Friday, August 10, 2007

Minimum Wage

There's a concept in economics called "elasticity," more specifically, the “price elasticity of demand.” This is a concept in microeconomics, though experience tells me that it is often mistaken for macroeconomics. I have several theories about why that is, but simple ignorance is probably the real reason.

Most commodities have a relatively inelastic demand response to price changes, which is one of the reasons why firms try so hard to remove themselves from the task of supplying mere commodities by branding, or otherwise differentiating what they sell from the products of other firms, with copyright or patent protections, or some sort of barrier-to-entry strategy. One can also take advantage of commodity pricing on the upside, when there are supply crunches. The money Exxon makes from a supply scarcity of oil and gasoline (oil production or oil refining) is one such upside; oil firms literally make more money by supplying less gasoline. The electricity shortages in California a while back are another example.

But economics is a social science, and in social sciences, the “science” is often subverted by the “social.” That was the main sermon that the late John Kenneth Galbraith preached during his lifetime, and it took me longer to get it than it should have, partly (I will alibi) because he often used arguments that weren’t particularly strong. He argued, for example, that advertising does nothing but create artificial demand, and worse, that it made firms immune to consumer choices. I’d have loved to see his analysis of the “New Coke” but I don’t think he ever made one.

Still, agendas matter, and that is nowhere more obvious than in economics, and especially economists and their fellow travelers. There is a political philosophy afoot that holds “the market” (or “the free market”) to be some sort of moral fairy dust that can be sprinkled onto any policy to turn it into a just and moral action. This does, however, require some interesting mental gyrations on the part of the true believers.

Consider this analysis of the Minimum Wage, a tried and true policy of the advocates of labor. The basic argument in favor of the minimum wage should not be controversial: demand for the lowest economic value labor (sometimes called “unskilled” by those having never worked a minimum wage job) is inelastic, as befits a commodity. This means that a minimum wage above the “market clearing price” will result in some marginally lesser employment rate, but the margin will be proportionally less than the marginal increase in wages mandated by the minimum wage. In other words, the winners get more money than the losers have lost. This additional money must come from somewhere, of course, and traditional theory suggests that it comes from the business owners (and possibly managers) that have to pony up the additional wages.

Now there is a debate within the economic community as to whether or not there is any loss of employment in the minimum wage class (or in the overall labor force), at least for small enough increases. This might simply mean that the loss is too small to measure, given the other noise in the system, or it might actually mean that the increase in demand caused by a higher minimum wage (more money in the pockets of those who spend it), has a stimulative effect on the macroeconomics of the situation. In effect, minimum wage workers have more money to spend at Walmart, so Walmart has to hire more minimum wage employees. This is sometimes called the “Ford effect” because Henry Ford supposedly paid high wages to his workers so they could afford to buy automobiles.

But there isn’t really any way to make the case that the minimum wage hurts workers in general, because it simply isn’t true, and there is no intellectually honest way to make the economic argument that it does.

Nevertheless, I have seen quite a few articles, by economists, saying exactly that, in so many words. I remember one in particular, from an economist at Pepperdine University (the economics department at PU being essentially another right wing think tank, as is the one at George Mason University), that decried the terrible result that raising the minimum wage would have on the unemployment rate of black teenaged males. What are the odds that said economist has ever been concerned about the employment prospects of black teenagers in anything other than a context of arguing against policies that would actually result in monetary loss to large corporations?

But here’s where this all goes very meta. I once wrote more or less the same thing as the above in a posting to a Compuserve Forum. The result was that several other participants (who would all, I suspect, classify themselves as libertarians), simply refused to even acknowledge the argument, and castigated me for being so callous toward the unemployment that would surely result from a minimum wage hike. They were prepared to argue the does-it-or-doesn’t-it-cause-unemployment question, but the more general case of quo bono simply did not register.

Yet every one of them believed that he understood economics.

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