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Saturday, February 7, 2015

Worstall, Krugman and John Henry -- Why we need minimum wages at the minimum

Tim Worstall at Forbes writes on 2/3/2015:

Article "Proof Perfect That the Minimum Wage Costs Jobs


Worstall insists that Krugman, Stiglitz and other liberal economists are either lying or are misrepresenting reality when they argue that we need to increase minimum wages. He is wrong and there are a number of reasons he's wrong. Yes, when wages go up companies have to come up with a way to make good costs and may reduce the workforce or raise prices. But Krugman and other's follow on Keynes observation that when workers have more revenue they spend it more efficiency and that moves the demand curve as a whole in the economy to a new point. More recent economists note that the economy is never at equilibrium, that it is always changing; growing or shrinking, building or rebuilding. And that therefore the supply/demand illustrations are at best a snapshot of two dimensions of the overall economic equation. Our actual problems have to do with automation and the treatment of workers as an expense rather than part owners of the system.


In the Article he asserts:

"One of the most basic foundations of economics is under attack these days from certain people. That basic fundamental point is attacked because people simply do not want to believe that raising the minimum wage will cost some people their jobs. That fundamental principle of economics being attacked there is that demand curves slope downwards. If you increase the price of something then people will desire to purchase less of it." [Tim Worstall Forbes Article]

I'm not surprised that the Right doesn't name names, because this is straw argumentation. Krugman, for example, in fact, is an expert on Demand Curves. He literally wrote the book:

Krugman himself explains that when there is a liquidity trap (which is what we have now) and pressure from "sticky" demand for labor, productivity rises, yet wages stagnate unless there is some sort of mandate or external push. This push is minimum wages and labor policy. It creates what Stiglitz calls "a virtuous cycle."

But Worstall doesn't believe anything Keynes said. Darn actual experience. Micro economic models and "praxeology" have more meaning to him. Math becomes a myth that is a fact whether or not evidence says so. For the RW economics is authoritative and authoritarian. Truth what the authorities say it is.

"As a result of people not wanting to believe this basic fact about the world, that price rises mean lower demand, we’ve had all sorts of contortions from people who really ought to know better about the effects of a rise in the minimum wage. That increased effective demand will mean more demand for labour for example, even though that increased demand isn’t going to be enough to cover the job losses. The most usual default position is that, well, people should pay more just because they should. And I’m deeply unconvinced that we should be forming public policy of the logical basis of a toddler demanding that the world be fair." [Tim Worstall Forbes Article]

Then he asserts that:

"However, here we now have proof perfect that a rise in the minimum wage is costing some people their jobs" [Tim Worstall Forbes Article]

Do we? And his proof? Anaecdote. He notes:

"In November, San Francisco voters overwhelmingly passed a measure that will increase the minimum wage within the city to $15 per hour by 2018. Although all of us at Borderlands support the concept of a living wage in principal and we believe that it’s possible that the new law will be good for San Francisco — Borderlands Books as it exists is not a financially viable business if subject to that minimum wage. Consequently we will be closing our doors no later than March 31st." [Tim Worstall Forbes Article]

At best his example is of "correlation" as evidence of "causation". But in order for that to actually be true. One has to ask the question:

"Would Borderlands Books stay open if the minimum wage weren't going up?

As a bibliophile I've watched my favorite book places go under all over, at first due to monopolistic competition, and later due to simply bad management and unwillingness to react to changes in reading habits or find an economic model for living on the internet. Amazon isn't closing any stores in San Francisco.

"Many businesses can make adjustments to allow for increased wages. The cafe side of Borderlands, for example, should have no difficulty at all. Viability is simply a matter of increasing prices. And, since all the other cafes in the city will be under the same pressure, all the prices will float upwards." [Tim Worstall Forbes Article]

So "Borderlands with cafes in them should have no difficulty"...

"But books are a special case because the price is set by the publisher and printed on the book. Furthermore, for years part of the challenge for brick-and-mortar bookstores is that companies like have made it difficult to get people to pay retail prices. So it is inconceivable to adjust our prices upwards to cover increased wages." [Tim Worstall Forbes Article]

So the issue is being able to compete with Amazon, and Amazon's near monopoly on Books sales and publishing, not minimum wages.

So this is a special case, and raising wages is not the problem, competing with Amazon is. Citing a special case to prove a general point is an error in logic. The fancy term for it is:

"Fallacy of Accident. This error occurs when one applies a general rule to a particular case when accidental circumstances render the general rule inapplicable. For example, in Plato’s Republic, Plato finds an exception to the general rule that one should return what one has borrowed: “Suppose that a friend when in his right mind has deposited arms with me and asks for them when he is not in his right mind. Ought I to give the weapons back to him? No one would say that I ought or that I should be right in doing so. . . .” What is true in general may not be true universally and without qualification. So remember, generalizations are bad. All of them. Every single last one. Except, of course, for those that are not." []


So Tim Worstall is essentialy making a sophomoric error. But it works for propaganda. Next, apparently citing the owner of Borderland Books:

"The change in minimum wage will mean our payroll will increase roughly 39%. That increase will in turn bring up our total operating expenses by 18%. To make up for that expense, we would need to increase our sales by a minimum of 20%. We do not believe that is a realistic possibility for a bookstore in San Francisco at this time." [Tim Worstall Forbes Article]

Again, the issue is competing with Amazon, not increasing wages. And this is the best guess (WAG) estimate of the owner. In theory he could turn more of his bookstores into bookstores with coffee shops. But I guess that alternative doesn't occur to him. Instead he lets Worstall speculate for him:

"The other obvious alternative to increasing sales would be to decrease expenses. The only way to accomplish the amount of savings needed would be to reduce our staff to: the current management (Alan Beatts and Jude Feldman), and one other part-time employee. Alan would need to take over most of Jude’s administrative responsibilities and Jude would work the counter five to six days per week. Taking all those steps would allow management to increase their work hours by 50-75% while continuing to make roughly the same modest amount that they make now (by way of example, Alan’s salary was $28,000 last year)." [Tim Worstall Forbes Article]

Again, since the company is barely surviving now, it appears that it is Amazon driving them out of business. Having worked in a bookstore out of my love for books. I know that if they paid their employees more they'd sell more books. This is a case of a failing business using the false choice of paying slave wages or "doing the right thing" as an excuse to shut it's doors. Personally I have little sympathy for businesses that can't pay their wages, though in this case I have more than usual since the owner is struggling too.

But Worstall is placing all sorts of assumptions into his argument:

"That’s not an option for obvious reasons and for at least one less obvious one:
— "at the planned minimum wage in 2018, either of them would earn more than their current salary working only 40 hours per week at a much less demanding job that paid minimum wage." [Tim Worstall Forbes Article]

Of course one alternative, one that many business owners follow, is to pay themselves the minimum wage. He has other choices too, besides waging minimum wages. He could sell the company to his employees for example. Or as mentioned earlier turn more of them into cafes. But Worstall is trying to make a general point with anaecdotal data so we aren't doing business analysis here. Just propaganda.

"So, as a result of the increase in the minimum wage they can try to raise prices. As they say, a cafe could raise prices. Because everyone else in the city will be under the same cost pressures and so a coordinated price rise is likely. So, our first criticism of a minimum wage rise is that it doesn’t actually do all that much for minimum wage earners because prices will simply rise across the board to accomodate it." [Tim Worstall Forbes Article]

However, as this example shows, prices and wages are often "sticky" if wages go up for minimum wage earners, folks paid better already will likely get raises too. I've seen that in my own life. Minimum wages may obey the price curve in operation. But they are set based on custom and habit, power and power relations. Maybe some businesses have the issue Borderlands has, but most simply pay minimum wages because demand for employment vastly exceeds the availability of jobs. And that reflects macro-economic forces broader than the micro economic demand curve.

"There’s also that second way of dealing with it, which is to fire some of the staff and then ask the others to work harder. This is also the “increase productivity” argument that we so often see deployed. Hey, employers should just increase the productivity of labour to pay for the higher minimum! And, see what happens? We’ve just reduced the number of jobs on offer as our method of increasing productivity."

We are in a loop doing that now. Employees paid the minimum wage are already under demands to increase productivity. Financially savvy monopolists like Amazon can use automation to increase productivity. In the long run we need fiscal policies (tax changes) to discourage misuse of productivity to oppress workers.

"And then there’s that problem that they can’t raise book prices. But it’s not just people who have prices set for them who cannot do that. It’s also people who have competitors who face a different cost structure than they do. As in fact every single business in the economy does but not to necessarily the same extent. Imagine, say, Costco and Walmart. One pays staff well but employs about half the number of staff per $hundred thousand in sales than the other." [Tim Worstall Forbes Article]

John Henry, The Real Problem and The Larger Argument.

This argument is disingenuous but it does point to a Larger argument. Maybe if Walmart paid better wages they'd find it easier to increase productivity. Part of the real problem is that most of those wages go to taxes and are treated as costs. While investment in automation is both depreciable and increases the capital situation of the company. When the choice is between employees and machines, for a lot of businessmen the choice is obvious; machines.

"The second pays not all that well but employs more and presumably lower skilled staff to do so. We really could insist that Walmart pay everyone like Costco does. But if we did we’d find that Walmart would raise the productivity of its labour to that of Costco. That is, they’d fire a third to a half of the people they employ." [Tim Worstall Forbes Article]

Again this argument is a straw argument, though it illustrates the larger issue in our economy. Wages aren't keeping up with productivity because employers can substitute machines and automation for people and not pay any penalty. Indeed this issue was presaged in a famous legend:

John Henry is said to have raced a Steam Drill, and he won, but in the process he died. At this point automation wins chess games and there are things that humans have no hope of competing in doing against a machine. In competing against machines. Whether they are pile drivers or drones and cylons, the machines threaten to win. [Wikipedia article:]

The author shows that for most businesses in San Francisco employment is sticky. Raising employee pay will lower employment in some areas, but it also will increase demand for the products of those employees. It is a panacea in the face of the threat that automation is having to employment, but it is better than letting the choice be between slave wages or unemployment.

As McCulloch notes:

"An extension of the duration of compensated unemployment effectively diverts part of the potential labor supply into prolonged unemployment. By itself, this reduction in the supply of labor would, as Krugman notes, increase equilibrium wages given a normal downward-sloping demand curve. However, if it comes at the same time as an even bigger decline in labor demand, the net result will be wages that fall, but not by as much as would have been required to maintain full employment."

Of course he claims that Krugman isn't aware of this and that his arguments are somehow flawed for that. But the choice is between providing some succor for people being impoverished by low labor demand coupled with falling prices that put that downward push on wages. As Krugman or Stiglitz notes. Economics is not linear it is non linear. And as such paying people an immoral wage is immoral, not merely economically expedient. And as Stiglitz notes, supply and demand curves are moved by both demand and supply. Because they are actually power curves they are also moved by "virtuous cycles" versus "vicious cycles."

Further Reading:

Of course the Right Wing attributes these numbers to Krugman:
Worstalls article:
More fallacies
Further Readings:
Other subjects:

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