Learn More about the
Introduction – Winning one battle does not win the war.
Economist: This McDonald’s sure seems busy.
Activist: Our group is trying to raise the minimum wage. Care to sign a petition to get these workers a fair wage of $15 per hour? Everyone deserves a raise. Everyone deserves a living wage.
Economist: I can see that you have compassion for minimum-wage workers, but making millions of them unemployed will not help them.
Activist: We have new studies that show raising the minimum wage will not reduce employment much, if any. It’s the “new economics.” Virtually the same number of workers will be working here at this McDonald’s when the minimum wage is raised to $10 or even to $15 per hour.
Economist: I am economist myself, and I have seen those studies. But I doubt that raising the price of hamburgers will not reduce the demand for hamburgers or raising the price of labor, raising the minimum wage, will not reduce the demand for minimum wage workers. But for the sake of argument, even if those “new economics” studies are right and the same number of people will be working here at this McDonald’s after raising the minimum wage to $10 or $15, there will be unemployment, discrimination against the disadvantaged, a waste of 100% of your money and other problems.
Activist: If the same number of people will be working at this McDonald’s when the minimum wage is raised to $10 or $15, how will there be more unemployment?
Economist: If the minimum wage is raised to $10 or $15 an hour, people willing to work at McDonald’s for $8, $9, $10, $11, $12, $13, $14 and $15 an hour will apply for jobs at this McDonald’s. There will be more people applying for, at best, the same number of jobs, so millions of them will be unemployed. Do you want millions of people to be unemployed?
Activist: No. I don’t want millions of people to be unemployed. But this paper says that employment will not change.
Economist: You have been misled. Employment is not the same thing as unemployment. An economy with 100 million people working or employed and 4 million people unemployed is not the same as an economy with 100 million people working or employed and 10 million people unemployed; 6 million more people are unemployed and looking for work.
Activist: Six million more unemployed does not sound good.
Economist: Even with, at best, the same number of people working at this McDonald’s at a $10 or $15 minimum wage, there will be far more job applicants than positions at McDonald’s. See that McDonald’s manager standing there. Who do you think he is not going to hire because there are better job applicants?
Activist: The cashier who took my order sounded like a recent immigrant who could barely speak English and had a difficult time taking my order. If the manager had a choice, I suppose that manager would not hire recent immigrants who could not speak decent English. I was nice to the cashier who made a mistake taking my order because of the language difference, but other customers are not so nice. I have seen customers get upset at cashiers who could not understand their orders and walk out. I often see mistaken orders here where wrong orders have to be thrown out and customers given new meals.
Economist: The disadvantaged workers or low-productivity workers, such as the cashier you described, are not going to get hired. Milton Friedman called minimum wage laws, “discrimination against the disadvantaged.”
Activist: I just want to help the poor get a raise, not unemploy millions or discriminate against the disadvantaged.
Economist: It’s a trite phrase, but the road to hell is paved with good intentions. I would like to be able to say, “Giving everyone a raise to $10 or $15 an hour won’t cost much,” but it’s just not true.
Activist: Are these economic studies that say a high minimum wage will not reduce the number of jobs true?
Economist: Some of those economic studies may be partly true, mostly true or even entirely true.
Activist: If these studies might be mostly true or entirely true, what am I doing wrong?
Economist: Did the Japanese win at Pearl Harbor on December 7, 1941?
Activist: Yes. The Japanese did win at Pearl Harbor.
Economist: Did the Japanese win World War II?
Activist: No, the Japanese lost World War II.
Economist: Even without 20-20 hindsight, if someone argued that because the Japanese won at Pearl Harbor, the Japanese would win the war, would you agree?
Activist: No. Winning one battle is a far cry from winning a war.
Economist: Minimum wage activists may have won one argument or one battle, but just because one battle was won, the war is not won. The Japanese effectively lost the war the minute they attacked Pearl Harbor. Likewise, a high, living minimum wage is strategic folly from the start or as Milton Friedman stated, “a monument to the power of superficial thinking.”
Economist: See that gas station across the street selling gasoline for $3.50 a gallon. Suppose you worked for an Arab Oil Cartel and conducted a survey of gas stations in New Jersey years ago and found that after a 25-cent state-gasoline-tax increase, which raised the at-pump price of gasoline by 25 cents, the gallons of gasoline sold remained constant. You might be tempted to think, - We can raise the price of gasoline from today’s $3.50 to $5.00 or even $7.00 a gallon.
Activist: If raising the price of gasoline does not reduce the number of gallons sold at the pump, couldn’t the Arab Oil Cartel raise the price of gasoline to $5.00 or even $7.00 and pocket the price increase?
Economist: If gasoline increased to $5 or $7 a gallon, what would American and other non-Arab oil producers do?
Activist: If gasoline increased to $5 or $7 a gallon, American oil producers would turn on less productive oil wells. Old oil wells that were shut down because their cost of producing oil was $4 per gallon would be reopened. There would be more oil on the market at $5 or $7 than at $3.50.
Economist: And if the same amount of gasoline is sold in New Jersey and nationwide, and Americans are producing more gasoline, the Arab Oil Cartel will sell fewer gallons.
Activist: But the same number of gallons of gasoline is being sold?
Economist: True, the same amount of gasoline is being sold, but American gasoline sales are replacing Arab Oil Cartel sales. The same thing would happen to minimum wage workers. Suppose you formed a 2014-Minimum-Wage-Workers Cartel and conducted a survey of fast-food restaurants in New Jersey and found that after a past minimum wage increase, the number of minimum wage workers remained constant. You might be tempted to think, - We can raise the price of labor from today’s $7.25 to $10 or $15 an hour. But the 2014-Minimum-Wage-Workers Cartel is similar to the Arab Oil Cartel and will lose jobs to other workers when the wage is raised.
Economist: Just looking around this McDonald’s, can you see people who might work for McDonald’s if the minimum wage was raised from $7.25 to $10 or $15?
Activist: Some of those students sitting there wasting time might decide to work if the wage was $10 or $15 an hour. Some of those retired people reading newspapers might decide to work if the wage was $10 or $15 an hour. That mother with two kids in the corner might decide to work. Even some of those homeless people, if they are able to, might decide to work at $10 or $15 an hour.
Economist: So when the minimum wage is increased to $10 or $15 an hour, we will have more people applying for the same number of jobs at McDonald’s. McDonald’s won’t hire them all. Millions of people will be unemployed. Activists often omit this fact or hide it in the very back of their studies. In Santa Fe, the “showcase” example of where a high living wage “worked” in the book A Measure of Fairness, when the minimum wage was increased, even though the number of jobs did not decline likely do to a rising overall economy, more people were willing to work for the higher minimum wage and the number of unemployed people approximately doubled.
Activist: This activist group told me that unemployment would not change?
Economist: If they were smart and careful, the activist group may have told you that EMPLOYMENT would not change or fall very slightly. But EMPLOYMENT, people working at jobs, is not the same as UNEMPLOYMENT which is people looking for jobs who can’t find jobs. In our example of the Arab Oil Cartel, the gallons of gasoline sold remained constant, but gasoline supplied by American companies increased, so at $5 or $7 a gallon, the supply of gasoline is greater than the demand for gasoline. At $5 or $7 a gallon, there would be much UNSOLD gasoline. Every cartel knows this.
Economist: Likewise in the example of the 2014-Minimum-Wage-Workers Cartel, the number of workers employed remained constant, but work supplied by other workers increased, so at $10 or $15 an hour, the supply of labor is greater than the demand for labor At $10 or $15 an hour, there would be much UNEMPLOYED labor.
Economist: This unsold gasoline or unemployed labor is easy to see on a supply and demand diagram at an above equilibrium price even if the demand curve is perfectly inelastic (straight up and down at a fixed number of workers/jobs/gasoline).
2. Just as the wrong, high-cost oil will be used at a too-high price, the wrong, high-cost labor will be used at a too-high wage, reducing total output.
Economist: If the Arab Oil Cartel increases the price of gasoline to $7 per gallon, what is the highest cost gasoline American oil companies will produce?
Activist: If an Arab Oil Cartel increases the price of gasoline to $7 per gallon, won’t American oil companies open their wells and produce all the oil for gasoline they can up to a cost of $7 per gallon?
Economist: Right, the inexpensive $2 and $3 a gallon oil that easily flows out of the ground will still be produced, but also more expensive $4 a gallon gasoline, $5 a gallon gasoline, $6 a gallon gasoline and even $7 a gallon gasoline will be produced. If gasoline was at the free-market price of $3.50, the additional men and capital producing $5, $6 and even $7 a gallon gasoline could have been used to produce other things. It’s not a zero-sum game; it’s a waste of men and capital that reduces total output.
Activist: Spending $6 or $7 a gallon to produce a gallon of gasoline that was previously produced for under $3.50 does not sound good.
Economist: Making oil drillers and refiners do $7 of work for a gallon of gasoline wastes all of the price-increase paid; nobody gains. All or 100% of the $7 higher price paid will be wasted on higher production costs if the gasoline was produced at $7 per gallon. Most of the higher price paid will be wasted on higher production costs if the production cost was $6 per gallon. Almost half of the higher price paid for gasoline will be wasted on higher production costs for gasoline produced at $5 per gallon. Fifty cents of the high price paid for gasoline will be wasted on higher production costs if the gasoline was produced at $4 per gallon.
Activist: Is this waste the same in the labor market?
Economist: Exactly, raising the price of labor, the wage rate from $7.25 to $15, will attract higher (opportunity) cost workers to compete for the limited number of jobs.
Economist: It’s easier to see for someone who was working producing something else, say painting houses, at a fair market wage of $15 an hour, but after the minimum wage increase to $15 per hour decides to work at a job that formerly paid $7.25, say at McDonalds, but now pays $15 an hour. He is still making $15 an hour, so he is no better off financially, but we are paying him $7.75 more per hour than the previous McDonald’s worker. It’s a 100% waste of the $7.75 pay increase since nobody is better off. And society is losing the value of the $15 per hour work that he previously did painting houses.
Activist: Is this just like the oil example where we would pay $7 a gallon and the high $7 price would not make the $7-gallon-cost producer any better off?
Economist: Exactly, it’s just harder to see with labor than with products such as gasoline since, often, labor is not “working” in the paid labor market. Take that mom over there taking care of her kids. If the minimum wage was increased to $15 an hour, she might decide to work at McDonald’s instead of staying at home with her kids. Since taking care of kids is not paid for with money, economists usually overlook the opportunity cost of work at home or even leisure since it’s hard to measure the value of working at home or leisure. You can’t just say the mom is $15 better off working since she has to give up her time with her children. She might value time with her kids at $14 or even $15 an hour, so once again, most or 100% of the increase in wages would be wasted. It’s just economists often don’t or can’t put a dollar value on the opportunity cost of caring for her kids, who are now latch-key kids.
Activist: The kids are now latchkey kids. The mom is not any happier because she is just willing to work for $15, and some other worker who really needed the job was replaced by the mom. This sounds awful.
Economist: It even leads to discrimination against the disadvantaged, which is not only bad economically but unethical to deprive people of work because they drew the short straw in life. Milton Friedman called minimum wage laws mandatory discrimination against the disadvantaged. This may be easier to see in the case of bad or disadvantaged oil.
3. Mandatory Discrimination Against the Disadvantaged: Nobody will Buy Disadvantaged Oil or Hire Disadvantaged Labor.
Economist: Some members of our fictional Arab Oil Cartel (no relation on OPEC) produce “good” oil which is “light, sweet crude” oil. Other members of the cartel have oil that is just not that good. Some oil is “heavy, sour” oil, which is more difficult and more expensive to refine. If the Arab Oil Cartel fixed the price of all oil at one single price, would people buy the good oil or the bad oil first?
Activist: People would buy the good oil first and the bad oil last if they bought the bad oil at all.
Economist: Any oil cartel knows this and allows the bad oil to be priced lower than the good oil to compensate for the lower quality.
Economist: Some members of our fictional 2014-Minimum-Wage-Workers Cartel are better workers than others. Not every worker can be above average. Some people are below average. Some member of the 2014-Minimum-Wage-Workers Cartel are just not good workers. They are “disadvantaged workers” who are just not as smart, strong, or experienced as other workers. If the 2014-Minimum-Wage-Workers Cartel fixed the wage of all workers at $15 per hour, would employers hire advantaged or disadvantaged workers first?
Activist: Just like with oil, employers will hire the good, advantaged workers first, and the bad, disadvantaged workers last if they hire the disadvantaged workers at all.
Economist: Many, if not most or all, disadvantaged workers will not be hired. In addition to the huge personal loss to the unemployed individuals, this is a loss to society. Although they are not the most productive workers, they would be producing something if they were employed. For example, a grocery store chain in my city used to hire the developmentally disadvantaged (retarded) to retrieve shopping carts and do limited cleaning, which is about the most they could do. At $5 an hour, these developmentally disadvantaged were covering or close to covering their costs. I suspect these hires were partly, but not completely, charity hires. But at $7.25, $10 or $15 an hour, they are too expensive relative to their low productivity to employ.
Activist: Could we have lower minimum wages for disadvantaged workers like there are lower prices for bad oil?
Economist: In the past there were lower “subminimum” wages for teenagers or training wages, but exceptions to the minimum wage undercut its claims for a “fair,” “just,” or “living wage.” One can’t claim that $15 an hour is needed to be fair and live on, but then make exceptions for the disadvantaged. And deciding who is disadvantaged enough to qualify for subminimum wages would cause obvious problems.
Activist: Won’t the disadvantaged workers eventually find jobs after a long time?
Economist: In the long run, it looks worse for the disadvantaged as more people decide to become or remain minimum wage workers for life and don’t even try to get better-than-minimum-wage jobs.
4. In the long run at $7 per gallon gasoline, more people will drill for oil. In the long run, at a $10 or $15 minimum wage, more people will choose to become or stay minimum wage workers for life.
Economist: In the long run, if gasoline remains at $7 per gallon, do you think more people in the USA will drill for oil?
Activist: Obviously more oil will be searched for and found, although finding oil might take some time. More people would study oil production in school. More people will become roughnecks working in oil fields.
More Chapters in book:
5. Job Lock and few minimum wage job openings. People will be locked into whatever minimum wage jobs they find even if it’s the worst job for them.
10. Very Inaccurate Redistribution. Some of the poor gain; some of the poor lose. Some of the rich gain; more of the rich lose.
11. Introduction to Part II. An interesting discussion on how many jobs will be lost (not unemployment), but it really does not change the fact that a high minimum wage is an awful idea in any case.
13. As a percent of the total jobs, the effect of raising the minimum wage on the number of jobs is small and close to zero if not zero and is difficult to distinguish from zero.
15. Why raising the minimum wage had or has a “small” or no effect on the number of jobs as a percent of the total jobs.
18. Non-profit Organizations, Unlike McDonald’s, can’t pass the cost increase along to customers. Fewer Services To The Needy Will Be Provided.
19. In the Long Run, people will buy efficient gasoline-saving cars. In the long run, employers will buy efficient, labor-saving equipment.