Wednesday, February 20, 2013

Liberal Economists on the Minimum Wage

Predictably inept discussion on Diane Rehm this morning. Lots of platitudes about raising the minimum wage. Let's see what the great Nobel Prize winning economic heavyweights of the Left had to say on the minimum wage before they became partisan warriors:

Joe Stiglitz his book Economics: "If government attempts to raise the minimum wage higher than the equilibrium wage, the demand for workers will be reduced and the supply increased. There will be an excess supply of labor. Of course, those who are lucky enough to get a job will be better off at the higher wage than at the market equilibrium wage; but there are others, who might have been employed at the lower market equilibrium wage, who cannot find employment and are worse off....
In addition, a higher minimum wage does not seem a particularly useful way to help the poor.... Thus, the minimum wage is not a good way of trying to deal with problems of poverty."

Paul Krugman in his review of the book Living Wage in 1998: "...the authors argue at length that because only a fraction of the work force in the firms affected by living wage proposals will be affected, total costs will be increased by only 1 or 2 percent--and that as a result, not only will there be no significant reduction in employment, but the extra cost will be absorbed out of profits rather than passed on in higher prices. This latter claim is wishful thinking of the first order: Since when do we think that cost increases are not passed on to customers if they are small enough? And the idea that employment "of the affected workers" will not suffer because the affected wages are only a small part of costs is a non sequitur at best. Imagine that a new local law required supermarkets to sell milk at, say, 25 cents a gallon. The loss in revenue would be only a small fraction of each supermarket's total sales--but do you really think that milk would be just as available as before?"

Krugman's quote was AFTER the research by Card and Krueger, by the way, which he called "rather iffy."

I really want to win some converts on this issue. In reality, even $0.00 is too high of a minimum wage, because it precludes certain kinds of valuable apprenticeships. Minimum wages are bad.

Sunday, February 17, 2013

The Minimum Wage and Unpaid Internships

In the section on the minimum wage in his famous Principles of Economics textbook, Greg Mankiw writes: "Some teenagers are willing to work as "interns" for no pay at all. Because internships pay nothing, however, the minimum wage does not apply to them. If it did, these jobs might not exist."
Actually, that's not quite right. The law does not provide a special exemption for unpaid internships. Rather, the Department of Labor provides  six criteria for determining whether an unpaid internship is exempt from the minimum wage:
  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
The DOL goes on to say: "In general, the more an internship program is structured around a classroom or academic experience as opposed to the employer’s actual operations, the more likely the internship will be viewed as an extension of the individual’s educational experience (this often occurs where a college or university exercises oversight over the internship program and provides educational credit)."
Consequently, college students often have more job opportunities than college graduates. At Disney, for instance, there are fantastic internships available to college students, but their entry-level jobs for non-students are very menial. When people debate the merits of minimum wage laws, they often ignore this important part of the story.
While I'm at it, I've found that a good way to make the economic case against minimum wage laws is to talk about a "maximum wage." There is a presumably a maximum wage that is some amount less than the productivity an employee provides. So if hiring someone will increase revenue by $10/hr, then the maximum you will spend on that person is $9.99 / hr, including training and other costs. If the legal minimum wage is above an unskilled worker's actual maximum wage, that worker will be barred from entering the labor market. The reason the empirical evidence on this stuff is so mixed, I believe, is that companies do not go firing all their employees in response to minimum wage hikes, so you do get a temporary transfer of wealth from employers and consumers to employees.  But that's only temporary. Equilibrium will be restored as raises are deferred and productivity is increased; meanwhile companies simply will not hire new workers whose skills don't justify the higher wage.
Paul Krugman promises to make an economic defense of the minimum wage, and I look forward to seeing what he has to say. I wonder if he will address the college internship issue at all.