Category Archives: Labor Economics

Do More Immigrants Mean Lower Wages?

In an interview with Ezra Klein, Bernie Sanders says,

What right-wing people in this country would love is an open-border policy. Bring in all kinds of people, work for $2 or $3 an hour, that would be great for them. I don’t believe in that. I think we have to raise wages in this country, I think we have to do everything we can to create millions of jobs.

It’s true that we’re usually taught that if you increase the supply of labor, wages will go down. But, remember, that’s if we assume all else is equal. Famous left-wing economist Paul Krugman might disagree with that assumption.

In his famous work on trade theory — what won him the Nobel prize —, Krugman argues that a larger population implies a greater demand for goods, and therefore labor, because…you know…there’s more people. So what does this imply with regards to wages? If industries, or the economy as a whole through the division of labor, can benefit from economies of scales, it means lower prices and higher real wages.

So, if Bernie Sanders were really interested in raising incomes, he’d be an open borders advocate.

Do Unpaid Internships Make You Worse Off?

This morning, I read a LinkedIn article on unpaid internships, where I saw the following,

First off, it is worth noting that getting a paid internship in college is a very smart idea. The National Association of Colleges and Employers recently did a survey of people who graduated in 2013 with a bachelor’s degree and found that a graduate who did a paid internship while in college made an average starting salary of $51,930 – compared to a $37,087 average salary for workers who didn’t do an internship.

But here’s a shocking statistic from that same survey: 2013 graduates who did an unpaid internship while in college actually made less than students who got no internship at all – $35,721 a year, on average, compared to the aforementioned $37,087. Pretty bad deal – work for free and then make $1,366 a year less when it’s time to work for money.

There’s something wrong with that interpretation.

Let’s consider a single representative of a recent graduate. She has three options available to her, ordered from best to worst:

  1. Take a paid internship and later land a $51,930 salary
  2. Skip the internship and go straight for a full-time job with a $37,087 salary
  3. Take an unpaid internship and later take a job with a $35,721 salary

What determines which option she’ll take? Obviously, all recent graduates will want (1), but not all recent graduates will get that opportunity. Only the best will. Let’s say our graduate isn’t in that tier. She can opt for (2), but after we eliminate all those who achieved (1) we still have to choose the best of what remains to fill the limited number of full-time jobs available. That’s a second tier of candidates. Let’s say our representative doesn’t fit that category either. So, without options (1) and (2), the only thing she can do is (3).

What the author of this article wants to do is eliminate option (3), so that the only thing our candidate can do is be unemployed and hope that some time soon she’ll be able to fit into (1) or (2).

In any case, notice his wording. He’s saying that taking an unpaid internship leaves you worse off than choosing to work without that internship experience. That’s misleading, because to a lot of people who choose option (3), option (2) was never really a choice they weren’t sufficiently qualified. Option (3) leaves you better off, however, than not having a job at all!

A much more direct, if a bit more crass, way of putting my point is, those differences in incomes might represent differences in the skills different candidates have to offer. If someone takes an unpaid internship and over the long-run ends up making an average salary of $35,721, maybe it’s because they couldn’t compete against those other candidates who ended up getting jobs directly out of college or a paid internship.

So, it’s not that they’re getting bamboozled by employers. It’s that the unpaid internship was really their best choice, because (1) and (2) were really never on the table for them.

Rudimentary Foray into the Minimum Wage & African-American Unemployment

A commonly cited cause of relatively high African-American unemployment rates is the minimum wage. This argument is often made by libertarians. To detractors: it’s not just white, middle-class males who argue this. Walter Williams is well known for making the case — see his book, Race and Economics. Thomas Sowell, as well. The relationship is intuitive, if you assume that African-Americans, on average, are less productive than whites (and other ethnicities/races with lower unemployment rates) and perfect competition is the best model to apply to low-skill labor markets. My prior is that binding minimum wages do reduce unemployment, and so I’ve too repeated the argument, most recently today.

Knowing that intuition is deceiving, I want to develop a model to test — nothing too fancy, but not necessarily primitive, either. I don’t have that model yet. I’m looking at what data is available, what data is the best to use, and how I should manipulate the data, based on the model (e.g. should I compare rates of change or levels? what should be the functional form?).

In the meantime, here is the quick and dirty result, from the data I do have. All data is for California, including the African-American unemployment rate (BLS) and the inflation (CPI, less food and energy) adjusted minimum wage. The two compared,

Percent Change Minimum Wage v Percent Change African-American Unemployment (California)

The black trendline includes all data points (the blue diamonds); the red trendline excludes the highest blue diamond (-0.01942, 0.1963). The R2 are .0365 and .0311, respectively. Very low. Indeed, percent change in the minimum wage is not statistically significant. Also not statistically significant is the effect on the inflation adjusted minimum wage on the unemployment rate, and neither is the effect of ln(adjusted minimum wage) on ln(unemployment rate) — for those who may not know what the difference is, this last one measures elasticity; i.e. a one percent change in the real minimum wage causes a percent change in unemployment equal to the coefficient estimated for the former.

A “quick look” suggests that maybe the relationship between the minimum wage and African-American unemployment isn’t so obvious (or intuitive), after all.

CEPR Engages in Semantics

Reporting on the CBO’s recent study, claiming that the planned Federal increase in the minimum wage will lead to a loss of 500,000 jobs, CEPR writes,

The CBO projections imply that 500,000 fewer people will be employed at low wage jobs. It did not say that 500,000 people would lose their jobs. This is an important distinction. These jobs tend to be high turnover jobs, with workers often staying at their jobs for just a few months. While there will undoubtedly be cases where companies go out of business due to the minimum wage hike (many small businesses are always at the edge, so anything can push them over) the vast majority of the lost jobs are likely to be in a situations where businesses don’t replace a person who leaves or don’t hire additional workers as quickly in response to an uptick in demand.

The evolution of my reaction,

  1. When I first read the brief, yesterday, I thought that CEPR’s writers were trying to make the costs sound less costly than they actually are;
  2. Then, I started writing a post, and in the process of writing I realized that there is a good chance I was jumping the gun. So, I re-read the CEPR report and decided that they have a point (I’ll specify what made me re-think my position in a little);
  3. Today, motivated by this Intelligence Squared debate on the minimum wage, I decided to re-read the CEPR study, and I now find myself somewhere in between my initial reaction and my consequent reconsideration.

In reference to step (2), here is the part of the CEPR brief that caused me to reconsider,

With 25 million people projected to be in the pool of beneficiaries from a higher minimum wage, this means that we can expect affected workers to put in on average about 2 percent fewer hours a year. However when they do work, those at the bottom will see a 39.3 percent increase in pay.

That doesn’t sound like a bad deal. I don’t know what the average amount of hours worked by a minimum wage earner is, but I’ll assume it’s 40 per week — although, when I worked for minimum wage I’d be lucky to get 20. So, if the loss in hours is evenly distributed, the new minimum wage will affect total compensation as follows, more-or-less: 10.10(39.2) – 7.25(40) = $105.95. That’s $105.95 more per week minimum wage earners will make, even with a 2% loss in hours.

But, assuming an even distribution of hour loss seems like a very unreasonable assumption. If the average minimum wage worker works less than 40 hours a week, it’s also safe to suppose that some employees work more hours than others — this was my experience. Three main reasons come to mind: (1) firms don’t like perfect work sharing, because it reduces productivity; (2) firms discriminate between workers; (3) some minimum wage earners work two jobs, others don’t. So, the distribution of benefits from an increase in the minimum wage will be uneven. The problem seems worse when we think about some working two jobs, and others working only one, where some will land two jobs at the new minimum wage, making the spread of hour loss even more unequal.

Note how losses and benefits are distributed. That the quantity of labor will fall by an equivalent of a loss of 500,000 jobs suggests that significant chunk of the cost of a minimum wage is being passed on to minimum wage earners, not capital owners. This means that whatever benefits x fraction of minimum wage workers earn from the increase, they are receiving these at the cost of other minimum wage workers.

The minimum wage seems like a regressive welfare program, since some are becoming better off at the expense of the worst off. Even if the minimum wage is Kaldor-Hicks optimal (which I doubt, especially when we look at other margins), is that really a policy liberals want to support?

A Simple Argument for the Minimum Wage

Apparently, some people can’t figure out what a strong argument for the minimum wage might look like. In what follows, I will provide what I think is a reasonable case for minimum wage legislation.  What I’m not saying is that the argument is right. I’m claiming it’s reasonable. It is perceivable (there is some probability) that that it could be right. Neither am I saying that this is the argument I agree with. I don’t think the minimum wage is good policy.

The case for a minimum wage. Many people believe that all people deserve a minimum standard of living, and that one method of pursuing this is by paying minimum wage workers an hourly income above the market value of their labor. The classic economic argument against the minimum wage is that it creates unemployment, by pricing many workers out of the market. However, much of the recent evidence fails to reveal disemployment costs, meaning that firms raise their minimum wage without having to let workers go. In fact, some studies show that the minimum wage increases employment, as the monopsony theory of markets predicts. The implication is that the most cited cost to minimum wage may actually not be a cost at all.

Note what I don’t say,

  1. Minimum wage…liberals…marxists. There has to be something analogous to Godwin’s law for this. As the discussion grows longer, the probability that a libertarian will bring up socialism/Marxism approaches one.
  2. Minimum wage advocates are assuming labor markets are non-consensual. Or, they assume that the only alternative to taking a low wage job is death, meaning the contract is as good as slavery.

I’m sure there are people who do believe in these things. But, those who want to take part in the debate on the minimum wage know, or should know, that these are relatively weak arguments. And critiques of these arguments do not address the stronger ones. It should not be surprising to you if you are attacking the weak ideas, but your criticism is not persuading anybody who doesn’t already agree with you. And, you are misleading your readers, because you’re guiding them into taking a position by ridiculing the weakest form of opposition against it.

P.S. Here is a strong argument against the minimum wage, that does address the strong arguments for the minimum wage.

Minimum Wage and Prices

Most commentators probably realize that there are various ways a firm can respond to increases in the minimum wage. But, from what I’ve seen in the media (not in academic circles), most people only consider what the minimum wage will cost to the consumer if firms respond by increasing the prices of their product. But, thinking about, this strikes me as a strange way to talk about the costs of the minimum wage.

We know that how much of the minimum wage the firm can pass on to the consumer depends on the elasticity of demand,

demand elastic and inelastic

In the illustration above, the graph on the left has a demand curve that is inelastic relative to the graph on the right. Suppose each graph represents a different firm. The left-hand firm will be able to pass on more of the minimum wage cost to the consumer, because quantity demanded will fall to a lesser degree than for the firm represented on the right. (By the way, this is why labor unions are more effective when they’re unionizing labor for competitive monopolists. This is also why labor unions lobby their government to pass regulations — e.g. tariffs — that offer their industries monopoly rents.)

The demand curves for the industries most likely affected by the minimum wage — e.g. fast food, other restaurants, grocery stores, et cetera — are probably relatively elastic. What this means is that the firm’s ability to pass on the additional cost of the minimum wage to the consumer will be rather limited. This is one reason talking about product price and the minimum wage doesn’t make much sense to me.

The effects of a minimum wage are most likely seen elsewhere. Unemployment is the obvious alternative, but factors that give firms the ability to exploit labor may mitigate this to some extent. (“Exploit” has a specific, positive — not normative — definition: [MRP-W]/W; or the inverse of the labor supply’s elasticity.) Increasing the cost of labor can also reduce profits, which may be a disincentive to investment in the firm. One way or the other, the consumer is hurt by the minimum wage, but the least likely route is the direct one between increased input cost and increased output price.