Benjamin Franklin on the Minimum Wage

Benjamin Franklin apparently understood the notion that input prices affect product prices, which is a problem because product demand curves are not completely inelastic.  Discussing a minimum wage, he noted, “A law might be made to raise their [workers’] wages; but if our manufactures are too dear, they might not vend abroad.” This is one of the best arguments against a minimum wage: in an open economy, which the U.S. increasingly will be at least partly passed on in the form of higher product prices, which will in turn reduce product demand—and eventually employment.   (“On the Labouring Poor,” The Gentleman’s Magazine, April 1768.)

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  1. Matt Sharp says:

    The UK’s employment level barely changed when it introduced a minimum wage in the 90s. Surely it depends what level it is set at?

    Also, many jobs that pay minimum wage simply can’t be exported, because they’re in the services sector (though they could in theory be replaced by computers/robots, and probably will one day).

    Added to the fact that low-paid people spend a greater proportion of their income, raising the pay of, say, supermarket workers, should in fact stimulate the economy.

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    • matt says:

      Matt,
      Causation and correlation are not the same thing. Basically you are saying that since unemployment didn’t go up then it was a success. But nevertheless, in 1986 the united kingdom weakened minimum wage laws by limiting wage councils, the result was an drop from 11.2 in 1986 to 6.8 in 1990. Then as they slowly regained power the unemployment in the UK rose back up to 10.3% and then they were completely demolished in 1993 and resulted in a reduction straight down to 6.1% over the next 5 years. Since 1998 minimum wages have been set a a much more manageable rate. This has in large part not kept up with inflation and thus have very little impact on the overall economy, but back in the 80′s they had a significant impact on the economy of the UK.
      “Also, many jobs that pay minimum wage simply can’t be exported, because they’re in the services sector (though they could in theory be replaced by computers/robots, and probably will one day).”
      The reason the majority of minimum wage jobs are in the service industry and not others is a direct result of minimum wages making it unprofitable to operate facilities in countries with strict minimum wage laws. It is the reason that Manufacturing in America and the UK is way down, because labor for some jobs are set above the market price in which case companies are off shoring work. There was an article the other day I read that said that it would cost over $10,000 if the Ipad was made entirely in the USA.
      Here is the worst part about minimum wages that never gets discussed.
      Say you were making minimum wage and you have worked hard to get raises and are now making $3.00 over minimum wage and the government increases minimum wage by $2.00. Do you think your employer is going to give you a $2.00 raise? No, you just got a paycut because things got more expensive and you are able to purchase less with your money. These are the people that are in real financial trouble. 80% of all minimum wage earners are part time/teenagers/ or second jobs. The people however making slightly over minimum wages are the ones that gets pinched the hardest.
      I know this because while I was in school, I had a job making minimum wage and I worked my tail off to make more money I was then making $4 over minimum wage, minimum wage was raised by almost $3.00 and people who got there first raise was making what I had worked 4 years to get to. It was completely demoralizing. Also the things I bought was made by people making close to or minimum wage, and the cost of everything went up. So now new hires were making almost my salary and at the same time I was taking a real pay cut.

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      • Astraea_M says:

        What was going on in the late 80s and early 90s? Oh yeah, a huge boom that reduced unemployment across the board. Including in the US where the minimum wage did not go down. From 1986 to 1990, US unemployment dropped from 7.2 to 5.2.

        Actually, 84.1 percent of those who would benefit from increasing the minimum wage to $9.00 are at least 20 years old. And while many are part-time workers, that is because they cannot find full-time jobs, not because they are also in college. The EPI also found that almost half, about 47 percent, of the people who earn minimum wage are full-time employees working at least 35 hours per week. Another 36 percent work between 20 and 34 hours per week, Hall said. Only 17 percent of minimum wage earners work less than 20 hours a week.

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      • Matt says:

        Astrea_M
        See the great thing about stats is we can swing them however we want to.
        Lets look at it overall though.
        2.9% of American workers make minimum wage. out of the 143 million workers in America that is ~4.1 million workers making minimum wage. more than 1/2 are between 16 and 24. This means that only 2.05 million people or 1.45% of workers over the age of 25 make minimum wage. The average household income of those individuals are $53,000 per year. or over 150% of the poverty line. In fact 75% of those workers are above the poverty line. So now we are down to 500,000 people in the US who make minimum wage and live below the poverty line. The amazing thing is that 2/3 of all people who make minimum wage earn a raise within a year thus making the minimum wage line move rapidly.
        In other words in America with a population of over 311 million people .16% of the population makes minimum wage and lives below the poverty line.

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      • Oliver H says:

        Matt, I love it how you state “correlation and causation are not the same thing” but then construct an argument precisely out of this concept without controlling for a single confounder. And when you get called on it, you claim “the great thing about stats is we can swing them however we want to.”

        No, you can’t. Not unless you want to reveal that you do not know how to do a proper analysis.

        You simply cherrypick data and in doing so do not even attempt to stay logical. You claim “The reason the majority of minimum wage jobs are in the service industry and not others is a direct result of minimum wages making it unprofitable to operate facilities in countries with strict minimum wage laws.” yet ignore that the cost of operating a facility in and of itself is not affected by minimum wage and as such the dependency on manageable personnel costs should be much higher in the service industry.

        “There was an article the other day I read that said that it would cost over $10,000 if the Ipad was made entirely in the USA.”

        And because it was written in an article, it has to be true? Did you actually check what the margin of profit on Apple products is?

        “Say you were making minimum wage and you have worked hard to get raises and are now making $3.00 over minimum wage and the government increases minimum wage by $2.00. Do you think your employer is going to give you a $2.00 raise? No, you just got a paycut because things got more expensive and you are able to purchase less with your money”

        That’s again cherrypicking your data to construct a case, deliberately construction a context-free situation that has precious little to do with a real-world scenario. If the government increases the minimum wage by $2, then probably because prices have increased. In that case, it is far more likely that your boss increased your wage as an inflation compensation and not really because you convinced him with your hard work, and if not, the loss is not due to minimum wage but due to inflation.

        “I know this because while I was in school, I had a job making minimum wage and I worked my tail off to make more money I was then making $4 over minimum wage, minimum wage was raised by almost $3.00 and people who got there first raise was making what I had worked 4 years to get to. It was completely demoralizing.”

        So the real problem is that you believe anecdotes have evidentiary character. They don’t. The fact that you were demoralized by vagaries of inflation doesn’t prove anything beyond your individual person. To believe you can generalize from your own perception attributes way too much importance than is your due.

        So, alas your entire line of argumentation is devoid of any merit. And that is being generous. In academia, you’d be inches away from being suspected of academic fraud. At least in academic disciplines worth that name.

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    • Imad Qureshi says:

      Quote: “The UK’s employment level barely changed when it introduced a minimum wage in the 90s”.

      So this means no new jobs were added either..right? So Economy which might have grown in absence of these minimum wage laws, didn’t grew at the pace where unemployment would have went down to whatever it was before minimum wage went up.

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  2. Chad Clayton says:

    The argument simplifies the concept too much. Some examples: Very few markets are perfectly competitive by now as firms have moved to differentiate their products from one another, something which had not begun to as great of a degree by the late 1700s. American goods are generally well-received in foreign markets and in many places (Europe) cheaper than local alternatives. There’s also the concept of the efficiency wage; better compensated workers tend to produce more for their employers as they feel more inclined toward loyalty to the firms that employ them. Well-compensated workers are also less likely to quit their jobs saving the firms recruiting and training costs. Raising minimum wages ensures lower-income consumers earn more wages. As the MPC of an individual making low wages is far higher than a well-to-do laborer or employer, more consumption in the economy results in growth and less rigid social stratification.

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  3. JeffB says:

    While that is all true (Econ-101 stuff) it ignores the race to the bottom you get in wages in a system like this. Why stop with minimum wages? Why not add in other interference that artificially raises costs such as OSHA regulations? Where do you stop with this?

    We can see the result of no-minimum wages in the early 1900′s. That saw effective wage slavery and wages below subsistence levels. I doubt most people would welcome a return to those labor conditions.

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    • Alex says:

      while minimum wage may have a negative effect, promoting a safe workplace through appropriate safety regulations is hardly comparable. One is economic policy, the other is the value of human life. Anyone who has ever had to work a day with a real respirator for safety know why those laws are important.

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      • Enter your name... says:

        In terms of off-shoring jobs and raising costs, safety regs *are* comparable. That’s why dangerous jobs, like dealing with asbestos-filled ships, are handled in developing countries rather than here. Economically, a dollar is a dollar. Morals don’t count (directly) in economic equations.

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  4. Tom G says:

    Hidden due to low comment rating. Click here to see.

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  5. Jason says:

    “Best” by what standard? It sounds plausible, but from what I can tell, there’s scant evidence that Franklin’s hypothesis was actually true.

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  6. Matt says:

    Henry Ford instituted the 40 hour work week at his factories – something he did without all other industrialists hopping on the bandwagon.

    Further, this was not done for humanitarian reasons, but rather for business. Some say he wanted his employees to have enough leisure time in order to perceive the need or purchasing products, others say it was to increase efficiency.

    In either case, we know how this went – Ford took the world by storm!

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    • Steve says:

      Perhaps Ford added the 40 hour workweek and increased pay to legitimize his policy of “Americanization” of foreign born employees, along with his special police force.

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  7. Voice of Reason says:

    So are we to infer that it would be acceptable to openly have sweatshops running in America?

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  8. Alan T says:

    Wages confuse me, for reasons I will list below. If anybody reading this would like to unconfuse me, I would appreciate it.

    1. Don’t economists expect wages to equal marginal productivity? If this is so, why hasn’t the median real wage in the U.S. increased since 1973?

    2. Can the productivity of labor even be uniquely defined? If I give you a shovel and tell you to dig a hole, how much of total productivity shall I attribute to you, and how much to the shovel?

    3. Don’t economists assume that productivity declines as more workers are hired? This makes sense to me for an individual store or factory, but not for a large corporation. Can’t a company open a new store or factory, hire new workers, and expect the same productivity as before?

    4. Economists expect, on theoretical grounds, that increasing the minimum wage will reduce employment. It seems to be very difficult to confirm this empirically. Is the theory wrong, or is the effect difficult to measure?

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    • matt says:

      First off we are talking about an economy that meets the requirements of perfect competition in what you are talking about. Which would mean that we would have: Infinite buyers and sellers, no barriers to entry/exit, Perfect factor mobility, perfect information, zero transaction costs, Profit maximization, Homogeneous products, non-increase returns to scale, etc.
      This doesn’t exist in the real word almost ever, maybe a staple like corn or potatoes on the wholesale market would get close, but they still fall way short. In fact every corporation is founded on competitive advantages, in a situation where perfect competition would happen there would be no competitive advantage for any business in the market. So now that that is understood.
      1. Marginal Productivity is not a term I have ever used before, corporations are expected to operate where average total costs are = to marginal costs. Which means they make the maximum profit. When talking about labor the barriers to entry and exit are large, this is a huge problem when maximizing efficiency. Think about how when you get a new job offer most people would stay if their current organization gets close to their new one in salary, well this would never be the case. People get attached to their jobs and thus don’t operate at maximum efficiency. Meaning that the market in actuality doesn’t work like that. In order for that to be the case you would have an infinite number of jobs doing the same thing you are doing and it would not cost you or your employer a thing to hire or fire you.
      2. Yes, it can be defined in marginal terms. labor is just a variable costs, where as the shovel would be a fixed costs. People make big money as consultants by accurately identifying what is the impact of labor. It is not a simple thing, but it can be done.
      3. we assume that the law of diminishing marginal returns is in effect, not that each person isn’t as productive, but that each unit you produce will cost slightly more than the one before it, after some basic levels are reached. Marginal cost is a check mark, not a straight line going up. Which is why if I have 1 person making a car and I switch to 2 people I might actually have more made at the end of the time period per person, but the difference will start to minimize to a point then turn negative.
      4. The problem is that the economy doesn’t occur in a vacuum. While can we show on a basic level what is the impact of raising minimum wage in a single instance with everything else held the same in an economy it is impossible to show the direct impact of any one variable. just imagine you have an equation with millions of variables and you only change 1 variable on purpose, while the rest of them are changing every second, and you can only measure the output. Then you are asked how what you changed impacted the output. That is what it is like when you try to show the causation between minimum wages and the effects on an economy.

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      • Oliver H says:

        “First off we are talking about an economy that meets the requirements of perfect competition in what you are talking about.”

        And in the claims of negative effects of minimum wages, we are talking about a job market that is in equilibrium, which is a highly questionable assumption for the minimum wage bracket. An equilibrium implies by definition equal leverage on both sides, which is a flight of fancy.

        “The problem is that the economy doesn’t occur in a vacuum. While can we show on a basic level what is the impact of raising minimum wage in a single instance with everything else held the same in an economy it is impossible to show the direct impact of any one variable.”

        No, you can’t. You can only show what your model would predict.

        “That is what it is like when you try to show the causation between minimum wages and the effects on an economy.”

        If your model can’t predict real-world effects, then the academically sound conclusion is not to bemoan the number of confounders and say “Well, but the effects exist anyway”, but rather to toss your model and replace it with one that CAN predict real-world effects. Because everything else is pure omphaloskepsis and holds little to no academic value.

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    • tmeier says:

      1. Two reasons I could suggest. Wages and prices are linked, the real prices of many items, particularly those most closely linked to productivity increases have fallen, so the wage to price relation has reflected some of the productivity increase. Then the portion of the GNP which is redistributed by the government to people not producing anything has risen greatly since 1973 also so some of the increased productivity has not benefited the people who produced it but been ‘siphoned off’.

      2. I would say it can only be arbitrarily defined. In your example the shovel was created by labor and represents an investment. Only the iron ore and wood are final resources.

      3. I’d say it’s unlikely as efficiency of organization would fall which is an aspect of productivity.

      4. The effect would definitely be difficult to measure. I don’t know if it’s right. Minimum wage laws are just a variant on redistribution of wealth.

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