However, I also hold the view that too many unqualified students are already going to colleges (that is the subject of another post). And one of the empirical findings in the minimum wage literature is that increases in the minimum wage are associated with increases in the college drop-out rate. Now, I doubt anyone majoring in neuroscience is skipping out of college to take advantage of higher pancake flipper wages, so my bet is that these losses are concentrated among the group of people who ought not be in college today – at least given their woeful preparation in high school and the woeful way we run universities today.

The challenge to me is obvious. If I believe that fewer folks ought to go to college, yet I also believe that the minimum wage is bad, wouldn’t I have to abandon, at least partially, one of those views? Of course I do not think so at all. I invite you to chime in on why or why not. Whatever the answer, I like to debate myself like this to make sure I am always understanding how others may understand what my views are, and to make sure that I do not run into logical traps. If my thinking contradicts itself, that tells me that something has to give.

I’ll be putting together an extensive post on my evolving thoughts in Intellectual Property sometime over the summer that is the very essence of the debating myself discipline.

Here is the piece:

For a significant part of my life, I was a full-time dairy farmer, so I know first-hand how difficult it is to turn a profit on a farm.  Fortunately, a drought in 1983 forced the sale of my herd; otherwise I might still be getting a lot of exercise and earning what my Agway field man called “psychic income.”

The government has long pursued a cheap food policy, and nowhere is that evident more than in the dairy business.  Their objective is to have an “orderly market,” as opposed to a free market.  The idea is that no one should have to pay too much for a food that babies and young children need.  The problem is that it’s far easier to get cows bred in the spring than in the winter, so the supply of milk tends to be short in the fall and flush in January and February  (for the city people reading this, cows need to have calves in order to produce milk, and the ideal cow has one calf on or around the same date every year.  The gestation period for a cow is 305 days, and so an ideal lactation is also 305 days.  Cows get a two-month dry period every year so they can build up the nutritional reserves they will need when they freshen).

Under the terms of the federal milk market orders, dairy farmers earn a “base” according to their production from August to the end of October.  For that average daily quantity, they then receive a higher price for their “base milk” than for “excess milk.”  I’m not sure what the differential is now, but when I worked at the business end of the cow, it was $2.50 — a considerable penalty for exceeding one’s base.  Thus dairy farmers had a positive incentive to get cows bred to calve in the fall, and a negative incentive in the spring.  (It’s also true that consumers drink more milk in the fall than in the winter months — give the credit to ginger snaps.)

It’s important to note that the farmers producing the milk don’t have any incentive to sell their milk to the public.  Before we were enslaved by the federal order system, we shipped our milk to a dairy (called a “handler” by the milk market administration) owned by my uncles.  Because we wanted a good price for our milk, we actually sold retail routes and restaurant accounts that exceeded the production of our farm, so my uncles could not give us any crap about how tough it was to sell milk on the retail end.  What they paid us was a matter of mutual agreement, with an eye on what prices one could charge for retail dairy products.  Another thing in our favor was that our milk on the farm and the milk and ice cream at the dairy were arguably the best in the world.  That made it easier for us to sell the production from our farm.

Under the federal order, however, all handlers were required to “pool” the revenue (“receipts”), and the market administrators determined what the average “utilization” of milk was in the market order.  Let’s say for the sake of illustration that 60 percent of the milk was sold as Class I fluid milk (the highest value utilization), while the rest was Class II or Class III manufacturing milk.  Then little dairies like my uncles’ that sold 90 percent or more as fluid milk would pay into the pool according to their abilities, while Kraft and other big manufacturing operations would take money from the pool according to their needs (a little Communist Manifesto lingo there).

Pretty collectivist, eh?  But there’s more — the prices themselves were derived by a formula based on the price of manufacturing milk in Minnesota and Wisconsin (eat cheese or die).

And more still.  Given the fact that this whole system was designed to encourage the overproduction of milk so the babies would always have enough, any milk that could not be sold for any purpose was bought by the federal government and was stored in salt caverns and silos in the midwest.  The government paid a per-mile rate to truck the stuff from Pennsylvania to Kansas City — once you got 50 miles from City Hall in Philadelphia, the mileage charges started adding up.  I am not making this up.

All those surplus dairy products were then release on the market whenever milk prices appeared to be getting too high.  Also, they were used for the school lunch program, WIC, and for welfare recipients.  (There is a board game in this somewhere, like “Public Assistance.”)

At any rate, it’s easy to see why the dairy farming business turned out to be so unprofitable.  The manufacturing prices of milk in Minnesota and Wisconsin tended to reach their limit at the point that reflected the cost of machinery, cows and equipment, which meant in practical terms that most farmers lived off depreciation.  Add to this an abundance of farmers, like myself, who had a romantic view of farm life and an unwarranted appreciation of psychic income.  And don’t forget the Mennonites and Amish who knock themselves out for religious reasons.

There are two other fairly recent developments that have made things worse for dairy farmers.  The first of these is the sexing of semen:  it’s now possible to separate male sperm from female sperm, so that there’s a 90 percent chance one could get heifer calves from all those cows having one calf a year.  This was something scientists were working on in the 1970′s, and initially the cost of separating semen was expensive and only used when breeders were inseminating embryos from top sires and dams for the purpose of making embryo transfers.  Now, however, it’s just something you get with every dose of semen used in artificial breeding.  The result of all this is that dairy cow populations can roughly double in two years, shortening the business cycle considerably.  It’s not as bad as the chicken business, but when milk prices rise, dairy farmers can expand their herds quickly as everyone tries to catch the boom before the bust.

Three years ago, dairy prices were relatively high, so many heifers were saved and milk production exploded just as the price of feed was being pushed upward by the second recent development, the subsidies for ethanol.

High corn prices have encouraged farmers everywhere to grow corn for ethanol, and that has affected the price of feed for dairy cattle and has pushed up the price of everything else, like fertilizer, tractors and farm equipment.  A ton of mixed feed that cost me $100 in 1983 now costs over $500.  Hay, even junky hay that used to go for $40 a ton now costs $300 a ton.  The price of milk in 1983 was $13 per hundredweight.  Now it’s in the neighborhood of just $15.  Oops!

So the “No Farms” concept is not that far fetched, especially if you see the bumpersticker on a dairy farmer’s pickup:  the fate of his farm is in jeopardy as long as the feds tinker with supplies and prices.  Those farmers who can add and subtract are going to sell their cows and put the whole farm into corn.  If they get lucky, maybe Halliburton will drill down to the Marcellus Shale, and they can skip trying to raise corn with $500 per ton fertilizer.

But think about how a minimum wage increase would affect you if you were running a business. Perhaps the way to think about it is to line up current and prospective workers in order of how much value they create for your firm on an hourly basis. Imagine 10 workers and worker A produces $10 per hour worth of valuable things, worker B produces $9 and so on until worker J who can only produce $1 worth of valuable things for you.

If the minimum wage is $5.15, you at best will hire workers A, B, C, D and E paying each what they are worth to your firm. Thus worker A is paid $10, while worker B is paid $9, C is paid $8, D is paid $7 and E is paid $6. You’d like to pay each worker less, but if you do so, your competitors would be able to hire them away at better wages and make profits.

What do you do if the minimum wage is raised to $7.25 per hour? Do you simply raise the wages of worker E by $1.25 and worker D by $0.25? And if you do that, wouldn’t that be unfair to worker D who used to make more than E, but now makes the same? So would you respond by raising worker D’s wage to $8.25, and then C to $9.25 and so on, to maintain the “fairness” in your wage scale? It seems silly to be even asking the question doesn’t it? What you would likely do in the case of a mandated wage increase is to relieve workers E and D from duty (or otherwise reduce the costs of having them by $1.25 for E and $0.25 for D). Why? Because E and D cannot produce $7.25 worth of stuff for you.

I am not playing any fancy games here. If you don’t believe that this is how employers respond to mandated wage increases you would have to explain what forces would systematically keep wages below productivity. Because then and only then could firms sustain wage increases and maintain profitability. However, that is not the point I’d like to make. Suppose you do believe that low-skilled workers are active in markets for their services that are not uber-competitive, and that there is a reason to think that their wages are lower than the value of what they produce for firms (that still may be the proper outcome, as we would need to have a very long discussion on risk, the structure of production and interest/discount rates to get into an academic analysis of this), it cannot follow that all workers are systematically underpaid. That would produce such an enormous profit opportunity for other greedy employers that it is silly to even suggest it.

Thus, if at some point in the wage distribution workers are being paid their productivity, but at lower points in the wage distribution workers are not – then how can mandated wage increases at the lower end ultimately “spiral up?” They can’t … and some evidence for this is that the share of labor and the share of capital in national income has remained remarkably constant for the past 60 or so years. If mandates could alter the distribution of income in any way, then we should have observed times of better worker “treatment” by government to correspond to increasing labor shares and times like the radical free market 1980s through today to see labor’s share falling. But we do not see that.

The point is, mandated wage increases are like a pair of loppers, not the ladders that their promoters so often pronounce.

STOPPED HERE

Here is an excerpt:

But then, in 2007, Washington came to the “rescue.” As part of its efforts to provide a “living wage” for all Americans, Congress passed a law to step up the minimum wage to $7.25 per hour across all U.S. states and territories by 2009.[iii] Understanding that such a law would devastate American Samoa by raising canning costs past the point where the companies could maintain profitability, the non-voting Samoan member of the U.S. House of Representatives convinced Congress to allow an exemption for the islands. However, Republicans raised allegations that Speaker of the House Nancy Pelosi, in whose district both Chicken of the Sea and StarKist had corporate offices, had caved to pressure from big donors and was allowing the continued “exploitation” of Samoan workers. Facing a sticky political situation, the exemption was removed.

The Samoan representative desperately sought to fend off what he was sure would be an economic calamity. He asked the Department of Labor to issue a report examining the potential consequences of the law upon the islands’ economy. The report explained that “nearly 80 percent of workers covered by the FLSA earned under $7.25 per hour. By comparison, if the U.S. minimum wage were increased to the level of the 75th percentile of hourly-paid U.S. workers, it would be raised to $16.50 per hour.” Therefore, the study continued, “there is concern that [the tuna canneries] will be closed prior to the escalation of the minimum wage … and that production will be shifted to facilities outside the U.S.” Ultimately, the Department of Labor concluded that “closure of the tuna canneries will cause a total loss of 8,118 jobs – 45.6 percent of total employment.” (emphasis mine) [iv]

Despite this dire forecast, the law went through. Two years later, the results could not be clearer: Chicken of the Sea closed its cannery and moved its production to a largely automated plant in Georgia,[iv] while StarKist has reduced its workforce and is threatening to leave as well.[v]

If that were to occur, which seems likely, American Samoa would be left with no functioning industry.

And it goes on:

In the case of American Samoa, tuna canners simply could not deliver $7.25 cents per hour of productivity, so their jobs were eliminated. Rather than being employed at $3.26 per hour (the level prior to the minimum wage hike), they are now unemployed at $7.25 per hour. Which do you think is better?

Some would argue that life is better for the few that were able to keep jobs at $7.25 per hour. But that is fallacious – raising wages so far above market clearing rates will require that some other cost be imposed on workers in order to ration away the labor surplus – and that cost will rise so much that the effective wage workers receive is not only lower than the minimum wage, but lower than the wage they were getting before the minimum wage law was passed!.

Here’s a little of what is going on:

Among the unintended consequences of congressional “benevolence” are rapidly rising consumer prices, due to the higher shipping costs now necessary to bring consumer goods to the islands. Before the minimum wage hikes destroyed most of the canning jobs, lots of canned tuna were shipped from American Samoa to the U.S. (over 50% of the canned tuna in American markets came from American Samoa). One benefit of all the shipping traffic was a low cost of imports, as ships were coming to the islands anyway to pick up the tuna.

HT to my friend John B.

Low prices are excoriated because some view this activity as unfair to other businesses that cannot lower their costs as much. The worry is that Walmart will lower prices so low as to drive other companies out of business, and then when all of the other competitors are gone, then Walmart will jack up the prices of everything and take us for a serious ride. Nevermind that this has never been proven to have happened, and nevermind that consumers are big winners here, let’s just look at why Progressives are upset about these policies. It seems to me that they think it is unfair to inefficient, high cost, unprofitable competing businesses. And gosh, we just can’t have them go out of business.

Here is the pretzel twist: how come when these evil, large, greedy, price cutting firms compete in the labor market by offering high wages to workers the same arguments are not levied against them? Seriously. If the University of Rochester really wants me to teach here (for whatever reason) they bid up my wage. And they might bid it up so high that nearby competing institutions have no chance to secure my services. So, Rochester gets the good students, and gets high quality economics courses offered, while Nearby U. gets worse students and lower quality economics courses taught. This has the same competitive impact as U of R charging “cut rate” prices for students to enroll.

So I ask my dear enlightened progressives why is not OK for firms to outcompete other firms by making the lives of consumers better off, and at the same time it IS OK for firms to outcompete other firms by making the lives of other workers better off? You can’t have it both ways, can you?

The typical argument supporters make for the minimum wage is that “employers could just pay a little more, they can afford it, or what prevents employers from paying workers even $4 or $3 or $2 or less?” As I said above, I’ll not argue the economic case here, no one cares to listen to it. Just one economic thought before my ethical question:  f this is so logically true, then why is it that over 98% of employees in the labor force earn more than the minimum wage? And why don’t your employers cut your wages right now. The answer is related to the mirror question, “why isn’t the price of every good you consume sky high, or even a little higher than it is now?” You cannot answer each of these questions differently.

But the moral case against the minimum wage is just as solid, or so I once thought. If the populace believes that “we” have a moral obligation to help the poor, then how come we pass minimum wage laws requiring only a small subset of the population to take up this responsibility? What is moral about that? Why is not the responsibility falling on the shoulders of all of us? And did anyone ever stop to think of who it is that pays the minimum wage? If you think you are sticking it to Walmart, you have another thing coming … in fact, Walmart is very likely to be made better off when minimum wages increase the price of low skilled workers. Similarly, did you ever wonder why unions and their workers support the minimum wage so ardently? Isn’t the point of being in a union to be paid substantially more than the minimum wage and to improve workers’ bargaining position? Don’t most union workers earn more than the minimum wage? Then why the heck would they care so much about it (and don’t go screaming morals and ethics at me, if that were the case, why the minimum wage is the moral horse people should be riding is not clear at all to me, why not rise the death penalty moral horse, for example?). The plain fact is that when the minimum wage is raised, it makes the relative price of union workers (and Walmart workers) lower – thereby making it more attractive for companies to use union labor and not the now higher paid non-union workers. Parading around on your moral high horse when this is an underlying motivation seems a little disingenuous, no?

That’s right. Most minimum wage workers (who are not themselves poor, but leave that inconvenient truth aside) work at smaller companies, mom and pop shops, and the like. These places are not rich, and they cannot sustain wage increases without doing damage to their existence. These folks used their savings, their blood, sweat and tears, and took an entrepreneurial risk … and as a reward for that risk taking (to serve us) we … force them to pay workers more than they are currently being paid. Where is the morality in that?

Consider a thought experiment. There are two people, Amelia and Bedelia who are identical in every regard. Amelia decides to work for a hospital as a pathologist and earns $70,000 per year. Bedelia has the same skill set, but prefers to make her own hours, and wishes to be entrepreneurial about how do deliver pathology services to her customers. So she starts a little independent testing lab down the street from Amelia’s office. Bedelia has to hire to low skilled workers to process paperwork and deliver results to clients, Bedelia herself takes no salary, but keeps whatever profits she makes for herself. Each year those profits amount to $70,000. However, because she decided to start a business, she is now asked to pay her two workers just a little bit more – say 50 cents an hour over the market wage. Well, 2 workers earning 50 cents more per hour over a year amounts to $2,000 in additional expenses.

So now Bedelia, doing the same work as Amelia, but taking on more risk, is being asked to contribute $2,000 to the well being of two workers that she never had to hire in the first place. Let’s push this further. Suppose Bedelia managed to run the business all by herself with no workers. Since folks think it is morally fine to impose the costs of paying minimum wage workers more wages solely on Bedelia, does it them follow that just by going into business yourself that you are obligated to hire low wage workers? No you say? I have no idea how you could justify a no answer, and then argue that if she decides to actually hire people, and they voluntarily agree to take the position, that somehow she incurs an additional moral responsibility to help the poor.

Nothing prevents “us” from helping the poor and low wage workers. That we don’t perhaps says something about our moral code. That we legislate and force by point of a gun this responsibility on a select group of comparatively unwealthy risk takers says even more about our moral code. Consistent and honest thinking about the moral case for the minimum wage at least should raise the question of if it is the right thing to do. But that kind of thinking seems to be beyond the reach of knee-jerk religious supporters of “labor” policies. But if both the moral approach and the economic approach lead us to the same conclusion, how can one still strongly support policies like this?