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August 2004
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Home » Archives » August 2004 » My Response to Raul

[Previous entry: "Raul Groom's Proposition"] [Next entry: "Quote of the day (for yesterday)"]

08/10/2004: "My Response to Raul"

I apologize for the delay in writing my response. I would talk about how much of my time this weekend was taken up by plumbing, but I hate plumbing and don’t really want to give it any print time. Note to Fontaine: The gasket really should fit the mold of the faucet. Just a thought.

Here is my response to Raul Groom’s essay, “The Federal Minimum Wage,” which can be found at http://raulgroom.blogspot.com.

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The Federal Minimum Wage (Should Disappear)

Economically speaking, the minimum wage is an artificially created price floor on the cost of labor per hour. That is to say, there is no such thing as a price floor on the cost of labor until someone (read: the government) creates one and upholds it through use of force. This kind of action inherently introduces an artificial barrier to the freedom of market forces.


The historical line of economic thought concerning the minimum wage says that an increase in the minimum wage causes a directly proportional loss of jobs. Usually the formula was considered about 2% job loss to every 10% increase. This was the model used by every “serious” economist right up until the mid-90’s. Then all of the sudden, several economists suddenly jumped ship, claiming that, well, in fact the minimum wage did not have a link to job loss. What caused half the economic world to make like Kate and Leo?

That would be the 1994 Card-Krueger study*. David Card and Alan Krueger, economists at Princeton produced a study based on a survey of fast-food restaurants which showed that employment in New Jersey, where a higher state minimum wage had been implemented, rose relative to Pennsylvania, where the minimum wage remained at the lower federal rate. And the walls, they came a-crumbling down! Liberal-minded economists who had long searched for a reason to rationalize their internal feelings against the well-established laws of modern economic theory received this new study like it was Prodigal Son returning home. The truth had been revealed and they had known all along.

Unless the study was complete garbage. Which it was.

The survey involved cold calling the restaurants. The person answering the phone (be it owner, manager, or our friend, the minimum wage earning counter-jockey) was asked how many part-time and full-time employees worked at the restaurant. And then the restaurant was called again a few months later, where possibly a different person was asked the same questions. The terms were not defined to the survey taker, and different people answered the questions in different ways. The methodology was so bad that the Employment Policies Institute in Washington determined that the “data set consistently reports employment losses where none actually took place, and employment gains far in excess of their true values” and that almost a third of the data, did not even “identify...whether [there] was a job loss or a job gain.”

Scientists, these guys were not.

A later study was performed by economist David Neumark of Michigan State, who bothered to actually examine the payrolls of 230 restaurants in the New Jersey/Pennsylvania area. The result showed a 2.4% decrease in employment for each 10% increase in the minimum wage. I guess Nuemark never made it past Economics 101.

Raul Groom has argued that the reason that raising the minimum wage doesn’t matter is because it is much less than the “natural market price of labor”. And the reason for that is because of the “inequality of negotiating positions.” Now, normally I would simply give my patented one word response to a line of reasoning like this, but I respect Raul way too much to use a word like poppycock. So instead, I’ll try something else.

Balderdash.

The “inequality of negotiating positions” is inherent to the very nature of market forces. The “core principles,” if you will. If someone is a skilled worker, and the employer needs that skill more than the worker needs the employer, the worker is going to get paid more. Conversely, if a worker has no marketable skills, he’s going to get whatever anyone will pay him to do whatever anyone is willing to have him do. That’s true of every sort of negotiation in the history of mankind, way back to the days when the one caveman really wanted some of that fire, and that other caveman said, “Fine. Bring me like 400 dead mountain lions and we’ll talk.” While cavechick was fanning him and feeding him dates.

The natural market price for labor is whatever someone is willing to pay. There’s no ethereal magic number floating out there that the low-end can hope to obtain. It’s different for every job, for every employer, and for every employee. And since it isn’t 1893 anymore, there’s actually more than one employer in most towns vying for the best workers, even the unskilled ones. In many places, fast food chains are paying more than minimum wage because they are tired of hiring workers who think running the register while high is a brilliant idea. Even unskilled workers can get ahead as along as they have a decent work ethic.

To close this response, I want to list several positive benefits that will occur by eliminating the federal minimum wage:


  • The illegal labor market will be eliminated. Oh that’s right, there are jobs that aren’t worth minimum wage in America, and they are performed illegally for lower wages by people who are willing to do illegal things because their very presence in the country is illegal to begin with. I’m mildly surprised Congress hasn’t killed off the minimum wage law already just so they can acknowledge their housekeepers.


  • Without the minimum wage law, there will be less of a reason to outsource the production of things like your favorite pair of Nikes and those Bugle Boy undies you just soiled to any one of several small countries in the Asian Pacific.


  • Training wages can be established. An employer could pay an apprentice a lower wage combined with skills training, which would still have value for the employee. With a price floor, some employers may not be able to hire and train as many people as they could otherwise, thereby decreasing the number of ways in which unskilled workers can become skilled workers.



The Federal Minimum wage is a hindrance to a healthy, stable economy. It should be eliminated and market forces should be allowed to determine the natural market price for labor.

-------
* Though information regarding the validity of the Card-Kruger study is widely available from a variety of sources, not the least of which is the Congressional House website, I borrowed much of my information from Ph.D. Economist David R. Henderson, a writer for the Wall Street Journal, Reason Magazine, and an occasional commentator on NPR.

Replies: 1 Comment

on Thursday, August 12th, Uncle Carlos said

I would point out that housekeepers still wouldn't get acknowledged because of the costs of labor above wage (Mostly social security but in various states there can be other costs too).
The "inequities of negotiating position" is artificially created BY government. Caveman would as likely bonk the guy over the head as go out and get any skins. He'd take cave girl too. Government takes away that market force thereby leaving one person at a disadvantage.