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A Higher Minimum Wage Will Make Us Meaner by Scott Sumner

In a recent post, I argued that government monopolies often offered worse service to customers than competitive private firms. In this post (which will have something to offend both progressives and conservatives), I’ll look at a different but related problem.

A few days ago there was a big debate about a New York Times expose on working conditions at Amazon.com. (By the way, it would have been useful for the NYT to compare labor practices at the Seattle company to working conditions at firms operating in the Amazon region of Brazil.)

Many liberals were appalled, while conservatives often wondered why, if working conditions were so bad at Amazon, people didn’t simply “get another job.” I have sympathy for both sides, but probably a bit more for the conservative side.

One liberal objection might be that it’s not easy to get another job. (And perhaps that’s because monetary policy since 2008 has been too contractionary. And perhaps that’s because conservatives have complained about the Fed’s QE/low interest rate policies, which has made the Fed reluctant to do more.)

Regardless of how you feel about monetary policy, it’s clear that if employers feel they have a “captive audience” of workers, who are terrified of losing their jobs, it would be easier for the employer to crack the whip and drive the employees to work extremely hard. One advantage of a healthy job market is that workers have more power to negotiate pleasant working conditions.

But progressives also have some major weaknesses in this area. They tend to favor policies such as New York City’s rent controls, and the new $15 minimum wage being gradually phased in in some western cities.

I like to think of these policies as engines of meanness. They are constructed in such a way that they almost guarantee that Americans will become less polite to each other.

In New York City, landlords with rent controlled units know that the rent is being artificially held far below market, and thus that they would have no trouble finding new tenants if the existing tenant is unhappy. So then have no incentive to upgrade the quality of the apartment, or to quickly fix problems. They do have an incentive to discriminate against minorities that, on average, are more likely to become unemployed, and hence unable to pay the rent. Or young people, who might damage the unit with wild parties.

Wage floors present the same sort of problem as rent ceilings, except that now it’s the demanders who become meaner, not the supplier. Firms that demand labor in Los Angeles in the year 2020 will be able to treat their employees very poorly, and still find lots of people willing to work for $15/hour.

Even worse, this regulation will interact with the migrant flow from Latin America, to produce another set of unanticipated side effects. In some developing countries there is a huge army of unemployed who go to the cities, hoping to get one of the few high wage jobs available in the “formal” sector of the economy. With a $15 minimum wage, migrants will come from Mexico until the disutility of waiting for a good job just balances the expected utility of landing one of those good jobs. You’ll have lots more angry, frustrated, young Mexican illegal immigrants with lots of time on their hands. What could go wrong?

One reason that I am what Miles Kimball calls a “supply-side liberal” is that I believe my preferred policy mix (NGDP targeting, plus free markets) is most likely to produce the sort of “nice” society I grew up with (in Madison, Wisconsin).

This post first appeared at Econlog. ©

Scott Sumner
Scott Sumner

Scott B. Sumner is the director of the Program on Monetary Policy at the Mercatus Center and a professor at Bentley University. He blogs at the Money Illusion and Econlog.

Are CEOs Overpaid? by Gary M. Galles

Are corporate managers and CEOs overpaid?

Many politicians rail against “overpaid” corporate managers. But these attacks overlook the issues of risk and uncertainty.

Workers agree to compensation before performing their work. Consequently, their compensation reflects not a known value but their expected value when arrangements are made.

Managers who turn out more productive than expected will have been underpaid, those less productive than expected will have been overpaid. But examples of the latter don’t prove managers are generally overpaid.

As performance reveals productivity, competition will also bid compensation of superior managers up and inferior managers down. And we must consider the present value of that entire stream, not a given year’s results, to evaluate managers’ productivity versus pay.

No manager is always right, but not every mistake is proof that they’re overpaid. They are paid for superior, not flawless, judgment — fewer mistakes, but not no mistakes.

That is another reason top managers of large enterprises will be very highly compensated. A 1% higher probability of being right on a $1 billion bet is very valuable, and even more so for a $10 billion bet. But even the best will err sometimes, so mistakes don’t prove shareholders are overpaying for managerial judgment.

This is part of a series of micro-blogs by Professor Galles responding to frequently asked questions on economic issues. If you have a question, emailAnythingPeaceful@FEE.org. 

Stephen Limbaugh Answers the Question: Are Corporations People?

In Dinesh D’Souza’s the latest video of the “new voices” series, Stephen Limbaugh gives his unique take on the liberal dogma that “corporations are not people.”

EDITORS NOTE: This video initially appeared on DineshDSouza.com. Keep an eye out for more “new voices” videos on DineshDSouza.com in the coming months. In the meantime, watch some more of Stephen’s videos and connect with him on YouTube, Facebook, and Twitter. Dinesh D’Souza’s latest #1 New York Times best selling book is “America,” a rebuttal of the progressive shame narrative of American history, now available in paperback for the first time!