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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maskone909's picture

Please note this was not authored by ZH.

ThroxxOfVron's picture

"Higher wages for crooks, assholes and societal leeches=good for economy. Higher wages for hard working low wage earners=economy killer."

You wanna pay more for services?  -Then just fucking tip people!  No One is going to try and stop you.

See how easy that is?   You can do this all day every day; VOLUNTARILY.

I'm betting that You DO NOT tip people at every cash register you step up to.

YOU don't want to pay more for goods and services yourself.  

You want to FORCE other people to pay more for goods and services.

YOU want to FORCE other people to pay more to fund the .GOV bureaucrats to use the FORCE of Governemnt to FORCE other people to pay more for goods and services just because you like the idea even though YOU will not and do not voluntarily do it yourself !

Now REFUT what I have just asserted -or just stfu roll up those sleeves and step forward.

This is Fight Club.  We're here to knock some sense into each other and/or ourselves.

Bangin7GramRocks's picture

Stop yelling, I'm right here. There has been a steady suppression of wages in the this country for 40 years. Yet the wages of the true government leeches continue to rise at alarming rates. I am for living wages paid for hard work. It worked in this country for 60 yesrs and then it began to change. The standard of living for the bottom 80% is declining and without funny money credit it would be worse. Sorry you may to pay 25 cents more for a chemical laden fast food sandwich. And yes, I would gladly pay more for real food, shoes, clothes and my car if it meant a living wage for an American. I guess I just refuse to be a self-centered selfish asshole.

chunkylover42's picture

"There has been a steady suppression of wages in the this country for 40 years."

This is absolutely true.  However, take a look at total compensation which includes benefiits like health care costs that a majority of workers get through their employer.  The yearly change in total comp tracks very closely to CPI, in fact running just a bit above except for during recessions.  In other words, rising health care costs are a major reason why wages have stagnated.  Compaines big and small have had to pay increasingly more to offer health insurance for their employees every year, and that difference has come out of wages.

TimmyB's picture

Most Americans don't get employer provided healthcare. This is especially true of the people who work full time for poverty wages. So what you write is nonsense.

ThroxxOfVron's picture

"Stop yelling, I'm right here.

And yes, I would gladly pay more for real food, shoes, clothes and my car if it meant a living wage for an American. I guess I just refuse to be a self-centered selfish asshole."

BULLSHIT.  You wouldn't gladly do anything VOLUNTARILY yourself.  You have NO Excuse.

YOU are a self-centered selfish asshole.  -You just admitted that YOU don't do what You are demanding of Other People!

1. STOP acting like your deaf.

2. STOP lying about your motives and intentions.

3. STOP demanding that Other People be forced to do that which YOU yourself refuse to do VOLUNTARILY.

IF YOU 100% truely believe in paying people more to do what they are doing YOU can sinply pay more for the services and goods YOU pay for.  

YOU DON'T.  

I don't have to respect You & I don't respect You because You are a damnable hypocrite and fraud.

You DO NOT DO what You demand of Other People.

It really is THAT fucking simple.

stacking12321's picture

@B7GR:

this is total crap what you wrote:

" I am for living wages paid for hard work."

doesn't matter what you are "for" - it's not your damn money!

you have no right to decide what constitutes "a living wage" (some arbitrary, made-up number), and force other people to buy labor at that rate, it is not your right to decide that for others.

in a free society, commercial exchange is 100% voluntary, no one forces anyone else to take any deal.

if you are in favor of centrally planned economy, go live in venezuela or argentina for a while, let me know how you like economic life there, because that's what you're advocating.

 

PhilofOz's picture

In Australia there is no tipping culture at all. It's a shock to Aussies that go to some countries and see how this works. We pay the best minimum wage rates in the world and no one is going to tell us that our society in this day and age is worse than anywhere else. Having travelled the world, inc much of the USA in the last 15 years I see well what works best for society in general. With a true minimum wage of almost $22 an hour.( $16 + 20% casual rate + 9% employer superannuation added) it's called a "fair go to all" and it gives everyone a decent living wage. I know where I'd rather be when the shit hits the fan and it's not in a place where already near half the population is living week to week desperately waiting for the next paycheck.  

PhilofOz's picture

I'll just add that there are still no Wal-Marts in Australia even though they were considering expanding here 10 years ago. I'm in no doubt it is because of our high minimum wages that they refuse to accept. Tough! Keeps the little guys going a bit longer.

Seeking Aphids's picture

Good on ya Phil! The Australian/Canadian/Scandinavian models put the lie to the arguments against a decent living wage for all.  There is enough wealth on this planet to ensure that no one needs to live in extreme poverty. Those with an Ann Rand perspective should note that poverty results in disease and crime that threatens everyone...it is in the interests of all to eradicate poverty.

besnook's picture

omg! what a stretch. the reason there is a push for minimum wage increases is because no one is affected by it. it has become politically expedient because no one cares. besides, if a rise in minimum wage were to increase the need for any substitute it would be illegal immigrants and cash workers.

ThroxxOfVron's picture

"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."

Where oh where is my LTER?  Oh where oh where Cali beef?

Being Free's picture

Bottom line...it ain't the fucking governments job to set wages.  Though I'm not surprised that when they try the just screw things up.

artless's picture

Bottom line...

The government (or anyone else for that matter) DOES NOT HAVE THE RIGHT to decide what one party will sell his labor for in voluntary agreement with another party.

There fixed it for ya.

MagicMoney's picture

Increasing the minimum wage increases cost substitution. This is why unions support a higher minimum wage. They don't want to compete with other workers who would do the job for cheaper prices, even though they are not as quality workers. Minimum wage laws have thier blowbacks, and unintended consequences. Just like corporations who get stronger with regulations that choke off the competition, because they already grew big before such regulations were passed, or did so with minimal competition, it ensures they have less competition in the future. No different from minimum wage laws. A corporation like Wal Mart would pay their workers a higher wage with higher minimum wage laws, it simply makes other small companies start up, and grows costs more unbearable than that of Wal Mart. 

 

Such laws reduce competition, when you reduce competition, you get the status quo, you get less vibrant economy, and more monopolies, and monoliths that hang around for years with nothing to challenge them. 

 

Employers ultimately can do cost substitution of employees, like employ machines instead, because employees are too expensive, especially for low profitable activities. Multi nationals can pay the cost of minimum wage cost comparatively to that of small firms. Consumers decide prices, if employers raise prices too much, consumers may opt to buy something else deemed of more value than what they are offering. Thus they lose customers, thus profits, and possible have no business at all, thus no jobs. No customer would pay 10 dollars for a 8 ounce glass of lemonade from a lemonstand stand with the current real purchasing power in USD, they more likely spend their money on something else of higher satisfaction, and pass it up.

Sudden Debt's picture

If your discussing that America can't compete with China because of a raise in minimum wage you actually say America is already down the shiiters.

If there's no difference between a 50 dollar a hour worker and a 1 dollar a hour worker, America should just implode.

If America can't make the difference, people should move to countries that can still make the difference.

"No customer would pay 10 dollars for a 8 ounce glass of lemonade..."
...
Really? are you a freaking idiot?
My god... people like you make me sick.

I make 120 dollar a hour. And why does my boss pay me that? Because I make the company more money than that.
And that's how the economy goes.
If a company needs slave wages to compete... close the shop.

And most Americans are as fat as a cow. I don't think it wouldn't be a bad idea to ask 10 bucks for a cola.

FredFlintstone's picture

Close down fast food outlets, amusement parks, ect. Every 16 to 20 year old looking for a summer job can just suck it. Whose is the idiot again? Oh right, the guy paying you $120/hr.

Sudden Debt's picture

1. yes, close down fast food outlets. at least 9 out of 10 at least.
America needs to learn to eat normal food that doesn't turn people into fat slobs.

2. As a student I was a electrician, worked in a metal shop, a graphic designer...
I didn't want to do stupid jobs like working ina fast food outlet.
Teach your kids some proud. And if you lack them, at least help them find a person who can teach them proud because you clearly lack those skills.

Smegley Wanxalot's picture

Apparently, your parents never taught you english.

That point aside, kids/people don't need to beg your fucked up ass for permission or confirmation to eat what they want, or work whatever job they want. You worked where you wanted as a teen punk, others can work in warehouses or fast food, and if people are too fat for you, well nobody's making you look at them or fuck them.  It's not your business what they do, who they do, or what they eat.

You sound the same as every big-govt-humping control-happy piece of liberty-hating shit on the planet.  That means you are a fucking tyranny-enabling cunt.

thamnosma's picture

Pretty good English for someone from Europe.  In fact, better than yours.

FredFlintstone's picture

Arrogance is the hallmark of a fool. I applaud your accomplishments, but not everyone is as gifted as you claim to be. It is great that there are opportunities for everyone earn a living whether they relatively untrained and lack skills, or they have mental limitations that would preclude them from a higher calling. My children were lifeguards, tutors, engineering interns and one did work at Chipotle. Oh, the horror! I agree that we eat too much unhealthy food, but your proposal to close down 90% of fast food establishments is silly. My children are humble for the most part even though they have accomplished much and I am glad for that.

I just had an employee who turned in his resignation on Friday. He was the best technically, but lacked humility, empathy and kept to himself. He did not delegate and had trouble acknowledging errors. He was seen as stubborn by clients. He is taking a job that will require much more interaction with people in a field where you need to check your ego at the door. I wish him well, but feel that he may have a very difficult time adjusting.

If you are still young, you may be able to successfully work on being more humble. The world changes and with it technology. Our bodies and minds slow down and become less sharp. The young staff nip at our heels and want their chance. Arrogance and pride can accelerate you being ousted from a good gig and make it harder to land on your feet again. Good luck.

MagicMoney's picture

No they wouldn't. Because consumers have limited cash balances, or limited income. Consumers don't have unlimited money, or unlimited purchasing power. They pick, and choose what is of value, or the level of value of one good compared to other goods. If you say otherwise, you simply don't live in the real world.  This is why people shop at Wal Mart versus K-Mart whether you like it or not. Consumers determine prices. The reason why consumer pick, and choose which goods they spend thier money on is because there real income is scarce, so they economize on what to buy, they rank goods on the order of most urgent wants.

besnook's picture

you don't seem to understand the real world application of theory. the power of advertising, the power of persuasion, causes everyone to act against their interests at some time or another, some are affected all the time. apple products are an ideal example for this time, pet rocks are another brilliant piece of willfully wasting money. wal mart uses very sophisticated systems to get their customers to spend money on stuff they don't need for prices they can't afford. big retailers also use sophisticated systems to charge the maximum they are able to. consumers only determine prices on the margins. the companies determine prices for the ignorant(most consumers) because the ignorant don't know better. the antique collectible business is a great example of knowledge trumping ignorance in prices on the sell and buy side.

James_Cole's picture

Consumers determine prices. The reason why consumer pick, and choose which goods they spend thier money on is because there real income is scarce, so they economize on what to buy, they rank goods on the order of most urgent wants.

This is all well and good until you recognize that commodities / labour are priced globally which entirely changes the consumer dynamic. If all the inputs came from the same general region with same overarching laws as the consumer your argument would make sense, but that's not the case. 

Otherwise known as 'the race to the bottom.'

http://en.wikipedia.org/wiki/Race_to_the_bottom

artless's picture

@Sudden Debt

"If a company needs slave wages to compete... close the shop."

Ummm, slaves do not get wages. Nice twisting of language ro make the emotiuonally laced, irrational point. Just like you've been spoonfed by Big Media to do. I'll bet you also think things like a "right" to healthcare.

Try again. And yes America is long down the shitters. But not because we don't pay burger flippers $10/hr or even that the rest of my countrymen are fat ass overpaid slobs many of whom are so entirely unaware of how much they are at the teat of society at large that it would come as quite a shock to them if all went away one day.

Which it will.

PhilofOz's picture

I read somewhere that when slavery ended for many former slaves they were far worse off. They had their freedom, but they no longer had a roof over their head or food on their plate. If you're getting $7.25 an hour and all your wages go into having just a place to sleep and no chance of ever getting ahead, how are you any better off than how a lot of slaves had it? It gets worse as the market for labor gets even more competitive. I guess for some it does not matter as long as the profits keep up by paying their workers a shit wage... but eventually they will have to pay the piper.

BobRocket's picture

''By far the greatest part of the land,' said Owen when the row had ceased, 'is held by people who have absolutely no moral right to it. Possession of much of it was obtained by means of murder and theft perpetrated by the ancestors of the present holders. In other cases, when some king or prince wanted to get rid of a mistress of whom he had grown weary, he presented a tract of our country to some 'nobleman' on condition that he would marry the female. Vast estates were also bestowed upon the remote ancestors of the present holders in return for real or alleged services.'

 

You never had any chance.

 

The odds are always stacked against you.

 

There are only two ways.

 

1. Take from them that which they stole form others (and become them)

 

2. Not participate in their game.

 

Choose your side carefully

 

(the socios have decided it is in their best interests to string up the players)

 

 

TimmyB's picture

Maybe unions support minimum wage increases because they are made up of working people instead of large shareholders in McDonalds or Wal-Mart.

Sudden Debt's picture

It's called protecting the purchasing power.

Evil bastards are against it and will tell you 500 reasons why minimum wage should be a penny.

People who are against this are idiots.

OH NO,MY 1 DOLLAR HAMBURGER THAT GIVES A FAT ASS WILL COST 10 CENTS MORE!!!
EVIL!!!

Those who complain for a increase of a few cents even doubling a dollar hamburgur cost because poor people get a bit more should be thrown of a cliff.

Sudden Debt's picture

if you have to ask it's probably you :)

tgatliff's picture

I doubt prices would increase. Fast food prices are determined by what the consumer will pay and by competition. All increasing minimum wage would do is increase automation. Meaning, fewer jobs and more automation.

Marco's picture

It increases the speed of automation, not automation in and of itself ... nothing a year or so of technological improvement can't accomplish any way.

The issue of automation is an argument for either subsidized jobs or for basic wage (or for saying "fuck you got mine" I guess). Not for a given level of minimum wage.

4 Freedoms's picture

I think it's time to start a thread, talking about regulating "the maximum wage."  And, please, don't hate the player, hate the game.....

johnQpublic's picture

as i remember from my youth, having a minimum wage just meant that all unskilled labor payed the minimum wage

if you liked being outside you worked as a carpenter or landscaping

otherwise you became  a cashier

both payed the same

logically it should have payed more to be lowest tier carpentry as it was the hardest job and required the most brain power

having a minimum wage just made that THE wage

ultimately pizza delivery was the best job, providing the minimum plus a shot at tips

 

TimmyB's picture

Carpenters are not unskilled labor. If you think they are, then go build a stairway.

forrestdweller's picture

my new plan is to convert the salary of an average working person to one bowl of food a day and a bed at nigt (in mass dorms).

i think this is better than money anyway, with inflation and all.

i wrote a letter to the president, and i am still waiting for his positive response.

PhilofOz's picture

Oh come on, two bowls a day, otherwise output would suffer.

OC Sure's picture

Empirical data does negate the efficacy of price controls but I don't see in the article where price controls commanded by the federal government are, or are not,  constitutional.

By listing examples against the efficacy, then implicitly the premise is accepted that the federal government has the authority to control any prices at all; it does not. 

Per the tenth amendment, price controls such as minimum wage laws are to be determined per state if at all.

4 Freedoms's picture

I think it's best to get old school on the wage question:  Minimum wage is one ounce of pure silver per hour.  Maximum wage is one ounce of pure gold per hour.  What say you all?

LawsofPhysics's picture

The miners in my portfolio like your proposal...

4 Freedoms's picture

Then, I just might run for Prez in '16....on the "Sound Money and Fair Wages" platform.  Who should I select as VP so I don't get shot?

tip e. canoe's picture

funny, i was just talking about this the other day here, but no one seemed willing to trade their silver away for anything.   personally, in this stage of the game, i'd be willing to give/take 2 64 Kennedy 1/2's in exchange for an hour of time, regardless of its "price" measured by FRNs.   that's about ~.8 oz of silver.

the practical limitations of this is that there isn't enough gold/silver on the planet to implement this scheme.     the only way this could possibly work is to deflate everything down to an 1oz. of silver/gold per day min/max and then have silver valued closer to historical averages.   still not enough but at least it's getting closer.

it's an interesting hypothetical to wrap one's mind around though, if only to help remove oneself from the trap of using the FRN as the unit of account for everything.

RaceToTheBottom's picture

I wish the Mises institute would stop wasting their energy posting these theories about minimum wage. 

There is more bang for buck for them tackling the major financial issues of the world, but no, another Mises institute theoretician is going to pontificate about the purity of having no friggin minimum wage laws.

Great, the world will go belly up and Mises can feel virtuous about never succumbing to the wrong view on minimum wage... 

Take on a Bankster or two you egg heads...

MagicMoney's picture

Singapore does not have any minimum wage laws. Yet there is no acute poverty there.... Countries with high minimum wage have very high teenage unemployment & people on welfare. Hong Kong had no minimum wage laws either. Neither did China for a while. Yet they had a society where people had opportunity to climb the economic ladder and have higher wages. Not all jobs are equal. Not all jobs are equal in pay. Don't like the real world, then you must want the utopia of communism. This has been debated over, and over ad nausem, I wish people who claim increasing the minimum wage increases prosperity would simply give up on a argument that doesn't manifest realistically with their ideal dreams. If the logic that increasing the minimum wage creates prosperity with no trade offs, why not increase it 100 times over in one swoop, and prove it? Why don't politicians do this? Because they know it does come at expense. Can't handle the fact that that things are unequal., well go move to Venezuela, or Cuba, somewhere, maybe you will be happier over there.

 

You also conflate poverty with wages. Poverty is a result of poor jobs, and poor productivity. There is poor african nations & other nations, because they don't have any real productivity. Their goods, and services are low, few, and between. You got the whole economics of wages totally wrong. Higher wages doesn't create economic prosperity, it's goods, and services. If raising wages arbitrarily creates a better economy, why doesn't the United Nations raise wages for africans??? Because it doesn't work. Doesn't everybody want human society to be not poor??? Must be some conspiracy for people to keep other people poor...

sylviasays's picture

Things are definitely not equal in the communist worker paradises of Venezuela or Cuba. The crony communist elites at the top have all the wealth while everyone else is poor as shit. Maduro and his cronies have an ample supply of the softest toilet paper to wipe their fat asses with, but the poor in Venezuela have to use their hands to wipe becuase they can't get toilet paper!

RaceToTheBottom's picture

"You also conflate poverty with wages. "

Nonsense.  I think Mises should stop blathing about theoretical nonsense that matters cents on the dollar. 
WTF dpes Mises say about malinvestments like corruption and croneyism on WS and the US Government. 

Stop wasting my time with nonsense.

artless's picture

"WTF dpes Mises say about malinvestments like corruption and croneyism on WS and the US Government."

If you had to ask you must not know who the fuck Mises was. Try picking up a book. He answered all these questions decades ago.

There was also a Congressman from Texas who juts retired whose been shotuing the stuff from the rooftops for decades as well. Pure 100% unadulterated Mises, Austian Economics.

ZH picks up small articles here and there. Go to Mises.org and there you will find quite a bit more than min wage arguments.