Wednesday, December 17, 2008

A little bit better, every day...

I noticed this article in the Wash. Post last week about how the killers employed by Mexican drug cartels have been getting much more sophisticated and thought it was interesting. Not only because hired assassins are always going to be kind of inherently interesting, but also for the way it illustrates a universal economic point: people get better through experience.

Even with all kinds of book learnin', the best way to make yourself a more valuable employee is to hold down a job for a while. You'll learn the ins-and-outs of the job and get better at it. And, of course, as you get better at it, you are more valuable and thus, barring some unfortunate problem, better able to command a higher wage.

The fact that this is just as true -- if not more so -- at the bottom end of human capital as at the top end is why minimum wage laws are another one of those classic governmental programs that seem to straightforwardly advance one interest, raising the wages of poor folk, but actually work exactly to the opposite effect.

The goal seems to be unambiguously good: help poor people make more money. And the means couldn't be any more straightforward: force employers to pay them more.

But here's the problem: if you are not capable of producing value to employers that's worth more to them than the minimum wage, you will not be hired. So, right off the bat you're taking the least able members of society and locking them out of the job market entirely. (fn1)

This is bad for the obvious reason of them not having a job but you might think that this is okay in our modern welfare world. After all, if these people are that low on human capital, perhaps it's best that society take care of them through social safety nets and the like.

Ah, but here's the rub. If you can't ever get that first job, get your foot in the door even for what some rich person might find an appalling wage, you never begin the process of bettering yourself through experience. You are thus permanently less well-off not only monetarily but in terms of personal development.

You see folk who get uber-low paying jobs (yes, the minimum wage ones now, but it would be true of sub-minimum wage employment too, were that allowed to function) by and large do not keep those jobs forever. As they learn their job and develop skills, they move up the income ladder. Perhaps not very far but they do move. If you lock them out of the bottom, you lock them out of the growth.

As an aside, this is also why the selling of minimum wage increases is always so economically illiterate. The number of people who have earned minimum wage over some lengthy period is trotted out and talk about how awful it is that these folk have gone so long (since the last minimum wage hike) without a raise is tossed around. But this is wrong. They are not the same people, most people move on from minimum wage quite quickly and v. few stay at it forever.(fn2)

And that's before considering any shrinkage in the minimum wage workforce that happens as employers trim their employees to avoid paying folk who are not worth the new wage.

Coincidentally, as I was noodling this post I happened across this recent economics paper showing that minimum wage laws do, in fact, have all of these bad effects:
Based on their comprehensive reading of the evidence, Neumark and Wascher argue that minimum wages do not achieve the main goals set forth by their supporters. They reduce employment opportunities for less-skilled workers and tend to reduce their earnings; they are not an effective means of reducing poverty; and they appear to have adverse longer-term effects on wages and earnings, in part by reducing the acquisition of human capital. The authors argue that policymakers should instead look for other tools to raise the wages of low-skill workers and to provide poor families with an acceptable standard of living.
fn1: Interestingly, this lock-out was considered a feature not a bug of minimum wage laws when they were first suggested in the U.S. The people doing the suggesting back then were concerned about the huge migration of unskilled black labor from the South to the North. So they conceived of minimum wage laws as a way of locking those black folks out of the labor market. Ah progressivism. One wonders if the folk who like to use it as a label now-a-days would be as comfortable with it if they actually took the time to learn its history. But that's just crazy-talk, progressives are all about the future and the benighted past has nothing to teach us, right?

fn2: Note that this is a problem with reporting on "quintile" or other strata of earnings more generally. They tend to look at the distribution of income among quintiles in one year and compare it to another year without acknowledging that you are not talking about the same people in both years. For example, young people make less money, on average, than old people. Thus, over a lifetime, people tend to move from lower quintiles into higher quintiles. Obv. there is movement the other way as well, as people retire or scale back their workload or what-not. And, of course, there are lots of other things going on. But when you read a news story about how the income of the lowest quintile hasn't increased in 30 years or whatever, do take a moment to realize that the seemingly obvious conclusion: "OMG! 20% of people have been living on the same income for 30 years!" is flat wrong.

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