Thursday, August 4, 2016

A bouillabaisse of economic errors, misunderstandings and false presumptions about the $15 minimum wage

From Mark Perry.
"John Komlos, a professor emeritus of economics at the University of Munich, has written an article for PBS Newshour (“Why a $15 minimum wage shouldn’t scare us“) that I would have to describe à la Don Boudreaux as a real bouillabaisse (effluvium?) of economic errors, misunderstandings, false presumptions, and general nitwitery. Here’s the opening:
The economics of the minimum wage is widely misunderstood. While many commentators claim unjustifiably that increases in the minimum wage destroy jobs, there is actually no evidence to support their contention. Considered superficially, the logic seems plausible. If the price of something increases you’ll buy less of it, won’t you?
Nonsense. Obviously, it is possible, but it ain’t necessarily so. That’s the key point: it ain’t necessarily so. It is essentially an empirical issue. While many commentators claim unjustifiably that increases in the minimum wage destroy jobs, there is actually no evidence to support their contention.
Consider the context. Take the cup of coffee I have in the morning. I don’t care how much the price of coffee is — double it, triple it — I’ll still drink a cup in the morning. I won’t drink less of it.
And here’s some real nitwitery later in the article:
Raising the minimum wage has not hurt anyone except the boogeyman in the imagination of the 1 percenters and their entourage. Conservatives are merely throwing invectives at a phantom of their own imagination.
Yikes! Where to start?…. The economics of the minimum wage is widely misunderstood? Raising the minimum wage has not hurt anyone? Demand curves don’t slope downward? There is no evidence that increases in the minimum wage destroy jobs? As Steve Hayward commented recently, “Generally the first thing you learn on the first day of Econ 101 is that if you raise the price of something, you’ll reduce the quantity demanded for that something. Including labor.” So let’s focus on Komlos’s statement “I don’t care how much the price of coffee is – double it, triple, it – and I won’t drink less of it.” Shortly later in the article, he says “The same thing is true for labor.”

Baloney. There are at least several flaws in connecting a statement like — “I don’t care how much the price of coffee is – double it, triple, it – and I won’t drink less of it” — to the unrealistic assumption that doubling or tripling the minimum wage won’t reduce job opportunities for unskilled workers. From ECON 101, that statement tells us that John Komlos’s demand for coffee is relatively inelastic. But even in that case, his demand curve for coffee still slopes downward, reflecting an inverse relationship between the price of coffee and the number of cups he drinks per week or month.

Consider the following:

The Elasticity of Demand for Good X is partly determined by the percentage of a consumer’s income spent on Good X. The lower the share of consumer income spent on Good X, the less price sensitive consumers will be when buying and consuming that product (demand is more inelastic). Conversely, the greater the share of income spent on Good X, the more price sensitive consumers will be when buying that product (demand is more elastic).

What Komlos is telling us is that he spends a relatively low share of his income on coffee, and is therefore not very sensitive or responsive to increases in coffee prices. But consider something for which Komlos does spend a much greater share of his income, say the monthly rent for his apartment. Can you ever imagine that he would declare “I don’t care how much my monthly rent is – double it, triple it, quadruple it – and I won’t care and won’t consider moving to a cheaper apartment?” Or “I don’t care how much college tuition is for my six sons and daughters – double it, triple it, quadruple it – and I won’t care?”

And in the extreme, suppose that coffee prices increased ten-fold (from $7 to $70 per pound for example) or twenty-fold (to $140 per pound) or one-hundred-fold (to $700 per pound). Would Komlos have us believe that he still wouldn’t either: a) cut back on his coffee consumption (e.g. drinking 1 or 2 cups per day instead of 3 or 4 cups) if coffee were $700 per pound, or b) consider switching to a substitute morning beverage like tea if coffee cost $700 per pound? Not likely.

Komlos’s demand curve for coffee, like the demand curve for low-skilled workers, slopes downward, partly because there are substitutes for coffee just like there are substitutes for low-skilled workers.
Moving from coffee prices to wages for unskilled workers: Of course it would be the case that small businesses, restaurants, and retailers, unlike Komlos’s insensitivity to coffee prices, will be extremely sensitive to significant wage increases, because the share of an employers’ operating expenses devoted to labor costs, unlike Komlos’s share of spending on coffee, is relatively high. John Komlos might realistically not be too responsive to his morning cup of coffee doubling in cost from 25 cents to 50 cents per cup because that expenditure is such a small fraction of his overall spending. But Komlos’s response bears no realistic resemblance to how an employer in a competitive industry with razor-thin margins (like fast-food or retail), whose payroll costs might represents one-third or more of operating expenses, will respond to a 100% increase in wages for his or her low-skilled workers. Those employers, unlike Komlos, will be extremely sensitive to a doubling or tripling of wages for low-skilled workers.

Moreover, John Komlos’s demand for coffee as a general beverage category might not be too responsive to a doubling or tripling of coffee prices, but his demand for a specific brand of coffee will be very sensitive to price changes. Suppose there are two types of coffee available: Low-quality Coffee A at $7.25 per pound and High-quality Coffee B at $15 per pound. Further suppose that John Komlos currently prefers Coffee A, but its price suddenly increases to $15 per pound due to a “minimum coffee price” law. Would Komlos really have us believe that he wouldn’t switch from lower-quality Coffee A to higher-quality Coffee B under that scenario? Of course he would, and so would all rational consumers. The demand and market for low-quality coffee would simply dry up because consumers are longer being compensated for enduring the lower quality with a lower price.

Likewise, in the labor market, employers can hire either low-cost, limited-experience, low-productivity, low-skilled workers for say $7.25 an hour, or they can hire higher-cost, experienced, high-productivity workers for say $15 an hour or they can invest in labor-saving technologies and automation. Given those choices, many employers sensibly opt for the lower-cost option of hiring unskilled workers to economize on labor costs, and then provide on-the-job training to enhance the skills of those limited-experience workers. But suppose that the minimum wage for low-skilled workers increases to $15 an hour. Just like John Komlos would switch from low-quality to high-quality coffee in the example above, most employers would switch from low-skilled to high-skilled workers following a minimum wage hike to $15 an hour (or invest in labor-saving technologies). In the same way that the number of pounds of low-quality coffee sold would plummet following a 100% increase in price, so would the number of low-skilled workers hired also plummet following a 108% increase in the minimum wage. Employment opportunities for the most vulnerable workers – those least-educated with the lowest skill levels and least experience – (just like the demand for low quality coffee) would be significantly reduced following a minimum wage hike. John Komlos might still be able to enjoy his morning cup coffee following a doubling of coffee prices, but thousands of unskilled workers would find themselves unemployed with very limited job prospects following more than a doubling of the minimum wage. In other words, Komlos uses a completely unrealistic comparison of coffee prices and wages for low-skilled workers to suggest that a doubling of the minimum wage would have no effect on the demand for entry-level workers.

Later in his article, Komlos falls deep into the trap of fantasy-world thinking that small businesses, retailers, and restaurants, even though they operate on very thin profit margins, nevertheless have a “magic pile of money” sitting around in a closet somewhere that allows them to easily absorb a doubling of labor costs for their unskilled workers. That’s not even remotely true, and John Komlos as an economist should know better. He should also know that to compare a doubling or tripling of coffee prices to a doubling or tripling of wages for low-skilled workers is completely inappropriate and inexcusable for an economist.

This article is now a leading candidate to receive my “Economic Nitwitery of the Year Award” for its stew of economic errors and misunderstandings, which are at complete odds with the basic principles of economic theory and the overwhelming empirical evidence about the negative employment effects of the minimum wage. And shame on PBS Newshour for publishing such a bouillabaisse of economic nitwitery.

Update 1: On Twitter, Bryan Sloss points out another important economic error in the bouillabaisse: Mr. Komlos assumes that his personal demand for coffee represents the overall market demand for coffee.

Update 2: Tim Worstall, writing at, points out even more economic errors in the bouillabaisse effluvium."
Here is one of the comments:

Tim Worstall
"This is also amusingly bad:
“Of course, there are a few ma-and-pa operations that are struggling already, making no profit and cannot afford to pay higher wages. Those businesses will have to let go an employee and work harder to make up the difference. So there will be a couple of workers laid off. But such shoestring operations are a miniscule segment of today’s economy,”
The SBA tells us that:
“Small businesses make up:
99.7 percent of U.S. employer firms,
64 percent of net new private-sector
49.2 percent of private-sector
42.9 percent of private-sector payroll,”
Sure, small business and Mom and Pop aren’t the same thing but still…."

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