Monday, July 13, 2009

I tried linking this the other day...

...but apparently is set up in a way that isn't friendly to linking to particular articles. I've reproduced the article here, with a link at the bottom to Mr. Schiff's firm's website.

This does a great job of demonstrating that government action, despite it's (sometimes) good intentions, usually has unintended negative consequences that effectively make problems worse, or have a negative impact somewhere else that outweighs any actual benefits.

Minimum Wage, Maximum Stupidity

By Peter Schiff

In a free market, demand is always a function of price: the higher the price, the lower the demand. What may surprise most politicians is that these rules apply equally to both prices and wages. When employers evaluate their labor and capital needs, cost is a primary factor. When the cost of hiring low-skilled workers moves higher, jobs are lost. Despite this, minimum wage hikes, like the one set to take effect later this month, are always seen as an act of governmental benevolence. Nothing could be further from the truth.

When confronted with a clogged drain, most of us will call several plumbers and hire the one who quotes us the lowest price. If all the quotes are too high, most of us will grab some Drano and a wrench, and have at it. Labor markets work the same way. Before bringing on another worker, an employer must be convinced that the added productivity will exceed the added cost (this includes not just wages, but all payroll taxes and other benefits.) So if an unskilled worker is capable of delivering only $6 per hour of increased productivity, such an individual is legally unemployable with a minimum wage of $7.25 per hour.

Low-skilled workers must compete for employers’ dollars with both skilled workers and capital. For example, if a skilled worker can do a job for $14 per hour that two unskilled workers can do for $6.50 per hour each, then it makes economic sense for the employer to go with the unskilled labor. Increase the minimum wage to $7.25 per hour and the unskilled workers are priced out of their jobs. This dynamic is precisely why labor unions are such big supporters of minimum wage laws. Even though none of their members earn the minimum wage, the law helps protect their members from having to compete with lower-skilled workers.

Employers also have the choice of whether to employ people or machines. For example, an employer can hire a receptionist or invest in an automated answering system. The next time you are screaming obscenities into the phone as you try to have a conversation with a computer, you know what to blame for your frustration.

There are numerous other examples of employers substituting capital for labor simply because the minimum wage has made low-skilled workers uncompetitive. For example, handcarts have replaced skycaps at airports. The main reason fast-food restaurants use paper plates and plastic utensils is to avoid having to hire dishwashers.

As a result, many low-skilled jobs that used to be the first rung on the employment ladder have been priced out of the market. Can you remember the last time an usher showed you to your seat in a dark movie theater? When was the last time someone other than the cashier not only bagged your groceries, but also loaded them into your car? By the way, it won’t be long before the cashiers themselves are priced out of the market, replaced by automated scanners, leaving you to bag your purchases with no help whatsoever.

The disappearance of these jobs has broader economic and societal consequences. First jobs are a means to improve skills so that low skilled workers can offer greater productivity to current or future employers. As their skills grow, so does their ability to earn higher wages. However, remove the bottom rung from the employment ladder and many never have a chance to climb it.

So the next time you are pumping your own gas in the rain, do not just think about the teenager who could have been pumping it for you, think about the auto mechanic he could have become – had the minimum wage not denied him a job. Many auto mechanics used to learn their trade while working as pump jockeys. Between fill-ups, checking tire pressure, and washing windows, they would spend a lot of time helping – and learning from – the mechanics.

Because the minimum wage prevents so many young people (including a disproportionate number of minorities) from getting entry-level jobs, they never develop the skills necessary to command higher paying jobs. As a result, many turn to crime, while others subsist on government aid. Supporters of the minimum wage argue that it is impossible to support a family on the minimum wage. While that is true, it is completely irrelevant, as minimum wage jobs are not designed to support families. In fact, many people earning the minimum wage are themselves supported by their parents.

The way it is supposed to work is that people do not choose to start families until they can earn enough to support them. Lower wage jobs enable workers to eventually acquire the skills necessary to earn wages high enough to support a family. Does anyone really think a kid with a paper route should earn a wage high enough to support a family?

The only way to increase wages is to increase worker productivity. If wages could be raised simply by government mandate, we could set the minimum wage at $100 per hour and solve all problems. It should be clear that, at that level, most of the population would lose their jobs, and the remaining labor would be so expensive that prices for goods and services would skyrocket. That’s the exact burden the minimum wage places on our poor and low-skilled workers, and ultimately every American consumer.

Since our leaders cannot even grasp this simple economic concept, how can we expect them to deal with the more complicated problems that currently confront us?

-Peter Schiff, via


Nathan said...

I think this article is missing a few things.

First, it is ignoring an important component of every company: namely, the profit margin. If companies operated at a break even point, where every dollar spent had to be accounted for by a dollar earned, there would be no reason for people to own them, except as pet projects. The reason stock exists is because there is an implicit value in a company, and because that company pays its profits to its owners (frequently a.k.a. its shareholders). It is, in fact, practically impossible to sit squarely on the line between loss and profit, simply because doing so would take more time than it was worth, particularly when there are profits to be made.

Thus, assuming a company is not in the red, and thus not important to this discussion, the question each company must ask itself is not whether it should hire a worker who can only earn the company $6 per hour when it is paying him $7.15. The question is, instead, whether it should hire a worker who is only earning the company $7.50 per hour, when it is paying him $7.15. Not a lot of profit in that.

An excellent example of this is the newspaper biz. A decade ago, newspapers were consolidated by corporations buying them all up. Prior to the consolidation, they were making a handsome profit. After the consolidation, they began coming in at nearly a loss. The reason for this may be due partially to reduced ad sales, but a much bigger problem was in the interest on the loans corporations took out to pay for the newspapers in the first place.

Now newspapers are being forced to fire staff, not because the newspaper is not independently making a profit, but rather because it is not making ENOUGH of a profit to make up for the idiot maneuvers of the corporations that made the initial investments. The corps want more profit, so they cut some folks.

With the rest of the article, my biggest disagreement lies in three parts: First, how you get out of minimum wage jobs. Second, who is currently working in minimum wage jobs. And, third, why there are reasons most companies simply will not eradicate all minimum wage jobs.

I don't believe that minimum wage jobs act as a stepping stool to better paying jobs in any but the most infrequent of circumstances. How you get out of minimum wage is by getting education in any of a number of broad areas or by joining a union that forces a company to increase wages. In those areas in which minimum wage does lead to higher wages, such as promotions to management, individuals will still likely be hamstrung at some point and forced to get education if they want to continue up the ladder.

Next, while it is undeniably true that kids and young adults are a big part of the minimum wage pool, one should not assume that they are the only members. In fact, during a recession like the one we have before us, I'm betting an awful lot of people who have no interest "getting skills" at minimum wage jobs are being forced into them. While it's practically impossible to support a family on minimum wage, I'd bet it'd be even harder at $3/hr.

Nathan said...

(argument, continued)

Third, I can practically guarantee that, if a company had its druthers, it would get rid of as many employees as it could in exchange for mechanical assistance. Robots don't require income, employee policies, lawyers, or a thousand other things. They need the occasional mechanic, whose services can always be outsourced. I'm guessing the difference between a legal minimum wage and a market created minimum wage is immaterial compared to the difference between having an employee and not having an employee. The cost of having plastic silverware is still dramatically less than the cost of hiring an employee for 1 penny a day.

Eliminating the minimum wage will not prevent employers from replacing employees with machines and other technologically created items. What will is public demand. McDonalds and Walmart don't replace personal cashiers, not because of cheap labor, but because costumers would get ultra pissed and theft (even unintentional theft) would increase dramatically on carts of more than 30 or 40 items.
Finally (again), let's consider the fantasy of the gas station attendant. Why would you hire someone to pump people's gas and wash their windows, when there is no real benefit to you as an employer? People can pump their own gas just as easily for free. Why would you hire people to act as ushers, when people are perfectly capable of showing themselves to a seat in a theater? Particularly as you already have a floor staff hired that can help old and blind people if help is absolutely crucial?

The answer to those questions is, you wouldn't. We don't have those people anymore, not because of some minimum wage laws, but because they became unnecessary, and because society doesn't demand it, like society demands the clerks at Walmart and McDonalds.

While I think there are a few pretty good arguments against the minimum wage (inflation, for example), I think the ones provide by Mr. Schiff are flimsy at best.