Minimum wage and length of poverty spells

I had a pre-programmed blog post on the issue of the minimum wage and poverty which was preempted by Mark Koyama (a blogger here at Notes on Liberty). The tweet is below and it has forced me to adjust the post.

Mark is absolutely right! Let me explain why with my own spin on it.

First of all, the demand curve slopes downwards – always. However, the method of adjusting to price changes (wages are a price and the minimum wage is a price control) is not an empirical constant.  I am unlikely to fire workers for a 1% in the inflation-adjusted minimum wage. Firing workers implies transaction costs that are dependent of context (for example, if I am friend with my employee, this is a transaction cost in the form of a lost friendship), firm size (I won’t fire my only employee which represents 50% of my output for a 1% hike in MW) laws (firing and hiring regulations), institutions (social institutions, reputation, norms), my clientele (how elastic is their demand) and technological alternatives. For a 1% increase, I am likely to reduce work hours or cut marginal benefits (no free soup for you). For a 10% increase, I am more likely to consider the option of firing a worker or I may shift to a new technological set that reduces my demand for labor.  It may happen rapidly or take some time, but there will eventually be an adjustment.

In any case, the minimum wage will imply some losses with a deadweight loss. Only the method by which it materializes is debatable.  By definition, some people will be hurt and generally and even if supply is super-elastic (doubtful), some suppliers (workers)  will be ejected from the market (or the quantity of labor they can supply will be ulitmately reduced). Since the minimum wage generally tends to fall on unskilled workers, this must be correlated with workers close to the poverty line.

Ideally, we’d need a measure of the minimum wage to be compared with the “at-risk” population over a long period of time in order to encapsulate all the effects of the minimum wage. The perfect measure is the “length of poverty spell” variable which has been emerging progressively from the BLS. The problem is that it is not broken down by state. Fortunately, Canada has that variable (well, a low-income variable which is a relatie poverty measure) for provinces. Inside the Survey of Labor and Income Dynamics (affectionally known as the SLID), this longitudinal variable has a span of eight years. Basically, we can know if a person has been below the low-income threshold for up to eight years. Let’s take that extreme measure and plot it against the minimum wage divided by the average wage.

As one can see from the scatter plot below, there is a more or less clear relationship between the minimum wage as a share of the average wage and the length of poverty spells. What is more impressive is that this graph is not a regression. More precisely, the provinces with the highest minimum wages (like my own province of Quebec and the province of Nova Scotia) also have the most extensive social welfare nets. Alberta,  a province with the lowest minimum wage ratio and one of the least “generous” social welfare net in Canada, is at the very bottom of the pack in terms of the persistence of poverty.

minimumwagepoverty

I think this graph acts in very modest (but clear) support to Mark’s point (which is also the point of Burkhauser, Sabia, MaCurdy and many others)

Basic income: a debate where demand magically disappears!

For a few months now, the case for the basic income has resurged (I thought it died with Milton Friedman in 2006, if not earlier). In the wake of this debate, I have been stunned by the level of disconnect between the pundits and what the outcome of the few experiments of basic income have been. The most egregious illustration of this disconnect is the case of the work disincentive.

To be clear, most of the studies find a minor effect on labor supply overall which in itself does not seem dramatic (see Robert Moffitt’s work here). Yet, this is a incomplete way to reflect on the equilibrium effect of a massive reform that would be a basic income.

Personally, I think that there is a good reason to believe that the labor supply reaction would be limited. At present, many tax systems have”bubbles” of increasing marginal tax rates. In some countries like Canada, the phasing out of tax credits for children actually mean that the effective marginal tax rate increases as income increases from the low 20,000$ to the mid 40,000$. As a result, a basic income would flatten the marginal tax rate for those whose labor supply curve is not likely to bend backward. In such a situation, labor supply could actually increase!

Yet, even if that point was wrong, labor supply could shift but without any changes in total labor provided. Under most basic income proposals, tax rates are dropped significantly as a result of a reduced bureaucracy and of a unified tax base (i.e. the elimination of tax credits). In such a situation, marginal tax rates are also lowered. This means greater incentives to invest (save) and acquire human capital. This will affect the demand for labor!

A paper in the Journal of Socio-Economics by  Karl Widerquist makes this crucial point. None of the experiments actually could estimate the demand-side reaction of the market. Obviously, a very inelastic labor demand would mean very little change in hours worked and the reverse if it was very elastic. But what happens if the demand curve shifts? Widerquist does not elaborate on shifts of the demand curve, but they could easily occur if a basic income consolidates all transfers (in kind and conditional monetary) allows a reduction in overall spending and thus the tax take needed to fund activities. In that case, demand for labor would shift to the right. A paper on the health effects of MINCOME in Manitoba (Canada) shows that improvement in health outcomes are cheaply attained through basic income which would entail substantial health care expenditures reduction.

I have surveyed the articles compiled by Widerquist and added those who have emerged since. None consider the possibility of a shift of the demand curve. Even libertarian scholars like Matt Zwolinski (who has been making the case forcibly for a basic income for sometime now) have not made this rebuttal point!

Yet, the case is relatively straightforward: current transfers are inefficient, basic income is more efficient at obtaining each unit of poverty reduction, basic income requires lower taxes, basic income means lower marginal tax rates, lower marginal tax rates mean more demand for investment and labor and thus more long-term growth and a counter-balance to any supply-side effect.

I hope that the Bleeding Heart Libertarians will take notice of this crucial point in favor of their argument!

On celebrating the new year with a thought experiment

Each time I start teaching classes at the business school where I am a course lecturer, I am always amazed at the disconnect between the quantitative facts and the beliefs that individuals have. My favorite relates to poverty and inequality.

Everybody seems to think that poverty is increasing and that worldwide inequality is increasing. Each time, I have to show figures to shoot down those beliefs. I also do it in the french media of my home province of Quebec where – as a result of pointing out those facts – I am branded as a “neoliberal” for being optimistic for the fate of mankind.

However, let’s think about it in the context of the new year to see why there is room for optimism. Let’s make a thought experiment similar to John Rawls’ original position but somewhat differently. You have a hat with all the years since the neolithic age, each on a separate piece of paper. If you had to hope for one year in particular, which would prefer? I would pick 2016!

By picking 2016, I have one chance in ten of living under extreme poverty. At any earlier point in time, these odds would have been close to 90%. (The data comes from the Our World In Data project by the amazing Max Roser).

World-Poverty-Since-1820-full

Although this diminished poverty does not explain every improvement with regards to every other metrics of living standards (life expectancy, infant mortality, nutrition, heights, body mass, survival to diseases), it does explain an appreciable part of these improvements.

Sit down with some friends to celebrate the new year and ask them about this “thought experiment”. Ask them if they would pick 2016. Once it is presented as such, I am sure that in spite of all the headwinds facing mankind, they will be optimistic.

How to Rebut the Condescending Leftist

Economist Bryan Caplan, in responding to calls for more to be done by governments for the world’s poor, writes the following:

Isn’t the entire problem that the world’s poor have little of value to sell on the world market? The answer, surprisingly, is no. The world’s poor have a very valuable good to sell: their labor. Though Third World workers often earn a dollar or two a day, even unskilled labor is worth $10-$15,000 per year on the world market.

There’s just one problem: First World governments’ immigration policies effectively forbid international trade in labor. The world’s poor cannot legally work in a First World country without that government’s permission. For most current residents of the Third World, this permission is almost impossible to obtain. If you’re an unskilled worker with no relatives in the First World, you have to endure Third World poverty, win the immigration lottery, or break the law.

Do read the whole thing. It’s from the recent Cato Unbound symposium on “Authority, Obedience and the State.” The Cato Institute is probably one of three think tanks that actually puts out work I can count on (the other two being Brookings and Hoover). Their monthly Cato Unbound is one of the best symposiums on the web.

Dr. Delacroix has written on immigration before. Here is a piece he produced for the Independent Review. Here are his blog posts on immigration.

Links From Around the Consortium

Over at the Progress Report, Dr. Fred Foldvary writes on how we can extirpate poverty from the world.

Jacques Delacroix calls out Ron Paul’s statement about Iran being surrounded by the U.S. government.

Professor Jeffrey Rogers Hummel tackles the issue of slavery head-on in a Freeman article.

Brian Gothberg writes about the potential technology has to start protecting the ocean’s resources through property rights.

And our newest blogger, Dr. Ninos Malek, defends stereotyping (defending the undefendable is why I love being a libertarian!).