Category Archives: Living Wage

The Real Minimum Wage Is Always Zero

30 Friday Jun 2017

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Min Wage Denmark

A minimum wage study from Denmark reinforces the findings of the Seattle study released this week by economists at the University of Washington. Both studies conclude that increases in the minimum wage have negative effects on low-earners, at least for large increases in wage floors of the type advocated by “living wage” proponents. Alex Tabarrok provided commentary of both studies this week on the Marginal Revolution blog.

The Seattle study found that both employment and hours worked declined substantially among low-wage workers following the city’s minimum wage hikes. This became particularly clear after the most recent increase from $11 to $13 per hour. The average low-wage worker in Seattle lost $125 per month, according to the findings. The study has generally been praised for its detailed data and careful methodology.

The Danish study took advantage of the fact that the minimum wage rises by 40% on a worker’s 18th birthday. The chart above pretty much boils down the results. Employment drops by a third at age 18. Even worse, Tabarrok notes that after one year, 40% of workers who lose their jobs at age 18 are still unemployed, while 75% of those who keep their jobs at 18 are still employed. The fate of these two groups is likely driven by a gap in talent and skills, and that gap can only expand as the least-skilled are idled.

The minimum wage is a misguided policy that hurts those who can least afford it: low-wage, low-skilled workers. Firms forced to adjust to the higher mandated wage are worse off as well, not to mention their customers, who are likely to face higher prices and degraded service levels. Even those who remain employed at the minimum wage might suffer under less generous job perks and working conditions. Today, large increases in the wage floor can be expected to bring premature automation of jobs.

In the real world, workers of low skill vary tremendously in their actual ability, prior training and discipline to perform in a structured environment. Many of these individuals simply cannot add value over and above the legal wage. Some are simply incapable of understanding the demands of arriving on time and delivering effort over the course of a work day. Hiring firms cannot easily discern these differences up-front from social cues. They might try, however, which could lead to decisions that are unfair to some individuals. An even higher minimum wage makes these decisions all the more difficult and risky, and forecloses opportunities to a broader swath of low-skilled workers, consigning them to dependency on family or the state.

The minimum wage has always had appeal as an exclusionary tactic by higher-paid union workers. Cowed by its ostensible first-order effects on worker incomes, the left latched onto it as a fundamentally just policy. The negative second-order effects are predictable however. The economic evidence has been piling up, while methodological flaws in an earlier, prominent study finding the opposite in the 1990s have been exposed. As a policy, the minimum wage is unjust in its effects on the incomes of low-skilled workers and on their ability to gain valuable work experience, and on businesses attempting to deliver value to their customers.

Note: I believe Don Boudreaux should be credited with the phrase used in the title of this post, which I’m sure I’ve quoted before. For more background on minimum wage effects, see these earlier posts on Sacred Cow Chips. There are 20 posts with that tag, and some are more focused on the minimum wage than others, so keep scrolling!

The Looting Wage and Its Ultimate Victims

15 Wednesday Feb 2017

Posted by in Living Wage, Markets, Minimum Wage

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Like children asking their peers to exchange quarters for nickels, advocates of a “living wage” hope that the government and voters will agree that workers should be paid by private employers at a rate the activists deem appropriate, regardless of skills. (The “living wage” is left-speak for a very high minimum wage.) Even worse, those advocates actually believe that such a trade can be justified. Or do they? The simple economics of the claim is undermined by assertions that a living wage is simply a matter of social justice. But social justice cannot be served in this way unless one’s definition is so bound up in virtue signaling that you don’t know the difference. It’s even too charitable to say that the left’s definition of social justice is simply bound up in the present and the short-term interests of specific groups. The unfortunate truth is that the “living wage” sacrifices the very well-being of a large number of individuals in those groups, now and in the future. Here’s why:

Suppose the government mandates a “living wage” as well as a series of measures intended to neutralize all of its unintended consequences. These measures would include a complete prohibition of involuntary terminations, investments in automation, price hikes, movement of capital abroad, and immigration. The measures must also include subsidies for failing employers. Just imagine the burden of compliance costs related to these measures, and the complex task of carving out exceptions, such as the allowable price hike in the wake of an increase in the cost of raw materials. What about the additional workers who would enter the labor force to seek employment at the higher wage? Should they be prohibited from doing so, or should employers be required to hire them, or should they be subsidized to hire them? And how will taxpayers afford all of these government subsidies?

Clearly, the situation described thus far is not sustainable. Both the initial wage hike and many of the other steps, ostensibly intended to cushion the blow on various parties, represent flagrant abridgments of private property rights, or rather, property takings! Of course, the real intent is for private parties to pay for the “living wage”. Presumably, employers are to pay the costs, especially large employers and their wealthy investors, like you when the value of those shares in your IRA, pension or 401k plan begins to tank. The reality is, however, that the unintended consequences will spread the cost in a variety of unpleasant ways.

Those in the coalition for living-wage legislation have not given much thought to the reverberations of such a change. At the most basic level, some people cannot command a high wage because they lack higher-order skills. Some have not learned the importance of reliability, of making sure they arrive at work by a specific time every day. Some have not learned the importance of concentrated work effort, of demonstrating that effort and avoiding excessive slack time. Some communicate poorly, or fail to comport themselves in a manner that commands trust. Some have a sketchy work record, presenting a risk to prospective employers. Living wage advocates assert that all of this is irrelevant, but it means everything to an employer.

How would employers attempt to to survive under a living wage? One doesn’t have to think too deeply to realize that wage floors lead to a loss of jobs for several reasons. Those lacking the skills to justify the higher wage will be out the door. Some employers will fail, finding it impossible to pay the hike in their labor costs or to pass it along to their cost-conscious clientele. The living wage is likely to lead to premature automation of many tasks otherwise requiring unskilled to more moderately-skilled workers. The capital investment needed to automate any manual process may well become worthwhile given such a shock to wage rates. Moreover, while some in the living wage movement complain that U.S. employers seek-out lower wage rates abroad, the living wage itself would lead to more of this substitution. The living wage also creates opportunities for those willing to work illegally at sub-minimum wages, including many undocumented immigrants. By driving a larger wedge between the wages of other home countries and the U.S., the living wage creates an incentive migrate In pursuit of the enlarged set of black-market opportunities for labor.

So just imagine having the government mandate a wage that is nearly double the market-clearing level. The quanity of labor demanded declines and the quantity supplied increases, leaving a surplus of workers at the mandated wage. The demand for labor declines still more as the weakest firms close shop. And it declines still more over horizons long enough to enable investment in automation and relocation of production to foreign shores. Add to the mix an expanded flow of workers from abroad. Not all of these surplus workers, native and immigrant, would be willing to take “underground” work at a rate below the living wage, but some will.

So, which of the measures listed in the second paragraph would mitigate the costs imposed by the living wage? In reality, none of them would succeed without spreading the cost more widely. Prohibiting involuntary terminations? Businesses will fail and/or prices will rise. Prohibiting investment in automation? The same. Prohibiting price hikes? Business failures, terminations, and premature automation. Prohibiting movement of capital abroad? An outright revocation of property rights and a distortion of incentives for productive investment, which would also discourage the movement of capital into the country, not just out.

Are there measures that could make the “living wage” a sustainable outcome? Yes, but they cannot be accomplished immediately by decree. Indeed, doing so would thwart the achievement of the objective. In short, productivity must increase. While productivity is multi-dimensional, education, training and work experience all foster improvement in a worker’s ability to add value. Unfortunately, our system of public primary and secondary education has been unsuccessful in producing graduates who can compete in the labor market, even at today’s minimum wage. Wholesale reforms are needed, but even the best educational reforms will take time to come to fruition. In the workplace itself, apprenticeship programs could provide under-skilled workers an avenue toward greater competitiveness at higher wages. Again, apprenticeships may only make economic sense to employers at a legalized sub-minimum wage, as Australia allows.

Second, productivity is dependent on the quality and quality of the capital invested in a business. The key to improving this capital is profitability. It’s ironic that living-wage advocates fail to see that their proposal runs directly counter to steps that would contribute to  productivity and wages. Instead, they seem intent on killing the geese that lay golden eggs! Far better to allow those eggs to be transformed into new capital assets that can enhance worker productivity and justify higher wages. Some jobs will be replaced by automation, but capital and new technology tend to create new kinds of jobs and inevitably boost worker productivity. (See “Will Automation Make Us Poor?” by Aaron Bailey.) Employers will still have an interest in seeking out, if not developing, new talent. The automation should take place as part of a more natural evolution, not one prematurely hastened by unrealistically high wage mandates.

The living wage is a prescription for failure and a death-knell for the private economy. It will fail the least-skilled workers and even some semi-skilled workers who cannot compete for jobs at the living wage. It will automate jobs before the natural time dictated by the market-driven process of technical evolution. It will lead to higher prices, which drive down the real value of any wage gains that workers manage to capture. It will lead to business failures, especially among small businesses. It will offer false hope to unskilled immigrants. It will reduce capital investment among smaller firms struggling to meet the higher wage bill. It may well lead to a slew of even more destructive public policies, such as business subsidies and other price controls. And it will create dependency on the state. The living wage is a destructive policy and ultimately a prescription for the death of self-sufficiency. It  cannot foster real social justice.

Robots and Tradeoffs

31 Wednesday Aug 2016

Posted by in Living Wage, Markets, Technology

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The other day, a few colleagues were lamenting the incipient robot domination of the workplace. It is true that advances in automation and robotics are likely to displace workers in a variety of fields over the next few decades. However, the substitution of capital for labor is not a new phenomenon. It’s been happening since the start of the industrial age. At the same time, capital has been augmenting labor, making it more productive and freeing it up for higher-valued uses, many of which were previously unimagined. The large-scale addition of capital to the production process has succeeded in raising labor productivity dramatically, and labor income has soared as a consequence. That is likely to continue as increasingly sophisticated robots assume certain tasks entirely and collaborate with workers on others, even in the service sector.

Advanced forms of automation are another step in the progression of technology. The process itself, however, and the adoption of robotics, might well be hastened by public policy that pushes labor costs to levels not commensurate with productivity. I wrote about this process in “Automate No Job Before Its Time” on Sacred Cow Chips late last year. The point of that essay was that government-imposed wage floors create an incentive for automation. Because a wage floor has its impact at the bottom of the wage scale, at which workers are the least-skilled, this form of government intervention creates a regrettable and unnatural acceleration in the automation process. Other mandated benefits and workplace regulations can have similar effects.

Robert Samuelson makes the same points in “Our Robot Panic Is Overblown“. He notes the effectiveness of the U.S. economy in creating jobs over time in the presence of increasing capital-intensity. But he also warns of potential missteps, including the dangers of government activism:

“There are two dangers for the future. One is that the new jobs created by new technologies will require knowledge and skills that are in short supply, leaving unskilled workers without income and the economy with skill scarcities. … The second danger is that government will damage or destroy the job creation process. We live in a profit-making economic system. Government’s main role is to maintain the conditions that make hiring profitable. … If we make it too costly for private firms to hire (through high minimum wages, mandated costs and expensive regulations) — or too difficult to fire — guess what? They won’t hire. That’s what ought to worry us, not the specter of more robots.“

Historically, automation has actually created more jobs than it has destroyed. In general, however, the new jobs have required higher levels of skills than the jobs lost. In “Why Are There Still So Many Jobs? The History and Future of Workplace Automation“, David Autor of MIT says it this way:

“Automation does indeed substitute for labor—as it is typically intended to do. However, automation also complements labor, raises output in ways that lead to higher demand for labor, and interacts with adjustments in labor supply. … journalists and even expert commentators tend to overstate the extent of machine substitution for human labor and ignore the strong complementarities between automation and labor that increase productivity, raise earnings, and augment demand for labor.“

As with almost all automation, robots will replace workers in the most routine tasks. Tasks involving less routine will not be as readily assumed by robots. To a large degree, people misunderstand the nature of automation in the workplace. The introduction of robots often requires collaboration with humans, but again, these humans must have more highly-developed skills than a typical line worker.

Hal Varian, who is the chief economist at Google, describes the positive implications of the ongoing trend to automate (see the link in the last paragraph of this post), namely, less drudgery and more leisure:

“If ‘displace more jobs’ means ‘eliminate dull, repetitive, and unpleasant work,’ the answer would be yes. How unhappy are you that your dishwasher has replaced washing dishes by hand, or your vacuum cleaner has replaced hand cleaning? My guess is this ‘job displacement’ has been very welcome, as will the ‘job displacement’ that will occur over the next 10 years. The work week has fallen from 70 hours a week to about 37 hours now, and I expect that it will continue to fall. This is a good thing. Everyone wants more jobs and less work. Robots of various forms will result in less work, but the conventional work week will decrease, so there will be the same number of jobs (adjusted for demographics, of course).“

An extreme version of the “robot domination” narrative is that one day in the not-too-distant future, human labor will be obsolete. Automation is not limited to repetitive or menial tasks by any means. A wide variety of jobs requiring advanced skills have the potential to be automated. Already, robots are performing certain tasks formerly done only by the likes of attorneys, surgeons, and computer programmers. Robots have the potential to repair each other, to self-replicate, to solve high-order analytical problems and to engage in self-improvement. With advances in artificial intelligence (AI), might humans one day become wholly obsolete for productive tasks? What does that portend for the future of so many human beings and their dependents who, heretofore, have relied only on their labor to earn a living?

There are any number of paths along which the evolution of technology, and its relationship to workers and consumers, might play out. The following paragraphs examine some of the details:

The Human Touch: There will probably always be consumers who prefer to transact with humans, as opposed machines. This might be limited to a subsegment of the population, and it might be limited to the manufacture of certain artisan goods, such as hand-rolled cigars, or certain services. Some of these services might require qualities that are more uniquely human, such as empathy, and the knowledge that one is dealing with a human would be paramount. This niche market might be willing to pay premium prices, much as consumers of organic foods are willing to pay an extra margin. However, it will be necessary to retain the perceived quality of the human touch and to remain reasonably competitive with automated alternatives on price.

Human Augmentation: Another path for the development of technology is the cyborgization of labor. This might seem rather distasteful to current sensibilities, but it’s a change that is probably inevitable. At least some will choose it. Here is an interesting definition offered by geir.org:

“Cyborgization is the enhancement of a biological being with mechanical or non-genetically delivered biological devices or capabilities. It includes organ or limb replacements, internal electronics, advanced nanomachines, and enhanced or additional capabilities, limbs, or senses.“

These types of modifications can make “enhanced” humans competitive with machines in all kinds of tasks. The development of these kinds of technologies is taking place within the context of rehabilitative medical care and even military technology, such as powerful exoskeletons, but the advances will make their way into normal civilian life. There is also development activity taking place among extreme hobbyists underground, such as “biohackers” who perform self-experimentation, embedding magnets or electronic chips in their bodies in attempts to develop a “sixth sense” or enhanced physical abilities. Even these informal efforts, while potentially risky to the biohackers themselves, might lead to changes that will benefit mankind, much like the many great garage tinkerers who have been important to innovation in the past.

Owning Machines: Ownership of capital will take on a greater role in providing for lifetime earnings. Can the distribution of capital ever be broadened to the extent needed to replace lost labor income? There are ways in which this can occur. The first thing to note is that the transition to a labor-free economy, were that to transpire, would play out over many years. Second, we have witnessed an impressive diffusion of advanced technologies in recent decades. Today, consumers across the income spectrum hold computers in their pockets that are more than the equivalent of the supercomputers that existed 50 years ago. Today’s little computers are far more useful in many ways, given wireless internet connectivity. There are many individuals for whom these devices are integral to earning an income. Thus, the rate of return on these machines can be quite impressive. The same is true of computers, software (sometimes viewed as capital) and printers, not to mention other “modern” contrivances with income-earning potential such as cars, trucks and a vast array of other tools and hardware. Machines with productive potential will continue to make their way into our lives, both as consumers and as individual producers. This also will include value-added production of goods at home, even for use or consumption within the household (think 3D printers, or backyard “farmbots”).

Saving Constructs: Most of the examples above involve machines that require some degree of human collaboration. Of course, even the act of consuming involves labor: I must lift the fork to my mouth for every bite! But in terms of earning income from machines, are there other ways in which ownership of capital can be broadened? The first answer is an old one: saving! But there is no way most individuals at the start of their “careers” can garner a significant share of income from capital. Other social arrangements are probably necessary. One of great importance is the family and family continuity. Many who have contemplated a zero-labor future imagine a world in which there are only two kinds of actors: individuals and the state. Stable families, however, hold the potential for accumulating capital over time to provide a flow of income for their members. Other forms of social organization can fill this role, but they must be able to accumulate capital endowments across generations. Of course, in an imagined world with minimal opportunities for labor, some have concluded that society must collectively provide a guaranteed income. To indulge that view for just a moment, a world of complete automation would almost certainly be a world of superabundance, so goods would be extremely cheap. That means a safety net could be provided at a very low cost. Nonetheless, it would be far preferable to do so by distributing a minimal number of shares of ownership in machines. These shares would have some value, and to improve resource allocation, it should be the individual’s responsibility to manage those shares.

Economic Transition: The dynamics of the transition to robot-dominated production raise some interesting economic questions. Should the advancement of robotics and artificial intelligence create a massive substitution away from labor, it will be spurred by 1) massive upward shifts in the productivity of capital relative to its cost; and 2) real wages that exceed labor’s marginal productivity. There will be stages of surging demand for the kinds of advanced labor skills that are complementary to robots. The demand for less advanced labor services does not have to fall to zero, however. There will be new opportunities that cannot be predicted today. Bidding for scarce capital resources and the flow of available saving will drive up capital costs, slowing the transition. And as long as materials, energy and replacement parts have a cost, and as long as savers demand a positive real return, there will be a margin along which it will be profitable to employ various forms of labor. But downward adjustment of real wages will be required. Government wage-floor policies must be abandoned. That will not be as difficult as it might sound: the kind of automation envisioned here would have profound effects on overall costs and the supply of goods, leading to deflation in the prices of consumables. As long as real factor prices can adjust, there will almost certainly remain a balance between the amounts of capital and labor employed.

In “Robots Are Nothing New“, Don Boudreaux passes along this comment from George Selgin:

“I’ve always been aghast at finding many otherwise intelligent economists arguing as if technology had a mind of its own, developing willy-nilly, or even perversely, in relation to the relative scarcity of available factors, including labor. Only thus can it happen that labor-saving technology develops to a point where labor, instead of being relatively scarce, becomes superabundant!

The fundamental problem, I believe, is confusion of the role of technological change with that of government interference with the pricing of labor services that is among the things to which technology in turn responds. Labor-saving technology becomes associated with unemployment, not because the last is a consequence of the former, but because both are contemporaneous consequences of a common cause, to wit: minimum wage laws and other such interference that sets wage rates above their market-clearing levels.“

There is much disagreement on the implications of automation. This excellent survey of experts by the Pew Research Center contains a number of insights. Also, visit Singularity Hub for a number of great articles on automation and AI, some of which are surprising. I believe that these technologies hold a great deal of promise for humanity. The process will not take place as suddenly as some fear, but ill-conceived policies such as a mandated “living wage” would put us on an unnaturally speedy trajectory. Opportunities for the least-skilled workers will be foreclosed too soon, before those individuals can develop skills and improve their odds of establishing a life free of dependency. Too rapid an adoption of advanced automation and AI would increase the likelihood of choosing suboptimal production methods that might be difficult to change later, and it would leave little time for education and training for workers who might otherwise leverage new technologies. The benefits of automation and their diffusion can be maximized by allowing advances to take a natural course, guided by market forces, with as little interference from government as possible.

Pay and Productivity

05 Sunday Jun 2016

Posted by in Living Wage, Markets, Minimum Wage

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Remember, the real minimum wage is zero, and state-imposed unemployment is not justice. In the private economy, wages rise with productivity, and that’s true across workers at any point in time, for workers over time, and for workers in different industries over time. Don’t think so? Contrary to the blithe pronouncements of Barack Obama and reports by the union-backed Economic Policy Institute (EPI), there has been no divergence in productivity and pay since the early 1970s. This is shown convincingly by James Sherk in “Workers’ Compensation: Growing Along With Productivity“. Sherk’s work shows that hourly productivity increased by 81% since 1973, while average employee compensation increased 78%. In contrast, the EPI has claimed that productivity grew 91% since 1973, but  employee compensation grew just 10%.

How did the EPI (and Obama) reach such a faulty conclusion? Sherk breaks the error into three major parts: 1) comparing the pay of a subset of workers to the productivity of all workers; 2) excluding the pay growth of the self-employed; and 3) inconsistent adjustments of pay and productivity for inflation.

The link between wages and productivity is immutable in a market economy. The state can attempt to short-circuit the relationship, but such intervention comes at the cost of dislocations in resource utilization and damage to well-being. Veronique de Rugy discusses Sherk’s findings and emphasizes the folly in thinking that the government can somehow divorce the pay of workers from their underlying contribution to the value of output:

“One of the assets of the American economic model is a relatively flexible labor market, especially when compared with labor markets in many European countries. It explains some of the consistently lower U.S. unemployment rates and higher economic growth. Unfortunately, this flexibility is increasingly threatened by government policies that would increase the cost of employing workers.“

Populists and statists share some destructive tendencies, such as a fixation on increasing the cost of labor to employers. The current debate over a “living wage” of $15 per hour involves more than doubling the minimum wage in many parts of the country. This is so far out of line with the productivity of low-skilled workers as to make absurd claims that it won’t have a serious impact on their employment. There are employers who won’t be able to survive under those circumstances. There are others who will have to scale back operations. Employers having access to capital in industries such as car washes and fast food know that automation is more than viable as a substitute for low-skilled labor. And new labor-saving innovations are inevitable when creative entrepreneurs are confronted with an obstacle like high-cost labor: necessity is the mother of invention. But premature automation is not an obvious consequence to living-wage advocates. And that’s to say nothing of the futures destroyed when low-skilled workers are denied opportunities for work experience.

The connection between wages and productivity is part of a well-functioning economy and it is just as alive and well in today’s economy as ever. The “right” wage cannot be determined by central planners, bureaucrats or legislators apart from productive reality, and the adverse consequences of their attempts to do so cannot be wished away. Only markets that price the real value of productive contributions can put resources such as low-skilled labor to their best use, avoiding the waste inherent in regulation that is always ignorant of dynamic preferences and resource availability.