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Tuesday, September 08, 2015

laboring under a misconception

There are lots of fun little stories that people tell that don't quite check out upon further examination.  A realistic grasp of history is well served by additional exploration.  One good example are the stories about Henry Ford and the payment of higher wages.  Another is the role played by labor unions.  In an article by Kevin Williamson he touches on both:

The unions are not, contrary to the popular bumper sticker, the “people who brought you the weekend” or the 40-hour work week. In reality, Ford decided to institute the five-day week in 1922, though it was not done until 1926 — a decade before the United Autoworkers union was even formed, and 15 years before Ford would sign its first union contract. The Ford example is illustrative in that the company’s work-force innovations — effectively doubling its entry-level wage at one point, five-day weeks, etc. — were driven neither by political pressure nor union extortion nor philanthropic impulse but by the fact that good workers were and are extraordinarily valuable, and every time Ford lost an assembly-line veteran and had to recruit and train a replacement was money out of Henry Ford’s pocket. Ford’s management knew what today’s executives in Silicon Valley and on Wall Street and in Montana sawmills know: People are assets, not liabilities.

The same principle holds true now: A world without union bosses is not a world of wicked coal-mine operators exploiting helpless serfs with nobody standing in the way but the Molly Maguires. It isn’t a union that inspires Google to offer such high wages and rich (indeed, sometimes silly) amenities to its employees — it’s Apple, Facebook, Microsoft, etc., each of which would love to drive a fleet of buses over to Mountain View and bring back everybody it could.  “Well, that’s Google,” you might say, “and not everybody has the skills or the talent to work in High Nerdery in San Jose or Austin or to tote a pitch book around lower Manhattan.” True enough, but the same principle applies to pipefitters and machinists and the 244 other labor categories Evan Soltas takes a look at here. His finding? That changes in productivity account for about 74 percent of changes in wages within any given industry. Workers get paid more because they produce more, not because there’s some coddled predatory halfwit threatening to pass out picket signs.

Henry Ford had good reasons for decisions  he made and unions had contributions to make of both the positive and rent seeking kind,  but I have a preference for a non-fiction version of the story.  I've voiced that preference before.

87 comments:

Clovis e Adri said...

I am curious, Howard, what are the positive contributions of Unions in your opinion?

Howard said...

Clovis,

Two cases come to mind. Both are most applicable in the case of large scale organizations. The negotiation of wage scales for a large number of people based upon some mutually agreed upon criteria would be greatly aided by having representatives available to sit down with management/human resources. Also, those representatives could make known concerns held by many employees about working condition and negotiate some resolution on said matters.

In contrast, an example of abusive actions would be demands for unreasonable inflexible work rules that make an employer uncompetitive.

Hey Skipper said...

Hi, I'm Hey Skipper, and I'm a union member. (Riffing off of Alcoholics Anonymous, in case that isn't clear enough, and the explanation doesn't spoil the joke, which it always does.)

[Clovis:] what are the positive contributions of Unions in your opinion?

I can think of one: acting as a countervailing power to management.

In most occupations, this isn't necessary. Working conditions and salary are costs that are amenable to market forces. Ford might want to pay its driveline engineers $2 an hour, and could, with the minor consequence of ending up with no driveline engineers. Where working conditions are relatively simple, and it is relatively easy to switch employers, and where there are a sufficient number of employers competing for workers, unions are completely redundant.

And, Harry, before you start bloviating and issuing pronunciamentos, that is aside from their thuggery and stupidity. (It is well worth the hour to listen to it all.)

My occupation is different. The working conditions are fiendishly complex, and there is a relatively small number of employers competing for employees. So, in my particular case, the union is a necessary counterparty with the necessary negotiating and legal expertise to match the company. And it is also necessary to ensure the company follows the contract (Full disclosure: the union is pursuing a grievance on my behalf regarding moving expenses.)

That said, there is nothing like a union for bringing out the entitlement mentality in people. The union has been repeatedly guilty of extraordinarily unprofessional conduct with respect to communications with the union members. And it demands complete loyalty to its contract demands, about which the membership is in almost complete ignorance. Part of what makes my union less toxic than most is that virtually all the members are college graduates, most with technical degress of one sort or another, so they are commensurately less prone to the marxist bollocks that infects the less analytically endowed.

But less toxic doesn't mean benign. The union has reached a tentative agreement with management, on which the membership will vote over the next couple months. It is amazing how that entitlement mentality, along with being a monopoly provider of pilot labor to the company, can turn many otherwise sensible guys into economic illiterates.

On balance, my union is only sllghtly more necessary than evil.

Peter said...

For large private enterprises, a union can counterbalance the whims and bureaucratic careerism of middle management. Williams is being highly selective in focusing on Ford, who had an unusual (and autocratic) hands-on interest in the welfare of his workers. There were other examples, such as 19th century Methodist capitalists like Cadbury. They're a far cry from the ambitious young modern MBA graduate trying to get an edge with the boss with his fancy new "rationalization" proposal full of "downsizing" and "heightened efficiency" gobbledegook.

Harry Eagar said...

Oh, for Pete's sake. Raising the wage to $5 at Ford had nothing to do with keeping good workers. After the wage was raised, Ford's turnover was 13000%.

That's right. Conditions were so bad that the typical worker lasted less than a month.

Clovis e Adri said...

Skipper,

I find it interesting you need the Union to make your Employer to follow a signed contract. Not my (far-away) picture of America.


Howard,

----
In contrast, an example of abusive actions would be demands for unreasonable inflexible work rules that make an employer uncompetitive.
----
Do you include wages here?

I've seen a lot of right-wing fire directed to unions trying to get a better pay for fast-food workers, for example.

I get they are not as special as Skipper - who deservers Union protection because his job is so fascinatingly complex (no irony here, I believe it is indeed) - but who decides they are being inflexible in their request, or just airing "known concerns held by many employees about working condition"?

erp said...

Harry, it's pretty amazing Ford produced a single car with a monthly turnover of workers. How do you explain that remarkable accomplishment?

Clovis, a contract is a legal document and as such subject to legal action. No intervention by union thugs is necessary.

Skipper, there have always been guilds and the like for artisans and professionals. The unions thugs who moved in on those are usually not members of the "trade." Pilot unions may be atypical.

Unions accomplish only one thing -- extorting money from employers by convincing the simple minded that they are more interested in workers' welfare than those who are paying them out of their own pockets.

Unions are the reason all those manufacturing jobs have moved off shore, the steel, auto ... industries likewise and yes, of course, management who placated them are also to blame.

They have destroyed the public schools, hospitals and other public institutions.

erp said...

How it's done.

Bret said...

erp wrote: "...a contract is a legal document and as such subject to legal action. No intervention by union..."

Well, legal action does cost a lot of money or otherwise require substantial resources. And one of the things a union does is allow employees to band together in order to have access to adequate resources to have legal protection against large entities.

erp said...

Bret, unions cost employees a lot more money than even lawyers would and those costs are ongoing, oppressive and escalating.

Clovis e Adri said...

Erp,

Are you talking about the direct costs of Union membership (like the fee paid per month) or the indirect ones (like possible difficulties for the Company in the long run due to Union impositions)?

If you are talking only about the first one, I bet the most simple legal actions would easily surpass years of Union membership.


Actually, our Libertarian friends here own an explanation for their non-Libertarian fellows on how they suppose that Libertarian order can work out if, in practice, justice is only served for those who can afford it.

erp said...

Clovis, you are wrong. In the U.S., justice is NOT only served by those who can afford it. There is such a thing as Legal Aid and the ACLU would be happy to intervene and most lawyers work for a percentage of the take. This is a non-problem distraction.

I'm talking about unions destroying jobs, towns and cities, whole industries and whole sections of the country ala our manufacturing, steel industry, coal ...

Unions are not invested in workers or the economy. Like all lefty institutions they are invested in milking the status quo for every drop of honey.

Krugman is a snake oil salesman.

Bret said...

Clovis,

This (more or less) libertarian has no problem with private unions, associations, and the like, especially in principle, for exactly that reason. A union, where membership is voluntary, is just a group of people who join together in order to safely and effectively sell labor. Nothing wrong with that and I don't think libertarians generally have a problem with the general principle of private, voluntary unions.

Unfortunately, the devil's in the details, and in practice, like many or most real world things, unions have some flaws. They have been associated with crime, corruption, violence, thuggery, fleecing their members, and a myriad of other unsavory practices. Nonetheless, to the extent that the laws enable their existence but demand membership be voluntary and the members' actions civil, I think that private unions probably have been important, overall.

Again, there's no libertarian reason to prohibit or even strongly dislike (except, of course, for the unsavory aspects) private, voluntary unions, in my opinion.

Clovis e Adri said...

Erp,

Are you telling me that, in the USA, it *does not happen* that people can be out-lawyered by bigger and richer opponents in courts?

People using Legal Aid usually will have access to a very busy and not necessarily good lawyer, employed by the State, right?

And I suppose even an upper middle class person, probably not entitled to Legal Aid, can easily be in serious trouble by tackling a big corportation in courts all by himself, draining easily all his resources and savings.

Most of our present order (and even more so in a Libertarian one) is built on the idea that everyone is equal under the law. To various degrees, in real life this is largely a farce.

One big difference, I guess, between the US and Brazil is that our Justice system is so much more farcical than yours.

If you think this is a non-problem, come down here and let me give you a walk on all the dysfunctionality it entails at so many aspects of daily life...

erp said...

Clovis, I have no idea how the legal system works in Brazil, but I do know how it works here and it's how I presented it above.

Hey Skipper said...

[Harry:] Oh, for Pete's sake. Raising the wage to $5 at Ford had nothing to do with keeping good workers. After the wage was raised, Ford's turnover was 13000%.

Hmmm. Let's ignore for the moment the absence of any sort of citation.

Instead, let's look at the glaring absence of something else: time.

13000% per, well, what?

IMHO, to be a progressive requires thoroughgoing innumeracy, covered with a heaping dollop of sloppy thinking.

Just so here. Turnover is meaningless without time. Most people, especially if they aren't progressive, would recognize that long before hitting Publish Your Comment.

Yet you didn't, Harry. Why's that?

Clovis e Adri said...

Erp,

I wonder, have you ever used your country's Justice system? If yes, when was that?

erp said...

Probably half dozen times. None for felonies. We lost a case against a local contractor who worked on our house in Florida because his employees lied. The lying was so obvious, the judge didn't force us to pay costs.

In a man-bites-dog coda to that suit, the contractor went to jail for five years as the outcome of a criminal suit against him for a similar kind of act some months later. I often wondered if the same judge sat in on that trial. He was clearly very annoyed at the lying when we were before him.

We won the other cases which were all of a similar nature. We also successfully convinced the probate court, without legal counsel this time, to allow our then 15 year old granddaughter to be placed in the care of the family instead of being made a ward of the state while her parents spent the better part of a year in various Boston hospitals.

Clovis e Adri said...

Thanks for the answer, Erp.

But I see no David versus Goliath cases in your CV then, right?

erp said...

The situation with probate court could have been huge, but both sets of grandparents, aunts, uncles, etc were all united in our request and we were spared the further horror of our granddaughter being taken away from us by a pretty good-sized Goliath in the form of the state of Connecticut --well that and the judge was a Yalie and a former patient at Mass General.

It doesn't hurt to have Right and Yale on your side.

:-)

Clovis e Adri said...

Erp,

Well, thanks very much for making my case for me. :-)

erp said...

Clovis,

There's one born every minute. :-)

I purposely threw that in without giving you the rest of the story. We only learned about the judge's history after the case was decided and he knew nothing about our backgrounds.

He came out to tell us personally that he arranged for a social worker in Massachusetts to visit our granddaughter so we wouldn't have to take her out of school to come to his court and when we commented to his clerks about the personal attention, they told us about his history and how he follows up on all the kids who come before him.

Conservative clean living, not connections, pays off.

Harry Eagar said...

Annual. My source is 'From the American System to Mass Production, 1800-1932: The Development of Manufacturing Technology in the United States,' by David Hounshell, although the same background is available all over. Ford is one of the most studied industrial organizations.



Clovis e Adri said...

Erp,

You still miss the irony here.

There you are thanking God and America for a judge to be sensible enough to do what looks like so plainly obvious and right.

The whole case shouldn't even be his damn business to begin with, unless there was family infight over who would take care of the girl.

erp said...

Now you're making our case for us.

Of course, it's none of the government's damned business as are all the other areas they've stuck their noses in.

Clovis e Adri said...

Erp,

Yep, I am partially making your case for Libertarianism up to a point, with a question you still did not answer. Let me rephrase it.

Libertarians defend Miniarchist states, where government size is minimal and its main role, other than defense, is to ensure contracts and the Law in general terms through a Judiciary system.

Libertarians also usually believe the State is the worst businessman ever, with its public employees being bunch of lazy bastards in the best case scenario, or more often a bunch of corrupt power and freedom grabbing suckers.

Well, here now comes the magic handwaving: they expect their Miniarchist system where the ultimate and only arbiter of good and bad - the Judiciary, which is entirely made of powerful and possibly corrupt lazy bastards - will work just fine to deliver all that freedom they wish for.

Somehow, knowing the Judiciary we have down here, that picture looks absolutely uninspiring to me.

But I am happy your Judiciary inspires so much more confidence for you, I really am.

But for the not so inspired Libertarians as Erp, I still ask how that is not a design flaw in your view.

[Before anyone answers this is just as flawed as the present system, which would be AOG's answer were him here, I disagree - the broader Executive powers of non-Libertarian systems at least give voters some way out of it.]

erp said...

Clovis, believe it or not, we had that system. There was some corruption, of course, but we were in the main law abiding citizens. You know, the kind who stop at red lights in the middle of night when not even a mouse is stirring.

We were in fact all equal under the law, rich and poor, etc. That's how it was. You can sneer and say it wasn't so, but in fact, it was very much so with the exceptions, proving the rule.

Now we've reverted to the wild west, but this time there is no difference between the good guys and the bad guys. They all threw their lot in with the indians for a handful of beads and fire water and the cavalry all identify as dance hall girls.

Hey Skipper said...

[Harry:] Annual. My source is ...

Do you happen to have a page number? And could you quote the relevant text? I couldn't find any reference to turnover, although I may have missed it because I don't have time to read the whole damn book.

And by damn, I mean do us all a favor and provide the source, because it is epically annoying to have to chase it down.

But let's not let your poor manners distract from a math lesson. Consider 13,000% per year turnover. Let's say that 100% turnover over a given period -- a year in this case -- for any random sample of 100 employees, means there would be 100 departures and replacements. Since 13,000% is 13 * 100%, that means there would be 1300 departures and replacements over the space of a year.

Now, further let's assume 300 work days per year, both for ease of computation, and to make that computation as favorable as possible for you

In order for 13,000% to hold water, that means each employee in any sample would have replaced 4.3 times per day.

Really? Does that sound plausible to you?

Hence my hope that you can provide some substantiation.

... although the same background is available all over.

Actually, no, it isn't.

Here is the sort of thing that is typicaly of what is widely available:

More Monotony, But More Money

To a large degree, Ford’s implementation of the Five-Dollar Day cannot be appreciated without first understanding his advances with the moving assembly line. Experiments through 1913 and into 1914 reduced the time required to build a Model T automobile from 12½ hours to a mere 93 minutes. Increased efficiencies lowered production costs, which lowered customer prices, which increased demand. The public was eager to buy all of the cars Ford could build.

Explosive production gains came at the cost of worker satisfaction. The very goal of the moving assembly line was to take what had been relatively skilled craftwork and reduce it to simple, rote tasks. Workers who had taken pride in their labor were quickly bored by the more mundane assembly process. Some took to lateness and absenteeism. Many simply quit, and Ford found itself with a crippling labor turnover rate of 370 percent. The assembly line depended on a steady crew of employees to staff it, and training replacements was expensive. Ford reasoned that a bigger paycheck might make the factory’s tedium more tolerable.


Hey Skipper said...

[Peter:] For large private enterprises, a union can counterbalance the whims and bureaucratic careerism of middle management.

Exactly. Middle management is under a great deal of pressure to meet targets, even if reaching those targets doesn't make sense in the bigger picture. That just comes with the territory of large organizations.

And that also, I'm reasonably certain, explains why the company, IMHO (and that of union lawyers who decided to file a grievance before I had a chance to ask), and I disagree on this particular part of the contract.

[Clovis:] I find it interesting you need the Union to make your Employer to follow a signed contract. Not my (far-away) picture of America.

Would that contracts be precisely built machines that crank out exactly the right answer no matter the problem.

In general, the company has more incentives to shade the meaning of the contract in its favor. It, therefore, will do so. Just as union members will exploit to the max anything they can.

That's reality.

I've seen a lot of right-wing fire directed to unions trying to get a better pay for fast-food workers, for example.

That's a very simplistic notion of "Right-wing" fire.

Let's assume that $15/hour becomes the US minimum wage. When that happens, what will be the US minimum wage?

I get they are not as special as Skipper - who deservers Union protection because his job is so fascinatingly complex.

To be clear, the complexity, or lack thereof, of my job isn't the issue; rather, it is the complexity of my working conditions that is. Deadheading (flying as an airline passenger to get to where the airplane is) alone is 13 single spaced pages of the 360 page contract — none of which has anything to do with the job itself.

… but who decides they are being inflexible in their request, or just airing "known concerns held by many employees about working condition"?

Good question. The simplistic, and frequently correct, answer is this: Where you stand on something depends on where you sit.

IMHO, most of that 360 pages isn't inflexible and expensive work rules, but rather spelling out expectations and obligations over a wide array of considerations, each of which impacts most, if not all, the others.

However, there are some elements of the contract that do, indeed, significantly reduce pilot productivity. Given rational scheduling around recurrent training and vacation, the company could fly the same schedule with 10% (roughly 400) fewer pilots. That's not chump change.

What's important to take on board here is that while my union is the monopoly provider of pilot labor to the company, the company is not a monopoly provider of package delivery services to the world.

Compare and contrast with public service employee unions, and that is before considering collusion that would land anyone in the private sector doing the same thing in jail.

Hey Skipper said...

[Clovis:]

Erp,

Are you talking about the direct costs of Union membership (like the fee paid per month) or the indirect ones (like possible difficulties for the Company in the long run due to Union impositions)?


Above I noted that the difference between a union that acts as a counterparty in a competitive market, and a union that is a true monopoly.

The United Auto Workers and Longshoreman unions are perfect examples of unions that were, in actuality or effect, monopoly providers of labor to an entire industry.

Which is to say, perfect examples of thuggery, corruption, and unbridled greed that led to crippling their respective industries.

That is what erp means when she says I'm talking about unions destroying jobs, towns and cities, whole industries and whole sections of the country ala our manufacturing, steel industry, coal …

[Bret:] A union, where membership is voluntary, is just a group of people who join together in order to safely and effectively sell labor.

Exactly. A corporation is a group of people joined together to joined together in order to pursue the goals of the corporation. Where it is beneficial for a group of people to join together in order to provide countervailing power to a corporation, then unions make sense.

Right to Work laws, and secret ballots are vitally important.

[Clovis:] And I suppose even an upper middle class person, probably not entitled to Legal Aid, can easily be in serious trouble by tackling a big corportation in courts all by himself, draining easily all his resources and savings.

True, which is why class action lawsuits are important.

Clovis e Adri said...

Skipper,

---
Let's assume that $15/hour becomes the US minimum wage. When that happens, what will be the US minimum wage?
---
To the illegals who, I guess, make up most of the population earning the lowest salaries, it will keep being whatever they accept to work for, since the law won't be valid for them anyway.



Howard said...

The minimum wage is always $0, no job no wage.

Clovis e Adri said...

Yes, Howard, and the rain is wet and the Sun is yellow. Any other great insight?

Howard said...

Clovis,

Just because something is obvious doesn't make it insignificant or irrelevant.

Clovis e Adri said...

Howard,

Yes, and I believe I am acquainted with the argument on how minimum wages may hinder employment, which is the message behind your point.

Yet you did not address mine. Perhaps you are unaware of the fact that a few defenders of higher minimum wages see the loss of jobs as a feature, not a bug (for it means less illegal immigrants).


erp said...

Clovis, if it's so obvious, how come your boy Krugman hasn't noticed it.

Bret said...

Krugman's well aware of it. He just believes that unemployment rates are not affected by small increases in the minimum wage (for example, as claimed by the famous Card and Krueger paper) and therefore it's not a relevant part of the minimum wage discussion.

Harry Eagar said...

If a business cannot afford to pay its workers sufficient to eat, clothe themselves and live under a roof, then it's a failed business and should be closed and its assets distributed.

If it can but chooses not to, and can use economic muscle to make it stick, then it should be closed and shut down.

erp said...

Really Harry? Whose business is it?

Nobody is forced to work for less than they think they're worth.

So in your world a business should be closed and their assets distributed?

Now we're getting somewhere. Back to the future where there is no private property.

Just who makes these decisions?

Living wage, but who decides what kind of life style businesses must pay for.

Do you know how ridiculous your comment is? Even more ridiculous than the famous From each according .... To each according ...

Like most lefties, I'd be willing to bet you have given little of your time or weal to others and are very protective of your own possessions.

Hey Skipper said...

[Harry:] If a business cannot afford to pay its workers sufficient to eat, clothe themselves and live under a roof, then it's a failed business and should be closed and its assets distributed.

You blow a great many things out your hat; indeed, it comes as something of a surprise when your pixels don't violate yet another chapeau.

But this really takes the cake. You display your marxism by denying workers the opportunity to make their own choices, assert a non-sequitor, revel in passive voice, and have re-proven that marxists prefer coercion and dependency on the state over any independence whatsoever.

There are other solutions to low wages, some far smarter than raising the minimum wage, which is an act of genious compared to what you spewed here.

Bret said...

Harry wrote: "If a business cannot afford to pay its workers sufficient to eat, clothe themselves and live under a roof, then it's a failed business and should be closed and its assets distributed."

So clearly no volunteer organization should be allowed to exist since they pay their employees $0?

How about a guy who runs a shoe-shine business as a one-man business but doesn't make minimum wage from it? Should he be shut down?

Tens of thousands of entrepreneurial startups don't pay their initial employees for extended periods of time (for example, I wasn't paid for 2 years when I started the robotics company). Should we not be allowed to start such things?

No surprise that a leftist is aching to see the government close businesses and have their "assets distributed."

Howard said...

the famous Card and Krueger paper

More like the infamous Card and Krueger study which has been discredited as being rather flimsy.

There are other solutions to low wages, some far smarter than raising the minimum wage...

Yep, earned income tax credit or some form of wage subsidy are much better remedies.

Bret said...

Howard,

You say potato, I say pahtahtoe (actually I don't say pahtahtoe, but you know what I mean :-) .

Famous, infamous, close enough. I'm willing to give it the benefit of the doubt for the very limited study that it was.

Clovis e Adri said...

Well, if you guys want to see what Krugman thinks about it - and he disagrees with Howard's last comment, for example (he thinks earned income tax credit is complementar, not opposite to wage raises), you can take a look here.

More importantly, the John Schmidt review paper he refers to is named "Why Does the Minimum Wage Have No Discernible Effect on Employment?". How about a post refuting it, Howard?

Hey Skipper said...

Clovis:

I'm still looking at the links, but two things occur to me.

First, this from the review paper: The weight of that evidence points to little or no employment response to modest increases in the minimum wage.

I have seen this in various forms many times, and every time I do it seems like it is begging the question: all evidence, and data, comes with error. If the increase is "modest", then the effects could very well be there but swamped in the noise. That doesn't mean the effects don't exist, only that they can't be seen. After all, if the US was to increase the minimum wage by a penny, it shouldn't come as a surprise that the consequences would be very difficult to perceive. That is compounded by the proportion of employees whose pay would be affected by an increase in the minimum wage. If there aren't many within that "modest" increase, then that makes the consequences even harder to perceive.

The second issue is that the evidence is gathered within an economy, but never seems to look at correlations between minimum wage and youth unemployment between economies. I don't have a specific link, but look at these images, and the articles behind them.

Finally, extraordinary claims require extraordinary evidence: why should employment be uniquely immune to supply and demand? It can't be. Let's set the miniumum wage at $40/hour.

Then after the economy is completely destroyed, we would then have enough information to conclude that the minimum wage damages employment, that small changes have small consequences, and that the only benefit to be had is the feelz that progressives get when they are spending other people's money.

Peter said...

why should employment be uniquely immune to supply and demand?

Because other costs don't vote?

Clovis e Adri said...

Skipper,

----
why should employment be uniquely immune to supply and demand?
----
It isn't. The better question is why should it be *linearly* dependent on supply and demand?

I see it a bit like inertia and friction: you can't move that block over the table applying "modest" force, it only moves after a threshold.

Those studies show a behavior like that, and notice they were done under realistic "modest" increases, not pennies like in your example.

I don't think economics is such an exact science as Physics, where we know well what threshold you need to move the block. Or I should take it back, for there are many new things about friction forces we are finding only recently...

Howard said...

Clovis,

Aside from the material presented by Skipper, I have a few other things for you to consider. It has been a long time since I examined the Card and Krueger study in detail, but there are both econometric and design questions. Here is an example of a problem arising from a design flaw:

A rise in the minimum wage leads to a shift within the industry, from the labour intensive model to the capital intensive production methods. That means that the Card and Krueger paper is…..well, not quite wrong, because it does what it says on the tin, but not telling us quite what people assume it is telling us. We don’t have evidence that a rise in the minimum wage leads to increased employment in fast food. We have evidence that it leads to increased employment in the capital intensive part of the fast food industry. That’s a very different thing.

Do note the implication of the Sorkin paper. That move over from labour intensive to capital intensive production models as a result of the minimum wage rise means that jobs in the industry as a whole are definitely lost. Even if employment in that capital intensive sector actually increases. On the obvious grounds that the capital intensive sector uses less labour to produce the same value or volume of output.

Card and Krueger really isn’t telling us what the general conversation assumes it is telling us. It might well be a good time to rethink this insistence on raising the minimum wage therefore. For there really are going to be job losses even if they’re in those parts of the fast food industry that we don’t measure, or at least that C&K didn’t measure.


Woops! Seems like a good way to produce misleading results.

A few other items for your consideration:

Walter Williams interview

Coyote blog - bad anti-poverty program, labor demand elasticity


If you value your intellectual integrity, you will eventually learn that as a public intellectual Krugman is not trustworthy or you can retain your "bliss."

Bret said...

Clovis wrote: "The better question is why should it be *linearly* dependent on supply and demand?"

Exactly. I've written almost exactly that over at Cafe Hayek. It's pretty clear to me that the no "discernible" increase in unemployment for small increases in minimum wage is accurate. Again, that's not to say there's no increase, but whatever increase there is (or even an unlikely decrease) is hidden by other factors and noise.

My grounds for rejecting the minimum wage is different. It reduces the freedom of low wage laborers and that, to me, is not acceptable.

Card and Krueger was unusual in that it found a decrease in unemployment with an increase in minimum wage. I don't even find that impossible, just unlikely.

Howard said...

My grounds for rejecting the minimum wage is different. It reduces the freedom of low wage laborers and that, to me, is not acceptable.

That is where any harm is concentrated. Acknowledging that changes the discussion.

Card and Krueger was unusual in that it found a decrease in unemployment with an increase in minimum wage.

See the first article and you'll see how they got that result.

Clovis e Adri said...
This comment has been removed by the author.
Clovis e Adri said...

Howard,

Thank you for your links, I'll read them later on. But I want to reply to your last phrase separately:

---
If you value your intellectual integrity, you will eventually learn that as a public intellectual Krugman is not trustworthy or you can retain your "bliss."
---

There is, at any discussion table you sit at, a recurrent quarrel over who is fit enough to be cited, usually with intellectual integrity, if not intellectual capacity itself, being invoked to replace the slap in the face of honour duels of past.

My opinion on citing authors and thinkers is that - trustworthy or not - what matters is only the argument itself.

Chidren fear wolves and bears. Men face them head on.

Howard said...

My opinion on citing authors and thinkers is that - trustworthy or not - what matters is only the argument itself.

On that we are in total agreement. My comment was a friendly heads up. There are many Krugman fans who assume everything he presents is correct. Too often, the soundness of what he presents seems to depend upon how partisan a mood he is in at that time. Absent that problem there are still times he can deliver insightful analysis.

Hey Skipper said...

[Howard:] The minimum wage is always $0, no job no wage.

[Clovis:] Yes, Howard, and the rain is wet and the Sun is yellow. Any other great insight?


Clovis, you are selling Howard short.

Just like a great many people think there is such a thing as "free", a great many people also think that if a law is passed increasing the minimum wage, then nothing changes except that some people get paid more. (I'll bet there is a large overlap between the two groups.)

All the jobs that are worth between .01 cents per hour and whatever the minimum wage happens to be disappear. For those people who would have taken those jobs, there minimum wage is zero. By government fiat (which is really all these new minimum wages amount to: numbers pulled from the rectal data banks of people too stupid to be anything other than politicians) they become wards of the state.

That's bad enough. Worse, though, is the deprivation of personal freedom. What business is it of the government if I should choose to take a job paying less than some arbitrary amount?

When I was 13 (way back in 1966), I walked into a bike shop and asked for a part, using the correct term for it. For some reason, that sufficiently impressed the owner of the shop. On the spot, he offered me a job working Saturdays for $1/hr. At the time, that was barely half the minimum wage. On top of that, it was illegal for a kid my age to be working in the first place.

That job was one of the best things that has ever happened to me.

[Clovis:] Yet you did not address mine. Perhaps you are unaware of the fact that a few defenders of higher minimum wages see the loss of jobs as a feature, not a bug (for it means less illegal immigrants).

Wow, you have a heck of a memory.

I think Ron Unz might well be right, but in the wrong direction. (A subject for a separate post, which I might get around with not quite so much eventually as I usually consume.)

[Hey Skipper:] why should employment be uniquely immune to supply and demand?

[Peter:] Because other costs don't vote?


Peter, if I had said "why should the minimum wage be uniquely immune" then your response would have made perfect sense.

But I didn't.

The minimum wage in Germany is 1473€ per month; roughly $10.30/hr, about 50% more than the current US Federal minimum wage.

There is a McDonalds at the Düsseldorf airport. Lots of business, but only 3 registers where you would expect 8 or 9. Yet the lines are short.

Cursory inspection shows why. Ten feet away from the counter are a half dozen iPads where you submit and pay for your order, then get a receipt with the order number.

So, as a rough guess, that McDonalds has reduced its employee count by 20% (at least during peak periods). And the only reason that those 3 registers still exist is because some people are reluctant to try something new.

Krugman. Card & Kreuger. You guys paying any attention?

[Clovis:] Those studies show a behavior like that, and notice they were done under realistic "modest" increases, not pennies like in your example.

I disagree. IMHO, the cause — change in the price of labor — was too small to for its effect to be discernible from all the other causes lurking about at the time, some of which the authors were bound not to even know about. (Indeed, it appears that C&K have "walked back" their findings.)

If C&K's study holds any water, then the elimination of the youth minimum wage in New Zealand shouldn't have any employment effect. Or countries with higher minimum wages (PPP) shouldn't have higher youth unemployment. Or companies in countries with higher minimum wages shouldn't be looking harder to automate jobs.

Wrong. Wrong. Wrong.

Hey Skipper said...

BTW, Clovis, I pretty much finished looking at your link. It was interesting, but ultimately unpersuasive. There was no good explanation for the extremely counterintuitive conclusion that making something more expensive does not reduce the demand for it.

Besides, I found contrary conclusions:

But six years later, the Card & Krueger study was debunked in the same economics journal that originally published it.

In correlating minimum wages and youth unemployment across the OECD, the IMF says:

The high levels of youth unemployment can be explained by both the output gap and labor market
factors. Of particular relevance are labor costs (measured by the tax wedge and minimum wages
relative to the median wage), especially for low-skilled labor; the opportunity cost of working
(measured by unemployment benefits); and spending on active labor market policies (ALMPs)
including programs that intervene in the market to address unemployment.


And the Federal Reserve says

We estimate the employment effects of changes in national minimum wages using a pooled cross section time-series data set comprising 17 OECD countries for the period 1975-2000, focusing on the impact of cross-country differences in minimum wage systems and in other labor market institutions and policies that may either offset or amplify the effects of minimum wages. The average minimum wage effects we estimate using this sample are consistent with the view that minimum wages cause employment losses among youths. However, the evidence also suggests that the employment effects of minimum wages vary considerably across countries. In particular, disemployment effects of minimum wages appear to be smaller in countries that have subminimum wage provisions for youths. Regarding other labor market policies and institutions, we find that more restrictive labor standards and higher union coverage strengthen the disemployment effects of minimum wages, while employment protection laws and active labor market policies designed to bring unemployed individuals into the work force help to offset these effects. Overall, the disemployment effects of minimum wages are strongest in the countries with the least regulated labor markets.

Howard said...

...
If C&K's study holds any water, then the elimination of the youth minimum wage in New Zealand shouldn't have any employment effect. Or countries with higher minimum wages (PPP) shouldn't have higher youth unemployment. Or companies in countries with higher minimum wages shouldn't be looking harder to automate jobs.

Wrong. Wrong. Wrong.


But they SO wanted it to be right!

erp said...

Skipper's experience at his first job and its effect on his life isn't unique. On the job training is discounted in today's world, but in the good old days, apprenticeships and the like were the rule. Not only did they learn "stuff," they learned how the world worked. Kids rarely get the sense of accomplishment that comes from a job well done now.

Clovis e Adri said...

Skipper,

----
The minimum wage in Germany is 1473€ per month; roughly $10.30/hr, about 50% more than the current US Federal minimum wage [...]

Ten feet away from the counter are a half dozen iPads where you submit and pay for your order, then get a receipt with the order number.
----

The short story as you sell it: German high minimum wage made McDonalds go for the iPad. Hence minimum wages are bad. QED.

Let's see how your narrative plays out in numbers.

Price of an iPad in Germany: $450. Mean life of such machine in a Mcdonalds: let's guess 2 years.

That's a dime/hour of salary for that iPad if it worked only 40 hours/week. As it actually works nonstop the whole week, it's 2.4 cents/hour a salary.

And if you are smarter than a McDonalds executive, you could equally employ a $50 tablet at a pay of 0.5 cents/hour.

What do you think are the odds those new Syrian employees could survive on that? It doesn't pay the calories they burn to be alive while they attend you.

So surely the far lower $7/hour US minium wage is fireproof enough against those iPads taking over, right?

Clovis e Adri said...

Skipper,

---
There was no good explanation for the extremely counterintuitive conclusion that making something more expensive does not reduce the demand for it.
---
There were many other studies exemplified there that do not share the weaknesses of Card & Krueger.

And I agree we do not find there a simple logic for employment being robust against modest wage increases. Yet, it doesn't matter: phenomenological findings should be judged on their own, not whether you have a complete theory to account for them.


You comparison between disparate countries also tells me little on this matter, for the simple reason every table will have their own friction coefficients.

It is fairly easy to renounce a low paying job in places where the welfare state can cover your needs with nearly the same lifestyle. That alone will make a comparison between US and European minimum wages rather useless, IMHO.

Bret said...

Clovis wrote: "Let's see how your narrative plays out in numbers."

You can write any narrative you like, of course, and so can Hey Skipper, yet your narrative would seem to imply that all McDonalds everywhere should use iPads by now.

And yet they don't.

They happen to be used where the minimum wage happens to be higher.

Do you not think that "at the margin," a higher minimum wage is more likely to instigate a transition to using capital equipment to replace labor?

As a business person, I certainly am more likely to consider capital equipment if labor becomes more expensive. Of course, in my business I'm almost counting on labor become more expensive, so in that regard, I really like high minimum wage laws. I'm thinking about $40/hr would be just about perfect for me.

Clovis e Adri said...

Bret,

---
Do you not think that "at the margin," a higher minimum wage is more likely to instigate a transition to using capital equipment to replace labor?
---
It surely is. The question is only how important that is for a minimum wages discussion.

The transition will happen anyway, the minimum wage influencing if it will happen a bit earlier or a bit later.

Are you of the opinion that, since most jobs will be taken by computers anyway, it makes no sense to set a minimum wage?

Unless you are of that opinion, to conflate minimum wages and iPads is to muddle the discussion with no greater insight to compensate for it.

erp said...

Clovis, right now $40/hr is what I'm paying my yard guy. You're not thinking extravagant enough.

Why aren't all fast food places here using i-Pads or the like? Because patrons here aren't all German and those devices would quickly be stolen or trashed requiring security to oversee them or replace or repair them obviating any savings in low-cost labor.

Clovis e Adri said...

Erp,

Soon enough - surely less than 10 years - all those fast food places won't need iPads. You'll just go to the place and order (or pre-order before getting there) the thing with your own device, be it an iPad, smartphone, etc.

The technology is already here and used in not so few places. This is, AFAIK, the main new thing about the Apple Watch, it has a system to optimize this process in restaurants, hotels, and so on.

Hence, a McDonalds where you needed 10 cashiers will have one or two for a time, and after a few years no cashier at all: only the cooking guys who will take the occasional break to attend for something unexpected. And those cookers will be fewer and fewer as robots take the cooking too.

Once that automatization gets to be the standard in some big enough place (be it Germany, if you like), it will take down the other places pretty fast (be it the US, if you will) no matter how small minimum wages you have.

So there again, you can't be serious if you fear minimum wages will bring machines to replace the poor people: Wake up, they will replace poor and rich alike soon enough.

erp said...

Clovis, most "poor" people aren't inconvenienced by working here in Uncle Sap's world and the people paying the bills are getting more and more depressed. Since Obama has interfered with insurance companies, our supplemental Medicare insurance premiums and deductible have gone up 400% and we haven't gotten the news yet exactly how much the Medicare premiums will be in the new year.

Bet ya thought us geezers got everything freeeeeeeeeeeeeeeeee ... and Harry wants states to up Medicaid benefits for the downtrodden. Money for same to come from the same shrunken pot of gold.

I wish Bret would invent a robot that would read my mind and do yard work the way I want it done, quietly clean up after itself and put itself to sleep until I want it to wake up and start working again.

Would be worth its weight in gold.

Clovis e Adri said...

Erp,

You may consider buying one of those robot lawn mowers.

I guess though, for more general yard work like you want, a complete solution won't be available so soon.

erp said...

Clovis, we don't have any grass. Our landscape uses the principles of xeriscaping, but what we do have is a canopy of enormous palm trees, huge oaks and over 100 foot tall pines among many kinds of other trees like pecan and mulberry and shrubs of all kinds. There's always tons of raking and removing of debris, cleaning of gutters and drains ...

Things we used to do easily, now no longer possible. Finding responsible people to do this is pretty impossible, hence our willingness to pay an exorbitant hourly wage to someone even marginally competent and my desire for a robot.

Clovis e Adri said...

Erp,

Don't you have gardening companies to take care of all that for you?

erp said...

For 20 years, we had a great guy who took care of everything, did repairs inside and out, was creative and artistic as well. He retired due to health related issues although he is quite young and in the months since then at least a half dozen yahoos have been here and gone. Most landscape people only know how to cut grass and blow off the driveway into the street leaving their debris behind them.

______

O/T - comments and posts aren't finding their way into my email account although the message below confirms they will be sent on as usual?

Hey Skipper said...

There were many other studies exemplified there that do not share the weaknesses of Card & Krueger.

And I agree we do not find there a simple logic for employment being robust against modest wage increases. Yet, it doesn't matter: phenomenological findings should be judged on their own, not whether you have a complete theory to account for them.


True, but you make the assumption that the studies' phenomenological findings were a consequence of the modest wage increase. There could be, indeed almost certainly were, other causes. Not only that, but the findings themselves don't exist in a vacuum.

Taking away your assumption leaves the possibility that these studies, like the vast majority of social science and economics studies, were either designed to make the facts rhyme with the theory, or that the phenomena is embedded in an environment so complex that it is practically impossible to tease anything meaningful out of "modest" changes.

Card & Kreuger is probably a good example of the former: the weaknesses are so obvious that even I could pick a couple out. That progressives keep citing the study as proving everything they know to be true is telling.

I suspect most of the cited studies fall into the latter category: modest changes mean any signal will be swamped in the noise.

To take the position that modest increases have no effect on employment, or even a positive effect, is to make the several claims: that the effect seen is due to the cause; the effect is completely contrary to supply and demand; and that there is some inflection point where increases in the minimum wage start having the expected effects on supply and demand.

Or, we can look at immodest increases in other economies, see exactly what we would expect, and conclude that what we expecte doesn't go away simply because it gets too small to measure.

I don't have in ideological dog in this fight. I would love it if simply deciding to raise the minimum wage would increase employment and make a bunch of people better off at the same time.

Unfortunately, that sounds an awful lot like expecting a free lunch.

Harry Eagar said...

'How about a guy who runs a shoe-shine business as a one-man business but doesn't make minimum wage from it? Should he be shut down?'

Recall that I am a New Dealer. You ask one of the most difficult questions that the New Deal chose to deal with: how to help workers trapped in a system that prevented them from ever achieving economic decency. Specifically, Southern sharecroppers and owners of tiny farms.

The conclusion was that these entrepreneurs should be forced out so that larger, at least minimally efficient economic units could be formed. The method was designed to offer them a better way out. It might have worked, maybe, but it was sabotaged by landowners who appropriated the funds intended for the poor.

Talk about rentseeking.

Hey Skipper said...

Wow, as answers go, that is pretty much a total fail.

Irrelevant, and maddeningly vague: The method ... What method? Designed by whom? Forced? How was it sabotaged? Is its failure the reason we have so many sharecroppers today?

Bret said...

Clovis wrote: "Are you of the opinion that, since most jobs will be taken by computers anyway, it makes no sense to set a minimum wage?"

I haven't really been able to decipher your comment (in its entirety, not just this sentence) for several days, and it doesn't quite make sense to me, so I've given up.

For this particular sentence, since I don't think most jobs will "be taken by computers anyway" (see my Give Me a Hand post) no, I'm not of that opinion.

This is my opinion of minimum wage laws.

Bret said...

erp wrote: "O/T - comments and posts aren't finding their way into my email account although the message below confirms they will be sent on as usual?"

I have no idea. Anybody?

Hey Skipper said...

Works fine for me.

Bret said...

Hey Skipper wrote: "I would love it if simply deciding to raise the minimum wage would increase employment and make a bunch of people better off at the same time."

It is actually possible. In a situation where the fixed cost per employee is huge and is both unnecessary and useless, increasing the minimum wage could actually "increase employment and make a bunch of people better off."

An extreme example for illustration. Let's say the government has a fixed per hour tax of $1,000 per hour on each employee. And let's say the government takes that money to pay people to dig holes and fill them back in again.

Then, raising the wages of folks from $5/hr to $10/hr doubles the available earnings to everybody and cuts the number of holes being dug and filled in by a factor of two, wasting far less resources.

With all this extra cash, demand would clearly increase, new businesses would be started, and employment in the private sector would increase.

In fact, this would have virtually the same effect as a tax cut.

To me what's interesting about the minimum wage studies is that there does seem to be a trend. Older studies show a stronger decrease in employment with rising minimum wages than newer studies. At the same time, regulatory costs and fixed costs per employee have indeed risen. I'm wondering if it's possible that were near a point where the oppressive hand of government really is making it so minimum wage increases could be stimulative?

lawabidingcitizen said...

test

lawabidingcitizen said...

Trying again.

lawabidingcitizen said...

Okay. Note erp's new moniker.

erp said...

Really Harry, small southern landowners stealing money allocated to help the poor is pretty small potatoes compared to the institutionalized stealing which is an integral part of lefties' retirement packages and it's not only local, but worldwide.

Just recently the Clintons et al. grabbed off gazillions from the money donated for Haiti Relief. Africa is another prime example of money being poured into bottomless pockets of despots (after lefty politicians get their share of course) while the natives continue to live in squalor.

If only a small percentage of the money allocated to help the poor were actually spent on helping them, i.e., not on handouts, our economy would be humming along with the private sector paying higher wages because they actually needed to compete for additional workers.

BTW - any comment on your cohort playing the pope card? How loud would you all be screaming separation of church and state if a conservative pontiff were addressing congress and berating it for turning our country on its head.



... erp

Clovis e Adri said...

Bret, Skipper,

----
Hey Skipper wrote: "I would love it if simply deciding to raise the minimum wage would increase employment and make a bunch of people better off at the same time."

It is actually possible. In a situation where the fixed cost per employee is huge and is both unnecessary and useless, increasing the minimum wage could actually "increase employment and make a bunch of people better off."
----

Since we are dealing with (unrealistic) hypotethicals, let me offer another one.

Suppose a place where every successful business owner had, for reasons arbitrary, the habit of hoarding money and hiding a good part of it. They would dig holes up, stash the money there, and forget about it for the rest of their lives. It doesn't matter if a better opportunity to invest it appeared, they wouldn't bring it back.

Suddenly, government passes a law that obliges them to take a small part of their month's profit and distribute it among the employees. So now they have less money to stash in the holes.

With all this extra cash in workers' hands, demand would clearly increase, new businesses would be started, and employment in the private sector would increase.

So, how do we check which of those two hypothetical worlds, Bret's or mine, could be influencing more our real one?

Bret said...

Clovis,

You're describing monopsony power. That is usually the standard argument about why minimum wage laws are helpful - that employers universally collude in order to rip off low wage workers. The standard retort is that entrepreneurs would hire away these low wage workers because of the profits left available. I find that retort compelling, you may not, but if you think there's substantial profits to be made at the current minimum wage (or just over), why not start a business and both prove your point and make a lot of money?

On the other hand, as I note, the costs of government regulation has gone up a lot, and that's not something entrepreneurs can do anything about.

Bret said...

Clovis,

Actually, reading your hypothetical again, I see you're proposing something different. What you're saying is let's force business folk to take a loss. But wouldn't they just shut down the business first? No business guy is going to go into their hoards of cash and take a loss to pay low wage workers.

Clovis e Adri said...

Bret,

Clearing up the example, it goes along like this: every businessman makes X of profit, and take a fraction (suppose X/2) of it to bury in the ground just for the sake of it. The other half of profits goes for the normal stuff (to pay his own salary, to invest somewhere else, etc).

Upon being forced by govt fiat to give, suppose, X/10 to the employees, he decides to take from that X/2 he would bury (burying 2X/5 only).

And that's not exactly monopsony I am talking about (I guess). Now, I didn't ask you how business would be surviving at all by paying $5/h for the employee and $100/h in taxes for having that employee, so I won't worry about the possibility of the owner shutting his business because he is taking a 10% loss on profits now. For just like your example was a bit of a tax cut, mine is very much like a tax hike, right? Businesses can go bust after a 10% increase in taxes, sure, but that's not the point of the example (neither yours nor mine, I think).

Clovis e Adri said...

Bret,

---
why not start a business and both prove your point and make a lot of money?
---
Short answer? Because I can't.

I do Physics, and it takes most of my time. But not only that. In order to do Physics, I took the only job in Brazil where you are allowed to do so and be paid for it: to be a professor in a Federal University.

Much like the European model, I am hence a federal public employee. Not only that, I work under an exclusivity clause: I am not allowed to do anything else, including opening up a business in my name (even if I never invested time on it, only money).

In other words, I am a bit of a ward of the State.

I know Erp has issues with his son for him taking up a position like that in a French University. So, Erp, he is not the only one.

Were not for Physics, I can tell you, I would love to open up a business and give it a try, "monopsony power" being true or not. Although I can assure you, to open a business (and make it work) in Brazil is a lot harder than what you are used to in the US...

Howard said...

With all this extra cash in workers' hands, demand would clearly increase, new businesses would be started, and employment in the private sector would increase.

Clovis,

Good idea, but wrong route or mechanism. Business spending and investment account for the majority of the expenditures in the economy. (I'll show how that works in a future post.) If you reduce some of the burdens to start and operate a business, you will get more business spending and investment. Some of those expenditures will be complementary to labor. If you do things that increase the cost of labor then there is extra incentive to make investments that replace labor. You can fight it or work with this approach. You could also wave a magic wand and remake the world as you imagine it should be.

Clovis e Adri said...

Howard,

No, what I described was not an idea nor a proposal. And was not good either. The point was, like Bret's example, only to exemplify a situation where, counterintuitively, raising the minimum wage would create more jobs.

Back to real life, I think that example bears no truth to small or middle size businesses. Though it may touch (who knows?) on something about the big ones.
And not only about them hoarding money, but also - from the point of view of the American worker - investments made in other countries don't impact the American moinimum wage workers directly: in near to medium term counts as much as burying the money away.

Hey Skipper said...

[Bret:] It is actually possible. In a situation where the fixed cost per employee is huge and is both unnecessary and useless, increasing the minimum wage could actually "increase employment and make a bunch of people better off."

Apologies for playing catchup here.

Where is the Like button? That comment, now that you have made it, is perfectly obvious, yet isn't something I would have thought of.

After all, I don't run a company. Nor do the people running those studies.

Thanks for the insight.