Why Minimum Wage Laws Are Not the Answer

By Jacob C. Maichel

"Minimum wage laws [are] one of the most effective tools in the arsenals of racists everywhere"
-Economist Walter Williams

Minimum wage laws are likely some of the most misguided public policies that exist in the United States. I am incredibly sympathetic to the plight of the poor, but supporting a government mandated price fixing scheme not only creates distinct winners and losers but promotes very perverse outcomes for many vulnerable groups. Furthermore, the idea that a minimum wage is the key to lifting people of out poverty is clearly a logical fallacy. Why not make it law that everyone must be paid no less than $2,000 an hour? Then everyone would make over $4,000,000 annually and poverty would be abolished, right? Well no, instead the only people who would remain employed are those who create at least $2,000 of value an hour for their employer, a small fraction of the workforce. For businesses to be able to support this ludicrous minimum wage they would have to significantly reduce the workforce, likely with large increases in automation. Although the U.S. federal minimum wage is not $2,000, but instead $7.25, these artificially inflated wages do raise the incomes of some low skilled workers at the expense of eliminating the income for all who can not find work as a result. 

Generally I think people who advocate for minimum wage laws mean well but likely have a fundamental misunderstanding of the topic. Pleas for a living wage are not new by any means. Saint Thomas Aquinas believed that commodities (farm products) should demand a fair price and workers should be paid a sufficient income to support themselves. In this time period, however, this was unachievable as the majority of people lived very minimally and often survived off of their own food production. The idea of a "just wage" or "living wage" really gained a resurgence of popularity during the industrial revolution. Social reformers of the time believed that it would be more beneficial for children to be in school, rather than working for low wages in dangerous conditions. This belief led to the creation of the first minimum wage laws in the country. 

In 1912 Massachusetts passed the first minimum wage laws the U.S. had ever seen, although they were only pertinent to women and children. This was largely in response to a fear that unskilled workers who were payed low wages were taking the jobs of adult men. The idea behind the law was that by forcing employers to pay unskilled workers similar wages to skilled workers employers would opt for the latter, protecting the working man from competition. Many states followed Massachusetts' example, but these laws were shortly lived as the United States Supreme Court ruled them unconstitutional for violating the principle of freedom of contract.  The repeal of these laws was largely ignored as the country prospered in the 1920s. High demand for workers coupled with tightened immigration allowed for competition within the market to allow wages and working conditions to naturally improve with no coercion from outside forces. 

In 1929 the unemployment rate in the U.S. was roughly 3.14% compared 24.75% in 1933. As wages across the nation began to decrease the desire for a guaranteed minimum wage again resurged. Unfortunately, the underlying ideology for the justification of the laws seemed to shift from getting children out of the workforce to instead guaranteeing a "living wage" to those who were employed. What is misunderstood about this situation is that even though many with jobs were making less, if wages remained where they had been in the 1920s many more people would have been without a job. In 1933 the New Deal's National Industrial Recovery Act (NIRA) promised a minimum wage. This was largely a failure as it only increased the wages of unskilled workers, who already struggled to find gainful employment, not the wages of skilled workers who already were paid above the minimum wage. Rather than stimulating recovery, it appears to have made it harder for unskilled laborers to find work. The NIRA lasted only two years before it was deemed unconstitutional as well in 1935. It was replaced by the Fair Labor Standards Act in 1938 and since then the U.S. has had a minimum wage. 

The Fair Labor Standards Act did not impact the labor market in a significant manner. Once the U.S. began to militarize in the 1940s the wartime economy increased wages far above the minimum wage. It remained this way until 1956 when Congress significantly increased the minimum wage and authorized the U.S. Department of Labor to conduct surveys to increase compliance amongst employers. Teenagers have always had higher unemployment than adults but after 1956 there was an incredible proliferation in teen unemployment, illustrated in the graph below. 

Teenagers typically have the least amount of marketable skills other than the unique value they possess of being able to work for low wages. Without this advantage many lost their jobs to more skilled laborers in the short term and the long term impact of automation is starting to be realized more and more. 

Perhaps more alarming is the power these minimum wage laws grant employers to discriminate in hiring. As wages increase and businesses reduce their workforce, this creates a surplus of individuals looking for employment. Economist Thomas Hall in Aftermath: The Unintended Consequences of Public Policies explains very clearly that discrimination is very difficult when the amount of applicants is similar to the amount of job vacancies determined by the market. As this surplus increases it empowers employers to increasingly choose employees based on personal preferences, including race. Historically, black teens have had a higher unemployment than their white counterparts but after the 1956 wage increases it became exceedingly worse. This can be seen in the following graph depicting the difference in unemployment rates in black and white teenagers before and after the 1956 wage increases. 

It is hard to deny that minimum wage laws are clearly government-mandated price fixing schemes that create distinct winners and losers. It's ironic that labor unions and politicians that call for higher minimum wage laws forget why they were enacted in the first place; to force unskilled laborers (largely children) out of the workplace. This has greatly impacted the most vulnerable groups of workers, namely teenagers, and steals valuable experience they need to be successful in gaining future work. Although many people who support these laws have good motives, the road to hell is surely paved with good intentions. Supporting these laws seem good in theory but in practice they not only promote a slew of dangerous outcomes, but can explicitly allow racist hiring behavior. 

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University

Limbic Capitalism: Article Review

By Jacob C. Maichel

I have been reflecting a lot on technology and it's role in our lives, as well as how our consumption of the internet and its impact on our social relationships. I recently came a across an article by David Courtwright, How 'Limbic Capitalism' Preys on Our Addicted Brains, which was a thought provoking read and I suggest you check it out. If you do not however I plan to discuss it and share some thoughts.

The first thing I found interesting was the concept of "limbic capitalism," a fresh use of capitalism to explain pyscological consumption. I do not want to discuss the traditional idea of capitalism in this review, strictly this specific nuanced interpretation provided by Courtwright. These same advances which provide an abundance of conveniences also pervert previous business models by promoting excess consumption, often leading to addictions. Such societies are run by governments or underground organizations whose products are focused on consumer's biological limbic system. The limbic system influences behaviors such as motivation and emotional responses and, yes you guessed it, addiction.

Courtwright next takes a step back to examine historical examples of simplified understandings of vices, exemplified by Victorian-era reformers. These reformers are said to have thought vices were dependent on the local culture, as well as noticing that all vices seemed to have a few things in common. The first was monetizing vices is often big money, the second is that vices are often linked. Rarely is a brothel without booze or an opium den far from a casino, Courtwright claims.

Contemporary neurologists now confirm the Victorian beliefs on vices through our understanding of how dopamine promotes pain and pleasure. These subconscious responses condition people’s reactions to similar stimulation in the future. What this means is that people tend to do what their brain tells them is rewarding even if they know it is bad for them. This is why addicts continue to crave something even after they do not want to do it anymore, in a sense, your brain is stuck
So what does all of this have to do with technology? It is undeniable the amount of luxury and conveniences brought by technology, however, understanding it in the context of limbic capitalism is an interesting thought (the irony of this being typed on a computer is not missed on me). Courtwright states:

The more rapid and intense the brain reward they [the product] imparted, the likelier they [the consumer] were to foster pathological learning and craving, particularly among socially and genetically vulnerable consumers.

Internet technology and products that evolved based on its existence were developed at unprecedented rates since its inception. This greater accessibility and affordability of the internet has made new products available, good and bad, bringing with them new vices and addictions. Think of the gamer who now sits down slurpin' Mountain Dews all day, or the average person who scrolls through thousands of tweets. Not only can entrepreneurs exploit new vices that come by chance but rather create and market products by playing into addictive behavior to increase demand. While I am not sure if he is right or wrong on this question I can't think of a video game that is made to be played for 15 minutes a day.

I do highly recommend giving the entire article a read. The discussion on both the monetization of addiction and how technology fits in is very thought provoking to say the least. My concern is how these psychologically damaging practices which target our limbic system are omnipresent in our daily life. It is without question that technology has brought tremendous advances in many aspects of our lives, such as communication and the spread of information. The unanswered question is this: although we are reaping the benefits at what cost to our personal relationships and psycologial wellbeing?

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University

Where Did We Get Time Zones?

By Jacob C. Maichel

In the 1800s time was very loose to say the least. People could not move faster than the speed of horses so schedules were pretty tentative, which wasn’t a big deal in their relatively slow moving lives. As the United States began to industrialize and develop factories, steamboats, mail, etc time needed to be more uniform inside of towns. Each town decided on its own official town time creating thousands of unique time zones across the United States. Michigan, for example, had 38 different times alone! 

 With the invention of the railroad everything changed as the country opened up. A trip from New York to Chicago that had taken a month by horse could now be completely in two days on a train. Variations in times was not only a scheduling nightmare but ultimately a safety hazard as trains sometimes hit each other due to timing confusions. The railroad’s solution was to make each train its own traveling “time zone”, so that no matter where it went it was based on the time where the line was based out of.

During this period William F. Allen was the secretary general of the time convention and had no shortage of people reaching out to him pleading to change the outdated time system. By the 1870s trains were common across the country as the United States shifted from a collection of towns to one uniform country. In the 1980s the scientific community struggled with meteorologists not being able to collaborate on anything, such as times of shooting star sightings. Allen decided to take on the task of standardizing time as we know it by splitting the country into zones.

Allen begins by going to the Boston Railroads with the idea. They promptly deny him stating they only set time via the Harvard observatory. Rather than admit defeat Allen simply convinces the Harvard observatory to adopt his plan and soon after the city of Boston follows. Allen next approaches the city of New York arguing time may become known as Boston Time if they reject him, which was all the convincing needed to get New York to agree.

As more cities began to adopt the plan there was push back. One preacher was so against it he was quoted saying “we follow God’s time not railroad time” and then smashed his watch on the pulpit. Another notable objection came from the attorney general who stated that government buildings go off of D.C. time. However, enough States adopted Allen’s plan that his objection was ignored. The plan continued and Allen’s team mapped out 4 different time zones that we are familiar with today.

At 12 noon on November 18, 1883 all time is set to become standardized. They used telegraph lines to notify balls across the country of the exact moment to drop and start counting time. These dropping balls eventually give way to the traditional ball dropping in New York every new year. Though there was still some disagreements in 1918 standardized time was officially adopted by the U.S. Federal Government, and in 1966 they abolished all local times. 


References

Helm, Sally, Host. Episode 918 “The Day Of Two Noons”. Planet Money, NPR, 7 June, 2019. https://www.npr.org/2019/06/07/730727038/episode-918-the-day-of-two-noons

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University

Economics of the Federal Government Shutdown

by Levi A. Russell

This article originally appeared in the Ottawa Herald

As of this writing, the current federal government shutdown is one of the longest on record. This shutdown is directly the result of the Senate’s unwillingness to take up a budget passed last month in the House of Representatives. Indirectly, it is the result of an impasse between President Trump and congressional Democrats on the issue of $5 billion for the wall on the southern border.


What does the shutdown cost us? Is there irreversible damage to the economy? Is it worth it to create a shutdown to get the funding President Trump wants for the border wall or, from the other perspective, to keep the wall from being built?


The most recent estimate I could find of economic losses from a government shutdown is from a 2013 Office of Management and Budget report. The report indicates that the 16-day shutdown in October of 2013 reduced fourth quarter 2013 GDP growth by $2 to $6 billion. In the private and government sectors combined, 120,000 fewer jobs were created during the first two weeks of that October as a result. These sound like very large numbers, but the reduced GDP growth only amounted to 0.2% to 0.6% lost growth. In December of 2018, 312,000 jobs were created in the U.S. economy, which easily makes up for any lost job growth the shutdown may have caused. This suggests that there is not much in the way of irreversible damage to the U.S. economy as a result of even a long government shutdown.


The term “government shutdown” is bandied about in the media regularly, but it’s difficult to justify this term in my opinion. Most of the largest agencies in the federal government are still humming along, including social security, medicaid, medicare, food aid, food inspection, law enforcement, investigations, and veterans’ benefits. Some government employees in these agencies are currently working without pay, but they will receive back pay when the shutdown ends.


Other functions have partially or fully closed operations for the duration of the shutdown and furloughed employees. Those employees may or may not receive back pay. Agencies that have closed are the IRS (no tax refunds will be processed during the shutdown, but you still have to pay taxes), national parks and museums, the US Department of Agriculture’s rural home loan approval system, and other “non-essential” services that aren’t currently funded.


Certainly the shutdown has a negative impact on a segment of the population. Tens of thousands of federal employees have to work without pay for a period of time and others are laid off and won’t receive pay. As a former state employee, I have a little different point of view on this. Federal government jobs are typically well-paid and very secure. The richest counties in terms of household income surround our nation’s capital. In effect, federal employees trade higher pay and lower risk of being laid off or fired in general for higher political risk. Most of our jobs are dependent on our ability to add value to the company, owners’ and managers’ ability to keep the company in business, and our customers’ preferences; federal employees’ jobs avoid a lot of that risk but have to deal with political risk.


Ultimately, this shutdown is political in nature. It isn’t about large segments of the budget, the maximum allowable amount of debt the federal government can incur (debt ceiling), or a big piece of legislation like Obamacare (the cause of the 2013 shutdown). The $5 billion price tag on the border wall is a drop in the bucket when compared with the proposed $4+ trillion budget. Put another way, the fight over the border wall funding is less than 0.12% of the proposed budget. I won’t pretend to know the benefits or drawbacks of the existence of a stronger border wall, but the shutdown itself will only have lasting impact on a relatively small group of federal employees. Most of us won’t even notice it.

Dr. Levi A. Russell is the Gwartney Institute Professor of Economic Education and Research at Ottawa University

Unintended Consequences: Cigarette Regulations

by Levi A. Russell

One of the biggest challenges with regulation is avoiding unintended consequences. Regulators are human and are thus limited in their ability to determine all the effects of the regulations they impose on the public. While some regulations are likely necessary, we should be careful about calling for additional regulations, especially in cases where it is difficult to forecast their effects.

E-cigarettes, a relatively new product that is currently very lightly regulated, are a good example of a case where extreme caution is advised when determining new regulations. The FDA is considering regulations on e-cigarettes because they are concerned that e-cigarette companies are marketing their products to teens. E-cigarettes have been shown to function as a "gateway drug" for regular cigarettes. However, as a recent Forbes column points out, these products are also very useful in helping adults quit smoking.

The FDA must balance the costs of e-cigarettes (teens using them and moving to cigarette smoking) with the benefits (helping adults quit smoking). As the Forbes column points out, about 1.5 million smokers use e-cigarettes to quit each year. On the other hand, about 0.5 million teens start smoking each year due to e-cigarette usage. So, the raw math indicates that restricting e-cigarette usage will mean that more people in general are smoking each year because the 1.5 million who quit with the help of e-cigarettes will find it harder without them.

Time will tell whether the FDA decides to restrict e-cigarette usage. Does it make sense to keep people from using e-cigarettes to quit smoking just to prevent a relatively small group of teens from starting? Surely this is a difficult ethical issue, but keeping an eye out for unintended consequences like this is a necessary part of the regulatory process.

Dr. Levi A. Russell is the Gwartney Institute Professor of Economic Education and Research at Ottawa University