that they reduce non-wage compensation.)

This is a good point:

If you favor a minimum wage hike, do you criticize wage subsidies because inelastic demand for labor means most of the value of the wage subsidy will be captured by the employer? Or do you somehow want both policies at the same time, because they both involve “government helping people”?

I support wage subsidies to low wage workers because I believe that minimum wage industries tend to be highly competitive, with zero long run economic profits.  And for exactly the same reason I oppose minimum wage laws.

 

 

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