Pay me or trade me

Man, if you want to stop rational conversation in the United States, talk about rent control, taxes, or the minimum wage. “If we don’t do this, the world will end.” “If we do this, the world will end.” And in the background, some talking head, usually male, but nowadays, maybe a woman, saying the exact opposite to some befuddled broadcaster. What’s a good citizen to do? You could say “They’re all full of crap.” And maybe you’re right. Of if you’re in a seance with Harry Truman, you could ask for a “one handed economist.” On the other hand, you could say, as a friend of mine does, “two economists, three opinions.” That appeals to the cynical pomo in me. What, Pilate said, is truth? Good question, dude. Especially when redemption is on the line. Isn’t it always.

The Dems have tied themselves to the mast of raising the minimum wage to $15.00 an hour. That bald statement doesn’t tell you much. Joe Biden has said, incorrectly, its not a issue that has anything to do with the federal budget, so it merits separate treatment. Smart move, Joe. This way, you leave your credentials a sensible moderate intact. I get it.

But, really, why is the issue so controversial? I mean, really, unless you’re an Unpalatable or a Filthy Capitalist, how could you demur? I’ve seen the hurt in my Liberal friends’ eyes when I suggest the Neanderthals may have a point. Et tu, Salvucci? You can actually side with those people? Well, not exactly, but I know from which cave they spring. It is called a demand curve, and if you can get any closer to a religious dogma in neoclassical economics than “demand curves slope down,” you got to tell me what it is. Spare me the free lunch. No less an economist than Joel Mokyr insists that technology provides one, and he’s a Big Deal and I’m not. Besides, that’s not the issue.

Any economist trained anywhere other than a Red Roof Inn will tell you price and quantity are inversely related when it comes to demand. Forget all the nerd reasons that your econ teacher laid on you. It comes down to substitution. In the purest flavor of neoclassical stuff, no one needs anything, because there are substitutes for everything. If gin gets too expensive relative to other spirituous liquors, then you’ll switch to something else. Like vodka. It doesn’t have to be a perfect substitute. After all, the goal is to get buzzed, not to improve Scotland’s balance of trade. I know, not much finesse there for the connoisseur, but this isn’t The New Yorker. So if there are substitutes for everything, consumption is not an all or nothing proposition. You can always use a little less or a little more, depending on relative price. And, horror of horrors, that describes the labor market as well

For some reason, applying the theory of demand to people and jobs really ticks people off. Hey, that’s my brother you’re talking about. And he’s not a pineapple. We don’t traffic in human labor in the same way we traffic in kumquats. Really? Explain the Atlantic Slave Trade. Are you saying the enslaved were kumquats? No. Hardly. But it’s odd how the use of slave labor and the theory of demand make odd bedfellows. You think planters were happier when African slaves were cheap or expensive. You just answered my question. It’s uncomfortable, but it’s true. And saying it doesn’t make me a reactionary. Or a defender of slavery. Just an economic historian, which is much less sensational.

The idea that relatively high wages will make an employer think twice about hiring is hardly a stretch, especially if you’re talking about unskilled labor. By definition, unskilled workers have nothing distinctive about them (but they’re people, man! I know). If you’re picking up fruit at the market, and it’s all the same, which do you choose? Chances are, the cheapest one. Why pay a premium for something that has no distinctive qualities? Unskilled labor, alas, is like a generic fruit in the market. Push up its price and people start to look for a substitute. Saying you are going to help unskilled labor rise from poverty by raising the minimum wage is naive. What you’re gonna do is give someone an incentive to find a substitute for it. So, ultimately, at a certain level, the minimum wage is self-defeating. When I went to McDonald’s in France, there was no smiling employee to greet me and take my order. I got to talk to a screen. And collected my order by number. The Europeans have tougher labor laws than we do, and you can’t just fire someone because you’re in a bad mood. High wages have the same effect: they encourage substitution of capital for labor.

This isn’t politics, or shouldn’t be. In the same way face masks aren’t politics, or shouldn’t be. The virus doesn’t care, and, alas, the market tends not to either. “That’s why I hate capitalism.” Yeah. Your complaint is registered.

So you’d probably say, “Hey, you’re opposed to raising the minimum wage, right?” Ah, not exactly and not per se. For one thing, I was taught that inflation adjusted wages and prices do the heavy lifting in markets, and I’ll wager the real (inflation adjusted) minimum wage has fallen in the United States, so pushing the number of dollars up some is not likely to break any employer. And that’s what the studies all say, lately. Chicago, Seattle, Jersey, whatever. They strain to find substantial employment effects. The explanations are many and varied; if you’re that curious, go look at the current Congressional Budget Office report on the pending increase (https://www.cbo.gov/system/files/2021-02/56975-Minimum-Wage.pdf). Yeah, I know, boring. Facts always are. Remember, find me a one-handed economist.

For another, I’m not sure I trust the studies because looking for an effect from a minimum wage increase after it’s happened is like trying to find the horse after someone unlocked the barn. Employers aren’t stupid, and even as we argue, I’ll bet a lot of them are figuring out ways to preemptively deal with an increase before it happens. Expectations matter, and people adjust. We know that. So Heaven knows how good the data is. At a local supermarket, the cart jockeys disappeared before the ACA went into effect. I know. But it’s Texas. I don’t disagree. The moral high ground has very little value here. It ain’t Seattle.

I guess my reaction to the CBO study is, well, how big is big, how bad is bad. Will the benefits, broadly measured, justify the costs. That is a very, very difficult question to answer, because a lot depends on who gets what of each. You pay, I benefit. I’m for it. If not, NIMBY. It depends.

It also strongly suggests that economic questions end up as political issues, as this one obviously is. Do you really think this one is any different? You think Trump made any sense when he said exports good imports bad? Like so much else the guy spouted, that was backward. Completely wrong. Who cared. You saw what happened. In his world, Lies Trumped Good Economics.

I suspect this is going to be decided politically as well, and believe me, the world won’t end if the Democrats get what they want. I believe in the principal of “This is not necessarily a great idea, but it’s time has come.” And an increase in the minimum wage sort of falls there. It will lift some people out of poverty, and there’s far too much of that in the United States. It will hurt some workers, and I suspect it will also act as a wealth tax of sorts, about which I am also vaguely supportive. Why? Because the alternative is worse. I don’t want to watch more people get talked into the idea that they don’t matter. And that invading the Capitol is their only way to make the point. Some mistakes you have to make. Welcome to the real world.

Published by RJS El Tejano

I sarcastically call myself El Tejano because I'm from Philadelphia and live in South Texas. Not a great fit, but sometimes, economists notwithstanding, you don't get to choose. My passions are jazz, Mexican history and economics. Go figure

7 thoughts on “Pay me or trade me

    1. We agree more than we don’t. It is a religion with a lot of the Econ. When I suggest to them it’s less of an issue for people as they move up the skill ladder, I still get dirty looks. Or “they don’t need it.” Oh. I thought nobody needed anything. I should really sit down with the CBO report and tease out some cost and benefit implications, even if they’re only notional. There’s also stuff that a static analysis can’t get, even though the CBO is using some kind of dynamic simulation. My point is the world won’t end. I read where the ACA knocked out 70,000 part time jobs. Well, I’m sorry if that’s the cost of the legislation, but let’s get people insured first and then deal with the cashiers who lost their jobs over it.

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  1. I love having friends that can take people down out of the stands, cheering out of team loyalty, and putting them onto the playing field. It is useful to understand rationales and consequences of doing something vs. doing nothing for people like me who had Econ 101 in 1972 and nothing else except Barrons, WSJ since. Now onto Maule’s thoughts.

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  2. Maule is very lawyerly and does a better job of pointing out that the minimum wage was not intended to simply keep people from starving. Yup. It was in the context of reimagining American society–which we badly need to do again. I’m afraid it’s going to take another brush with yet another catastrophe to shake people out of their lethargy.

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  3. I wonder what it would cost to maintain a slave today. Unskilled labor is probably much cheaper, as as you say, there is plenty of it! 👍🏻

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      1. 12 credits / semester, lunch pass, keys to stuff, $150/mo, and 30 lashes. USC 1974-76. Now? Slave labor yes, but worth it to the slave!

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