A $9 Minimum Wage Doesn't Help the Poor

Last night, in his State of the Union address, President Obama suggested that Congress raise the minimum wage to $9 an hour. 

Economists have been pointing out for decades that this sort of policy tends to create unemployment. An employee who is paid $7.25 an hour and produces $8.00 of output is making his employer 75 cents better off every hour he's at work (leaving off for now the nontrivial added costs of the employer's share of the Social Security taxes, unemployment insurance taxes, etc.). Raise the minimum wage to $9.00 an hour, and the employer is $1.00 an hour worse off every hour he's at work. Employers who are forced by their customers to use resources efficiently are not going to be able to keep a money-losing employee on the payroll.

But the negative effects will not be confined to rising unemployment. Sure, some people who were making $7.25 will now find themselves making $9. That doesn't mean they're better off. Compensation takes the form of monetary and non-monetary compensation. Low-skilled workers may get paid $10 in total compensation, $7.25 in dollars and $2.75 in employee discounts, free food, training and experience that's transferable to the next job, flexible work hours, or some other perq. Since employers have to compete for employees, there's a good chance that the $7.25/2.75 balance is one that employees consider beneficial. So mandating a $9/hr. minimum not only shuts out the worker who can only produce $8/hr. of output--it also makes the worker who was earning $7.25 an hour worse off as the perqs start to disappear. Employee discounts dry up, work hours are take-it-or-leave-it, and so on. Furthermore, many unskilled workers may leave the market altogether, which takes them out of the unemployment statistics. Many teens may occupy their time with volunteer work or internships. This may be less productive than a $7/hr. job, but if they can't top the minimum wage hurdle, it may be the best they can do.

So why do politicians persist in supporting the minimum wage, and periodic increases in the minimum, when most economists have been arguing that this is damaging? Someone must be better off, or the policy would die for lack of supporters.

My students sometimes will say that the unskilled workers may believe that they're better off, even when they're not. In other words, they're duped into a policy that sounds good but leaves them unemployed, underemployed, or losing valuable benefits. That's possible, which is one reason that it's important that economists continue to explain the problems of these policies. It's also possible that wealthier "social reformer" types may believe that they're helping the poor--even though they're pricing the poorest and least skilled workers out of the market.

The real beneficiaries of this policy are those who were making more than $9/hr. to begin with. They don't have to worry about the lower-skilled workers competing with them for the job. The minority teen (particularly in the lower-wage South) is most likely to be hurt by this. Anthony Bradley does a good job of pointing out the practical and moral effects of this in his post over at the Acton Institute's blog.

Whole Foods CEO John Mackey favors Capitalism

Whole Foods CEO John Mackey is a self professed libertarian and argues that capitalism is be a moral system, that can be philanthropic, environmentally responsible, and still earn strive to earn profit.

RealClearMarkets - Let's Scrap the Fed's Open Market Committee

Recent College of Charleston economics graduate Luca Gattoni-Celli who will be blogging at The Motely Fool has a post on Real Clear Markets - Let's Scrap the Fed's Open Market Committee: "The central planning board met every five to eight weeks. Sometimes it had special meetings to address emergencies. Over a 70-year period, it brought together 12 of the most brilliant economic minds the nation had to offer: bankers, academics, career public servants, even captains of industry. These experts voted to set a price, the most important price in the nation, and arguably the world."

'via Blog this'

Crovitz: Who Really Invented the Internet? - WSJ.com

Sarah Squire at Modified Rapture provides us a brief history of what technology existed before the internet and how it came into existence.  L. Gordon Crovitz tells us: Who Really Invented the Internet? - WSJ.com: "It's an urban legend that the government launched the Internet. The myth is that the Pentagon created the Internet to keep its communications lines up even in a nuclear strike. The truth is a more interesting story about how innovation happens—and about how hard it is to build successful technology companies even once the government gets out of the way."

'via Blog this'

Why pay for water?

I just returned from 2 weeks in Italy. It was a great experience, except that I was always thirsty. In Rome, you can drink from the beautiful fountains throughout the city since all of the fountain water comes from the aqueducts and is potable. However, if you go into a restaurant, you have to pay about $3 to get a bottle of mineral water. The only exception was Bir & Fud which actually served tap water in a large bottle.

I asked an economic historian for an explanation of why restaurants charged for water, but he could not give me one. My first guess is that the institutions in restaurants in Europe evolved prior to potable water being available. These restaurant likely served beer which was much safer to drink than water. Once water became available, the restaurants decided to charge for water also. However, if this was the case, an entrepreneur could open a restaurant and serve "free" tap water and perhaps attract more customers.

The Bir & Fud restaurant did not charge for water because it was a place that specialized in beer. Thus, most of their customers would order beer. Serving water for free may be a way to keep these beer drinkers hydrated so they might actually order more beer.

If you think about it, the restaurant does incur a cost when it serves water. The cost of the water itself may be quite low, but the glasses still need to be cleaned and time is spent serving the water. They also incur these costs with bottled water, but can cover the cost by charging. Perhaps I should actually be asking why U.S. restaurants are not charging for water??

Can you buy votes? What does Citizen's United Mean

Fabio Rojas  over at OrgTheory has an excellent post describing the literature on money and elections. Most of the literature points out that it is very tough to convince voters to switch candidates. Maybe voters are too smart to be influenced by outside money, or too irrational to even so what makes sense. Or perhaps the voters are too stupid to understand the commercials. But all of this begs the question, "If advertising dollars don't matter, why do they do so much advertising?"

I was very happy to see that economics pays the best according to a recent survey in the Wall Street Journal.

http://blogs.wsj.com/economics/2012/04/17/which-college-majors-pay-best/?blog_id=8&post_id=16106

I will note that petroleum engineering is not included in this survey. That does pay well.