Tag Archives: Black Market Activity

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.

Causal Confusion In The Gun Debate

18 Wednesday Mar 2015

Posted by in Gun Control, Uncategorized

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As a follow up to my recent post on defensive gun uses (DGUs), I think it’s appropriate to discuss international comparisons sometimes cited in support of the anti-gun rights agenda.This was prompted by correspondence from a fellow blogger, to whom I’ll refer as HH, who followed up with a post featuring some international data. I respect HH’s effort to collect the data and to present it with some eloquence, and with a little less rancor than the original correspondence. Nevertheless, the international comparisons are not as straightforward as HH would like to believe.

Let me state at the outset that I am not a big “gun guy”. I support individual liberty and a minimal state apparatus in general, along with gun rights, but I am not affiliated in any way with the NRA or any other pro-gun organization. As I told my well-armed older brother, he would not be impressed with my weaponry. I still keep a nasty, old fireplace iron under my bed. And I have a few rocks in my backyard.

HH believes that the high U.S. homicide rate relative to the handful of other developed countries he mentions (along with India) proves that “gun control works”. I differ for several reasons discussed below.

Causality and Gun Control: HH’s conclusion brings into focus two different aspects of the gun control question. The first is whether a change to more restrictive gun control leads to a reduction in homicides. That is not as obvious an outcome as HH thinks. For example, a gun ban cannot eliminate all guns, especially within limited jurisdictions. (Perhaps the federalist approach is partly why HH considers our gun laws “a mess”, but federalism is a feature of our system, not a bug, not least if it discourages local politicians from enacting ineffective rules.) Black market traffic in guns is likely to be sufficiently profitable to justify the legal risks in the presence of a ban. And the empirical evidence as to whether more stringent gun control reduces homicides is mixed at best (see here, here, here and here).

The empirical evidence presented by HH is not related to changes in gun laws (except for one or two suspect assertions about mass shootings). Instead, cross-country comparisons of homicide rates are given along with a single correlate: “gun laws”. The one data point driving the presumed direction of causality is the U.S., which has lenient gun laws and a high homicide rate relative to the four other countries (five if we include the U.K., from whence HH hails). The comparisons are made with no controls for the history of gun rights and ownership, demographics, other prohibitions, or any other confounding influences. For HH, it’s all because of guns.

Mass Shootings: HH spends some of the post discussing this phenomenon, which is rare albeit horrifying. Mass shootings account for very few of U.S. homicides, and there has been no discernible upward trend in the U.S. (see here, here and here). Moreover, multiple victim shootings are just as common in Europe as they are in the U.S. They usually prompt calls for bans on arbitrarily-defined “assault weapons”, but the bans do little to prevent such tragedies.

Historical Background: Guns owned by private individuals played an important role in the American revolution. In fact, early British attempts to confiscate weapons led to an increase in the hostilities leading up to the war. The Second Amendment of the U.S. Constitution was intended to protect individual gun rights and to protect the nation from future tyrants.

The homicide rate has declined steadily in the U.S. over the past three hundred years, from estimates of more than 30 per 100,000 people in the early 1700s to less than five today. A similar pattern occurred in other parts of the world, but after 1850, the decline in the U.S. failed to keep pace with declines in Europe.

Private guns were integral to westward expansion in the U.S. Leaving aside the tragic consequences for Native Americans, the scramble for resources and the under-developed legal system in the west undoubtedly contributed to homicides. At the same time, the need of settlers to defend life and property in an insecure environment made gun ownership (and DGUs) a necessity. This history and the generally high value placed by Americans on individual rights set the tone for today’s generally permissive attitude toward gun ownership in the U.S.

Alcohol, Drug Prohibition and Homicide: The temporary lows in the homicide rate prior to the 1910s “may have been illusory“, according to this abstract, because many homicides were reported as accidents in that time frame. More accurate reporting created the impression of a rising homicide rate during the 1910s. Alcohol prohibition began in 1920 and contributed to an increase in U.S. homicides until after repeal. Likewise, later in the twentieth century, the drug war, together with a bulge in the youth population, contributed to an even larger increase in the homicide rate. It is interesting that this increase was accompanied by an apparent decrease in the rate of spousal homicide. (A curious aside: one analyst has noted the strong correlation between homicide rates in the U.S. and fluctuations in the use of lead-based paints and leaded gasoline.)

Illegal drugs are just one area of black market activity in which the U.S. is a world leader. The connection between heavier underworld and gang activity and prevalent restrictions on victimless, individual behavior, on the one hand, and homicide rates on the other, helps explain the elevated U.S. homicide rate. The existence of this link is supported by an extremely strong concentration of homicides within specific social networks.

Demographics: The interaction of legal restrictions on behavior and weak economic circumstances is undoubtedly a factor contributing to high homicide rates. It is striking that U.S. homicides are so heavily concentrated within the African American community. The relative lack of legal economic opportunities within the African American community may be connected to greater illegal trade and homicides. Homicide rates are also somewhat elevated among U.S. Hispanics and Native Americans. Among the White and Asian segments of the U.S. population, homicide rates are comparable to those of Europe (and well under India’s rate).

Suicides: My antipathy for anti-gun arguments is probably softest with respect to gun suicides. Guns are certainly “weapons of convenience”, easily transported, fast and highly effective. Within the U.S., there is some evidence that gun ownership and total suicides are positively correlated, despite a negative correlation with non-gun suicides. However, total suicide rates in the U.S. and U.K. are similar. The rates in France and especially Japan are higher, while the rates in Denmark and India are lower. Moreover, suicide is symptomatic of larger social problems that have little to do with gun rights. Our inability as a society to deal effectively with mental health issues probably has much more to do with suicide and homicide rates than gun ownership.

Summary: There are many reasons to discount international comparisons of homicide rates and regulation of firearms. The comparisons often neglect measurement issues, but more importantly, strong conclusions about the efficacy of gun control from such top-line comparisons are often drawn without carefully addressing the question of causality between changes in gun laws and changes in homicide rates. The comparisons also fail to consider variations in the larger historical and legal context within which gun ownership occurs. For a large society like the U.S., there are vast differences in sub-groups that usually reflect other social problems, some of which are created by intrusive government itself.

I close below with some thoughts on HH’s criticism of my original post on DGUs.

DGU Denialism: HH’s objections to my post on DGUs were based on a belief that I:  1) quoted misleading statistics on gun violence in the U.S.; 2) engaged in scaremongering (apparently by quoting a wide range of estimates of DGUs); and 3) used a headline (“When Government Prohibits Self-Defense”) demonstrating a wildly paranoid view of the intent of the U.S. government.

The statistics on gun violence I cited in that post came from the U.S. Department of Justice and The Law Center To Prevent Gun Violence, which are hardly representative of the gun lobby. By providing information on gun homicides, suicides, accidents and nonfatal wounds presented in emergency rooms, I was seeking to provide a fairly comprehensive list of the “downsides” of guns in the U.S. I thought that was only fair as a way to lend perspective on estimates of DGUs. The statistics on gun violence vary from year-to-year, of course, and even the homicide numbers vary across different “official” sources for a given year (the example given at the link is total homicides). For these reasons, my initial intent was to quote ranges. However, not all of the data were available over multiple years from my original sources. Some of the figures were simply DOJ “estimates”. And apparently, my searches did not turn up the most recent data available (most of the figures I quoted were either 2010 or from 2005 – 2010). Well, mea culpa, mea culpa. My range for gun homicides of 10-12 thousand per annum was off, according to HH: it was actually 9 thousand! So, my range should have been broader in view of the continuing decline in gun homicides in the U.S., but I’m heartened to know that they were lower than I thought.

As for DGU’s, it is undeniable that they are a real phenomenon, though HH seems apoplectic that anyone would dare to discuss them. They obviously happen, though no one claims “there is always a good guy with a gun“. In fact, homicide statistics often exclude deaths from DGU’s and police shootings. (In the U.K., apparently one has to be found guilty of a murder for it to be counted as a homicide.)

Since any proposal to limit firearms would be more successful in disarming the law-abiding population than miscreants, it is reasonable to ask whether DGUs would decline more than non-justifiable homicides. Moreover, the low end of the range of DGU estimates I quoted came from DGU skeptics. In any case, I don’t think the following statements qualify me as a “scaremonger”:

“Estimates range from under 100 thousand per year to more than 2.5 million. There are reasons to doubt both of the extremes. … Given this range of estimates, it would be conservative to hedge toward the lower end. ”

Finally, the headline: Now, I like a punchy headline, and I’ll bet HH does too. I also believe that the ultimate goal of the statist anti-gun lobby is to outlaw private firearms. Again, such a policy would have the largest impact on gun possession among the law-abiding population; the headline was meant to convey the consequences of doing so.