Morosoph's Journal: Reply to The Angry Economist

Russell Nelson writes in his column: The Angry Economist that The Minimum Wage really does destroy jobs, but he seems to be misconstruing the minimum wage argument, which isn't that the minimum wage has no effect on jobs, but that the effect is less than you would imagine.

Russell approaches the argument with a naive supply-and-demand response, and asserts "This isn't Economics 101, it's Economics 001." Yet in doing so, he's ignoring the core of the more subtle point about the functioning of a monopsony. Essentially, since as an employer, your competitors are also facing higher wages costs, almost all of you can afford to pay the higher rate. Yes, this means that prices go up, but this is indeed equivalent to (roughly) a sales tax, with minimal overhead costs, as Brad DeLong points out.

Certainly supply and demand curves aren't going away, but your classic supply and demand curve is a steep one, as a result of severe competition. The minimum wage, by cartelising the workforce eliminates this competition, resulting in a much more gentle supply and demand curve, the result of which is that you can do a lot of redistribution of wealth for a small cost in employment. The psychological trick employed here is to imply that the severe rigours of the market also apply to the labour market, when in fact, taken in aggegate, the market is far less rigourous: a classical economist's intuition is honed by considering the supply and demand curves experience by a single firm in a competitive market for a particular good.

Tyler Cowen is playing the same trick, in effect, by claiming that employers will cut costs elsewhere, "Gordon notes that the government can make an employer raise nominal money wages, but can't stop him from turning off the air conditioner." This is in fact emotion masquerading as logical argument. An employer is going to want value for money; they wouldn't indiscriminately adjust costs to the "correct rate", for they are going to want an efficient and motivated workforce. Quite possibly, the reverse effect could occur: the workforce costs that much more, so it's more important to keep them efficient, so that you turn the air conditioning on sooner.

The flaw here appears to be the result of imagining that there is a "correct rate", but in truth, the rate is emergent from supply and demand; it is not divinely discovered by an invisible hand doling out "true justice". Employers will spend more or less on the workplace in accordance to how this effects their profits, not (just) their overheads. An investment that paid off beforehand is still likely to pay off. There is little existing slack in the system before the pay rise, since the "extras" not prescribed by law are susceptable to competition, and therefore, if they could be trimmed to save costs, would have been trimmed already.

Update: The Angry Economist has posted a "rebuttal".

My terse response is that it would be moral to have as full an employment as possible if there were no fallback. As there are benefits paid to the unemployed, it's simply not the case that we're sending people into severe poverty if they don't get a job, so the best policy is not maximal employment at all costs.

I expect that he would be opposed to "artificial" job creation, even if it could work, so I think that this is fake emotion. Maybe I'm wrong.

I'm assuming that

[Red Warrior]

both of these individuals did some statistical analysis to back thier contentions? And that you reviewed thier analysis, and can show where they are wrong? For instance, you can show the confounding factor that just happens to make states in the US with minimum wages higher than the federal rate also have higher rates of unemployment?

I think you overstate the "they'll just raise prices" tact. Prices DO have a finite elasticity. I might buy a $3 Big Mac. I guarantee I won't buy a $30 Big Mac. (not without MA

Re:I'm assuming that

[Red Warrior]

Ehhh...

I looked at what you linked to, and it appears that nobody crunched the numbers, and at least in two instances said they were uncrunchable. Which is false. The US is a good example. It has a federal minimum wage, as well as a number of states which have a higher minimum wage. A number of which, including mine, stating that they will be X% ABOVE the federal minimum. And at least one (I think it's Oregon, but it might be one of the east coast states - It's been a while since I argued minimum wages, and

Re:I'm assuming that

[Morosoph]

I was ranting on about Russell's bad analysis [russnelson.com], and yes, he doesn't really seem to grasp stats. In fact, he appears to be requiring conditions where the minimum wage would fail in any case though poor price elasticity. Small changes which would allow prices to adjust do not count as good evidence to him.

How one does a decent detailed statistical analysis is beyond my current level of expertese. I wanted to pick up Russell on his relatively gross errors. A decent statistical study could prove either, or

Re:I'm assuming that

[Morosoph]

Decent statistical analysis would clear the air, you're right, and I'm sure that "left" and "right" here, as ever, are as guilty of prejudice as ever. The main point of my article was that the argument about monopsony was thrown out as "a complicated story" [marginalrevolution.com] (implicitally bollocks), and a classical supply and demand analysis put forward that suggested many things that it did not actually say. I'm a mathematician, so I picked up on the bad analysis. Naturally, data is the ultimate judge, but people underra

Re:I'm assuming that

[Red Warrior]

Jose did end up quiting when we couldn't raise his wage. I saw him once or twice after that, and IIRC, he had entered some sort of auto mechanic's apprentice program - where he in fact made a lot more money. That's what I recall, anyway. I hope it is correct. Food service, especially low-end food service, should be a "starter job", not a career.

If the (min wage) labor component were 100%, wouldn't it rise in exact correlation with the rise in the min wage? Demand staying constant (which I don't assume, but

Ps. Happy Holidays!

[Morosoph]

I was going to ask you how your vacation's going, but I got a bit a a taster here: http://slashdot.org/~Red%20Warrior/journal/79656/ [slashdot.org]

You seem to be having fun! Keep at it :-)

Re:Ps. Happy Holidays!

[Red Warrior]

Thanks. In case you couldn't tell, today was a "no son" day. :-)