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DanielLC comments on On Walmart, And Who Bears Responsibility For the Poor - Less Wrong
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Funny. I think minimum wage is a terrible policy precisely because we'd be better off replacing it with guaranteed basic income. I think welfare is a terrible idea, for the same reason.
They all have the same intentions, but guaranteed basic income is the one the meshes the best with the invisible hand. Even if you have no idea if you should be helping the poor, minimum wage is the wrong way to help the poor, so clearly you shouldn't have minimum wage.
It is of course possible to have both. Set a minimum income guarantee for everyone (so that even those who are not working, don't starve), allow the minimum income to be retained by those in work (so avoiding a high effective tax rate on low incomes), and add a minimum wage as well (so discouraging low-productivity work, and incentivizing training for higher productivity work).
By the way, the major political value of describing Walmart as a "welfare queen" is that welfare recipients are stigmatised, and this line of rhetoric redirects the stigma (and tends to dilute it). It is unfair to Walmart, but perhaps no less fair than calling anyone a welfare queen.
You can have both, but minimum wage is still a bad idea. You're better off just having a higher minimum income guarantee.
Why a bad idea, though? I guess you are disputing this point:
Here's a simple model. Assume that full-time employees cannot live on less than $8 an hour (they starve, can't pay rent etc.) Also assume that an employer can offer untrained staff two sorts of job:
Job 1 has very low productivity, total value of $6 per hour, but a pay-rate of $3 per hour. $3 a hour is too low to live on, but employees will accept it where that supplements a minimum guaranteed income.
Job 2 has higher productivity, total value of $14 per hour, but staff must be trained to do it, and because they now have transferable skills, the employer must offer $10 an hour to retain them. The training costs average at $2 per hour over the typical duration of the employment.
The employer offers staff Job 1 because that gives a higher profit ($3 per hour, rather than $2 per hour). Staff take it because $3 is better than nothing. But there is more economic value created if employers offer Job 2 instead. A minimum wage requires them to do that. You can argue the details, but that's the general principle.
There is clearly a counter-argument that the minimum wage is a market intervention and can cause inefficiencies (it may result in some folks who just can't be trained losing their $3 per hour jobs). But the counter to that counter-argument is that the minimum income guarantee is already a market intervention which is encouraging employers to offer Job 1 (as it allows employees to accept it). So a corrective intervention is needed.
That's an inefficiency, but it seems to me that a far more central one is embedded in the assumptions of your toy model: how many unskilled jobs ($3) funge against skilled or semi-skilled ones ($10). In practice, it seems to me that the kind of jobs an employer can offer are often narrowly constrained by business requirements.
A factory owner, for example, might be able to retrain unskilled line workers (fitting Subwidget A to Subwidget B) to do semi-skilled work (operating a widget-fitting machine) for higher total productivity; that's consistent with your model's assumptions. But if you run, say, a hardware store, someone's got to stack shelves, mop the floors, and run the registers, all of which take roughly the same level of training, and there's only so many places you can squeeze out more per-body productivity by investing more. Anyone you have to fire because of minimum-wage laws there represents an economic loss: they aren't getting paid, and you aren't running as efficient a business as you could be.
OK, a fair criticism of the "toy" model, which was simplified to make the point. There are always multiple choices of productivity and wage level, and big moves (more than doubling employee productivity, while simultaneously quadrupling the cost of labour) usually can't happen quickly.
Back in the real world, I did a quick look at the economic evidence, and was surprised. The latest evidence base is that the minimum wage has surprisingly little effect on anything. It seems to have no discernible effect on employment levels - see here - but it has no clear net impact on training levels either - see here.
One problem is that minimum wages tend to be varied only marginally, so it is hard to see a big effect. However, the UK provides a more dramatic experiment, where minimum wages were abolished in the 1990s, then re-introduced a few years later. Some UK assessment here on employment and on training. Again, not a big impact in either case, though training levels apparently did increase among groups affected by the minimum wage. This suggests the toy model is not totally daft.
Interesting reading, although I'm always leery of relying on a single meta-analysis of a politically charged subject. For the sake of argument, though, let's take it as given that increasing the minimum wage has no or only a small effect on employment rates. Where's the money coming from, then, and what would we expect that to do to the economy?
First option: It's a free lunch; the money would otherwise go to line the pockets of (spherical, behatted, cigar-chomping) capitalists. This is implausible to me on priors, but we can put bounds on how far we can stretch it: most businesses run on margins of 15 to 20%. I'm having a slightly harder time finding figures on personnel costs, but Google informs me that 38% is a decent payroll target; factor in benefits and such and let's call it 50% for all personnel-related expenses. This suggests that minimum wage laws could increase average wages by 10 or 20% without cutting too much into business owners' cigar budgets, although we should really be thinking on the margins here.
Second option: It's being passed on to consumers in the form of higher prices. On average people are making more but also paying more; this means inflation. There are institutions trying to control inflation, though, so the costs probably end up being taken out in lower interest rates or in subtler ways. Note that higher costs of consumer goods work a lot like a mildly regressive tax; lower-income people buy more in consumer goods as a share of income.
Third option: The balance of labor changes. Jobs that can't economically be done at the lower wage points move to places that have less stringent laws, and trainable or higher-skilled jobs move in to fill the employment gaps. I don't think I'm economist enough to analyze this fully, but it looks like we'd expect wages for those higher-skilled jobs to go down in the affected jurisdiction as a consequence of supply-and-demand issues, probably after a time lag. In any case someone's still doing crappy jobs for crappy wages; they just don't show up in the statistics. Frictional costs also arise; outsourcing isn't cheap.
Fourth option: Something's masking the effect. Either the changes are slow enough that they don't show up in the available statistics, or something I haven't thought of is going on.
My first reference above was more of a "meta-meta-analysis" since it surveys the results of several meta-analyses! At a high level, it is going to be quite difficult to argue that there really is a big impact on employment, but somehow all the analyses and meta-analyses have missed it. As I said, I found it surprising, but this is the full evidence base.
This is the main question addressed by the Schmitt paper. To quote the exec summary.
"The report reviews evidence on eleven possible adjustments to minimum-wage increases that may help to explain why the measured employment effects are so consistently small. The strongest evidence suggests that the most important channels of adjustment are: reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners ("wage compression"); and small price increases."
One of the other hypotheses considered was a reduction in profits (which is what the toy model would suggest: the low-wage "Job 1" maximizes profits rather than productivity, and moving to "Job 2" increases productivity but lowers profits). However, Schmitt found not many studies and not much evidence of this, except in the UK following introduction of the minimum wage from nothing. Again, I found that very surprising: if anyone is losing out by paying the minimum wage, you would expect it to be the Walmarts of the world. But not so, apparently.
Personally I would expect large corporations and the very rich to be capable of defending their position against any reasonably predictable shift in the economic environment, since they have resources and motivation to lay out more comprehensive contingency plans than anyone else. That extra productivity from "Job 2" doesn't just vanish into the aether. Higher minimum wage means the poorest people have more money, then they turn around and spend that money at Walmart.
The ones who lose out from a higher minimum wage would be the middle managers, who are then less free to treat bottom-tier workers as interchangeable, disposable, safe targets for petty abuse. With higher wages, those workers will have more of the financial security that makes them willing to risk standing up for themselves, and specialized skills that make them more expensive to replace. That's what wage compression, reductions in turnover, and improvements in organizational efficiency look like from the trenches.
The poorest people do not directly benefit from minimum wage, because they don't have jobs. Many participants in the informal economy are also very poor.
One option I didn't think of in the ancestor is that people pushed into the informal sector may still be showing up as employed in the sources being referenced: people making a lower-than-minimum-wage living as e.g. junk collectors are sometimes counted as such depending on methodology. We could pick out this effect by asking for personal earnings as well as employment status: if higher minimum wages are coming out of corporate margins somewhere, we'd expect average earnings (at least in the lower segment of the workforce) to go up, but we wouldn't expect that if it's pushing people into the informal sector. A survey would probably have to be carefully designed to have the resolution to pick this up, though.
Managers are more likely to abuse minimum wage workers the higher the minimum wage. At a higher minimum wage workers will value their jobs more and so will tolerate more abuse before quitting, and managers will value having the worker less because employing the worker is more costly.
If you can formulate that claim sufficiently precisely to be falsifiable, it shouldn't be hard to test it.
Someone downvoted your reply, Nornagest, which I really can't understand: I upvoted it myself.
The parent is now at -2; one more down and it will disappear from view, and we will get a heavy tax for continuing.
What is happening here? Are we just not allowed to have discussions on this forum about the possible economic gains and costs of minimum wage or minimum income policy?
Someone's probably downvoting everything in the thread, most likely on grounds of being too political for the forum. My other comments here have taken the same hit.
Obviously I don't agree with that policy as it's applied locally, but I can't really blame them either. This exchange has been relatively sane, but the discussion under other comments has had points of low quality, and I'm not totally convinced that we're better off with the thread as a whole.
My knee-jerk assumption is that Job 1 would actually not be accepted by almost any employees. This is based on the guess that without the threat of having no money, people generally would not agree to give up their time for low wages, since the worst case of being unemployed and receiving no supplemental income does not involve harsh deterrents like starving or being homeless.
Getting someone to do any job at all under that system will probably require either a pretty significant expected quality of life increase per hour worked (which is to say, way better than $3 per hour) or some intrinsic motivation to do the job other than money (e.g. they enjoy it, think it's morally good to do, etc.)
It's more likely that a well-implemented basic income would simply eliminate a lot of the (legal) labor supply for low-wage jobs. I both see this as a feature and see no need for a minimum wage under this system.