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Assigning the Burden of Proof

Have you ever experienced learning a new word and then hearing it everywhere in the days after you learn it? I’ve had a similar experience since making my argument that the burden of proof that the minimum wage is beneficial falls on the law’s supporters. Now I’m seeing people making burden-of-proof arguments everywhere. Bryan Caplan, in a post on EconLog, quotes Mike Huemer making the argument explicitly:

[T]here is a kind of moral presumption against coercive interventions. Laws are commands backed up by threats of coercive imposition of harm on those who disobey them. Harmful coercion against an individual generally requires some clear justification. One is not justified in coercively harming a person on the grounds that the person has violated a command that one merely guesses has some social benefit. If it is not reasonably clear that the expected benefits of a policy significantly outweigh the expected costs, then one cannot justly use force to impose that policy on the rest of society.

Ryan P. Long, over at Open Borders: The Case, makes what is essentially a burden-of-proof argument for open borders:

[W]hile it’s easy to merely allege that “the immigrants” caused crime to increase in your neighborhood or property values to decrease, it is substantially more difficult to prove it. I leave the burden of proof for [the idea that the differences between people really do translate into a reduced quality of life] on immigration’s critics.

Migrants from poor countries often see a 20-fold increase in their earnings just by setting foot in a wealthy country, so you had better have a good reason for barring them from doing so. The people at Open Borders: The Case do a great job arguing for the positive benefits of increased migration, but if we assigned the burden of proof correctly, it would be open borders’ opponents who would have to do the hard arguing.

Finally, while he doesn’t make an explicit burden of proof argument, Bob Murphy’s recent EconLib article raises the important point of non-price allocation under a binding minimum wage:

Raising the minimum wage might represent a drastic harm to the most vulnerable and desperate workers if the specific employees who would be working for $10.10 an hour are different from those who would be working for $7.25 an hour. What could happen is that the higher wage would attract new workers into the labor pool, allowing firms to become pickier and, thus, to overlook the least-productive workers, who would remain unemployed or lose their jobs to more-highly-skilled workers.

Murphy constructs a scenario where the demand curve for low-skilled labour is particularly inelastic, but the supply curve is still elastic, meaning that while the number of job openings has changed little, the number of low-skilled workers chasing those jobs has increased.

Even though (by construction) our hypothetical minimum wage has not significantly reduced total employment, it has, nonetheless, drastically impaired the functioning of the labor market. The “glut” of workers on the market means that non-price allocation mechanisms must come into play. Since there are now multiple applicants for a given job opening, employers can rely on other criteria, including racial and class background, to choose which worker gets the job. It is much more likely that an applicant will need to “know somebody” to get hired, and that teenagers from “respectable” backgrounds will be the ones to work at fast food restaurants, displacing teenagers who might be in more desperate circumstances.

These concerns are not merely hypothetical. Even many economists in favor of the wage hike agree that raising the minimum wage will affect the turnover of workers. For example, one of the leading revisionist authors, Arindrajit Dube, says that in one of his earlier co-authored studies “we… find that both hires and separations of low-wage workers (teens, restaurant workers) fall in response to [a] minimum wage increase, but employment levels do not change noticeably.” [footnotes removed]

What Bob is saying is that there’s more to the minimum wage law than just employment. Even if the revisionist studies that show small employment effects are entirely correct (which is not at all clear) there’s still plenty of reason to think that the minimum wage hurts the very people it’s supposed to help.

But let’s suppose, for the sake of argument, that employment isn’t reduced by the minimum wage, and that the non-price allocation mechanisms are efficient, so it really does do more good than harm to low-skilled workers. Would this morally vindicate today’s supporters of the minimum wage?

I don’t think so.  As Mike Huemer argued in the article quoted above, interference bears a higher burden of proof than non-interference:

[W]hen the state actively intervenes in society–for example, by issuing commands and coercively harming those who disobey its commands–the state then becomes responsible for any resulting harms, in a way that the state would not be responsible for harms that it merely (through lack of knowledge) fails to prevent. Imagine that I see a woman at a bus stop opening a bottle of pills, obviously about to take one. Before I decide to snatch the pills away from her and throw them into the sewer drain, I had better be very certain that the pills are actually something harmful. If it turns out that I have taken away a medication that the woman needed to forestall a heart attack, I will be responsible for the results. On the other hand, if, due to uncertainty as to the nature of the drugs, I decide to leave the woman alone, and it later turns out that she was swallowing poison, I will not thereby be responsible for her death. For this reason, intervention faces a higher burden of proof than nonintervention.

Imposing a minimum wage before we have enough evidence to say it does more harm than good is morally questionable whichever way the chips fall. Saying to low-skilled workers, “we weren’t sure that banning all contracts that pay a wage between zero and ten dollars per hour would help or hurt you, but we imposed the minimum wage anyways, and it turns out it did help you,” is morally equivalent to saying to someone, “I wasn’t sure that I would win that hand of poker, but I bet your life savings on it anyways, and it turns out I did win!”

How good a hand would you need to morally justify such a bet? A pair of eights? Three jacks? A straight flush? Even if you’re as sure that the minimum wage will do more good than harm as you are that three jacks will win a round of poker, the fact that you’re gambling with someone else’s livelihood should make you think twice about taking that bet.

The post Assigning the Burden of Proof appeared first on The Economics Detective.

Assigning the Burden of Proof

Have you ever experienced learning a new word and then hearing it everywhere in the days after you learn it? I’ve had a similar experience since making my argument that the burden of proof that the minimum wage is beneficial falls on the law’s supporters. Now I’m seeing people making burden-of-proof arguments everywhere. Bryan Caplan, in a post on EconLog, quotes Mike Huemer making the argument explicitly:

[T]here is a kind of moral presumption against coercive interventions. Laws are commands backed up by threats of coercive imposition of harm on those who disobey them. Harmful coercion against an individual generally requires some clear justification. One is not justified in coercively harming a person on the grounds that the person has violated a command that one merely guesses has some social benefit. If it is not reasonably clear that the expected benefits of a policy significantly outweigh the expected costs, then one cannot justly use force to impose that policy on the rest of society.

Ryan P. Long, over at Open Borders: The Case, makes what is essentially a burden-of-proof argument for open borders:

[W]hile it’s easy to merely allege that “the immigrants” caused crime to increase in your neighborhood or property values to decrease, it is substantially more difficult to prove it. I leave the burden of proof for [the idea that the differences between people really do translate into a reduced quality of life] on immigration’s critics.

Migrants from poor countries often see a 20-fold increase in their earnings just by setting foot in a wealthy country, so you had better have a good reason for barring them from doing so. The people at Open Borders: The Case do a great job arguing for the positive benefits of increased migration, but if we assigned the burden of proof correctly, it would be open borders’ opponents who would have to do the hard arguing. (more…)

The post Assigning the Burden of Proof appeared first on The Economics Detective.

Benefits Vs. Capital

Spencer writes the following in the comments to my post about monopsony and the minimum wage:

“If wages increase, the employer would want to increase workers productivity normally that would entail improved working conditions.

But you are claiming that employers react to higher wages by implementing policies that reduce productivity — that does not make any sense and is contrary to economic theory.”

I want to make a clear distinction between benefits and capital. Benefits are things that the employer provides that make workers happier to work for that employer, ceteris paribus. Capital is what the employer provides to make each worker more productive.

The reason employers provide benefits (above those legally mandated) is because their employees implicitly pay for them by taking a pay cut. People must be paid more to do more unpleasant work, and less to do less unpleasant work, so investments employers make to make working for them less unpleasant are implicitly paid for through lower wages.

As Spencer suggests, economic theory does predict that a binding minimum wage will lead firms to shift away from low-skilled labour and into other factors of production, including capital. This will make those low-skilled workers still employed at the higher wage more productive, such that their marginal product is at least as high as the minimum wage. My claim is that a binding minimum wage leads employers to provide fewer benefits than they otherwise would.

Often, the same thing can function as both a benefit and a capital investment. Modern garbage trucks allow garbage men to pick up garbage faster, but they also make the job less unpleasant by minimizing the amount of garbage the garbage men actually handle. If I were running a private garbage-pickup service (are there any?), my choice to invest in a modern garbage truck would depend both on how much more productive it would make my workers and on how much it would reduce the cost of hiring and retaining workers. If the truck costs $200,000, the extra productivity it generates is $150,000, and the decreased unpleasantness is worth $60,000* to the workers, then I would buy the truck. That would allow me attract and retain workers for $60,000 less, and I would net $10,000 in additional profits.

If, however, the workers were subject to a price floor on wages that would not allow them to accept a pay cut greater than $40,000, I would not consider the other $20,000 of value created for the workers, and I would not invest in that particular truck, as it would earn me a net loss of $10,000.

Worker training can also function as either a capital investment or a benefit (from the firm’s perspective). The distinction economic theory makes is between firm-specific human capital investments and non-firm-specific human capital investments. The firm captures workers’ productivity gains from firm-specific human capital investments, because a worker who knows all the ins and outs of working at firm A but cannot transfer his skills to firm B has a low reservation wage and therefore a poor bargaining position. Firm B would pay him the wage of an unskilled worker, so firm A doesn’t have to pay him more than that to retain his services. However, if the worker gains skills that would serve him equally well at A or B, then he can use those skills to negotiate a higher wage for himself.

Thus, training a worker with non-firm-specific skills is a benefit from the firm’s perspective, as the worker will capture his additional productivity through higher wages. So workers must pay for non-firm-specific training through implicitly lower wages. If wages cannot be lowered below a price floor, then the worker cannot buy the training.** This means that we can’t theoretically predict whether the minimum wage will increase or decrease the total amount of worker training, as we would expect firms to offer more firm-specific training per worker and less non-firm-specific training.

While the minimum wage is a price floor on wages, it is also an implicit price ceiling on benefits. The most a worker can implicitly spend*** on benefits from his employer is his marginal product minus the minimum wage, unless he is willing to take his entire compensation in benefits, in which case he can get an unpaid internship or volunteer position. Few poor people can afford to work unpaid internships, so the minimum wage is more damaging to them than it is to people from wealthier families.

 

* That $60,000 figure is a future-discounted stream summed across all garbage men.

** The worker could contractually agree to continue working at a low wage for a period of time after training has increased his productivity as a way of paying for the training. This could mitigate the negative effect of the minimum wage, but such contracts come with their own difficulties and risks.

*** I suppose they could get around the minimum wage by changing the payment from an implicit wage cut to an explicit payment, but there are obvious pitfalls to doing so. Imagine the headlines: “Walmart charges employees for training!”

The post Benefits Vs. Capital appeared first on The Economics Detective.