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Murray Rothbard vs. Paul Krugman on $9 Minimum Wage

One of the big progressive talking points coming out of the President’s recent “State of The Union” address is his proposal of once again raising the Federal minimum wage, this time to $9. The minimum wage is one of many political proposes designed specifically to make anyone that opposes it look like greedy and heartless. Why, who can argue that people should be able to make enough money to meet their needs? Why surely $9 is a reasonable amount of money to pay someone, the argument goes, and if you oppose that, well then you just must be a heartless soul who doesn’t understand the plight of the “working man”!

In defense of policies such as these, liberals will often trot out their favorite Nobel Prize Winning Economist, Paul Krugman, so they can point to him and say “Hey, Stupid! This guy won a NOBEL PRIZE! You’re just some libertarian blogger, how you gonna argue with THAT!”. And right on cue, there is a post from Paul Krugman’s blog “Conscience of a Liberal” currently being spread around the social media that deals with the minimum wage issue.

From the top Krugman takes the wrong approach, attempting to disprove simple logic through empirical studies:

So what should you know? First, as John Schmitt (pdf) documents at length, there just isn’t any evidence that raising the minimum wage near current levels would reduce employment. And this is a really solid result, because there have been a *lot* of studies. We can argue about exactly why the simple Econ 101 story doesn’t seem to work, but it clearly doesn’t — which means that the supposed cost in terms of employment from seeking to raise low-wage workers’ earnings is a myth.

As Bob Wenzel recently explained on his blog Economic Policy Journal, it is fallacious to attempt to use empirical studies to prove or disprove something that is based on irrefutable logic. Wenzel sums it up in his typical hard-hitting no-nonsense fashion:

The simple fact is that if you force people to pay more for something, they will buy less of it.

There are no empirical studies that can refute this. It is pure logic. And no empirical studies are needed to prove the argument. They can’t.

Anyone using empirical data to try and prove or disprove logic is a quack.

Not to let Wenzel take away the spotlight from the real star of this weekly feature, here is Murray Rothbard on the minimum wage from his book, Making Economic Sense:

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My goodness, I hate this

My goodness, I hate this line:

"disprove simple logic through empirical studies:"

You assume that your logic is perfect. That is the problem. So when the empirical evidence, doesn't match the logic, you fault the evidence. There is something wrong with your logic. It doesn't match the data. You need a new hypothesis to match the data.

For example, let us look at Bob's statement:

"The simple fact is that if you force people to pay more for something, they will buy less of it."

Can't you think of numerous example of how this can be disproven? Let us say, I put a gun to your head, and say "give me ten dollars, and I'll spare you". Or, I say "give me one thousand dollars, and I'll spare you." In both cases, you're going to buy exactly one of "me sparing you".

But let us move away from this ideological puzzles, and look at a case study. McDonalds, for example, had to raise the price of some of its popular items when certain commodities became too high around 2009. They were terrified of losing customers, but they had to raise their prices to stay afloat. You know what happened to their customer base? Not a damn thing. The customers returned, paid the increased price without batting an EYE. And when commodity prices went back down, McDonalds realized that they had underestimated their customers' propensity to, all kidding aside, consume. And they kept the high prices and had a higher profit margin. This teaches us some lessons. First, for the longest time, they were willing to keep prices stable despite a lower profit margin. Secondly, when (through this administered pricing scheme), they finally had to raise prices to stay in the black, consumption did not drop.

You're also ignoring, that a lot of times, when prices increase, capital takes the hit. So the consumer base sees no change. The result, is that money shifts from capital to labor.

Second to last...transactions within the private sector net to zero. If the customer has to pay more, that money goes somewhere else, and will be spent somewhere else. That will cause economic stimulus somewhere else. Moreover, if you believe in the science of class balances within a sectoral balance system, when money shifts from the top to the bottom, it causes more real growth.

Look, at a moral level, I'm not advocating for that. Where is the fairness in the government dictating price levels for labor? But I am also very confident that a raise in the minimum wage to 9 will do practically zilch to employment and economic opportunity.

The last piece of evidence? Obama raised minimum wage from 6 and change to 8 and change. Employment soared. Where is this supposed negative effect?

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Every debate around economics in the mainstream is a moot point

3 things are going to implode the economy in the short term.

- Rapidly Ageing population / pensions outlays

- Rapidly increasing automation/ robotics

- Interest payments on the debt

Both Austrian and Neo-Keynesian school fail the basic test of viability in the face of these incredible problems.

Tools of war are not always obvious. The worst weapon is an idea planted in the mind of man. Prejudices can kill, suspicion can destroy, and a thoughtless, frightened search for a scapegoat has an everlasting fallout all of its own.

I don't think this minimum

I don't think this minimum wage argument is as black and white as some believe.

When I started driving gas was 27 cents a gallon. The price has gone up more than ten fold, yet I am buying more gas than ever before. If you absolutely need something, you will keep buying it even if the price goes up.

What if employers were allowed to pay 75% of minimum wage for up to 3 months while employees are being trained. The people who were willing to work and able to learn would surely be worth 9 dollars an hour after they are trained. The worthless ones could be let go if they fail to qualify.

Krugman isn't capable of debating Rothbard...

...Kermit the Frog is more his speed.

Anyway, short course in minwage debate...very simple.

Learn this term: "marginal revenue product." That means the amount of additional revenue yielded by the addition of one unit of labor to a production process. For example, if I pay someone to work 1 additional hour at my factory, and I gain an additional $10 of revenue as a result, the marginal revenue product of that unit of labor is $10.

So, how much will I pay this person? He makes me $10/hour, so I will not pay him more than $10/hour. But competition between employers prevents me from paying from much less than $10/hour. So I end up paying him just under $10/hour.

Now suppose the gov says I cannot pay less than $11/hour. What will I do? I'll fire this person, because at $11/hour, I'm losing money by keeping him employed.

If the minwage is set at $11/hour, anyone whose labor is worth less than $11/hour will be fired...and that's why the minwage causes unemployment. It does not raise wages.

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."

The minimum wage: objectivism vs

pragmatism.

Pandas: The Silent Killer?
next 'Nightline'

I don't think that it is the

I don't think that it is the role of government to control wages however I believe the poor would be better off if they earned more money. I also don't believe that 18-20 year olds are all worthless like some of the commenters. Lets face it, for jobs that require physical strength and endurance they can do more than an old person. If the mimimum wage is raised a little at a time I think it will not have a significant effect on unemployment.It might force prices up some but that is what the government wants, to inflate away the debt. Using the same type of logic as Rothbard you could conduct a poll and ask employers if they would reduce their workforce if the minimum wage was raised from 7.25 to 7.26 per hour. If they all said they would keep all their workers that could be offered as proof that raising the mimimum wage would have no effect on unemployment. The government may be overstepping its role but raising the mimimum wage a little is not such an evil act. There are far more evil things we can fight against than that. We dont need to alienate millions of poor voters and chase them over to the democratic party.

price floor

The minimum wage is a price floor where a worker has to charge the employer at least $9 for their labor.

Who will the employer hire in this situation? The worker who is worth the nine bucks. The ones who are not worth it, will not get hired.

$9 hr X 2 people X 50 weeks = $37,440

This is more money than what half the people in West Virginia make.

Requiring businesses to pay $9 hr minimum wage plus comp, Soc. Sec. X2, unemployment, Fed taxes, state taxes, county taxes, township taxes, city taxes, and now the cost of Obamacare will just cripple West Virginia, Mississippi and a number of other states.

In my experience, NONE of the American 18 to 22 year olds are worth $9 per hour to start.

They have 2 years of Spanish but can't speak Spanish. They don't know how to put air in a tire, plunge a toilet or put oil in an engine. They can't spell, write, or communicate, problem solving is out of the question and they have no character whatsoever.

They should pay me $90 per hour to show them how to become self propelled.

The gamers can go scratch.

"Timid men prefer the calm of despotism to the tempestuous sea of liberty" TJ

Encore!

That was beautiful.

metalhed19's picture

Instead of giving people more

Instead of giving people more dollars, why not quit letting the Federal Reserve print so much more $, there by prevent current dollars from growing weaker.....

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Because it's better for them to appease the sheep or better yet

Lambs.. Sheep just get sheered for the most part.. Lambs get slaughtered.. so it's Lambs because it's happening more and more.

So anyway.. the Lambs are appeased while the farmers keep going ahead with their plans as usual. Meanwhile the dumb Lambs are all smiles over the extra feed they've been given but little do the dumb bastards know.. They will pay the ultimate price in the end.

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If they keep raising minimum wage

employers will soon be forced to pay skilled workers the same wage as burger flippers. Which in turn will discourage anyone from going to the trouble of acquiring any job skills. Just another effective method to decimate the economy.

Raise the minimum wage... then hire millions...

Raise the minimum wage then hire millions of government workers to affect the outcome! 'Voilà! We raised the minimum wage... therefore there are now more employed!'

Big government always presupposes creating jobs... and big government always presupposes deficit financing with fiat, as in counterfeit money. In fact it bases it's very existence upon the theft of wealth, transferring another's God given value into their fiat counterfeit money!

The creation of money through hidden transfer of value to fiat money, always forms the basis, though a diminishing basis, of their outcome based fraud.

They could not exist as 'big government' if force fed a constitutional diet!

Like a Cat Chasing its Tail

If the government wants to "fix" wages, why not "fix" the dollar?
What's the use of increasing hourly wages when the government simultaneously devalues a minimum-wage worker's earning through inflation?
If you want to "fix wages, "fix" the dollar by linking it to gold and silver.
Anything less amounts to a cat chasing its tail.

Of course, but then the government is without a job.

.

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Price fixing

Minimum wage laws are price fixing plain and simple. Liberals don't operate logically nor do most comprehend free market economics. I've had liberals flat ou say during arguments that they don't mix politics and economics! That's impossible! They are one in the same.

here is more detail

wenzel is over simplifying.

The latest research suggests that a carefully imposed minimum wage (and I would consider Britain's carefully imposed, and one indexed to inflation carelessly imposed) can raise incomes at the bottom of the wage spectrum without much reducing employment. But a higher minimum wage is neither a sufficient or a particularly germane response to labour-market polarisation and capital's rising income share. The problem is simply that the supply of people and robots available to do routine work is exploding. A proper response to this dynamic must either be a big change in relative skill supplies or relative productivities, or a move toward wage subsidies that are far larger and broader than have been considered in the past.

http://www.economist.com/blogs/freeexchange/2013/02/labour-m...

Wenzel nor Rothbard are oversimplifying

Minimum wage laws must disemploy anyone whose marginal revenue product to the firm is lower than the minimum wage.

Saying it doesn't is indeed like arguing against gravity, actually it's even more ludicrous, it's arguing against math.

Also insomuch as automation is a factor, arbitrarily increasing the cost of labor promotes that very thing. Pushbutton elevators being the famous example. Button operated elevators had been around before they were economically viable. What made them viable was minimum wage laws. Within a few years of minimum wage laws being enacted elevator operators went from being wherever elevators were, to being a boutique affectation of affluence. Now almost nowhere to be seen. Minimum wage laws made it cheaper to buy more expensive pushbutton elevators than hire operators.

Minimum wage laws just cut off the bottom rungs of the ladder.

Further: If minimum wage laws do not cause unemployment it is because there is a government intervention distorting the labor/employer relationship. In an approximate free market cost will be as low as the employer can get away with while attracting labor from other employers true, but high profits in turn attract competition. Equilibrium is achieved when the profits are not high enough to attract more competition. For profits to remain higher than that means there is something impeding competition, which is of course regulation, tariffs, tax code, licensing, and various other means of statutory monopoly protection.

In that situation the firm which is enjoying monopoly profits at the expense of consumers and employees via government action can sometimes absorb the increase in minimum wage because the MRP of the employee has been held artificially high.

However Over time monopoly profits themselves are eroded since all costs, not just labor, tend to expand to fit the profit and profit margins inevitably decline even if you can manage to hold one cost, labor, low. Monopolies thus become increasingly inefficient over time.

So it's only relatively new monopolies that are in the situation that MRP of employees is sufficiently higher than wages for this to occur.

Yes, but consider. If I am

Yes, but consider. If I am pulling in a huge profit margin, and can't operate without my below minimum wage staff, and I still have a huge profit margin even if I pay them above their productivity, I'm not going to fire them all and go out of business just to spite them for paying them beyond their productivity. If I half a choice between a lower profit margin and no profit, I choose the lower margin and overpay some people.

Master Pretzel Twister
https://twitter.com/MenckensGhost

True but I have addressed this in detail

But I'll treat it again. If margins are so high that raising a price floor will still allow profits it means something is preventing more employers from existing to drive up wages.

There are only two cases:

1) If what you describe is not the case raising minimum wage will disemploy people.

2) If the case you describe is true, you could drive up wages by removing barriers to market entry of employers and simultaneously increase employment.

I think your instinct is right, and case two is largely correct.

But the answer is still not to increase minimum wage.

The answer is remove barriers to market entry for employers.

Investments and profit is fungible. If I have capital looking for a return I will put it where the best return is if I am allowed to do so. When some market sector is making much higher profit, like health care or finance for example, it is telling you that there are barriers to entry.

In the unskilled labor market what is keeping more employers out of the market is occupational regulation, professional licensure, zoning, environmental compliance, food preparation regulation, inspections, corporate taxes, mandatory insurances, building codes, and various other compliance costs.

This keeps people who can perform some needed service, cooking, home repair, interior design, plumbing, housekeeping, hair styling, carpentry, or thousands of other things people would buy and which you could employ unskilled help and in fact teach them on the job, you can't do.

You can in some places and some occupations do it yourself.

But if you want to hire someone to help you, you hit a wall. If you want to buy a structure for the business you hit a wall.

The reason for this isn't to keep you, your potential employee, or potential customers safe.

If that was the case you wouldn't be allowed to do it yourself.

If that was the case they wouldn't grandfather existing businesses whenever they pass new market barrier laws.

These laws are there to protect existing market actors from competition.

Many marketable goods and services do not have any real capital requirements.

Many marketable goods and services could be started by anyone who can save a few weeks pay and has done the job for a few months.

A business you could start with a few hundred dollars is made to cost tens of thousands of dollars with licensure, regulatory compliance, building codes, legal fees, etc, etc, etc.

If you manage to work through these, which is also an entirely different skillset from being a successful entrepreneur, which you also must master, and you get large enough and want to branch out of state, you face and entirely new and more expensive set of compliance costs.

This is why wages are low.

This benefits employers at the expense of employees and at the expense of people who would like to be employers.

Further if you raise minimum wage, and assuming you raise it just the right level not to disemploy anyone, ie just enough to consume the excess profit (impossible to know for an entire sector) it is only a temporary solution. The government will continue to supply more barriers to market entry to the employers to reap ever higher monopsony rent. (to say nothing of Fed inflation stealing their cut from the worker)

Because progressives are stupid, they will go along with anything which seems to 'help' the employee and 'hurt' the employer, like more intrusive occupational or hiring standards or corporate taxes, or environmental regulation, or anything they can dream of. Of course this all does the exact opposite. It hurts the employee and the employee who would like to be an employer and helps existing employees.

This will make it just that much more impossible for new businesses to start.

This relative decrease in the number of employers will bid down wages with regard to inflation.

The battle cannot be won this way.

(BTW excellent to see you asking good questions)

Fact,

You could be right and you could be wrong.

If there are enough hungry and desperate mouths lined up willing to work, then the wage rate will be very low regardless of margins, profitability, et al.

If one society wants to use various means to uphold a standard of living it considers desirable, and preserve a middle class perhaps for political stability, then it is in their interests to take steps to do so, even if it means some involuntary unemployment or some inefficiencies.

Master Pretzel Twister
https://twitter.com/MenckensGhost

You fail again

I'm only surprised that I thought you could learn. But I can learn.

Again there are only two possibilities.

As you stated, it's possible that employers are earning 'excess' profits and can afford higher wages and still remain solvent. This is the left wing argument.

It's possible they aren't and the wages if forcibly raised will disemploy people. This is the right wing argument.

I think the first is true.

In neither case is minimum wage the solution. In either case removing barriers to becoming employers is the solution. That will raise wages and employment rates.

The fact remains the only reason monopsony profits are being reaped is because government prevents people from becoming employers thus driving down wages. That process will only continue and accelerate if minimum wage is raised.

Now add in inflation

Which will actually gradually lower the real value of the minimum wage . . .

Actually I like your analysis. Anyway, if we consider the near term, minimum wage laws can havea small or no impact on unemployment in certain mixed economies. If you extend the time considerations, yes, there will eventually be a negative impact. But the argument goes that in the longer run so many things change unpredictably that the original prediction is not relevant anymore.

Yes of course, inflation

Yes of course, inflation punishes labor inverting a very important part the natural balance of power between labor and capital. With sound money employees wages have ever increasing purchasing power and employers have to go and request pay reduction of find other ways to increase efficiency.

With inflation employers are continually reducing wages without consent and, due to government controlled media and education, most often without even awareness. Labor is forced to continually beg for scraps.

Re MW, you summarized well. MW can in some cases not cause unemployment in some cases, because it's a mixed economy. This is an instance of the general problem of planning, you create more problems with your previous 'solutions'.

So while the cases of MW not disemploying do exist, they are uncommon and they are ephemeral. Overall unemployment certainly goes up.

Further MW causes other further problems.

For one you create a moral hazard by removing the free market cost of being a bigot. In a free market bigots bid up the cost of labor from their favored race, gender, orientation etc. Less bigoted employers have a labor cost advantage, which over time will have profound positive social effects.

To correct for that you have little option but to further violate liberties with EO statutes. Which impede economic growth at the least, but also incur social tension from people otherwise disinclined to be bigots, but now are because they didn't get a job they were qualified for. As well lower standards cause real inferiority where only perceived inferiority existed before. You can't have different standards without different quality outcomes on aggregate.

I could go on forever with interventions and problems caused. However to call them unintended consequences seems to be ascribing to ignorance where malice is more appropriate. The level of ignorance required for this to always happen is not believable.

Even in your statement

You say 'without much reducing employment'. So right there you admit that it does reduce employment, thereby proving the point.

Saying Wenzel is oversimplifying is like saying Newton was oversimplifying the concept of gravity.

You don't need empirical studies, which are done specifically to try to show direct causation, to prove or disprove logic.

Price controls and gravity both have real, known properties. No "studies" that attempt to prove or disprove either will change anything.

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Over simplification

First - I was quoting the article.

Second, comparing Gravity and the effect of minimum wage is silly - Newton's "LAW" of gravity is completely empirical - there was no theory at all - no reason why gravity occurs, it just did, and it follows this equation.

So, minimum wages have different effects depending on the circumstance you are looking at. It seems reasonable to look at what minimum wages do to the economy.

I agree that morally minimum wages are wrong. But so is government assistance to corporations. If you want to go from here to where we want, you are going to have to understand how the immoral world works, unless you expect the world to just change overnight.

The problem

The problem with the empirical study method is that it you cannot study economics and put it to a test in the way you can a scientific theory. Economics is the study of individual human action, and you cannot compare logical deductions with a physical scientific theory.

In that respect, fair enough - gravity wasn't the best analogy..

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Paul Krugman?

Is that you? I didn't know you read the Daily Paul.

If you took the time

To read the article I posted you would see that it disagrees with Krugman as well.

The

article does not present the exact same argument as Krugman, but it does suggest that the results of empirical studies can uncover solutions that can be applied to the market by force, thus enhancing transactions for the betterment of humanity. This is where I disagree with Krugman, the aritcle, and you.

Of course minimum wage laws have differing imapcts to differnet wage levels. A minimum wage increase set to 1% the median wage would impact significantly less transactions than one set to 5% the median wage. This is not the argument. This is irrelevant. Minimum wage laws outlaw employment set at certain price levels. Not only is this immoral, but it distorts the market and introduces unpredictable untintended consequences. The empiracal studies you reference cannot factor in the entire market response created by fixing prices, because the effects are so vast and not predicable. How do these empirical studies plan on compiling the data of those wage earners forced to accept wages "under the table"? How are their wages impacted? You cannot know, because it's impossible to find the data. How do these empirical studies compile data based on rise in prices created by the cost of labor rising due to minimum wage laws?

You cannot apply empirical studies to economic transactions. Price fixing is price fixing. It doesn't matter if it is in wages, fuel, or money.