Random Thoughts from the High Desert
Written by Sig Silber
It seems there are strange thoughts in the air. It makes me wonder if there has been another "event" in Roswell, New Mexico.
Pricing Out the Disadvantaged
Reading the recent comments of new Fed chair Janet Yellen raises the question in my mind of what planet those who are proposing raising the minimum wage live on. It must not be Planet Earth. So perhaps it is a repeat of a prior episode of an unscheduled landing in Roswell New Mexico.
It is very rare to raise the price of something when demand is weak. It is ok if the demand is inelastic. In a slack housing market, a broker will not advise the seller to raise the sale price.
For most of us, the demand for our services individually is fairly elastic. If we demand more than the going rate, there may not be very many willing to hire us.
A group can collude to reduce the elasticity of supply which is the basis for labor unions and other monopolies including licenses. But the unemployed and low-wage workers are not generally in a position to play hard ball with employers or potential employers. Being involuntarily unemployed or being a low-wage earner is generally indicative of not being able to differentiate how one is perceived by employers.
So one wonders why, in a slack labor market, government takes actions to make getting a job more difficult? How does one explain it?
I know our Congressional Budget Office (CBO) has written a report on this so I decided to review the full report which can be found by clicking here.
On the one hand, I was impressed with the understanding of the analysis problem demonstrated by the CBO. But in many ways they indicated they did not have the ability to estimate the impacts definitively.
They provided a comprehensive list of reference studies one of which addressed the question of the impact of a rise in minimum wage in a recessionary environment, but I did not see how that was factored into their analysis.
All in all, there seemed to be a fairly good assessment of the scale effect which is the immediate response of employers to higher labor costs but the analysis of the substitution effect was woefully inadequate. I do not have the rights to use them so I have not included photos I have seen recently of ultra-modern fast-food self-service devices entering the market in Europe reminiscent of Horn and Hardart "Less Work for Mother" with which I grew up on the East Coast. I think they may have started in Philadelphia where I was born. Post card courtesy of Wikipedia. There are people working behind the scenes but it was a low labor approach to food service.
The following quotes from the CBO Report may be of interest.
"In CBO’s assessment, there is about a two-thirds chance that the effect of the $10.10 option would be in the range between a very slight decrease in employment and a decrease of 1.0 million workers; thus, there is a one-third chance that the effect would be either above or below that range."
That is where the mean estimate of 500,000 unemployed comes from. But what about the one-third chance? How high might that be? It would seem reasonable that this one-third chance relates to more rather than less of a negative effect on employment.
"Thus, the percentage reduction in employment of low-wage workers is generally greater in the long term than in the short term, in CBO’s assessment."
I wonder if those who have read summaries of the report have grasped what that means.
"In analyzing the $10.10 option, CBO used a central estimate of the elasticity of employment for teenagers of -0.10, with a likely range from a very slight negative amount to -0.20."
This means that a 10% increase in the minimum wage would result in 1% to 2% decline in employment in that group.
"Some studies have found large elasticities for particular groups of adults, such as high school dropouts or African Americans in their 20s."
Do we not care about those groups? I am sure there are other groups who are last to be hired and first to be fired.
"... employers facing an excess of workers or of job applicants tend to favor adults over teenagers. Supporting that explanation is research suggesting that encouraging employment among low-wage parents reduces employment among younger, childless adults."
Do we not care about household formation?
Yes, adults are more likely to vote. Is that why policy that increases employment of older voters relative to younger voters are pushed?
Some other data that might be important is that age 16 - 19 is not the major age group impacted by a minimum wage increase. In fact that group represents only 12% of the low-wage workers. However 87% of those employed in that age group are low-wage. Of low-wage workers, 21% have less than a high school education and 58% of workers who have less than a high school education are in low-wage jobs. So in one sense this quantifies the at-risk group of those who are currently employed but tells us nothing about the characteristics of the unemployed population. One might expect that the unemployed demographics are more skewed towards the characteristics which are unfavorable for employment when the minimum wage is raised. The estimate of the number to become unemployed was intended to cover both the employed during the second half of 2016 and the unemployed who would be unable to get a job due to the higher minimum wage.
To me it is curious that the data used by the CBO comes from the 2013 Census Bureau's Current Population Survey (CPS) which collects information from approximately 60,000 households. I would have thought that a more accurate source of information (e.g. payroll data) might have been utilized.
Here is another look at the theory of minimum wage.
From the abstract:
"Contrary to widespread belief, we show that low-pay workers might not generally prefer that the minimum wage rate be increased to a level where the labor demand is unitary elastic. Rather, there exists a critical value of elasticity of labor demand such that increases in the minimum wage rate make low-pay workers better off for higher elasticities, but worse off for lower elasticities. We demonstrate that the critical value decreases with the workers’ income-equivalent wage rate and increases with their risk aversion. It is also shown that there may not exist an optimal minimum wage rate, and if it does exist, may not be unique."
In other words it is not clear that workers as a group if properly informed would favor an increase in the minimum wage. The two key factors are the "equivalent wage" i.e. what the worker if unemployed would receive as benefits plus the value to the unemployed of the leisure time and the "risk aversion" of workers to being unemployed. I do not believe that the risk aversion of low-wage workers was considered by the CBO.
So why does government insist that workers must raise their price and that failure by a worker to raise their price is punishable by prison?
And at a more personal level, why can government compel me as a potential worker to raise my price? Does government have sovereignty over my body and my labor? How about my thoughts? How about my vote? Can the government legislate the minimum amount I can be paid for my vote?
What also has not been taken into account is the risk to society of having more unemployed people. Does government have the right to increase my risk of being harmed by an unemployed person who is unemployed due to an action taken by government?
I think the unemployed and those harmed by an unemployed person should initiate a class action suit against government entities which force people into unemployment by taking away their right to set their own price for their labor. Such a lawsuit might be successful. I wonder if it has been tried. It should be tried. Government should not have the right to force a person to be unemployed.
How about Hobbes' Social Contract?
The 17th Century English philosopher Thomas Hobbes came up with the notion of a Social Contract. Hobbes was not the first one to come up with that concept but is probably the most famous.
There are many formulations of this concept but here is one:
"First, they must agree to establish society by collectively and reciprocally renouncing the rights they had against one another in the State of Nature. Second, they must imbue some one person or assembly of persons with the authority and power to enforce the initial contract. In other words, to ensure their escape from the State of Nature, they must both agree to live together under common laws, and create an enforcement mechanism for the social contract and the laws that constitute it. Since the sovereign is invested with the authority and power to mete out punishments for breaches of the contract which are worse than not being able to act as one pleases, men have good, albeit self-interested, reason to adjust themselves to the artifice of morality in general, and justice in particular. Society becomes possible because, whereas in the State of Nature there was no power able to “overawe them all”, now there is an artificially and conventionally superior and more powerful person who can force men to cooperate. While living under the authority of a Sovereign can be harsh (Hobbes argues that because men’s passions can be expected to overwhelm their reason, the Sovereign must have absolute authority in order for the contract to be successful) it is at least better than living in the State of Nature. And, no matter how much we may object to how poorly a Sovereign manages the affairs of the state and regulates our own lives, we are never justified in resisting his power because it is the only thing which stands between us and what we most want to avoid, the State of Nature."
That is all fine and good but recently I was told that by existing I had agreed to this contract? Well not really! I am wary of even verbal contracts let alone unsigned written ones but contracts that exist by virtue of me existing? I have to ask and did ask what planet did this person come from? I have not agreed to any Social Contract so I guess I am in revolt against it or at least in the negotiation phase. No! I am in outright revolt.
Now a Sovereign may have the power to control me. That is easily done. But the reality that someone has the power to control me is not equivalent to me having agreed to submit to that power and authority.
Sometimes I wonder where people are coming from. We raise the price of that of which we want to sell more and tell people that they have agreed to contracts by virtue of existing. And this Social Contract varies by culture. So if the Social Contract says that women have no rights, does that mean they have agreed to have no rights? If the so-called Social Contract says that infidels must convert or pay a tax for their failure to accept another's version of the truth, does that mean the infidel has agreed to those terms?
I observe that our barnyard animals (equines, ovines, and domesticated junglefowl) figure out how to live together not in pure nature as they are protected by an electric fence from the coyotes but they have to and do learn how to get along with each other. So why is it that humans must have a Social Contract stuffed down their throats or revert to nature and not be able to get along? It makes no sense to me. I must not be sufficiently evolved.