Friday, April 4, 2014

Minimum Wage And Vacuum Cleaners (re-post)

(Nore: This is a re-post)

As it happens with many other economic fallacies, the one about the necessity of a "minimum wage" seems to withstand the most attacks by economic reality and economic theory. Not only has minimum wage laws not brought the economic bonanza promised by the politicians, it is the main cause of unemployment or underemployment for a part of the population of working age, especially the young and the unskilled. How is it that this pernicious myth continues to live despite decades of evidence to the contrary and sound economic reasoning?

Most people of good conscience feel that the imposition of a minimum wage (sometimes called the "living wage") by government is justified because the morality of making employers pay a higher wage to their employees is self-evident. Shouldn't a person obtain a wage that reflects fairly the labor he or she produces? For waking up early and going to work for 8 hours a day? How dare employers not compensate their employers for their exploitation?

In reality, minimum wage laws have the effect of keeping people unemployed for a longer time than they would otherwise, because most low-wage jobs are entry-level jobs usually filled by the young and the inexperienced and not by the heads of households who happen to pay mortgage, utilities, or food and shelter for the wife, kids and the dog. There's really no good reason for pricing these folks above what the market is willing to pay for the production that they're able to trade, as doing so will keep them out of the labor market until they - somehow - obtain the skills and experience necessary to price their labor better.

Even so, a great number of people cling to this notion that imposing a minimum wage helps workers by allowing them a more "deserving" compensation for their labor. The reason they would believe this is that people apply their own subjective valuation as moral imperative, so it becomes easy for them to conclude that a wage considered (subjectively) "low" is in reality something that could only come as a manifestation of an immoral soul, from a selfish miser or a curmudgeonly misanthrope. Unfortunately, this muddling of morality and economics is what allows politicians to convince enough people of the moral case for imposing a minimum wage regardless of very real economic effects of such imposition, such as intervening on the voluntary relationship between two willing individuals; or regardless of the immorality of pricing someone's labor by fiat, not unlike imposing a price floor or a price cap on goods.

You probably have heard or read the counterargument that minimum wage laws do not really create unemployment because, after all, business owners would still employ someone rather than doing the work themselves. What is being ignored in that case is that employers make decisions at the margin, meaning that they will consider the marginal value of someone's labor compared to the cost of adding one more employee, and if the marginal cost exceeds the employer's expected utility for adding that one more worker, the employer will then abstain from hiring that one additional worker. There's also the fact that employers will consider the Opportunity Cost of doing the job themselves compared to having someone else doing it, and if the cost of employing an additional employee is higher than keeping the current number of workers or doing the work himself, then the employee will not hire any more workers and simply demand more productivity from his current workers. Worse, if the marginal utility of the least trained of his current workers cannot meet the cost of an increase in the minimum wage, then that employer could decide to fire that worker which automatically raises the unemployment level.

Let me give you an easy analogy to help you understand the role that Opportunity Cost and Marginal Utility play in making economic decisions related to the cost of labor:

There's little question that vacuum cleaners made by the Dyson company are possibly the best home vacuum cleaners ever designed and made. There's also little question they're possibly the most expensive vacuum cleaners in the market today, some going for as much as $500.00 USD. There are plenty of competing vacuum cleaners in the market that have not only a much lower price, they can arguably perform a decent job of cleaning carpets even if not at the same level of efficiency as a Dyson.

One can also say that the Dyson is a more productive machine than many other vacuum cleaners of similar capacity, even if being of an older design or of less quality, yet of a lower cost. However, for most homes, a lesser vacuum cleaner will do the job just as well. This is what in economics is called the law of Comparative Advantage: There are things one person of lesser-productivity can still do better for the cost than a person of higher-productivity. A young and inexperienced high school drop-out can probably wash a few less dishes per hour than a highly-educated efficiency expert, but the lower wage the inexperienced and young worker will obtain makes him more cost-effective for the required productive output than the highly-paid efficiency expert. The same can be said about the different vacuum cleaners compared to the Dyson. At the margin, a vacuum cleaner that does a decent job of sucking dust out of carpets but at a lower cost than a Dyson will have the economic advantage, and more people will likely choose the lesser vacuum cleaners for the (mostly) light-cleaning jobs. People that need a vacuum cleaner that packs a greater punch for a bigger job will most likely choose the Dyson.

Now, imagine that the Government decides to impose a Minimum Vacuum Cleaner Price that is only $10.00 dollars less than the price of a Dyson. Now there's no real advantage in price between the vacuum cleaners and the Dyson.

Do you think people would still choose the less productive vacuum cleaners over the Dyson? The problem is that the Government now made the Opportunity Cost of not choosing the Dyson much higher than it would have been if the prices of all the other vacuum cleaners be allowed to move up or down freely. People would thus, most of the time, choose the Dyson over the other vacuum cleaners even when the Dyson may really be too good for the job, only because it would now offer more value for the money compared to the other (suddenly) equally-priced vacuum cleaners. This would make the price of the Dyson go up because of increased demand, whereas the price of the other vacuum cleaners would not be allowed to go down despite the sudden lower demand, thus placing them at an immediate disadvantage in the market. People that cannot afford a Dyson before will not afford to buy ANY vacuum cleaner now, which means they will have to do without.

A similar phenomenon occurs because of minimum-wage laws: As the price of labor is not allowed to move freely, employers will end up choosing more qualified employees as their opportunity cost increases. Employers would end up bidding the price of more qualified employees above normal market price, leaving those less qualified with either a wage that does not increase with improving productivity or, worse, unemployed. If a person cannot afford an artificially expesive vacuum cleaner, he or she will certainly not afford an artificially expensive worker. Hence the unemployment rate among youths and the inexperienced, especially among minorities.

Some economists, especially those that subscribe to socialist ideas, will argue that the price for labor is different than the price for many other things. In fact, these economists are simply engaging in moralizing as there is no reason why labor - a commodity subject to the Law of Scarcity - would be suddenly immune to the Law of Supply and Demand. But the simply fact is that a wage is a PRICE, set by the two people making the deal of exchanging one commodity for another, in this case: labor for money.

An often-mentioned argument is that minimum wage increases have a positive effect on overall productivity. Economists on the left will even show the studies to prove it. But if you consider again the analogy of the vacuum cleaners, you will spot the basic fallacy in their conclusion, which is that if you stop buying the less expensive vacuum cleaners and buy the more expensive vacuum cleaners, the overall productivity of the sucking of dirt will improve considerably more. However, that does not mean all vacuum-cleaners suddenly became more productive, only that the only vacuum-cleaners being used now are of better quality than what you would see without the price floor. That certainly does not translate to more overall cleanliness since there will be considerably less vacuum-cleaners doing the job. Thus the improvement in productivity is only illusory, not unlike stating that you can improve the height of people by killing all the short people.

It is NOT easy to make a case against the minimum wage when people are so quick to give a moral spin to labor itself, so much in fact that some will even find the commoditization of labor abhorrent. But one important argument against minimum wage laws is that they will hinder and destroy the opportunity of many young and inexperienced men and women to find a job which not only allow them to earn a wage, but also give them the necessary skills required for future and more fruitful endeavors. Besides, it is immoral to hinder a person's freedom to SELL his labor at whatever price he or she deems acceptable, just like it would be immoral to force vacuum cleaner manufacturers to price their vacuum cleaners the same as a Dyson, for the labor is owned by that person and not someone else.

Saturday, March 1, 2014

Edgar The Exploiter

This video demonstrates how the imposition of a universal minimum wage, while only helping just a tiny minority of workers that obtain wages close to the minimum wage, hurts many other marginal workers whose wages are well below the new proposed wage.

The Conversation

Brilliant Libertarian video.

Wednesday, December 18, 2013

Would Walmart Shoppers Support Higher Prices for Workers' Higher Wages?

I particularly love the guy at the end that tells Peter that he should not say "Higher prices" because that scares people off (!!)

Monday, October 21, 2013

The French Are Finally Finding Out That Socialism Is An Expensive Luxury That They Cannot Now Afford

The failing economy and harsh taxes of François Hollande's beleaguered nation are sending thousands packing - to Britain's friendlier shores

"A poll on the front page of last Tuesday’s Le Monde, that bible of the French Left-leaning Establishment (think a simultaneously boring and hectoring Guardian), translated into stark figures the winter of François Hollande’s discontent.

More than 70 per cent of the French feel taxes are “excessive”, and 80 per cent believe the president’s economic policy is “misguided” and “inefficient”. This goes far beyond the tax exiles such as Gérard Depardieu, members of the Peugeot family or Chanel’s owners. Worse, after decades of living in one of the most redistributive systems in western Europe, 54 per cent of the French believe that taxes – of which there have been 84 new ones in the past two years, rising from 42 per cent of GDP in 2009 to 46.3 per cent this year – now widen social inequalities instead of reducing them."

Saturday, August 24, 2013

Why Do We Trade?

Why do we trade? This video by LearnLiberty with Michael C. Munger explains.

Monday, May 6, 2013

Education =/= Schooling

The prevailing notion among most people is that education can only be provided in a rigid and highly structured environment called "School", with a set of subjects that must be learned within a certain time in order to proceed to the next structured setting, like in an assembly line. The above short video quickly explain the many rigid aspects of modern schooling plus how, where and why it originated.

Tuesday, April 9, 2013

We Need Teeth Control In This Country!

In the "What will come next?" department,

We should have a conversation about teeth control in this country!

So many tragedies could be averted if we, as a community, and the government, get involved to reduce all this biting violence that brings so much sorrow to so many families! I mean, who needs more than 10 teeth? We should have more laws and enforce them to make people undergo a background check if they want to get themselves dentures! Our schools can be made safer if we enforce zero-tolerance rules against grinning!

Monday, April 1, 2013

Will Doctors Be Accepting Only Cash In The Future?

According to an article in Forbes magazine, many doctors are considering or have decided to provide medical care on a cash-only basis in order to reduce their costs substantially. What will this mean for the future of medical services in the United States?

Obviously, this is not the first time doctors accept cash for their services; but, for many years, the norm has been that people buy medical insurance as a way to pay for medical services. This 3rd party payment system is the main driver of medical care costs in the U.S., primarily because it shields the consumers from the true costs of medical care, and also because the practitioners have to keep and maintain a mountain of records to satisfy the red tape created when dealing with insurance companies (leaving aside Medicare/Medicaid).

From the Forbes article:
Even before Obamacare, direct-pay practices were growing in popularity. According to the Center for Studying Health System Change, direct-payment practices increased from 9.2 percent of the market in 2001 to 12.4 percent by 2008.

Nearly 7 percent of doctors say they are planning to change to some form of direct-pay care in the next three years, according to a survey of 13,000 doctors done for the Physicians Foundation.
7 per cent may not seem like many, but as word of mouth allows practitioners to know first-hand of the advantages of a cash-only business, the number is going to grow. The article also states that many doctors are planning on retiring early or know a colleague that is planning to do the same. This will surely mean a shortage of primary care doctors who would still be in business receiving insured or Medicare/Medicaid patients.

One worry that can stem from this trend is that there will not be enough doctors to see patients who are poor or have no insurance. Will a direct-pay system affect poor people more than rich people? A typical housecall may cost $100 USD, a huge amount considering the $30 USD co-pays that an insured patient pays; but factor in your monthly premium payments and you will see that it actually becomes much cheaper to see a cash-only (or direct-pay) doctor than keeping insurance. If a working-class family decides to risk it and stop buying insurance, it will probably be better for them in the end because they can use the money they save (from not paying insurance premiums) to set up a medical savings account for direct-pay visits and still purchase catastrophic medical emergency insurance at a lower cost.

How does all of this factor in with Obamacare? The new health insurance law makes it mandatory for people to purchase health insurance, under the threat of paying a penalty. This may in the end not amount to much because the Internal Revenue Service - the agency in charge, under the new law, of applying the penalty - doesn't have the manpower or wherewithal to impose a penalty on anyone, except maybe small and other businesses. This means people will not buy insurance unless they really need to. This is surely going to impose a huge burden on the health insurance industry as they are not allowed to deny coverage to people with "pre-existing conditions."

What will this mean for the cash-only medical service, especially as it becomes more popular for those that decide not to buy insurance? My take is that the government will not sit idle by and will come up with some sort of imposition that will turn all practitioners into employers for the state, just like it happened in countries like Canada or the U.K., where doctors are not allowed to freely practice their industry, as they are burdened by restrictions on billing or against private practice completely; for instance, several provinces in Canada forbid doctors from billing clients directly. It is possible that the U.S. government may thus decide to impose similar restrictions to private practice in order to keep doctors from engaging in direct-pay systems, and thus retaining control of the industry in their own way. The government may face a huge legal battle if it decides to go this route, especially coming from the doctors themselves or even from the several states. All of this promises to be an interesting spectacle as the U.S. government tries to impose its will over the medical service industry.

Monday, February 11, 2013

The Philosophy Of Liberty

Here are in a nutshell the fundamental principles that define libertarianism: a) The self-ownership principle, from where the right to liberty, life and property are derived. b) The Non-aggression principle, or the non-initiation of force against other people. The video explains these principles in a very concise yet entertaining way. It is a good primer on libertarianism and Voluntaryst ethics.