Minimum Wage Laws

A poster asked over at my xanga regarding my thoughts on the minimum wage. Having a list of mostly-expired topics doesn't exactly give me a viable alternative, so here we go.

The discussion around the minimum wage is amusing to watch. Supporters and opponents continue tossing the same facts and figures at each other, as if repeating their arguments one more time will convince the other side just how supremely wrong they were in their foolish assumptions.

Seriously, though, it's an interesting issue. A related subject is mandatory overtime pay rules, which I want to discuss before going on into the minimum wage. Mandatory Overtime Pay, which I'll dub as MOP for the rest of the post, are relatively self-explanatory: after a certain amount of hours worked, a firm must pay a worker such-and-such a higher wage (generally time and a half). The obvious critique of MOP is that it unduly tells the firm how they can go about paying their employees while punishing them even more for obeying the law (in the form of a much higher wage). For a firm to avoid paying the extra MOP wage, a firm has three options:

1) Hire another worker, which has the obvious drawback of now costing the firm twice as much as before MOP;

2) Make the current worker more productive in order to allow the worker to complete their job in enough time for MOP not to activate (in the U.S., that's under forty hours a week). The drawback to this is that it generally requires some form of extra capital to make the worker more productive, e.g. extra training and/or machinery to help them become more productive;

3) Reduce the amount of work the employee has to work so they don't exceed the MOP-activation threshold, which means that there is a job that needs to get done that isn't.

All of these options have problems, each of which has more problems than the simple ones I've outlined above. To hire another worker, for instance, a firm has the additional costs of finding another worker willing to take the job. On the other hand, look at the pluses to each:

1) The firm now has double the production as before in that niche.

2) You have a more productive worker, which could be particularly worthwhile if the cost was training (a once-and-you're-done cost).

3) The worker gets more leisure time.

Now that I'm through bringing up the pros and cons of MOP (for reasons that are beyond my understanding), I can finish up my digression and move back on track to the original subject at hand: minimum wage laws.

Minimum wages aren't actually the demons (or angels) that people make them out to be. There's an entirely other dimension to them which is unaddressed...probably because the actual effect is difficult to measure. The effect I refer to is the typical firm's desire to do more with what they have when faced with a necessary rise in costs. If you're faced with higher costs for something you can't substitute, you try your best to get some higher output out of it; for a good example of this, look at Toyota, which is frequently lauded for getting all of its employees included in cost-saving measures by innovation on their own levels of employ; instead of going out and finding the cheapest-cost workers, Toyota encourages their workers to become more productive.

In introductory economics, typical models will explain something akin to the following line of reasoning: minimum wage laws establish wage floors above that of the equilibrium wage, which creates a surplus of workers willing to work at the higher wage and a reduced employer demand to pay for jobs at such a high pay rate. The discrepency between supply and demand is a labor surplus, also known as unemployment.

Sounds simple enough, right? It has its own kind of simple logic, too. From the business majors I've met, introductory macroeconomics and microeconomics are the only courses of that sort required, so doubtless many see the situation as simple as the preceding paragraph.

Of course, it isn't. One issue is that most people don't work for minimum wage, so it's not as though a spike in the current minimum wage ($5.15 an hour) will cause another Great Depression. Besides, 18 states have minimum wages higher than the federal standard and those states total some one-half the population of the United States.

My old stomping grounds of Washington State, just in case anyone was curious, has the highest minimum wage, currently standing at $7.63 an hour and tied to inflation.

The main point is that a hike in the minimum wage wouldn't crush our economy. In fact, it might raise the productivity of our workforce (a hypothesis I examined above), which could be healthier for the economy in the long run. Now, I'm not going out on a limb and insisting that the U.S. Congress go out and make the minimum wage $10.50 an hour or somesuch nonsense. Minimum wage laws do impose costs on firms that may not be prepared for it and whose labor markets may be distorted by such tampering. Furthermore, many minimum-wage jobs are in industries where it's certainly difficult to raise a worker's productivity - janitors, cashiers, food service jobs, bus drivers, college interns in Washington, D.C...these aren't exactly jobs where you can train someone for a day or two and expect their output to rise dramatically.

Such is life where services take up 80% of your economy. Training is a two-tiered payoff; for some service jobs (like the ones I mentioned above), it can have next to no payoff. For upper-echelon jobs (lawyers, doctors, accountants, political operatives, etc.), payoffs can be enormous, but those occupations aren't exactly minimum wage, so that's beside the point. There's only one type of training that can significantly help minimum-wage workers, and it has absolutely nothing to do with their improving the productivity jobs: significant education in more highly-skilled, often technologically-intensive jobs.

And here we are back at education, my big issue...pure coincidence, of course.

Why Racial Test Score Convergence is Imperative

Now that is a sexy title. Anyway, moving on...

Much of the hullabaloo regarding the No Child Left Behind Act, passed back in ’01, was the extra attention that public schools would have to pay towards “higher standards,” as if this was some sort of panacea towards fixing schools, which are plagued with some of the following problems, among others, in no particular order:

• Local monopolies
• Enormous barriers to entry and exit in both number of schools and the necessary labor (e.g. teachers)
• Rising costs and few mechanisms or incentives for reducing costs
• No mechanism between pay and performance
• Extremely limited ability for customers (e.g. parents and their children) to “shop around” for better facilities
• Parent-Teacher Associations that prevent schools from pressing kids harder on the grounds that it will “hurt their feelings”
• Old and decaying facilities
• An unequal, regressive, poorly-designed revenue base system (property taxes)
• Very little actual consensus about what the priorities of school should be

There are more reasons. Higher standards will solve few, if not any, of these. In fact, it will solve none of the reasons listed above. That isn’t to say that higher standards won’t help…before continuing, it’s necessary to issue a slight disclaimer: I do not support raising standards, particularly in math and science, to the degree of, say, Japan. As much as I’d prefer the rest of the United States to emulate my old stomping grounds of Seattle a little more, higher suicide rates isn’t the best place to start. Kids there…well, they take school and achievement a little too seriously.

Not that such an eventuality would ever happen here. That’s a cultural difference twixt the Land of the Rising Sun and the Land of the Swelling Waistline.

Again, I digress. The main point is that higher standards, coupled with a little more of a carrot-and-stick system from schools (throwing out the arcane age-based grade system or the one-track-fits-all school achievement ladder, for instance) could do wonders to give kids real incentives to get interested in learning. They’re not the end-all and be-all to save public schools in this country, but they could help significantly on the achievement end of the situation.

So where does race come into this debate? Try about five million different places, but I’ll just choose one and try not to stray from it too significantly. One of the biggest problems in raising standards is that there are students that are far enough behind the current standards as to make it next to impossible to catch up with the rest of the student body: young minority students. The gap is – thankfully – closing, but there are still significant shortfalls between majority and minority students. Now, there’s something to be said about the “cultures of learning” argument – the idea that a child’s ethnic/racial/socioeconomic background could have a profound impact on a child’s attitude towards learning – and that’s not something that can be addressed on a governmental level. The most important objective is still to seek some sort of convergence among test scores for children.

Obviously, this isn’t a proposition that has many detractors. Provided that scores harmonize up and not down (i.e. scores rising to a convergent plateau as opposed to falling to a parallel floor), most everyone would support student averages to be relatively similar across racial boundaries.

However, there’s a more important factor here. The argument of the state of Mississippi in U.S. v. Fordice, back in 1992, was on-target, but for the wrong reasons.

Backing up a minute. The case itself dealt with the Justice Department suing the State of Mississippi for keeping abnormally high academic admissions standards based on ACT scores (rather than GPA), which were known to be racially disparate (the Mississippi white schools had an admission requirement ACT score of 15; the average white student’s score, 18; the average black’s, 7).

The case for the state of Mississippi was that the white colleges couldn’t afford to lower their standards, because their higher standards in classes would be too much for kids that scored too low on the ACT tests to demonstrate aptitude but were high enough to get into the predominantly white schools under newer (and lower) standards, whereas no one would be able to get into the predominately black schools if they raised their standards.

Why was this argument sensical? Because of the vast disparity between the scores of white and black students. Which gets me to the main point of this entire post:

Academic standards can’t be raised sufficiently to promote achievement until racial disparities are statistically insignificant.

If they’re raised too soon, there’ll doubtless be another case like Fordice in which someone will say that the new standards discriminate somehow – and given the current state of affairs, that’s all too possible.

As to how to solve this problem…I don’t know. I really don’t. One of my first posts relayed several solutions to help improve education and I certainly have a good number more. However, those are all majoritarian; I have scarce knowledge about how kids of different races think, act, and approach education at such a young age. I have little or no study in psychology and even less in child psychology. Not having any racial studies background either, I can’t attest to any superior insight from racial group to racial group.

When it comes to the solution of this muddle, I can only frame the problem. Your guess is as good – if not better – than mine.

Why Jim Cramer hates [Corporate] America

For those of you who have seen the CNBC show, "Mad Money with Jim Cramer," this post will hit more strongly than those of you who haven't. For those that have been fortunate enough to evade that monstrosity, I'll just give you a hint of what you're missing: a bald, stocky man running around a studio stage, making all sorts of strange noises like an obnoxious disc jockey while waving his arms about as if he's escaping a collapsing building. Between the torrent of spit and the foam that's running down his chin like some rabid dog, he shouts out stock tips for trigger-happy investors. One of his central tenets is to buy stock when it's on a temporary loss and buy it when it's at a temporary high - and to do so quickly and without hesitation, living and dying on quarterly numbers.

If my words have failed to give you a disturbing enough image, take a look at this.

If my words have also failed to illustrate how irritating this man's voice is on the psyche, one of my roommates will often flip to him and leave him on for just long enough to get me ranting.

Why does this man draw my ire so? Why, what a perfect segue.

Long story short - Jim Cramer hates Corporate America.

Short story long - Jim Cramer's tactics promote bad business and investment decisions. Cramer's not the only guy out there, but he's endemic of the problem with short-term investors nowadays.

There are two ways to approach investing, perfectly illustrated by the Seattle Post-Intelligencer's David Horsey, who made a political cartoon two years ago or so depicting the dichotomy between what businessmen nowadays preach (sound investment, cautious decision-making, and so on) and how businessmen act (more or less like a frantic, crazed man rolling dice). The latter is, unfortunately, increasingly common, thanks to the popularity of people like Cramer, who preach that investors should get in while the going's good and yank out all their money when stocks are high.

On the surface, nothing sounds inherently wrong about this. After all, why shouldn't investors do what they please with their money? If you buy low and sell high, you've got a steal and made a tidy profit. Self-interest! That's what capitalism is all about, right?

Sort of, but not exactly. Since I don't want to bore anyone reading this with a discussion of Nash equilibria (yes, it's slightly more complicated than how Russell Crowe depicted it in A Beautiful Mind), I'll just move on, since that's not even my point. This type of buy-fast-sell-faster mentality can harm both the investor, by making them buy or sell at improper times and lose a large share of their capital, and firms, for reasons I'm about to expound upon.

In a firm full of small investors, the inflow and outflow of capital via stock buying and selling won't significantly influence a firm's bottom line; investors are "price takers" insofar as their purchase doesn't influence the total stock of stock, and consequentely the price thereof. But firms aren't always made up of small investors - just ask Carl Ichan, who's buying up AOL-Time Warner. Big-time investors thinking in what my AP English teacher called "short-term time" can wreak havoc with established companies, as even the hint of one of those investors cashing out can completely decimate a company's quarterly report...which, in turn, can cause more "short-term time" investors to cash out, egged on by their ranter-in-chief Jim Cramer...and the feedback cycle continues.

And now we get to the real meat of the argument. Companies, eager to keep investors of this rather repugnant (yet well-financed) ilk content to keep their cash in company stock (something which a healthy chunk of executive pay is tied to, another incentive to keep the big investors happy), favor policies to build short-term profit policies, which more often than not sacrifice long-term growth. Again, there's nothing inherently wrong with executives responding to investor demand - that's the "implicit bargain" made between investors (who invest their money) and executives (who get paid to run the company).

But when investor demand conflicts with the long-term health of the company and its employees...well, that's when I have qualms. Companies aren't just moving money around for investors; they hire people, too, who depend upon them for their livelihood. According to one a book that I'm fond of, Affluenza, the average American family can only sustain their standard of living without a job for the better part of a month or so. I'm not advocating that investors should keep their money sunk in a dying company for the sake of its employees; that's not sensicial in the least.

However, when the attitudes of investors who want to make a quick buck conflict with the long-term health of the company, economic growth, and the jobs of its employees (not necessarily in that order), then it's obvious which should be valued more highly.

With that in mind, I say a pox upon you, Jim Cramer.