The Trouble With the Minimum Wage…

Opponents of the minimum wage tend to focus their attacks on the idea that it causes unemployment by forcing employers to discriminate against employees whose working abilities justify a wage less than the legal minimum:

Whether or not increases in the minimum wage (or minimum wage laws more generally) actually increase unemployment is a hotly-debated subject. Krueger and Card (1992) found that to not be the case; more recent meta-analyses of the academic literature such as Neumark and Wascher (2006) have found it to be true, but only to a small extent.

I want to come at this from a different angle. My intuition is that the minimum wage — even if it does not lead to decreased employment — is not an effective means to a fair wage level. This is because it is a price control set by the government, and as Hayek and Kirzner noted, the government has no scientific way to determine what an appropriate price level is for a good or service. Only a negotiation process between the employer and employees can organically determine such a thing. Moreover, as government is often bought out by large corporate interests, it is often in no position to fight for a fair share for workers. The notion that government dominated by corporate interests should set the minimum wage puts the fox in charge of the henhouse.

The empirical evidence seems to tally with my intuitions. Defenders of the minimum wage must confront the basic failure of minimum wage laws to secure the working class a fair share of the pie. Since the Federal minimum wage laws were introduced in the 1930s, wages and salaries as a percentage of GDP have gone on a general downward trend:

WASCUR:GDP

And the minimum wage has stagnated, even as productivity has risen:

min-wage1-fig2-2012-03

If the minimum wage is not meeting its aims, why do we continue to persist with it? There are other possible approaches.

Repealing minimum wage laws may be a better bet. Let the market negotiation process deal with wage levels. Accept that government has no scientific means to determine an appropriate wage level throughout the economy. Then treat any overhanging issues of poverty and living costs entirely separately, perhaps with a basic income guarantee as proposed by Milton Friedman and embraced by economists from across the political spectrum from Friedrich Hayek on the libertarian right to Lord Skidelsky on the Keynesian left. Such a scheme combined with a repeal of minimum wage laws would free labour markets from unnecessary price fixing, while still addressing the issues of poverty and unequal access to capital by providing citizens with a basic income to spend or invest.

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Rome & Central Planning

Central planning — like war — never changes. It has always been a powerful and effective way of achieving an explicit objective (e.g. building a bridge, or a road), but one that has has always come with detrimental side-effects. And the more central planners try to minimise the side-effects, the more side-effects appear. And so the whack-a-mole goes on.

This was true in the days of Rome, too.

From Dennis Gartman:

Rome had its socialist interlude under Diocletian. Faced with increasing poverty and restlessness among the masses, and with the imminent danger of barbarian invasion, he issued in A.D. 301 an edictum de pretiis, which denounced monopolists for keeping goods from the market to raise prices, and set maximum prices and wages for all important articles and services. Extensive public works were undertaken to put the unemployed to work, and food was distributed gratis, or at reduced prices, to the poor. The government – which already owned most mines, quarries, and salt deposits – brought nearly all major industries and guilds under detailed control. “In every large town,” we are told, “the state became a powerful employer, standing head and shoulders above the private industrialists, who were in any case crushed by taxation.” When businessmen predicted ruin, Diocletian explained that the barbarians were at the gate, and that individual liberty had to be shelved until collective liberty could be made secure. The socialism of Diocletian was a war economy, made possible by fear of foreign attack. Other factors equal, internal liberty varies inversely with external danger.

The task of controlling men in economic detail proved too much for Diocletian’s expanding, expensive, and corrupt bureaucracy. To support this officialdom – the army, the courts, public works, and the dole – taxation rose to such heights that people lost the incentive to work or earn, and an erosive contest began between lawyers finding devices to evade taxes and lawyers formulating laws to prevent evasion. Thousands of Romans, to escape the tax gatherer, fled over the frontiers to seek refuge among the barbarians. Seeking to check this elusive mobility and to facilitate regulation and taxation, the government issued decrees binding the peasant to his field and the worker to his shop until all their debts and taxes had been paid. In this and other ways medieval serfdom began.

So much for the view that increasing aggregate demand is the recipe for wider prosperity; Diocletian surely raised it a lot. But that didn’t really accomplish much, either in terms of wider prosperity, or in terms of the sustainability of the Roman civilisation. Raised aggregate demand is only useful if it contributes to creating and producing things that society needs and wants. And as Hayek brutally demonstrated, central planning is notoriously useless at determining what people actually want.

Of course, no modern centralist (e.g. Krugman) explicitly endorses price controls although, I am sure some of the more Hayekian or Paulian-minded among us will point out among other things that the minimum wage and the setting of interest rates are both kinds of price control. Diocletian however, was far more expansive.

From Wiki:

The first two-thirds of the Edict doubled the value of the copper and bronze coins, and set the death penalty for profiteers and speculators, who were blamed for the inflation and who were compared to the barbarian tribes attacking the empire. Merchants were forbidden to take their goods elsewhere and charge a higher price, and transport costs could not be used as an excuse to raise prices.

The last third of the Edict, divided into 32 sections, imposed a price ceiling – a maxima – for over a thousand products. These products included various food items (beef, grain, wine, beer, sausages, etc), clothing (shoes, cloaks, etc), freight charges for sea travel, and weekly wages. The highest limit was on one pound of purple-dyed silk, which was set at 150,000 denarii (the price of a lion was set at the same price).

And how did it work out?

The Edict did not solve all of the problems in the economy. Diocletian’s mass minting of coins of low metallic value continued to increase inflation, and the maximum prices in the Edict were apparently too low.

Merchants either stopped producing goods, sold their goods illegally, or used barter. The Edict tended to disrupt trade and commerce, especially among merchants. It is safe to assume that a gray market economy evolved out of the edict at least between merchants.

Bernanke of course is much more sophisticated; he uses the facility of the primary dealer banks to hide the currency inflation necessary to monetise government debt. Central planning wins again? No; central planning always comes with unpredictable boomerang side effects.

I suppose, though, that it is comforting that history is repeating itself. After the horrors of mediaeval feudalism, we pulled ourselves up anew from the wastes of history.