With the health care system so convoluted, I’m glad there’s at least one champion out there who can make things simple for us. Enjoy.
Three new additions Monday, Jul 27 2009
Uncategorized 2:03 PM
The minimum wage debate on employment was very much alive the past few days across the blogosphere (and still is, actually). I’ve had very many interesting discussions with people with differing points of views. I think I’ve learned a lot from it. Perhaps in the future I will be able to touch on a few issues I wasn’t able to in my last post.
In any case, I’m pleased to be adding three new blogs to my blog roll. As always, I might not agree with everything being posted on these blogs, but I find what they have to offer interesting and worthwhile. They usually cover many of the same topics I might and you’ll typically find them to be liberty-minded.
The first is Classically Liberal, a blog that covers a whole host of issues, typically with a libertarian perspective. I don’t really know anything about the author except that they go by the name CLS.
The next is the Becker-Posner Blog, which is maintained by Gary S. Becker and Richard Posner. Dr. Becker is a professor of economics at the University of Chicago and the the recipient of the Nobel Prize in Economics in 1992 “for having extended the domain of microeconomic analysis to a wide range of human behaviour and interaction, including non-market behaviour.” Judge Posner is a judge for the United States Court of Appeals for the Seventh Circuit in Chicago and lectures at the University of Chicago Law School. He has been a respected writer on law and economics. The blog, which was started in 2004, typically takes a classically liberal approach to contemporary issues.
Finally, I am adding the Freakonomics blog. This blog is an offshoot of one of my favorite books: Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (2005). The book, written by Steven D. Levitt and Stephen J. Dubner, is about economic theory being applied to culture and other social phenomena. Dr. Levitt is a professor of economics at the University of Chicago and Mr. Dubner is a journalist for The New York Times. At least six additional people currently write for the blog. The blog tends to focus on economics, incentives, and other interesting news. One of my favorite parts about the blog is that the people who comment on it are very bright and bring just as much insight into issues as the writers for the blog. Enjoy!
A look at the minimum wage Saturday, Jul 25 2009
Yesterday the minimum wage rose to $7.25, thanks to a bill signed by President Bush in May of 2007. I figure now might be a good time to examine the minimum wage and its effects on employment. Forewarning: this is a very long post and is very economic oriented, so bear with me.
In my freshman year at SCSU, I took a course on the principles of microeconomics (with Dr. Komai, an excellent professor) where we learned about price floors including a minimum wage. I found the topic interesting, and so wrote about it in a research paper for my English course. In it, I argued for an increase in the minimum wage and indexing it to inflation. (Note this was in 2006, prior to President Bush signing the minimum wage increase bill.) This is back when I considered myself a Republican (!) and when most Republicans and other economic libertarians were arguing for an abolishment of the minimum wage under the assumption that a minimum wage causes higher unemployment. Many microeconomists and other economists would agree with that assessment (see, for example, this blog post by Gary Becker made around the same time as I wrote my paper). Now in an intermediate microeconomics course, I was again presented the classical economic argument that a price floor like the minimum wage will create a surplus (i.e. unemployment). Why do economists make this argument and does it make a minimum wage undesirable?
I find using graphs the easiest way to understand price floors. First of all, a price floor is when the government sets a minimum price for a product or good. This typically occurs when it is perceived that the normal (i.e. equilibrium) price is too low and that a higher price would be more favorable (such a regulation on the price is meant to be beneficial to the supplier of that good—but more on that later).
Without outside regulation, a price can be determined where the demand of a good intersects or is equal to the supply of that good. Graphically, this can be represented as:
As you can see, if the price went down, the quantity demanded would increase, but the quantity supplied would decrease (creating a shortage of goods). If the price increased, quantity demanded would decrease, but quantity sold would increase (creating a surplus). A surplus will put a downward pressure on price until the quantity demanded is equal to the quantity supplied. A shortage will put an upward pressure on price until quantity demanded is equal to quantity supplied.
If the government stepped in and made it illegal to sell or purchase a good (labor in this case) below a certain price, a surplus of that good will exist if that new price is above the equilibrium price. Graphically, this can be represented as:
If the minimum wage is set above the equilibrium wage, then there will be a surplus of labor (i.e. unemployment) because the quantity of labor supplied will be higher than the quantity of labor demanded. This is why most Republicans and many economists argue against the government instituting a minimum wage. It creates more unemployment than there would be without a minimum wage. The higher the minimum wage is above the equilibrium wage, the higher the unemployment is going to get.
That is the classical economic model of the minimum wage (also known as the “textbook model”). This explanation is short and deliberately not thorough for the purpose of space and time, but accurately represents the typical example of a price floor. In understanding economic theory, however, you should always realize that certain assumptions are being made. To gauge the reliability of that theory, you would do well to also gauge the assumptions on which the theory is being made. Sometimes you may find that, while the theory looks nice, the assumptions on which it depends can be seriously strenuous. In this case, the classical economic model makes a number of assumptions that also happen to influence how the slope of the demand curve looks (i.e. the elasticity of demand). (All elasticity means is how sensitive people are to changes as measured through percent changes. It can measure, for example, how responsive people are to changes in price. Mathematically, this can be represented as %ΔQuantity/%ΔPrice.)
If the slope of the demand curve (i.e. the wage elasticity of demand) is changed, you’re going to end up with different results. Namely, unemployment is higher the more elastic the demand. Conversely, if the demand is fairly inelastic, unemployment will not be as high. Graphically, this can be represented as:
In this example, the D1 curve is more elastic than the D2 curve. With the minimum wage set above the equilibrium wage, the quantity of labor demanded is less for the elastic demand curve (Qd1) versus the inelastic demand curve (Qd2). Therefore, the unemployment resulting from the minimum wage is smaller when demand for labor is inelastic. So we must therefore ask how elastic the demand for labor is. However, we should also realize that this model is still based on classical economic model where a number of assumptions are being made.
Gary Fields, a professor of labor economics at Cornell University, questions one of these assumptions in a 1994 article. He argues against the “one-sector model which implicitly assumes that the minimum wage applies uniformly to everyone.” Instead, he claims a two-sector model, including a covered and an uncovered sector, is more appropriate based on empirical evidence that suggests two sectors (i.e. covered and non-covered) exist nearly everywhere. Fields concludes that actual theoretical results are less clear-cut than assumed in the textbook model, which “simply cannot be relied on” because it is unrealistic. Fields also stresses the importance of empirical studies to measure the real effects of the minimum wage, because theoretical models do not suffice.
Other assumptions being made have also been challenged. For example, it’s likely the case that employers of labor have monopsonistic power—that is, where few buyers (or employers of labor) face a large amount of suppliers. Without going into detail, this would suggest a higher minimum wage would also increase employment (up to a certain point of course). Again, other assumptions can be challenged (and have been) and so it is important to not only rely on theoretical models but to also look at empirical data gathered from real-world situations.
One study I looked at was a 1994 paper by Richard Freeman, a respected labor economists at Harvard. He found that pre-1980 minimum wages had a “modest adverse effect on employment,” where a 10% increase in the minimum wage would increase joblessness by 1 to 2%, implying the minimum wage is an “effective redistributive tool.” During the 1980s when the minimum wage was held stagnant and the real value of minimum wage decreased, unemployment of low-skilled labor actually increased. In surveying three studies on employment after the early 1990s minimum wage increases, Freeman found that two reported insignificant unemployment effects and a third reported an increase in employment (suggesting employers were monopsonistic). Freeman goes on to cite other empirical studies that show moderately adverse or even positive effects on employment through minimum wage increases, again suggesting the minimum wage is an effective redistributive tool.
A highly influential paper on the effects of the minimum wage on employment was done David Card (UC Berkeley) and Alan Krueger (Princeton University) in 1992. In it, they found that employment went up after a minimum wage increase from $4.25 to $5.05 in New Jersey (while Pennsylvania’s stayed at $4.25). Classical economic theory would have suggested employment would decrease. Of course, Card and Kreuger’s work was heavily criticized, for example by George Mankiw, an influential Harvard economics professor, and Gary Becker (who I noted earlier in this post). Others, such as Joseph Stiglitz and Paul Krugman, both influential Nobel laureates, accepted Card and Kreuger’s findings. Surveys of economists have shown a decreasing amount of economists who believe the minimum wage result in significant negative employment effects, partly due to Card and Kreuger’s research (see, e.g., here). (Still, however, a majority agree a minimum wage does increase unemployment.)
Finally, in a 2004 paper by David Neumark (UC Irvine) and Olena Nizalova (MSU) find that in states with higher minimum wages, workers of ages 16 through 19 experience higher unemployment; in the 20 through 24 age range, however, the unemployment difference is smaller; and within the 25 through 29 age range, there is even higher employment in states with higher minimum wages. This suggests that young teenagers, ones most likely to live with their parents or be second income earners, take the brunt of any unemployment caused by the minimum wage. William Maloney and Jairo Mendez affirm in a 2004 paper, “[unemployment] effects [from the minimum wage] have traditionally appeared to be weak in the US, perhaps with the exception of young workers.” Those who are in most need of the minimum wage increase—those more likely to be older and have children—are the ones who seem to be the least affected by any unemployment effects the minimum wage has. The minimum wage, therefore, is a fairly well targeted policy that has the potential to help low-income families when it is raised. Indeed, Sara Lemos proclaims in a 2006 paper, “The minimum wage has a concrete potential to serve as a policy to alleviate inequality and poverty without undesirable side effects.”
Many Americans happen to agree. One reason why people tend to favor the minimum wage over other redistributive tools and transfer payments is because it creates an incentive to work. As Richard Freeman points out, a minimum wage requires no taxes or government borrowing. This is contrast to other policies such as earned income tax credits or subsidies for employers of low-skilled labor, which must come out of the government’s budget.
Critics, on the other hand, maintain the minimum wage causes prices to increase. Daniel Aaronson and Eric French, writing for a paper published by the EPI in 2006, explicitly find that prices rise about 0.4 to 1.5 percent with a ten percent minimum wage hike. This makes sense because a higher minimum wage imposes higher costs for firms who hire at the minimum wage. “Higher labor costs are pushed on to consumers in the form of higher prices,” they write. However, this reason alone should not be used to detract the minimum wage. In a 2003 paper, Sanjiv Sachdev finds that most people prefer to redistribute their income (e.g. through increased prices) in such way that rewards those who work, not to those who do not. The minimum wage acts like a redistributing tool for the poor, but unlike other means of doing so (e.g. welfare), it rewards those who work. We must therefore weigh the cost of higher prices to the rewards that the minimum wage brings.
Millions of people today work at the minimum wage, and many more are affected by the minimum wage by so-called “knock-on effects,” and whose collective bargaining is weak (Stephen Bazen, 2006). With researchers suggesting ambiguities in the classical theoretical model of the minimum wage and empirical studies showing only moderately adverse, insignificant, or even positive effects on employment, I think the minimum wage can be used as an effective policy for raising living standards of low-skilled workers. It effectively targets those who work and those most likely to be breadwinners of the household. With the new minimum wage hike passed by President Bush, I hope new studies can come out that can either confirm or deny these findings. Time will tell.
Neoconservative delusions Friday, Jul 24 2009
I plan on making a post about the minimum wage today, but I first want to make a post about something that really enraged me today. Back on July 19, Fox News analyst Ralph Peters suggested the Taliban should murder Bowe Bergdahl, the 23-year-old American soldier who was captured by the Taliban on June 30 in Afghanistan. On July 21, Peters went on Bill O’Reilly’s Fox show to explain his comments, showing no remorse for his previous statements, saying Bergdahl was a deserter (with O’Reilly adding that Bergdahl is “crazy” and “a nut”). So the argument being made is that since Peters believes Bergdahl is a deserter, the Taliban should save us “legal hassles and legal bills” by murdering him.
Right from the get-go we can see how absurd Peters’ argument is. First off, as Jim Miklaszewski points out on Rachel Maddow’s MSNBC show, there is no evidence nor any claim by the military that Bergdahl is a deserter. In fact, the Pentagon is allegedly “outraged” over Peters’ statements. So too are 22 Congressional veterans who are demanding an apology.
But let’s even assume Peters is right in his assumption that Bergdahl is a deserter, even though there is no evidence to support such an assumption. Would we be right to advocate for his execution? Should we support his capture? Or is it in fact always wrong to call for the murder of an American soldier, or any captured soldier in a time of war for that matter? Here we have a young man with a family and girlfriend who care about him and who voluntarily joined the military to serve his country, and Peters is on Fox News calling for his murder. This is the most backward and twisted conclusion to come to. One has to be truly sadistic to see any merit in Peters’ statements. Even if Bergdahl was a deserter, the rational, legal, and moral argument to make is to say he should either be held as a prisoner of war in accordance with international law or be sent to the United States for trial. To show the kind of contempt that Peters displays toward American service members, one must abandon any sense of rightness, patriotism, or value in human dignity. He should be disgraced.
Social versus Economic rights Wednesday, Jul 22 2009
Sorry I haven’t made the post about minimum wages yet. It’s obviously quite a complicated issue, so I’m still doing some more research on the topic, which is taking time in addition to starting a new summer session at school. However, just the other day I was having a discussion with a liberty-minded friend of mine on the issue of cap and trade. She was opposed to it and pointed to an op-ed Sarah Palin (Alaska’s governor who is soon to resign) wrote on the topic for the Washington Post. Naturally, I pointed out how stupid Governor Palin is. One simply has to go through her beliefs on social issues (among other things) to easily realize this. For (a brief) example, her positions that victims of rape who become pregnant should have to bear those children, that religiously-motivated intelligent design should be taught in science classes, or that abstinence only should be taught. My friend’s response was that now is not the time for a social debate, as the country is a bad recession. Right now, the only thing we should be focused on is the economy is her contention. She puts a precedence of economic rights over social rights.
As I rebutted, that’s pretty rubbish. Social rights issues are important regardless of how well the economy is doing. Outlawing abortions in a recession is no more moral than doing so in the heights of a bubble. It’s no more excusable to teach religion in science classes when stocks tumble than when they’re peaking. I think it would be a non sequitur to argue otherwise. It’s fine to argue for economic freedom, but it’s an entirely different thing to say it trumps all other issues.
I don’t, however, want to create a false dichotomy. Social and economic issues are not mutually exclusive. They are often interrelated. However, if forced with the decision, I would put precedence of social issues of economic issues. For example, I would much rather live in a country that was experiencing hyperinflation but still respected human rights than one where the economy was growing but systematically violated human rights.
I gave her the example of Pinochet’s Chile. Augusto Pinochet was the ruthless dictator of Chile 1974 until 1990. As a student of Latin America history, I was absolutely appalled by the horror stories that came out of Chile under Pinochet’s rule. Here is a guy, with the help of Milton Friedman and the Chicago Boys, who completely reformed the Chilean economy, liberalizing, deregulating, and privatizing at an astonishing rate. If there was a laissez-faire economy, it was Chile. And, you know what, some economic indicators like GDP rose. However, this came at the price of massive repression. Dissents were disappeared, tortured, murdered. Democracy did not exist. The country was ruled with an iron fist by the military and its dictator. If you dare spoke your mind, you would be brutally repressed.
Did the liberalization and expansion of the economy legitimize the loss of social rights? The answer is a resounding “no.”
I don’t want to give the impression that economic repression is not a bad thing. It very well can be. The point I want to stress though is that even if a government decides to command its economy, end trade, tax its citizens, or otherwise check markets, this is a much better alternative of restricting the social freedom of its citizens. So, through reading my blog you may find that I put a priority on social rights, even though I also agree economic freedom is very important.
Trying too hard to be anti-green Monday, Jul 6 2009
Daniel Hamermesh is a very well established economist. This is why I was surprised when I came across this blog post on the Freakonomics blog, a blog created in 2005 as an extension of Freakonomics (one of my favorites books).
In the post, Hamermesh argues against an article that suggested leaving on computers overnight is wasting $2.8 billion in energy costs a year, in addition to creating unnecessary pollution. Hamermesh’s contention is that it’s actually better to leave your computer on overnight.
Hamermesh’s reasoning is that there are also costs associated with turning off and on your computer daily. He assumes that turning on and off your computer wastes about 20 hours a year per person for a conservative estimate of 50 million computer users. He then argues that even at earning $3 an hour (much less than the current minimum wage), you will be wasting money because $3x20x50,000,000 = $3 billion, which is greater than $2.8 billion. That is, the opportunity cost is higher because the time you take to turn on and off your computer is wasted time. He therefore concludes, “This story is yet another example of environmental savings uber alles — that saving $1 in environmental damage is worth much greater costs incurred along other dimensions. These stories assume explicitly — or, more usually, implicitly — that people’s time has no value.” He continues his attack on the article, writing, “Stories like this and exhortations for environmental do-goodism hurt the environmental movement, because in the end, people realize that heeding these exhortations would actually waste resources . . .”
Almost immediately you can see why this argument Hamermesh makes is completely specious (and many of the commenters make note of this). First, the idea that it takes fives minutes a day to turn off and on your computer is probably unrealistic. It takes just a few seconds to turn off your computer, and most computers in today’s age turn on in under five minutes. But that’s not really important. The biggest mistake is that Hamermesh assumes people do absolutely nothing while their computers turn off and on. Even more, he assumes people could be earning their normal wages during this time. That’s absurd.
A lot of people, including myself, do other things while they wait for their computer to turn off, like prepare breakfast, go to the bathroom, brush their teeth, shower, etc. (Also, it’s usually useless to keep your computer on overnight because you are sleeping and are unable to do anything. In fact, it’s probably rather costly because your computer likely has moving parts which can wear out through continuous use.) And most people do not have an opportunity to earn a wage during this time or simply prefer not to for obvious reasons. Still others may prefer to incur costs if the result is a lesser impact on the environment through using less electricity, for example. But that may not be for naught, as limiting environmental damage may have a benefit in the long run (e.g. minimizing the effects of global warming).
I think Hamermesh was just trying to find a way to attack the green movement, but resulted in a rather humiliating article. Reading his post, you sense he is a bit fed up with what he calls “environmental do-goodism.” Unfortunately, trying too hard to be anti-green may give you presupposed answers and result in shoddy economic analysis in attempts to support your presuppositions.
(Speaking of microeconomics, I plan on assessing the effects of a minimum wage on unemployment in an upcoming post, hopefully soon.)