Friday, 30 January 2009

Quote(s) of the day, on the minimum wage

While the Key Government considers their reaction to this year’s “minimum wage review,” due Monday – and people say that the days of price-fixing are dead! -- so-called economists are all a-twitter about what they might do, Nobel Laureate James Buchanan has some thoughts about most of that advice:

“Anyone who says minimum wage laws decrease unemployment disavows the law of demand and is therefore unqualified to speak as an economist.”

True enough. Are you listening Helen Kelly?  Are you listening Matt McCarten?  Increasing the minimum wage in the teeth of a coming depression doesn’t “help boost spending” –- except, in the short run, to union reps -- it simply raises costs at a time producers can least afford them, and to the extent the “price floor” pushes wages above  the market rates for particular jobs, it ensures those  jobs will soon be gone, to the detriment of employees and employers, and what was once productive spending. 

Prices don’t need to be fixed – and at the present time they urgently need to fall.  One man’s price is another man’s costs.  As the likes of Pigou and Haberler and Patinkin argue, “falling wages and prices would increase the real value of money holdings, and the spending out of those real cash balances would restore the economy to full employment.”  But only if the politicians and the union reps get out of the way first.

I liked Roger Garrison’s answers to so-called “armchair economist” Stephen Landsburg a few years back. 

Landsburgh writes concerning an increase in the minimum wage: "Sure, you've lost your job. But don't forget, this was a minimum-wage job in the first place."
Garrison replies: “Your being retained or released may be a marginal matter to the employer, but it may be an all-or-nothing matter to you.”
Landsburgh again: "In fact, the power of the minimum wage to kill jobs has been greatly overestimated. Nowadays, most labor economists will tell you that that minimum wages have at most a tiny impact on employment."
Garrison, in response: “It may have a small impact on total employment, but only because primarily minimum wage legislation redistributes employment--from the (would-be) working poor to the entry-level worker in a middle-income household and from the unskilled to the skilled. Ditch diggers lose their jobs. Trenchers with union operators get more jobs. The "tiny" effect is the net effect. But, of course, to focus [only] on this net effect is to miss the perversity of the legislation.”

Final point again, from Garrison: “Measured unemployment captures so-called "frictional unemployment" and not much else. To be counted as unemployed, you have to be actively looking for a job. People who are excluded from the labor force by the minimum wage do not continue to look. They may be unskilled, but they're not stupid.”


  1. There's a new book out by Neumark and Walzer that surveys all of the evidence on minimum wages -- the regulation is much worse than even most economists would argue. The book's at Amazon here. The effects are especially devastating for marginalized groups.

  2. Crampton, I have read the original study by Neumark & Wascher on minimum wage and it is evidence from that study confirms that it doesn't decrease youth unemployment. NZ employment data is cited in that paper. Their paper is freely available (PDF) to be downloaded from the following SSRN link below:

    Minimum Wages, Labor Market Institutions, and Youth Employment: A Cross-National Analysis

    Policy analysts/advisers to the government who haven't read the paper, must be sacked for incompetent since they're not doing their job. Advisers should actively scour economic literatures on a regular basis so that they're being up to date on recent studies.

    It seems like that those government analysts/advisers with fat paychecks are just giving politicians their misguided opinions on this issue without any factual basis at all. Jesus, I could help out those advisers (to doing/collecting research materials for them ) for a fraction of their total inflated salaries.

  3. sean fitzpatrick30 Jan 2009, 14:21:00


    Well said.

    Reality is the public service has just mutated from being the independant research and advisory arm of the NZ govt to being a public relations and propaganda machine focused on sexing up information to back up govt policy. The Setchel incident showed that - and God knows how many other such incidents have occured outside of public eye.


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