How Special-Interest Groups Benefit From Minimum Wage Laws

Tyler Durden's picture

Submitted by Gary Gelles via the Ludwig von Mises Institute,

Those campaigning for a substantial jump in the minimum wage all assert that the purpose is to help working families. Unfortunately, careful students of the evidence come to a different conclusion. As Mark Wilson summarized it, “evidence from a large number of academic studies suggests that minimum wage increases don’t reduce poverty levels.”

Some workers lose jobs (high minimum-wage states have among the highest unemployment rates); others have hours cut. The least-skilled get competed out of the jobs that remain (e.g., the minimum wage hits teenage employment hardest). It crowds out on-the-job training, impeding workers’ ability to learn their way out of poverty. And those effects are worse in a recession. It also raises costs and prices that workers pay as consumers.

How can we explain support for a policy that harms many of those supporters say they wish to help? We explain it by focusing not on low-income workers, but their substitutes.

Consider an analogy. If the price of ice cream was pushed up, earnings of ice cream producers might go up or down, depending on how much less was bought as a result. But producers of frozen yogurt, a substitute for ice cream, will definitely benefit, because a higher price of ice cream will increase demand for frozen yogurt, clearly benefiting its producers.

Similarly, increasing the minimum wage will raise the cost of hiring low-wage workers. And while it might actually hurt low-wage workers, it will help each substitute for low-wage labor by increasing its demand. Thus, the narrow self-interest of those offering substitutes for low-skill labor, rather than compassion for the working poor, may best explain support for higher minimum wages.

Unions top that list. A higher minimum wage increases the demand for union workers by reducing competition from lower-skilled workers. For instance, if the minimum wage was $8 and the union wage was $40, employers give up 5 hours of low-skilled work for every union worker-hour utilized. But increasing the minimum to $10 means employers give up 4 hours of low-skilled work for every union worker hour.

Union employers benefit as well, because the higher costs imposed on non-union competitors raise the prices they must charge, increasing demand for union employers’ output.

This can also explain why other “altruists” support higher minimum wages.

Non-union workers and employers in high cost of living areas, where virtually everyone earns above the federal minimum wage, benefit, by raising the cost of production imposed on rivals where wages are lower (Which is why many in high-wage areas favor higher federal minimum wages, while those in low-wage states — the alleged beneficiaries — often oppose them). Workers and producers where state minimum wages exceed the federal minimum also gain because it raises the cost of production where the federal minimum is binding, relative to where they are located.

Because all these substitutes for minimum-wage workers will see increased incomes, businesses and politicians in those locations will also benefit, and so join the bandwagon pushing for “doing good” in a way that directly benefits them.

Even Wal-Mart benefits from this effect. Because Wal-Mart already pays more than the federal minimum, in low-wage areas a federal minimum-wage increase raises competitors’ costs, but not theirs. In high-wage areas, supporting a higher federal minimum wage is a costless way for Wal-Mart to demonstrate compassion for workers.

Virtually everyone who supports higher minimum wages asserts their intent to help working families. But it may frequently be a false compassion whose common denominator is advancing one’s own self-interest while harming working families. That would also explain why so many are unwilling to seriously consider whether such compassion actually works, rather than just sounding good.

The same mechanism is at work in the depression-era Davis-Bacon Act, which is still in force. It required the payment of “prevailing wages” on any project that received federal money. But its genesis was the explicitly racist intent to exclude lower-cost southern firms employing black workers from underbidding local white workers for construction projects, by forcing them to pay their workers more.

A similar illustration came from South Africa, under apartheid. White labor unions backed “equal pay” laws for blacks and whites in the guise of helping black workers. But what it really did was raise the price of hiring blacks, who had less education and fewer skills on average, as well as being discriminated against, relative to the price of hiring whites. Whites gained, but black unemployment jumped as a result of that “compassion” on their behalf.

Another illustration from outside the labor market is the support of corn farmers, corn syrup processors, and those in their communities for restrictions on sugar imports from other countries. By substantially raising the price of sugar in the U.S., the policy has driven many candy makers and the jobs they create outside the U.S., harming those workers and their communities. But it has raised the price of a substitute for corn syrup, increasing demand for corn syrup and the inputs that go into making it, benefiting those in corn-producing states.

Most people don’t seem to recognize this clearly self-interested mechanism behind support for supposedly compassionate or altruistic policies to benefit others, which is why it typically stays under the political radar. But once a person thinks through it, the connection becomes obvious. Further, it suggests the appropriate test that should be applied in such cases: Whenever someone claims an altruistic reason to support a policy, but it clearly advances their narrow self-interest, the latter effect can explain such support regardless of whether it actually helps the supposed beneficiaries. Therefore, a great deal of cynicism is justified. And when their “story” for how supposed beneficiaries are helped cannot stand the slightest real scrutiny, as with the current minimum-wage campaign, there can be no doubt that such cynicism is justified.

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NoDebt's picture

"How can we explain support for a policy that harms many of those supporters say they wish to help? We explain it by focusing not on low-income workers, but their substitutes."

We ARE helping them.  We are helping them make the right choice.  The choice to go on Welfare, Food Stamps and to fake Disability claims.  

Come to the light.  All are welcome in the light.

James_Cole's picture

 

Gary put more effort into this post than the last one but still fails to cite a single actual study and instead comes up with 'analogies.'

Consider an analogy. If the price of ice cream was pushed up, earnings of ice cream producers might go up or down, depending on how much less was bought as a result. But producers of frozen yogurt, a substitute for ice cream, will definitely benefit, because a higher price of ice cream will increase demand for frozen yogurt, clearly benefiting its producers.

First, what the fuck kind of analogy is that? Seriously. And second why would frozen yogurt producers ‘definitely’ benefit? A ten cent increase in my ice cream cone is going to send me running to frozen yogurt? You can prove this?

And then how much do you estimate the price would go up depending on what increase in the minimum wage? 

If my labour costs go up let’s say 2% will this mean I’ll sell 2% less ice cream? If minimum wage was dropped 2% would that mean I’d sell 2% more ice cream? Because interestingly… labour costs have been going down, corporate profits have been going up.. and consumers? They’ve been buying less shit!

When you actually look at it in non-abstract terms it ain’t as simple as A B C

Come up with an actual real case study on minimum wage specifically and add some facts and then write a post...

myne's picture

Consumers are producers?

How can that be?

That doesn't fit the narrative!

rehypothecator's picture

By some incredible coincidence, Archer Daniels Midland (1) lobbies for the continuation of sugar price supports and (2) produces high fructose corn syrup.  Simply amazing, isn't it? 

James_Cole's picture

By some incredible coincidence, Archer Daniels Midland (1) lobbies for the continuation of sugar price supports and (2) produces high fructose corn syrup.  Simply amazing, isn't it? 

The other thing Gary leaves out is who actually works in the fields and what their wages are, particularly considering how protected the industry is.

DaddyO's picture

Hey Jim, this is how sugar cane is harvested.

http://www.bing.com/images/search?q=sugar+cane+harvester&qpvt=sugar+cane+harvester&FORM=IGRE

The combine driver makes a good living setting in his air conditioned cab, don'tcha know.

DaddyO

DaddyO's picture

Here in Florida it is mostly mechanized, the migrants are used mostly in the row crop production of produce for human consumption.

And see if you can get more recent date on wage rates, 1998 is so 20th century...

Look there is no way around the fact that farm workers no matter what stripe don't make high wages. But when you use executive order to hike wages it triggers all kinds of other wage hikes.

Most if not all union contracts have wage push clauses for minimum wage hikes.

So union workers no matter what their wage get the same hike.

This in turn triggers Davis-Bacon Act hikes for most .gov contract workers. So the Lockheed Martin Tech making 55k + bennies gets the same hike the union workers get.

So a $3 per hour hike in the minimum wage which for the part time worker equates to about 3000K/yr gives the full time union worker 6 laning I-95 about $6000 to $8000/yr hike depending on overtime.

The Lockheed Martim worker who gets about 2500hrs per year just saw a raise of $7500

DaddyO

AmCockerSpaniel's picture

Does the amount of your pay effect your level of living? Does the level of your income effect

your spending? Do you want to fund foreign workers, and pay out of work American works? If

they can force workers to work for just food, and no more, can it not be done to you and yours?                                                                             

James_Cole's picture

And see if you can get more recent date on wage rates, 1998 is so 20th century...

Are you suggesting wages have gone up? 

Most if not all union contracts have wage push clauses for minimum wage hikes.

12% of the workforce, mostly .gov.

The Lockheed Martim worker who gets about 2500hrs per year just saw a raise of $7500

 

Totally irrelevant. Defence contracts exist in world of completely made up economics. 

 

 

The thing about arguments around minimum wage is they often spin off into anecdotes such as yours. How about approaching the issue head on? If a minimum wage hike is a negative for the economy, what about it's corollary - getting rid of the minimum wage / lowering it? Or another argument - where should the minimum wage be set?

Those arguments are no good because they require critical thinking. The best you get from the MSM is higher labour price = higher product costs = lower sales = lower employment. Or on the other side higher wages = more disposal income = bottom up consumerism = more demand. And then the predictable binary back and forth.

And on zh you have the braindead libertarians going on about how .gov shouldn't be allowed to set any prices, totally ignoring that the entire US economy is built on price controls. 

No one wants to fucking think. 

 

And then the propagandists.. they're clever because they always dance around the complex issues and are smart enough to know that most people will a) do nothing rather than risk a negative impact b) generally choose no change over any change which is great for maintaining the status quo. 

http://www.thesleuthjournal.com/wp-content/uploads/2013/09/corporate-pro...

Oh, but imagine how much worse it will be with a minimum wage hike! Scary!!

From the same people who sold you on exporting the American manufacturing base in order to secure long lasting American prosperity.. Part 2: how raising the minimum wage will destroy America!

BigJim's picture

 And on zh you have the braindead libertarians going on about how .gov shouldn't be allowed to set any prices, totally ignoring that the entire US economy is built on price controls.

So 'brain-dead' libertarians - who are the ones decrying central banks' setting of interest rates, minimum wage laws, regulations, subsidies.. are somehow 'ignoring' that the 'entire' US economy is buit on price controls?

Even if we ignore the obvious fallacy in your assertion that the 'entire' US economy is somehow 'built on' price controls, you're talking gibberish.

James_Cole strikes (out) again.

James_Cole's picture

So 'brain-dead' libertarians - who are the ones decrying central banks' setting of interest rates, minimum wage laws, regulations, subsidies.. are somehow 'ignoring' that the 'entire' US economy is buit on price controls?

The ones arguing out of one side of their face that a minimum wage hike would be a huge detriment to the economy while out the other side acknowledging that most aspects of the economy are centrally controlled. 

The way I see it, up until the 2008 crash I heard a lot "efficient market hypothesis blah blah blah market forces blah blah blah" then mysteriously at the time of the crash I heard "OMG! We need 1 trillion dollars no questions asked right now or there will be tanks in the streets!!" And now I'm hearing more "efficient market hypothesis blah blah blah market forces blah blah blah."

And on the TV, Libor? QE? Ah, who gives a fuck. Minimum wage? Millions of 'debates.' 

Libertarians are the useful idiots who show up to complain about unions and workers rights - something they and the business community have common ground on & have coincidentally had a lot of success crushing, while the shit libertarians talk against which actually benefits the elite banking interests, somehow that just keeps humming along perfectly. 

Oh yea, end the fed, sure. We all got the bumper sticker. No more free money to banks, yep. Been saying that since 88! Really goin' strong!

BigJim's picture

 The way I see it, up until the 2008 crash I heard a lot "efficient market hypothesis blah blah blah market forces blah blah blah" then mysteriously at the time of the crash I heard "OMG! We need 1 trillion dollars no questions asked right now or there will be tanks in the streets!!" And now I'm hearing more "efficient market hypothesis blah blah blah market forces blah blah blah."

As usual, your post is a logic salad of conflations, errors and calumnies. You clearly don't know what the 'efficient markets hypothesis' is, not that it's at all relevant to your post decrying libertarians; as it wasn't libertarians saying we need "1 trillion dollars no questions asked right now or there will be tanks in the streets!!"

Libertarians denounce government intervention in all aspects of the market, dolt; and government intervention in setting minimum wages does increase unemployment, even if you're too simple to understand why. Try rereading the article until you understand it and then your comments might begin to make sense.

James_Cole's picture

You clearly don't know what the 'efficient markets hypothesis' is

My point is people talk a lot of shit when it's convenient but tend to throw it all away when expedient. As in the case of the 2008 crash when you had all these Milton Friedman / efficient market disciples suddenly insisting on no-strings-attached bailouts from taxpayers. 

Or another example is 'staunch libertarian' and anti-UN guy Ron Paul running to the UN to try and steal his website back from his own supporters who wanted to sell it to him. In an instant he tossed in the trash everything he ever claimed about libertarianism & the UN in order to look after his own particular self interests. As people always do.  

Libertarians denounce government intervention in all aspects of the market, dolt; 

Which is a completely dishonest intellectual position. Do you use the internet? Are you on the internet right now? lol 

and government intervention in setting minimum wages does increase unemployment, even if you're too simple to understand why. 

Already argued this many times, above and below on this thread. You're for no minimum wage, got it. 
Canoe Driver's picture

All wage increases are, almost immediately, counteracted by corresponding inflation, because the wage increase itself, by its very nature, is inflationary. Therefore no wage increase can provide other than a transient improvement in purchasing power. All wage increases are thus nominal and are made essentially for reasons of morale improvement and employee motivation. Real improvments in purchasing power can only be had through productivity increases and/or through owning, controlling and manipulating the means of production, i.e., capital stock. 

James_Cole's picture

Therefore no wage increase can provide other than a transient improvement in purchasing power.

Except... that's not true. Purchasing power in a number of countries is greater than the US consistently at the minimum wage level. 

Real improvments in purchasing power can only be had through productivity increases 

So, if there are major productivity increases yet stagnant wages...?

http://cnnmoneytalkback.files.wordpress.com/2013/02/chart-minimum-wage-e...

and/or through owning, controlling and manipulating the means of production, i.e., capital stock. 

You advocate socialism then?

tip e. canoe's picture

of course, he has to be skilled enough to set the right GPS coordinates so the combine doesn't harvest the neighbor's field ;~)

thamnosma's picture

No, if labor costs go up you don't sell less ice cream, you make LESS money.  As a business owner, that's not the friggin' idea.  Plus it doesn't increase costs 2%, but enough that the owner must reduce employees or risk destroying what profit margin he/she has.  What do you think the profit margin is for most businesses? 

James_Cole's picture

Reading comprehension skills, work on them.

drendebe10's picture

Bow down and give thanks to yhe would be king arrogant narcissistic lying illegal alien kenyan muslim sociopath so it and its wookie can keep living yheir grand imperial lifestyle whole yhe tax paying serfs and peasants eat cake. 

4 Freedoms's picture

Yes!  By all means, lets bring back slavery.....wait.....

LawsofPhysics's picture

Just out of curiousity, does anyone know what percentage of all workers are actually in a union?  None of my employees are.  I doubt that this number is more than 7%.  Seems to me that the average wage has been steadily declining, doubly so when one considers the purchasing power of those wages.  Pretty clear that all of this is pretty much irrelevant if you are not using sound money or maintaining some rule of law and prosecuting the fucking fraud.


NoDebt's picture

You talking private or public sector workers?  Two very different animals.

LawsofPhysics's picture

So, you still believe that private military contractor is really working in the "private" sector and could stay in business without the government (public)?

What part of ALL don't you understand?

maskone909's picture

Private defense industry would simply contract with outside govs so yeah they would stay in business.

LawsofPhysics's picture

So they would find another public to steal from.  Sounds fucking great to me. 

maskone909's picture

Lmfao i know what u mean. If i had the money and could legally purchase some of that shit i would buy it. I could always use an apache with anti tank missiles

johnQpublic's picture

for the morning commute i would assume>.....

MisterMousePotato's picture

I *need* a car that goes 180 miles per hour to get to work in the morning. And one that has a .30 cal belt feed weapon roof mounted, so, yeah. There's hope.

drendebe10's picture

Sign me up. Will yhey take BTC as a deposit?

NoDebt's picture

No, I'm commenting on the percentage of union employees in the private sector vs. the public sector.  Which was, I believe, your original question.  How we got on the issue of a private company whose only major client is government, I have no idea.

Greenskeeper_Carl's picture

The way I like to frame it is that it's our money we need to fix. When the minimum wage was 1.25, that was 5 quarters that were 90% silver. Those 5 quarters are worth nearly 20 Bennie bux today. Employers aren't able to increase wages at the rate the fed/govt are debasing the currency and remain profitable. The solution is to stop allowing a private banking cartel to debase the dollar for their benefit, not force employers to pay more money. So, like pretty much all of our economic problems, the solution is to end the fed.

TimmyB's picture

Whether or not the currency is debased, American jobs will flow to China, the profits will flow to the billionaires who shipped the jobs overseas, and these billionaires won't pay a fucking cent in taxes, so working people will have to take up the slack. Please explain how changing the currency fixes these problems.

BigJim's picture

Why did the jobs get shipped to China? Because the overall costs of US workers rose to the point that Chinese workers produced goods more cheaply... despite the US' superior infrastructure, more highly educated workers, and productivity/hour of the workforce.

Why is this? For a bunch of reasons... minimum wage laws, more onerous regulation, higher taxes... and when you have property bubbles caused by artificially low interest rates, their higher prices are reflected in higher rents/mortgages for businesses.

But the biggest problem for US workers is that, for the US to have the world's reserve currency, the US must, by definition, export ownership of USD... ie, run a constant and expanding trade deficit (see Triffin's dillemma)

TimmyB's picture

Nope. American jobs went to China when our government lowered tariffs and allowed U.S. Corporations deduct the cost of moving production overseas from their US taxes. Then the government didn't tax overseas earnings until that money entered the US.

The price of third-world peasant labor has always been lower than US labor.

TimmyB's picture

Nope. American jobs went to China when our government lowered tariffs and allowed U.S. Corporations deduct the cost of moving production overseas from their US taxes. Then the government didn't tax overseas earnings until that money entered the US.

The price of third-world peasant labor has always been lower than US labor.

Kirk2NCC1701's picture

Thank you for not falling for the Magician's Trick of TPTB:  Distraction & Action.

Wish more people (here and elsewhere) would have that clarity of thought.

ebworthen's picture

Well, o.k., so let us start by ending "minimum wage" for insurers, corporations, and other societal parasites.

No subsidies to Big Ag., Big Pharma (Obamacare), Banks (QE), Corporations (tax breaks), etc.

It's all a big Ponzi, you may as well cut the little guy in on it, or cut the bullshit.

One or the other.

Greenskeeper_Carl's picture

Cutting the little guy in on it would unleash the hidden inflation in a big way. The status quo is able to muddle along precisely because the money goes to all those at the top and largely stays there. All that QE mostly remains as reserves with the TBTF banks. If QE money was actually given to the little guy, as in the 'helicopter drops' inflation would sky rocket. And since these big firms aren't even able to turn a profit without them, noting will change until it is forced on them. I'm not defending this practice in any way, just saying why that will never happen

maskone909's picture

Would abolishing the minimum wage destroy the fastfood industry? Would it cause deflation? I cant fathom the implication but my gut feeling tells me it would be a good thing.

thamnosma's picture

We need to raise the minimum wage to $5,000 per hour.  We end poverty and spur consusmer spending.  Or just have the fed send every family a cool million.

LawsofPhysics's picture

"Or just have the fed send every family a cool million." - if it was really sent to every family, this would have been more equitable then giving tens of trillions to a few fucking bankers and financial fucks. - just saying.  Moral hazard can be a bitch once people start sharpening their blades...

FredFlintstone's picture

Publisher's Clearing House could be used to distribute checks at $1M each to 85,000 lucky winners every month. The Fed could then take a rest.

 

thamnosma's picture

Yes, definitely, I want an "equitable" collapse.  Sheesh.

Kirk2NCC1701's picture

Hear, hear.  Philosophical perspectives aside, IMHO, giving every family $1M would do EXACTLY what the Fed "claims" to want to achieve:  VELOCITY OF MONEY (VOM).

Alas, if we were to call them out on this, we'd find out that VOM is not the REAL agenda, as they'd come up with a host of excuses which the MSM talking heads would back.  Let's not confuse Pretext with Motive.  In simple terms... Their Pretext is the "good of the Nation".  Their Motive is the "good of Fed's true owners", the 0.01%.

ZHers, keep the Clarity, Focus and the Faith.

Shad_ow's picture

Yeah!  That magic pen is discrimating against the little people.  Obama needs to get with it and "fix" everything with the stroke of his genius.

drendebe10's picture

Too late. The narcissist sociopathic liar is out living its grand imperial golf lifestyle while its ho lookin wookie is parading around. In a 17 grand smock.

drendebe10's picture

Too late. The narcissist sociopathic liar is out living its grand imperial golf lifestyle while its ho lookin wookie is parading around. In a 17 grand smock.

Bangin7GramRocks's picture

Weekend Tyler strikes again! Higher wages for crooks, assholes and societal leeches=good for economy. Higher wages for hard working low wage earners=economy killer. Who the fuck are you, Frank Luntz?