The charge is often made that low wage workers are being "exploited" by their employers. What is meant by "exploited" isn't usually defined clearly, so let's explore some possibilities.
1) A low wage is exploitation per se. Even if the worker's productivity is in line with their wage.
2) The low wage isn't a necessary precondition of "exploitation." What's important is that the employee produces far more than their wages indicate. Their employers are earning a huge surplus on their labor, and declining to share it with their employees.
Casual conversation suggests people are using definition 1). But 2) seems like a more reasonable definition of "exploitation." It's possible that some people are so unproductive, for whatever reason, that they simply cannot produce more than $7.25 an hour for their employer, no matter how well managed or well capitalized their workplace is. Such a worker is not being exploited. In fact, there's nothing special or logical about the $7.25 figure, which (frankly) was basically pulled out of someone's ass just over a decade ago. (Minimum wages are set by politicians enacting whatever legislation they can get away with, not carefully fine-tuned by economists and statisticians who come up with the answer to a complex optimization problem.) Some employees might only be able to eke out a mere $3 of productivity per hour. An employer who puts this person in a job might actually be doing charity work, in the sense that they're losing $4.25/hour to employ them. Assuming such cases exist, does it make sense to talk about the worker "exploiting" the employer? (I suspect that some employers are consciously doing charity work for workers who otherwise have a hard time finding work, like people with criminal records or disabilities, and I'm certainly not criticizing them for doing something pro-social. Just pointing out that it's unreasonable to expect businesses to make a habit of losing money.)
Thomas Sowell has actually made a similar argument by pointing to highly paid superstar athletes. He points out that these people will tend to be hired by whatever team will earn the most from them, in terms of ticket sales, advertisements, merchandise, etc. A team in a city with a larger population will be able to pay more, because they more likely to sell out tickets for a sporting event and have more fans bidding up the prices of those tickets. A team that is already popular, with a large fan base, might be able to make more money on advertising. The highest-bidding team for a superstar's services might conceivably make $10 million more than the next highest bidder because of the athlete's effect on all these revenue streams. But they might be able to out-bid their second-best rival by offering only $1 million, thus keeping $9 million of that person's value-added. (Of course, the actual outcomes are risky and somewhat random, but businesses, including sports franchises, think in terms of expected revenues and profits.) One might say that highly paid athletes are exploited to a much higher degree than low-paid workers, assuming "exploitation" implies the intuitive definition, productivity in excess of pay. And this argument would tend to apply to other highly paid workers. The very best CEO for a company might earn the company tens or hundreds of millions over what the second-best candidate would earn, but they are likely to only capture a fraction of that in take-home pay. Nobody thinks of these people as "exploited".
Maybe someone will wish to argue that, actually, those low-paid workers do produce an enormous surplus for their employers. Thus they are being exploited according to definition 2). This theory bumps up against some uncomfortable realities. Who gets hit the hardest during an economic downturn in terms of layoffs and unemployment? Low-wage workers or highly paid workers? Empirically and (I think) matching with most people's intuition, it is the low-wage workers. But this makes no sense if these workers are earning a huge surplus for their employers. If Walmart is paying its employees $14.26 an hour (Walmart's average hourly wage) but earning, say, $30/hour, then each employee is a tiny gold mine. Likewise, why keep around the highly paid (some argue "overpaid") employees during hard times, when any inefficiencies in the system bite hardest? Also, take a look at profit margins by industry. Do sectors that hire a lot of low-wage workers have generally high or generally low profit margins? Consider also the very high rates of turnover (as in openings and closures) in the restaurant industry. Why is it so hard to stay in business if it's so easy to exploit low-skilled labor? Finally, supposing it were true that there were some kind of enormous profit to be reaped by employing low-skilled workers, shouldn't that attract more competition? If Walmart is only paying $14.26 for something that's actually worth $30, shouldn't someone else bid for that worker's services? Even assuming the bidding doesn't get the worker's pay up to $30/hour, shouldn't someone at the very least bid an extra dollar? Shouldn't another employer be willing to earn "only" $14.74 instead of $15.74 on each employee's labor? Markets are generally pretty good at not mispricing things, because this kind of bidding and counter-bidding is always happening. Nothing should stay badly over- or under-priced for long. If a worker is working at Walmart for $14.26/hour, it probably means nobody else was willing to pay them more for comparable work, and Walmart actually gave them their best option. It makes little sense to heap scorn on the employer who is doing the most to help that person.
I think we do ourselves a disservice by misstating the nature of the problem. The shitty reality is that some people just are not very productive. It could be an intellectual limitation, like they're just not very smart, or a social limitation, like the inability to correctly pick up on cues and instructions from their manager, or a behavioral issue, like chip-on-my-shoulder resentment towards authority and general insubordination. If these prosaic explanations of low wages make more sense than theories about power structures and "exploitation", we should face that fact with our eyes wide open. Otherwise we'll implement bad policy solutions that don't address the actual problem. Minimum wage legislation and other legislation that's meant to "protect the worker" can be counter-productive by making it even less profitable than it currently is to hire certain workers. Or even un-profitable, as in, "I can only hire this person at a loss." This isn't a plea to shed a tear for business owners, but rather to understand what business owners are likely to do in response to profit motives. If we are trying to incentivize pro-social behavior on the part of businesses, we need to set the incentives right. That first requires correctly specifying the problem.
If you do know how to coax tremendous productivity out of low-skilled workers, please go into business and hire them. You will bid up their wages, you will make a fortune for doing it, and you will become my personal hero. I dearly wish I knew the secret formula for getting higher productivity out of people, and moreover in a way that scales up to millions of people. Sadly I do not.
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It's also worth noting that only about 2-3% of the labor market earns the minimum wage or less, so the fraction of workers "protected" by this policy is small by any measure. Businesses apparently are willing to pay workers more than the statutory minimum in the overwhelming majority of cases. The reason, I suspect, is that labor markets are actually quite efficient and good at paying the appropriate wage for the worker's value added.
Wednesday, August 7, 2019
Sunday, August 4, 2019
The Minimum Wage: a Modest Proposal on Data Gathering
What follows will be a mere data gathering proposal. I'm not intrinsically arguing for or against a minimum wage with this post, just arguing for the data collection that will allow us to study the effects of the minimum wage. In a sentence: Every state should start tracking every worker's total hours. (Every state already tracks total earnings for the sake of workers compensation eligibility, among other things, so this is not much of a change.)
The Seattle minimum wage studies by the Jardim et. al. group were particularly well done and revealing, because they actually had the data to accurately measure wages and hours worked for basically everybody in the state of Washington. The only states that currently capture this data on "hours worked" are Washington, Oregon, Rhode Island, and Minnesota (according to Jacob Vigdor, who was kind enough to correspond with me by e-mail on this and other questions). Most states collect this data for the sake of tracking eligibility for workers comp, and most states just have a "total earnings" trigger for eligibility. Washington (and possibly these other states) also have a "total hours worked" trigger, so they have to capture this data to administer workers comp in compliance with state law. If every state were collecting this data, the empirical work on minimum wage would be a lot more accurate.
Knowing everyone's hours worked in addition to total earnings allows us to 1) figure out what each worker's average wage was (by simply dividing the one by the other) and 2) figure out if minimum wage increases cause workers' hours to be scaled back. Item 1) is important because most studies have used crude proxies for "minimum wage earners", effectively assuming that restaurant workers or teen employees are minimum wage workers. With "hours worked" we could accurately identify minimum wage (or near-minimum-wage) workers before and after the wage hike. Item 2) is important because employers may be more prone to scale back hours than to do outright layoffs. So the "disemployment" effect is due to loss of hours worked, not job losses. Indeed, this is what was found in Seattle, and low wage workers' hours were scaled back so much they actually lost out in terms of total wages.
My hesitation about writing this post came from reading Coyote Blog. The blog's author, is an employer and often writes about what a pain in the butt it is to gather data for various government reporting agencies. So I specifically asked him this question via e-mail, and he was kind enough to respond. He told me that almost all employers use a payroll provider anyway, who are almost certainly tracking the number of hours worked so as to accurately calculate employees' paychecks. It's possible that this data is being collected somewhere already, it's just not being reported to any central government for aggregating and doing studies. Collecting this might be as simple as flipping a switch already built into each payroll provider's code, or at the very most changing some code to make it similar to what's used in Washington. (He clarified that what's painful is when governments start asking for data that was never collected before, which the employer might not even know. Say, a demographic category, or something like "disability status", which an employer might not be legally allowed to even ask about. He's written extensively about this on his blog, so I'm not revealing any secret details from the e-mail.)
This proposal is agnostic about whether the minimum wage is a good idea or a bad idea. Minimum wage proponents should be saying, "Yes, that will give us the firepower we need to refute Seattle and put this to bed once and for all!" Minimum wage opponents should be saying, "Yes, that will allow us to replicate the findings of Seattle as more states and cities roll out minimum wage hikes!" Neutral parties can take a wait-and-see attitude. Economists should be celebrating the job security of having tons of extra data to analyze. "Yay! Now we can figure out new statistical tricks to make the effect get bigger/go away!"
To expand the proposal just slightly, we could also start tracking each employee's municipality, in case different cities have different minimum wages. The Seattle study started with all Washington workers, but it had to infer who did and didn't work in Seattle based on the employer's address. This didn't work for, say, McDonald's, because McDonald's has locations all over the state. Only businesses that were unique to Seattle could be located for the sake of the study. I think the Jardim et. al. papers handled this limitation adequately and their results are still valid, but some critics have latched on to this as a reason to dismiss the paper's results. So let's fix the problem going forward.
The Seattle minimum wage studies by the Jardim et. al. group were particularly well done and revealing, because they actually had the data to accurately measure wages and hours worked for basically everybody in the state of Washington. The only states that currently capture this data on "hours worked" are Washington, Oregon, Rhode Island, and Minnesota (according to Jacob Vigdor, who was kind enough to correspond with me by e-mail on this and other questions). Most states collect this data for the sake of tracking eligibility for workers comp, and most states just have a "total earnings" trigger for eligibility. Washington (and possibly these other states) also have a "total hours worked" trigger, so they have to capture this data to administer workers comp in compliance with state law. If every state were collecting this data, the empirical work on minimum wage would be a lot more accurate.
Knowing everyone's hours worked in addition to total earnings allows us to 1) figure out what each worker's average wage was (by simply dividing the one by the other) and 2) figure out if minimum wage increases cause workers' hours to be scaled back. Item 1) is important because most studies have used crude proxies for "minimum wage earners", effectively assuming that restaurant workers or teen employees are minimum wage workers. With "hours worked" we could accurately identify minimum wage (or near-minimum-wage) workers before and after the wage hike. Item 2) is important because employers may be more prone to scale back hours than to do outright layoffs. So the "disemployment" effect is due to loss of hours worked, not job losses. Indeed, this is what was found in Seattle, and low wage workers' hours were scaled back so much they actually lost out in terms of total wages.
My hesitation about writing this post came from reading Coyote Blog. The blog's author, is an employer and often writes about what a pain in the butt it is to gather data for various government reporting agencies. So I specifically asked him this question via e-mail, and he was kind enough to respond. He told me that almost all employers use a payroll provider anyway, who are almost certainly tracking the number of hours worked so as to accurately calculate employees' paychecks. It's possible that this data is being collected somewhere already, it's just not being reported to any central government for aggregating and doing studies. Collecting this might be as simple as flipping a switch already built into each payroll provider's code, or at the very most changing some code to make it similar to what's used in Washington. (He clarified that what's painful is when governments start asking for data that was never collected before, which the employer might not even know. Say, a demographic category, or something like "disability status", which an employer might not be legally allowed to even ask about. He's written extensively about this on his blog, so I'm not revealing any secret details from the e-mail.)
This proposal is agnostic about whether the minimum wage is a good idea or a bad idea. Minimum wage proponents should be saying, "Yes, that will give us the firepower we need to refute Seattle and put this to bed once and for all!" Minimum wage opponents should be saying, "Yes, that will allow us to replicate the findings of Seattle as more states and cities roll out minimum wage hikes!" Neutral parties can take a wait-and-see attitude. Economists should be celebrating the job security of having tons of extra data to analyze. "Yay! Now we can figure out new statistical tricks to make the effect get bigger/go away!"
To expand the proposal just slightly, we could also start tracking each employee's municipality, in case different cities have different minimum wages. The Seattle study started with all Washington workers, but it had to infer who did and didn't work in Seattle based on the employer's address. This didn't work for, say, McDonald's, because McDonald's has locations all over the state. Only businesses that were unique to Seattle could be located for the sake of the study. I think the Jardim et. al. papers handled this limitation adequately and their results are still valid, but some critics have latched on to this as a reason to dismiss the paper's results. So let's fix the problem going forward.
Weird Bullet-Biting by Minimum Wage Proponents
It's frustrating how the argument sometimes changes from "minimum wages have no effect on unemployment or job counts" to "those were bullshit jobs that shouldn't have existed anyway."
I'm thinking of a few recent examples from social media. Someone had posted a picture of the checkout counters of a store, where almost everything had been converted to self-checkout. This was from a state that had recently increased its minimum wage. The point was that it's easier to staff checkout counters with people if your store is free to set the wage. These are obviously low-skill, entry-level positions. Stores cannot afford to pay an arbitrarily high wage to these employees, so those jobs start to disappear when the minimum wage is raised high enough. Anyway, someone chimed in with a comment such as (paraphrasing): Those are demeaning jobs, and they should go away anyway. I guess that's fine if it was always your position. Someone could claim to be internally consistent if their position was that the minimum wage should be raised in order to kill off the "demeaning" jobs. (I find this to be an incredibly arrogant position and think it's insulting to low-wage earners, but I could imagine someone believing it). What makes it less believable is that these are often the very same people who argue that minimum wages have no impact on unemployment. They are inventing a post hoc rationalization when the bad consequences of their policy come to fruition (which they were warned about, and which they often explicitly denied would happen).
I hear this point expressed in different but similar language. When I have attempted to argue that a job might we worth doing at $5/hour but not at $7.25/hour (much less at the incredibly irresponsible $15/hour minimum some are proposing), sometimes minimum wage proponents implicitly acknowledge the point by saying "If you can't pay the minimum, you shouldn't be in business anyway." I've also heard, "You have to pay to play" from someone making the same point. I wrote about this here in my summary of Jonathan Meer's debate with Jamie Galbraith. Galbraith at one point bizarrely admits that some jobs will disappear, while maintaining adamantly that there will be no net loss in employment. (Galbraith's point: "Sure, you'll see some disruption. The whole point is to change the structure of the labor market.") This is weird. Someone is admitting that there are low-valued tasks out there in the world that might be worth doing. They are acknowledging that some entrepreneur could feasibly organize some (probably low-skilled) employees to do these tasks at a wage those employees would accept, a wage which is below the current (or proposed) legal minimum. But they are borderline gleeful about destroying such jobs.
For another related example, listen to this episode of Econtalk with Jacob Vigdor, in which he discusses Seattle's experience with a very large increase in the minimum wage.
This doesn't make any sense, at least not if someone is insisting on both the "no net job losses" story and the "those bullshit jobs should go away anyway" story. Supposedly there are people who would be in business hiring people for $5/hour, if we would let them. (And, importantly, there are workers who would willingly accept that wage. The willing consent of the workers is often overlooked or dismissed as "acting under economic duress" by minimum wage advocates.) If the "no net job losses" story is true, that means there are also, simultaneously, people willing to pay (for example) $15/hour for those same employees. Employers pay the wage necessary to attract the labor they need, but only up to the point that it actually pays off to employ that person. In other words, employers basically pay employees for their productivity. Supposedly there are employees who can coax $15/hour out of any given employee, but would be reticent in a world where the minimum wage was still $5/hour. These employers would supposedly sit quietly and let someone else buy up all the labor at $5/hour, even though these more productive employers could easily get an additional $10/hour of productivity out of them. Supposedly they know the secret formula for coaxing productivity out of low-skilled workers but will only do so if we make them? (Because, I don't know, they don't like money?)
Maybe I'm tying myself into a knot trying to make sense out of this. Most people are just sleep-walking into their political beliefs; they don't really have a coherent viewpoint or a well-articulated picture of their policies playing out. Their "ideology" is a bunch of ad hoc responses to criticism thrown together in a slap-dash manner, with nobody checking to see if the bullet points contradict each other (or common sense or economic theory or empirical studies).
In my preferred story, there is no contradiction. The minimum wage proponents are wrong on both fronts. Raising the minimum wage causes net job losses. The best minimum wage studies to date confirm the Econ 101 story, and find that the effect is quite large. And those low-wage jobs, the ones that are already killed off or would be killed off with another minimum wage hike, are perfectly legitimate options. Third parties should not be in the business of judging the morality of someone else's labor contract. If you aren't actually doing the hard work of figuring out how to put low skilled workers to work and getting high productivity out of them (and I absolutely salute you if you are such a hero!), if you aren't actively bidding for those workers' labor because you have a better deal to offer them, then it's really not your business to judge someone else's arrangement. This is coming from someone who generally tries to stay out of the "who holds the moral high-ground" game, because it's such a quagmire. But since some people come to this argument with nothing but moral rectitude, I should point out that minimum wage opponents have a good reason for thinking they also hold the high ground. That's why "I hold the moral high ground" doesn't get us anywhere.
I'm thinking of a few recent examples from social media. Someone had posted a picture of the checkout counters of a store, where almost everything had been converted to self-checkout. This was from a state that had recently increased its minimum wage. The point was that it's easier to staff checkout counters with people if your store is free to set the wage. These are obviously low-skill, entry-level positions. Stores cannot afford to pay an arbitrarily high wage to these employees, so those jobs start to disappear when the minimum wage is raised high enough. Anyway, someone chimed in with a comment such as (paraphrasing): Those are demeaning jobs, and they should go away anyway. I guess that's fine if it was always your position. Someone could claim to be internally consistent if their position was that the minimum wage should be raised in order to kill off the "demeaning" jobs. (I find this to be an incredibly arrogant position and think it's insulting to low-wage earners, but I could imagine someone believing it). What makes it less believable is that these are often the very same people who argue that minimum wages have no impact on unemployment. They are inventing a post hoc rationalization when the bad consequences of their policy come to fruition (which they were warned about, and which they often explicitly denied would happen).
I hear this point expressed in different but similar language. When I have attempted to argue that a job might we worth doing at $5/hour but not at $7.25/hour (much less at the incredibly irresponsible $15/hour minimum some are proposing), sometimes minimum wage proponents implicitly acknowledge the point by saying "If you can't pay the minimum, you shouldn't be in business anyway." I've also heard, "You have to pay to play" from someone making the same point. I wrote about this here in my summary of Jonathan Meer's debate with Jamie Galbraith. Galbraith at one point bizarrely admits that some jobs will disappear, while maintaining adamantly that there will be no net loss in employment. (Galbraith's point: "Sure, you'll see some disruption. The whole point is to change the structure of the labor market.") This is weird. Someone is admitting that there are low-valued tasks out there in the world that might be worth doing. They are acknowledging that some entrepreneur could feasibly organize some (probably low-skilled) employees to do these tasks at a wage those employees would accept, a wage which is below the current (or proposed) legal minimum. But they are borderline gleeful about destroying such jobs.
For another related example, listen to this episode of Econtalk with Jacob Vigdor, in which he discusses Seattle's experience with a very large increase in the minimum wage.
Emphasis mine. Just think about the contempt for low-wage workers that this reveals on the part of their political "advocates." I should acknowledge here that the politician in question isn't necessarily wishing these jobs to go away, as I've heard some people do. He's just observing that they probably are going away regardless and not feeling too bad about hastening their demise.And I'd say that there are not a whole lot of people who express optimism about the future of low-wage employment. I had a political operative from the Seattle Mayor's office come visit me a couple of years ago. This particular staffer from the Mayor was wondering if I would be willing to sort of go out in public and advocate for a higher minimum wage. And, I responded by saying, 'Look, that's not my job. I'm not an advocate. I'm a researcher.' And I mentioned to him that our research was actually showing that there were some potentially adverse impacts of Seattle's minimum wage. And he responded to me by saying, 'Well, in the long run, aren't these jobs going to go away anyway?' And so, this is coming from someone whose job description is to be a minimum wage advocate.
This doesn't make any sense, at least not if someone is insisting on both the "no net job losses" story and the "those bullshit jobs should go away anyway" story. Supposedly there are people who would be in business hiring people for $5/hour, if we would let them. (And, importantly, there are workers who would willingly accept that wage. The willing consent of the workers is often overlooked or dismissed as "acting under economic duress" by minimum wage advocates.) If the "no net job losses" story is true, that means there are also, simultaneously, people willing to pay (for example) $15/hour for those same employees. Employers pay the wage necessary to attract the labor they need, but only up to the point that it actually pays off to employ that person. In other words, employers basically pay employees for their productivity. Supposedly there are employees who can coax $15/hour out of any given employee, but would be reticent in a world where the minimum wage was still $5/hour. These employers would supposedly sit quietly and let someone else buy up all the labor at $5/hour, even though these more productive employers could easily get an additional $10/hour of productivity out of them. Supposedly they know the secret formula for coaxing productivity out of low-skilled workers but will only do so if we make them? (Because, I don't know, they don't like money?)
Maybe I'm tying myself into a knot trying to make sense out of this. Most people are just sleep-walking into their political beliefs; they don't really have a coherent viewpoint or a well-articulated picture of their policies playing out. Their "ideology" is a bunch of ad hoc responses to criticism thrown together in a slap-dash manner, with nobody checking to see if the bullet points contradict each other (or common sense or economic theory or empirical studies).
In my preferred story, there is no contradiction. The minimum wage proponents are wrong on both fronts. Raising the minimum wage causes net job losses. The best minimum wage studies to date confirm the Econ 101 story, and find that the effect is quite large. And those low-wage jobs, the ones that are already killed off or would be killed off with another minimum wage hike, are perfectly legitimate options. Third parties should not be in the business of judging the morality of someone else's labor contract. If you aren't actually doing the hard work of figuring out how to put low skilled workers to work and getting high productivity out of them (and I absolutely salute you if you are such a hero!), if you aren't actively bidding for those workers' labor because you have a better deal to offer them, then it's really not your business to judge someone else's arrangement. This is coming from someone who generally tries to stay out of the "who holds the moral high-ground" game, because it's such a quagmire. But since some people come to this argument with nothing but moral rectitude, I should point out that minimum wage opponents have a good reason for thinking they also hold the high ground. That's why "I hold the moral high ground" doesn't get us anywhere.
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