The "Minimum" in Minimum Wage

I can't stand minimum wage laws. They're terrible policy. Anyone with even a basic level of understanding of economics knows and can explain why. Since I don't have one :), I had to read Stossel's. One of the most obvious reasons minimum wage laws are bad policy is that the cut the bottom rungs off the wage ladder. As Stossel explains:

"The law of supply and demand, which operates whether we like it or not, says that when the price of something goes up, people buy less of it. That's why environmentalists like higher gasoline taxes, and anti-smoking activists back higher cigarette taxes."

Given that explanation, when the cost of labor goes up then people (employers) buy less of it. In other words, they don't employee as many people.

As much as I like Stossel (and anyone that's read Stupid in America can attest that I do) even he misses one important point here. I believe that increasing the minimum wage will only increase the number of illegal immigrants that are hired. I know this isn't terribly intuitive so let me try to explain it with an analogy that most people are more familiar with.

Years ago the NBA considered raising the height of the basket. The thought was that there were so many really tall people playing that the 10' height had become outdated. People who were 7'+ tall had an unfair advantage over 6' people because they were so close to the 10' basket height. They did some test to see how effective raising the height of the basket would be in leveling the playing field between people that were 6' and 7' tall. In tests that were done (can anyone find one of those old tests for me to link to?) raising the height of the basket didn't level the playing field as they hoped it would. Instead, it further exaggerated the disparity. It put the 10' goal even further away from the 6' tall person and increased the advantage that the 7' person had.

So how does this basketball analogy have to do with minimum wage laws? Right now mimimum wage is $5.15. That's our 10' basketball goal. The 6' tall people are American citizens that are currently being employeed at minimum wage. The 7' tall people are illegal immigrants. Their advantage is that they can work for a cheaper rate. Surely most companies are law abiding in their hiring policies but some try to break the law and get an advantage by hiring some 7' tall people on their team. They're cheaper to employ. When the height of the basket is raised (when minimum wage is increased) then the 7' tall people (illegal immigrants) have even more of an advantage. They have more of an advantage because whereas currently it costs $5.15 to employ a US citizen versus potentially $4 for an illegal immigrant raising the minimum wage to $7.25, as the house as just voted to do, pushes that disparity from $1.15 to $3.25.

I'm not condoning companies for hiring illegal aliens. Certainly regardless of the money that can be saved it's not a justification for breaking the law. It will encourage a lot of unscrupulous companies to do just that, though. It increases their incentive the break the law. It may not be worth them risking the fines and bad publicity and everything else that goes with getting caught to save $1.15 but it's going to become worth it to more companies for $3.25. The easier it is for illegal immigrants to get a job the more that are going to be streaming across our border. That's the real low point of increasing the minimum wage.

It's a free market. It's not a government market.

I like Fox News but I don't believe everything they report is the equilivant of something being etched in stone tablets. It's just far better than the other news programs out there.

As for their personalities, it's a mixed bag. Hannity is an ignorant boob. O'Reilly is marginally better at times. I really like Neil Cavuto (Porked, anyone?)though and he shows why in this piece. There's really not much I can add. It's simply splendid. This is exactly the way I see the issue.

In case anyone is wondering, I'm also a big fan of Andrew Napolitano, Brit Hume, Shepard Smith, and Tony Snow back when he was around.

Gouge This

There's been a lot of talk in the news about price gouging and how Congress is investigating. Some Democrat from Washington even wants to make "excessively unconscionable price increases" illegal. Seriously. What does that mean and what good is that going to do?

Our economy is based on supply and demand. He's a simple illustration. I own a generator store. The weather's been great, electricity cheap and in abundant supply, and my 10 generators have been sitting on the shelves for months with a $500 price tag on them. Well, a hurricane comes rumbling through (increased demand). Due to the new anti-gouging laws, I can't adjust my price and on such short notice I'm unable to increase my inventory (flat supply). Someone comes in and buys 1. As the warnings increase and the weather worsens, another customer comes in and buys 2 more. Just in case, he says, as he loads them up. The morning of the storm, 4 more customers come in and between them buy the remaining 7 generators that I have.

I've been unable to regulate my inventory because supply, demand, and price are all out of my control. As a store owner, I can never do much to affect demand. Given notice I can keep a steady supply, but I must use price to balance the two.

That's not the end of the story, though. Others come in desperate need after learning now that the power will be out for days. I have to turn them away empty handed. I have no more generators. Meanwhile the customers that came in and bought 2 generators each are running their TVs and air conditioners all day long. The people without are suffering. If I had been able to adjust my price, perhaps some of the customers that bought 2 generators just because the price allowed them to would have only bought 1. Maybe they'd just be running a refrigerator and a couple of fans. And maybe I would still have had generators on my shelf when the people that I had to turn away came in. Wouldn't they have been happy to pay $700 for my $500 generator?

Here's another scenario. This time my generator store isn't in one of the areas affected by the storm but in a neighboring area. I see the news reports about how people are in desperate need of generators. The new anti-gouging laws prevent me from raising my price though and my price is set to be able to sell the generators from my store. If I could raise the price of my generators to $700 maybe it would be worth it for me to try to deliver them to the storm affected areas. Since my price can't go above $500 though, I just let them sit unused in my store.

I'm sure some people would argue that those scenarios are very unrealistic and would never happen and they aren't good examples and all that. I saw the potential for those stories to unfold first hand when I was in the aftermath of Katrina last year, though. Price gouging laws prevent people from reacting to changing economic conditions around them. It may help some people in that they got a $500 generator for $500 instead of $700 but it hurts people others when a generator isn't still on the shelf. That's not gouging; that's basic economics.