Gnawing on the Marrow of the Golden Goose
It is my opinion that all knowledge of human nature can be found in Aesop. Aesop was apparently a Greek slave in the 6th century B.C. hence his appreciation for human morality must have been cynical indeed. (Greek slaves tended to be highly educated, yet must have been paid, well like a slave - which should be enough to make anyone cynical. Perhaps my friend Carlo can explain graduate student slavery in more detail here).
(Aesop: An Economist before his time)
The Tale of the Goose That Laid Golden Eggs is attributed to Aesop. Regardless of the fact that most of you, like me, were educated in the suspect public education system, you’ve probably heard this tale. Basically some poor dude gets a goose that lays golden eggs. He and his wife aren’t happy because they aren’t getting rich enough and figure that the inside of the goose must be loaded with gold and so they kill it. Cutting it open they find its just like any other goose and they’re poor again, albeit they do get to eat their just desserts.
Humans must long have had an appreciation for geese since the Brother’s Grim also have a similar story about a golden goose, except this time the goose is made out of golden feathers. A guy called Dummling (because he is ignorant yet well-meaning and generous) manages to win a real golden goose. People get greedy, start trying to pull out the feathers and get magically stuck to the goose doomed to follow it around until the end of days presumably, or at least until they’re eaten by a large wolf or gingerbread man.
(10th Century Jack Layton)
Perhaps the second goose story with its flock of foolish stucklings is more fitting when it comes to my present subject:
The Folly of the Minimum Wage. by Aesop.
Once upon a time in a strange place where animals defied evolution, far far far (too far even by plane) away a group of people called the Ozzies discovered this thing called the Minimum Wage.
(Only some things get better with age. Mel and the MinWage, NOT)
The Minimum Wage (after wreaking havoc in Oz) migrated to the United States like everyone else in the 1930’s and was quickly drafted into the effort to fight poverty and the Depression when everything was being tried except sound economic theory.
It is estimated that over 40,000 Americans lost their jobs directly from the government enacting the Minimum Wage within 1 year. (P. H. Douglas and J. Hackman, “Fair Labor Standards Act of 1938, II,” Political Science Quarterly, March 1939, pp. 29-55.)
So why the minimum wage? Currently in Ontario the Givernment (not a sp.) has decreed in its infinite wisdom that to solve all the problems of poverty the minimum wage must increase to 10 dollars an hour. The Toronto Star, known for its earth-shattering common nonsense and long-in-the-tooth anti-americanism, has borrowed a phrase from the great minds of US mobilization and declared a War on Poverty.
(This artsy picture is guaranteed to stop poverty, can you feel it working?)
Now let me say, because I can feel the moonbats circling that I am not against poor people. In fact I was poor (financially) for almost as long as I can remember. I just happen to believe (and know it to be true) that the very methods used to try and help people often do more harm than good. The one true equalizer and enabler of mankind is the free market. In fact it makes me angry to see my taxes used to hurt people.
Clicking on the above fancy artsy picture against-poverty-and-providing-a-passionate-influencial-feeling-in-the-proletariatTM will provide you with a long number of comments from well meaning but uneducated (in economics) people. Insterspaced within the comments are those of a few people crying out in the wilderness about the fallicy of the minimum wage. Those people are quickly executed.
On one hand I feel compassion for people who mean well like this. I hate writing these sober things this because some people are so sure of their beliefs the CBC has brainwashed into them regardless of the evidence. However it has to be done.
Absolutely some businesses would suffer — the ones who are now prospering on the work of employees who can not afford to feed themselves. If a company can’t stay afloat without forcing their employees to live in squalor and eat food bank handouts then they should not be in business.
William Hopper, Kingston, Ont.
On the other hand the Toronto Star feedback is also full of comments such as this dangerous and in my opinion mean-spirited comment. Take that you stupid greedy mom and pop business how dare you pay low wages to people willing to work. The type of comment from someone who wants to tell the rest of us what to do in the name of “What Society Wants”.
(Society’s best intentions are often keelhauled by lurking unseen forces)
According to the International Labour Office (an unbiased source if ever there was one), the Minimum Wage:
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increases living standards
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reduces exploitation
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encourages bargaining
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creates working incentives
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is set by a variety of committees and people with vested interests*
You can read more of their propaganda (which is really devised to support Big Labor Unions and keep the Third World poor) but here at clangmann.net we don’t bother with feel-good lies.
Countless economic studies since then have shown that Minimum Wage, for all its well meaning intentions has some disastrous consequences which should never be understated. Ever. The first thing you learn in real life is that you don’t get something for nothing.
Minimum Wage causes unemployment in the very people it is supposed to help. (Charles Brown, Curtis Gilroy and Andrew Kohen, “The Effect of the Minimum Wage on Employment and Unemployment,” Journal of Economic Literature, June 1982, pp. 487-528.) Unemployment is one of the most insidious economic diseases you can ever give a human because every year they are unemployed is a predictor of further unemployment. Why? Skills in the workforce, motivation, and employability are lost.
Whenever high minded people speak of raising the minimum wage I retort, “Yeah if the MinWage is so great we should raise it to like 20 or even 100 dollars or something” (often to their astonishment since they expect that since I like am a doctor and everything I must be a socialist kind of person who wants to tell everyone what to think and do like they do). These people almost always invariably reply, “Don’t be foolish, 20 bucks would be too expensive to the employer and it wouldn’t work.”
The cool thing is that deep down inside they know there are consequences to every feel-good action. I attribute this to good parenting. However what I often find amusing is how they all seem to know just how much an employer can pay before they go out of business.
(In Sodom they know the consequences of feel good actions though this guy getting some action doesn’t seem to mind much while Sodom burns behind)
Thankfully economic both theory and evidence can show us the way out of Gomorrah. So here goes. Basic economic theory constructs Supply and Demand curves for labour as follows.
This standard economics graph has Quantity of Labour (Q) on the “x” axis and Price (P) on the “y” axis. This is a Labour Market Graph for a segment of a market, say boat-making.
The red line designates Supply of Labour, the Supply curve, and can be interpreted as follows; as the price increases, the number of people willing to work (quantity, Q) increases. Not many people are willing to work at 0 dollars, but as the price increases the number of people willing to work increases. To bring more people into the labour force and in particular your segment of the labour force, the price needs to go up or people move elsewhere.
The blue line is the quantity (Q) of workers demanded by employers. The Demand curve. If the price is very high, the number of employees demanded is close to 0. At such a high price employers look for substitute inputs of production rather than humans. As the price falls, more workers are hired and less substitutes are used, ie: computers, robots, weaving machines, windmills, horses etc etc.
Where the Supply and Demand curves intersect is the most beautiful occurance in economics. This is the equilibrium point where the price for the number of employees demanded by employers equals the price of the number of employees willing to work. This is Price 1 (P1) and is the wage paid by employees to workers. In the free market since the beginning of time when humans first traded stones for other stones, this is how wages have been set. Government was not required.
When government raises minimum wage artificially to Price 2 (P2) suddenly the equilibrium is unbalanced. Employers follow their demand curve to P2 and are now only willing to hire Q2 worth of labour. Unfortunately at P2, many more workers are willing to work in this market but are not hired as employers find substitues for them. The green bracket at the bottom represents the Real Unemployment in this market.
Substitutes for expensive employees have existed since the beginning of time. Almost all human inventions have been made to increase the productivity of one human. When human labour becomes too expensive, employers switch to the substitutes that increase human productivity thus requiring less humans. France, notorious for strict and convoluted labour laws still produces most of the US supply of Viagra at their Pfizer plant. The plant is completely automated.
Oct 26th 2006
From The Economist print editionON THE banks of the sleepy river Loire, across the valley from Amboise’s historic château royal, stands a model of modern high-tech French manufacturing. In a neatly landscaped business park, Pfizer, an American pharmaceutical giant, produces 80% of the world’s Viagra, and the entire supply for the American market. Every bottle of Viagra bought in an American drugstore will have been filled, packaged, labelled, bar-coded and shipped from this site…
Ok Ok, so enough theory. Theories like anything must be offered to the gods of scientific proof. Lets examine the evidence.
It was only in the late 1990s that Card and Krueger started to question the economic notion that increases in minimum wage caused unemployment. They performed a study using employer surveys where they basically asked employers if they would hire less people if the government raised minimum wage. The answer to the survey was NO.
(Hold the presses)
This was one of the first times economists questioned the premise. Since then, this book has been highly criticized, in fact, Krueger said, “I want to emphasize that my comments should not be interpreted as support for the position that increasing the minimum wage is sound public policy.” (Alan B. Krueger,”Have Increases in the Minimum Wage Reduced Employment?” Jobs & Capital, Summer 1993, p. 11.)
More importantly people began to take a better look at the data and review the theory. As JS Mill states in On Liberty, “If the opinion is right, they are deprived of the opportunity of exchanging error for truth: if wrong, they lose, what is almost as great a benefit, the clearer perception and livelier impression of truth, produced by its collision with error.” In other words, wrong ideas have as much worth as correct ones, because by refuting wrong ideas we make the correct ones stronger.
Since this time more rigorous reviews of statistics and analysis have been asked for and discussed. David Neumark’s seminary paper sets a guidline for the proper use of statistics and analysis before “going to the data”, in other words commit to an analysis before examining the data to prevent research bias. In his opinion too many studies were designed with outcomes in mind. (David Neumark, “The Employment Effects of Minimum Wages: Evidence from a Prespecified Research Design” Industrial Relations, Vol. 40 No. 1 2001)
“On the one hand, the limits of the research design are clear—only data after the policy change can be included in the analysis . . . On the other hand, the strengths of this method are avoiding unconscious and conscious biases of the authors, editors, and referees.”
From his research Neumark finds that “evidence of disemployment effects of minimum wages tends to appear where we would most expect it - for younger, less skilled workers“. Moreover he shows that there can be a lag between implementation of the minimum wage and the subsequent unemployment effects.
So what does this mean for Canada? Well similar studies have been done up here. In general those studies are more interesting to me because each province in Canada sets its own minimum wage, thus each province is its own microcosm of data. Campolieti et al. show that minimum wage:
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has adverse employment impacts on less skilled workers and young workers
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may cause more part time employment at expense of full time
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there is a lag between implementation of minimum wage and its causation of unemployment which may run at around 6 years
“Minimum-wage increases in Canada have led to substantial adverse employment effects.[...] The overall results are fairly robust with respect to alternative specifications including: the inclusion of an additional control for the prime-age male skilled employment rate and, entering the minimum wage and the average wage as separate explanatory variables.
The adverse employment effects are larger after lagged adjustments occur for the most part. However, some of our estimates suggest the contemporaneous effect may be larger for lessskilled workers.”
This is particularly insidious to people about the enter the job market. Many employers look at previous employment before hiring, especially in competitive labour markets. If a potential employee has worked before they are much more attractive even if their labour was in an entirely different area. Why? It has to do with asymmetries of knowledge but basically it comes down to indicating to someone who has no idea who you are that you are an acceptable employee.
The effects from the minimum wage in Canada are measured in an economic term called elasticity. The %change in employment divided by the %change in minimum wage = minimum wage elasticity. The result from Campolieti is an elasticity of -0.30.
The Ontario government intends to raise the wage from $7.75 to $10 over the next few years (2010). This is a %change of 29% which works out to an increase in unemployment of 8.7% in people of the ages of 16-24 inclusive.
Even that self centered peculiar person, Cherniak, knows its a bad idea though he isn’t competent at all in his analysis.
Even social workers know its a bad idea. Minimum wage increase have been shown to increase utilization of welfare.
“But, but but,” cry the masses of well meaning Toronto-ites, “if the givernment doesn’t raise wages then poor people will suffer!” After all don’t you know that employers just love to grind up workers and fertilize the fields with their bones? Well rest assured, folks, the free market is there to save us once again. Productivity and economic growth raises wages for everyone. Take Alberta for example, where even workers in minimum wage type jobs have seen their salaries increase.
So next time you see a golden goose, don’t kill it. Its just not good eating.
(Dalton McGuinty - Ontario’s Dummling)
And so the tale of The Folly of the Minimum Wage ends. The People of Ontario are happy, they are stuck to Dummling McGuinty and his Golden Goose. For some people to feel good other people just have to suffer.
(A great review of minimum wages and worker protection can be found in Milton Friedman’s aged yet timeless serious “Freedom to Choose”. It directly applies to this subject. You can donwload them here or watch them here. Milton Friedman called minimum wage one of the most anti-nego laws ever created.)
