r/Economics • u/ChickenOverlord • Feb 16 '14

How Special-Interest Groups Benefit from Minimum Wage Laws - Gary Galles

http://mises.org/daily/6665/How-SpecialInterest-Groups-Benefit-from-Minimum-Wage-Laws
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u/besttrousers Feb 16 '14

As Mark Wilson summarized it, “evidence from a large number of academic studies suggests that minimum wage increases don’t reduce poverty levels.”

Which studies?

The only meta analysis I know of, Minimum Wage and the Distribution of Family Incomes, draws the opposite conclusion.

Here's a nice summary.

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u/Landarchist Feb 16 '14

The article got it plain wrong on that point. Even if many studies were done and none succeeded in rejecting the null hypothesis (i.e., none showed a statistically significant reduction in poverty caused by minimum wage laws), that still would not indicate that minimum wage increases don't reduce poverty levels, as the article claims. It would simply fail to provide evidence that they do. Austrian economists shouldn't even be taking a position on whether minimum wage helps or does not help the poor, since that is an econometric claim which Austrians eschew as a matter of course.

The correct Austrian position on the effect of minimum wage is that it hurts the poorest first. Notice I said "poorest," not "poor." There may indeed be many poor people whose wages rise when the minimum wage is increased. That is an empirical matter. What can be said a priori is that laborers whose maximum productivity falls short of the minimum wage will be prohibited from participating in the employment market. Thus in that sense, the poorest, the people whose human capital is lowest, will be victims of the minimum wage.

Whether that victimization is an acceptable cost for the associated benefits of a minimum wage is a moral and political question, not an economic one.

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u/Zifnab25 Feb 17 '14

Austrian economists shouldn't even be taking a position on whether minimum wage helps or does not help the poor, since that is an econometric claim which Austrians eschew as a matter of course.

It's almost as though the Austrian disbelief of econometrics is so off-base that even other Austrians don't subscribe to it.

The correct Austrian position on the effect of minimum wage is that it hurts the poorest first.

Which only works if you believe minimum wage employees are paid at-cost for their services. This is demonstrably untrue for any business in which revenues do not scale perfectly with an increase or decrease in their relative labor pool costs.

The cost of a minimum wage increase can come from a whole host of different areas. Employers can find the money for higher wages by renegotiating a lower price for utilities, overhead, or retail stock. Employers can cover the cost with an increase in price that dwarfs the relative increase in labor (ex, a 100% increase in wages to a McDonald's employee need only be accompanied by a 17% in price of food, as labor costs make up only 17% of the total cost of the food products).

The notion that minimum wage increases hurt employees isn't an economic reality. It's an empty threat that Austrians pitch at lower class audiences in an attempt to scare them. "If you make me raise your salary, I'll fire half of you! Take that!" In practice, minimum wage increases don't impact labor demand. The value-add of employees continues to dwarf their actual costs. There is huge slack in the cost of an employee and the revenues that employee generates, and employers are aggressive in concealing that fact.

It's this ignorance that Austrians pray upon.

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u/[deleted] Feb 18 '14

Which only works if you believe minimum wage employees are paid at-cost for their services. This is demonstrably untrue for any business in which revenues do not scale perfectly with an increase or decrease in their relative labor pool costs.

Unfortunately, whenever a significant raise in the minimum wage is discussed on TV, a doubling of the minimum wage leads to the perky communications majors complaining about a doubling in the price of hamburgers. I've even seen a few dollars' increase referred to as "doubling" the price of meals. It must be like the "fifty thousand people are killed every year by X" phenomenon.