Minimum Wage: the Jimmy the Stock Boy Fallacy

by Bruce Webb

Politicians tasked with convincing democratic majorities that they should oppose minimum wage increases generally fall back on the economic argument that such increases simply lead to job losses. Often they go on to point out that these losses fall disproportionately on the young, the unskilled, or minorities. Before examining whether this argument is in fact true at all and whether this effect is sufficient to cause us to vote against our own personal material interest it is worth asking if the argument is being offered in good faith.

A look at the bigger pictures suggests the answer is no. Because these same politicians seem indifferent to these populations in almost all other contexts. For example it is common for these same conservative politicians to claim that we should give tax breaks to companies to get them to relocate no matter that the job effects on the previous factory location might be serious. Now suddenly it is all about the jobs locally. Moreover when given the opportunity to fund education, job training, youth job programs, and community development, programs which might or might not be stimulative in the short run, but certain would create longer term opportunities for these same populations the Republicans in both Houses voted almost unanimously ‘No’. What GOP Leaders deem wasteful in Senate stimulus bill

So when you see arguments framed as follows: “How can you workers be so cold as to take a wage increase when you know it is going to cause poor Jimmy the Stock Boy to lose his job?” workers and voters should immediately be smelling a rat. Because what we do know is that if management decided it was more efficient to move from a system of supplies kept on site to an on demand system via some company like Corporate Express that Jimmy would be on his ass on the pavement in an instant. These appeals in economic guise are simply attempts to appeal to liberal guilt and worker solidarity to convince us to vote against our own interest in favor of the corporate bottom line.

Plus it doesn’t take a lot of complicated analysis to show that the argument can’t just rest on changes on employment at the margin, just a pencil and a calculator. Take a company with 100 workers including Jimmy making federal minimum wage currently at $6.55 per hour. This wage is scheduled to increase to $7.25 per hour on July 24th. Let’s say that management in order to partially compensate for this increased cost decided to lay off Jimmy. Should the other workers care enough that they should forgo the pay increase? For that matter should Jimmy even want them to? I suggest the answer to both questions is no.

We have 99 workers now making an extra 70 cents an hour which multiplies out to an extra $69.30 per hour. When we subtract out Jimmy’s wage that net drops to $62.75. Which is plenty enough to buy Jimmy a nice lunch on his last day. More to the point it is enough to subsidize Jimmy’s unemployment until he gets a new job. A job where he too will be getting $7.25.

Meaning that when economists like Bryan Caplan insist that workers who don’t understand that minimum wages are net negative for workers are irrational to the extent that they shouldn’t be allowed to vote (as advocated in Myth of the Rational Voter) he can kiss my something or other. The question is just not as easy as saying ‘cost increases so demand falls’ as being just self-evident. Because the system and the calculation is more complex than that. As an example I pointed out on Spencer’s post Minimum Wage Disinformation that there is a more or less constant demand for Big Macs and Pizza delivery, meaning that McDonalds and Domino’s have to staff up or just abandon the market. And that is mostly not going to happen, there is money to be made selling burgers and pizza. There may be price effects (though the chains generally like price uniformity and demand it in response to promotional offers advertised nationally), there might alternately be profit effects. Or maybe the bosses stop letting the employees getting discounts. The idea that this instead simply and always reduces to a cost/demand identity for jobs is nonsense.

What would an honest argument to convince workers they should vote for politicians so as to be protected from the horror of getting paid a little more an hour look like? Follow me below the fold.

Well first it would have to address the question of self-interest. I doubt that any right leaning economist would argue that it is not just a right but almost a duty to maximize your own self-interest in market transactions. Indeed that is kind of the driving principle of markets. Moreover I think most would argue that maximizing your family’s self-interest is an equally valid goal. Moreover that goal can stay valid even as the circles get wider: co-workers, average town income, average state income, average national income, even average world income. The only question is how much should you give up in exchange for the welfare of others as the circles get bigger

The standard argument against minimum wage is ‘Everything’. Don’t take a wage increase that is clearly in your own self interest because it might cost Jimmy a job. Or maybe the job of the last kid hired at Luigi’s Pizza downtown. Or maybe the job of some high-school dropout in Michigan. Sorry capitalists never seem to use this same logic on their own economic decisions, nope instead they want to maximize return and cut taxation levels regardless of its effects on the price of maize in Africa.

Are there circumstances where workers should buy in to this argument? Well I think so. Depending on where you draw your own personal circle if a wage increase causes a net decrease in income then you might consider forgoing it. For example if Jimmy was not just a co-worker but also a son contributing to family income you might pause. On the other hand if job prospects are reasonably good locally and Jimmy can get a new higher wage job in short period of time then I think you grab the increase. Similarly if you are working in a service industry and the wage increase causes the local manufacturing plant to shut down and so devastate the town’s economy you might think hard. But outside the agricultural processing sector I wouldn’t think that the general manufacturing wage was that close to minimum wage to start with. And unless there are barriers to mobility you always have the option to move to places that still have job opportunities.

When seems to suggest that the task for economists who claim that opposing minimum wage is such blindingly obvious policy to anyone rational is that they need to show that the net effect of such increases have such devastating income effects on the entire state, region, or nation that workers as a whole are in a structurally negative situation. It is not enough to show some minor correlation between minimum wage increases and teen unemployment. If such an increase helps me pay my rent and still leaves me availability to Big Macs and Pizza why should I rationally care that some resort somewhere has to cut back on housekeeping staff.

On my reading the whole thing reduces to exploiting Liberal Guilt for corporate profit. Bosses are not doing you a favor in keeping your wages suppressed. That argument on examination is threadbare.