Utopia, you are standing in it!

Noah Smith is OK with local experiments with higher minimum wages such as a $15 minimum wage in San Francisco. At least half of these workers sold out for minimum wage policy experiments will be teenagers and young adults.

Source: Finally, an Answer to the Minimum Wage Question – Noah Smith.

My most grating experience in the public service was reversing the slope of the demand curve for labour and education and training to argue that a minimum wage would increase opportunities for the low paid.

I drafted a briefing to the minister pointing out that minimum wage increases make investments in training less attractive to lower skilled workers. This is because the minimum wage increase increases the opportunity cost of training and reduces the rewards in terms of the wage increase. The would be trainee must give up a higher minimum wage in return for a smaller wage increase because the minimum wage increase swallows part of the wage premium from the now an increasingly pointless investment in training. There is only a small literature on the impact of the minimum wage on investment in human capital.

My manager told me to argue that increases in the minimum wage will make low skilled workers more likely to seek training. That conclusion was based on a consultant’s machine-gun econometrics research showing that the confidence interval was plus or minus regarding the minimum wage and employment training. This study contradicted everything known about the minimum wage and the incentive to invest in human capital. You do not increase of demand for human capital by reducing the rewards for investments in human capital.

Does a higher minimum wage really reduce employment? econ.st/1gp4Jbs http://t.co/WGMZGLKHmI—
The Economist (@EconBizFin) July 30, 2015

Back to Noah Smith. He admits freely that increases in the minimum wage reduce employment. He tries to ride out on the conclusion that that increase in unemployment after a small minimum wage increase isn’t much.

Source: Finally, an Answer to the Minimum Wage Question – Noah Smith.

Obviously the teenagers and adults thrown onto the scrapheap of society by the increased minimum wage don’t count in the brutal utilitarian calculus Noah Smith employs.

It's pretty simple: Minimum Wage = Compulsory Unemployment http://t.co/6xiX6YCp9Z—
Mark J. Perry (@Mark_J_Perry) July 25, 2015

Fortunately, many economists prefer Pareto improvements. This is where after a policy change at least one person gains and no one loses or at least the winners compensates the losers for their losses. Not so bad and isn’t much as suggested by Noah Smith for the welfare consequences of a minimum wage increase on unemployment are not good enough from an applied welfare economics perspective.

Most of the Left over Left are of the same view about the priority of losers and the need to compensate them whenever those evil neoliberals want to deregulate or remove the tariff. The Left over Left are completely preoccupied the fate of the workers who have lost their privileges from regulation or tariff protection rather than the consumers who are now richer. Without missing a beat, the Left over Left changes sides and become brutal utilitarians when it comes to the minimum wage and unemployment and investment in human capital.

Minimum wage advocates fail to take seriously that low paid workers who lose their jobs because of minimum wage increases are real living people who suffer when their interests are traded off for the greater good of their fellow low paid workers, some of whom come from much wealthier households. As Rawls pointed out, a general problem that throws utilitarianism into question is some people’s interests, or even lives, can be sacrificed if doing so will maximize total satisfaction. As Rawls says:

[ utilitarianism] adopt[s] for society as a whole the principle of choice for one man… there is a sense in which classical utilitarianism fails to take seriously the distinction between persons.

What is underplayed in the minimum wage debate is Noah Smith, Arindrajit Dube and other scholars are careful in what they say but politicians and living wage lobbyists don’t listen to those careful qualifications.

The key qualification of these academics is there are policy trade-offs that cannot be avoided when the minimum wage is increased. Some jobs will be lost if the minimum wage increases. Some say this effect is small, others say this effect is large, hardly anyone says it’s zero.

The claims that the minimum wage can be lifted without hurting employment are a long bow from what Andrajit Dube said about small changes in the minimum wage having small adverse effects on unemployment. What Andrajit Dube said is not much different from everyone else on the minimum wage – Nuemark is an example:

a 10 per cent increase in the minimum wage could reduce young adult employment by up to 2 per cent

David Card was always very careful amount about how his pioneering research  was about how small increases in the minimum wage not reducing employment in the presence of search and matching costs:

From the perspective of a search paradigm, these policies make sense, but they also mean that each employer has a tiny bit of monopoly power over his or her workforce. As a result, if you raise the minimum wage a little—not a huge amount, but a little—you won’t necessarily cause a big employment reduction. In some cases, you could get an employment increase.

Noah Smith is wrong. We do know what will happen if the minimum wage is raised $15 per hour. Some people will lose their jobs. More importantly, there is a reduced incentive for the low paid to invest in skills to improve their earning power because the minimum wage is already delivered that assuming they still have a job.

In 1965 an editor at Look asked an MIT economist why "liberal" economists hadn't signed an anti-minimum wage letter. http://t.co/ONuQKIWhG7—
Garett Jones (@GarettJones) December 02, 2014

How you handle these casualties of policy changes such as minimum wage increases is a central dilemma of applied welfare economics. This dilemma is usually solved by pointing out that it’s far less risky in terms of employment and welfare improvements and losses to increase the Earned Income Tax Credit (EITC) because that places no jobs at risk.

Now along comes Steve Landsburg to point out that the incidence of an Earned Income Tax Credit (EITC) changes when there is a minimum wage, when there is a price floor. Remember everyone agrees that when there is an earned income tax credit, some of the benefits go to the employer. When you raise the EITC, more people enter the labour market. This increase in the supply of labour drives wages down, which transfers some of the benefit of the tax credit from the workers you intended to help to the employers but not all of the benefits of the tax credit.

Steve Landsburg shows that in any labour market where the minimum wage is above the wage that would prevail but for the minimum wage law, the minimum wage cannot fall to cope with the increase in labour supply induced by the earned income tax credit. For that reason, all of the benefits of the earned income tax credit go to employers. Employers can hire more people without having to increase the wage they offer above the minimum wage. As long as the minimum wage is above the market clearing wage, more people get a job as a result of the tax credit, but no one takes home pay that is higher than the minimum wage.

One of the purposes of applied price theory, the study of economic history and even labour econometrics is to spare us policy experiments that we already know that they will not turn out well.