Does the Minimum Wage help the Poor?

In his recent State of the Union address[1], U.S. president Obama said: “Americans overwhelmingly agree that no one who works full time should ever have to raise a family in poverty.” He then went on with a plea for Congress to raise the minimum wage from $ 7.25 to $10.10 (US$) an hour (a 15% increase) and promised to ”issue an Executive Order requiring federal contractors to pay their federally-funded employees a fair wage of at least $10.10 an hour”. At the same time, the Ontario provincial government is set to rise from Can. $10.25 an hour to, possibly $11.00[2]. No doubt, other provinces will seek to follow and more than 30 U.S. states are considering increases. Some cities are going even further. The city of New Westminster in British Columbia, has been the first in Canada to follow a trend established in the U.S. where more than 140 municipalities have introduced legislation requiring employers who do government work to provide a “living wage”—for New Westminster $19.62 compared to the minimum wage of $10.25[3].

The “Love your Neighbour” principle would suggest that Christians also would not want families to be “raised in poverty”. However, on this issue also, we must “Count the Cost”—look at the unintended consequences. The fact is that most economists have concerns about legislated increases in wages. While increased minimum wages will, no doubt, benefit those who remain employed, these benefits come at the cost of putting people out of work. Noble laureate James Buchanan has suggested that “the notion that raising minimum wages would have no adverse impacts on employment was equivalent to..believing that water could flow uphill.”[4]  Unfortunately, this fallacy readily attracts votes of those unaware or uncaring about the negative consequences.

Consider an oversimplified situation, in which a company produces a product which sells for $15, requires $3 worth of materials and one hour of labour to produce. If the employee is paid $10 an hour, the company can earn $2 on the product towards profit and other general costs (e.g. equipment, factory maintenance). However, if that wage rate is increased to $12 an hour, there is no contribution to profit and other expenses—no incentive to produce. The employee will be laid off.  If the business is able to raise its selling price at all, it will sell fewer products and the number of jobs will also be reduced. 

While this example is simplified, the results in the real world are similar. In the market, the wage rate that can be paid depends on the value of what the worker produces (“marginal productivity of labour”). If the price of labour goes up, some companies will produce less, and reduce jobs (at least, not expand) or reduce the hours worked by their employees. Moreover, an increase in the minimum wage will inevitably cause wages in general to go up, since, obviously, those higher up will also want an increase. 

The negative impact of an increase in minimum wage has the most effect on the poorest--those least skilled who will be the first to be laid off and those unemployed who have the most difficulty getting another job. When given a choice, employers will hire the most qualified. Young people with no experience will have more difficulty getting that first job. 

In his address, Obama also claimed that the increase “will give businesses customers with more money to spend”. That, will be true for those who retain their jobs but untrue for those who lose theirs. Moreover, if businesses do pay the higher wages, that money has to come from somewhere—higher prices by consumers who will have less to spend, less spending on new equipment, less profits to shareholders who will also spend less. Thus the increased spending by some is unlikely to be a net gain for the economy.

The “living wage” efforts will have even more negative effects. U.S. research indicates that a doubling of wages (say from $10 to $20) reduces employment among low-wage workers by 12 to 17%. Moreover, 72% of workers benefiting from “living wage” laws were not poor.[5] Thus, such laws do little for the most poverty stricken while ensuring that taxpayers get less value for their money.

Now some, including president Obama, argue that the rise in wages will “boost morale” and, therefore, supposedly, productivity. If, for example, in the illustration above, the worker could be encouraged to increase his output per hour by taking only 50 minutes instead of an hour to produce the product, then there is room for a wage increase. However, productivity improvements are generally considered to come from capital investment, education and experience. It’s not clear to what extent “morale boosts” will have long-term productivity effects. Studies tend to confirm that the net effect of minimum wage boosts are not positive.

Thus, significant increases in minimum wages--particularly, in a period when unemployment is still above normal--are questionable; they help only the poor who remain employed. Efforts to help the “working poor” are, probably better directed through the tax system. Reducing taxes through tax credits (including refundable ones for those paying little tax) can achieve the desired effect without the negative job effects. Of course, that means tax-payers in general will pay the cost. But, is that not better than increasing unemployment?

Finally, if we must have minimum wage laws, a (lower) graduated youth wage  (as exists in some other countries) could be discussed to deal with the serious problem of youth unemployment--which is double the average rate of unemployment. It might even be extended to the "long-term" unemployed, to help them get back into the work force.

Another option to explore is some form of "profit-sharing"--keeping base wages moderate but sharing profits when things are going well. But, that's an issue for the distant future.

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[1] I will make no attempt to review the whole address. It did include things that we could all agree with and was short on detail on other issues.

[2] A National Post report suggests this will be done retroactively back to 2010; that would be ridiculous and impossible to implement. Can small businesses go back and pay extra past wages without raising revenues?

[3]  Charles Lammam, “Maximum Wage Damage”, National Post , Jan. 28, 2014.

[4]  Peter Foster, “MinimumThinking, National Post, Jan. 29, 2014 Lamman op. cit quotes a “comprehensive review” of more than 100 studies covering 20 countries and found the overwhelming majority of studies concluded that minimum wage hikes negatively affect employment.

[5]  Lamman, op. cit.

Counting the Cost of Biofuel

In the last two posts, I noted that stewardship implies that we must take care of God’s creation but also that in doing so we must “count the cost”. Just as I had posted the last one I read a brief note in the National Post  (Jan. 23,2004,p. FP11) entitled “Neil Young’s Clunker”. Young, who is currently touring Canada “tarring” the Athabaska Oil Sands mining projects, is quoted as reporting that “My car’s generator runs on biomass, one of several future fuels Canada should be developing for the post-fossil fuel age.” In response, the National Post  quotes the following from the website of the Sierra Club of Massachusets about biomass[1]

• Large scale biomass used primarily for electricity generation is extremely inefficient and emits 1.5 times as much CO2 than a coal-fired power plant.
• Claims of “carbon neutrality” for biomass do not account for externalities and full lifecycle accounting of carbon, including harvesting processing and transportation of fuels. Truckloads of biomass fuel would need to be transported on regional roads, adding to diesel particulate pollution and additional fuel use.
• Large scale biomass calls for the harvesting of millions of trees on tens of thousands of acres - some of it on state forest lands. Multiple facilities proposed in MA all claim competing areas for harvesting fuel at a rate that is not sustainable.
• Biomass consumes and removes organic forest material, including that which would normally remain behind and contribute to the forests ongoing ability to sequester carbon.
• Burning biomass can release carcinogenic substances and particulates in our air water.
• Biomass facilities evaporate and/or otherwise use massive volumes of water to operate and can impact rivers, streams, and water supplies.

Conclusion

The Sierra Club has significant concerns over the production of energy from biomass, including the net emissions of CO2 and airborne toxins, the inefficiency of biomass energy production, impact on ecosystems and public health, and assumptions made regarding “carbon neutrality” of such operations. 

This quote from an organization that bills itself as “the nation's oldest and most effective grassroots environmental organization” certainly illustrates why we must “count the cost”. Being well intentioned about the environment is not enough. It also provides another opportunity to point out that with judicious taxation, market forces can be harnessed to make better environmental decisions.

• If CO2 and particulate emissions were adequately taxed, electricity generators would take this cost into account and over time switch to methods that emit the least.
• If fuel is taxed more to reflect the cost of diesel particulate pollution and the cost of using roads, the incentive to  transport truck-loads of biomass would be reduced. Less biofuels would be produced.
• If forest lands would be overused, government could set sustainable limits and auction off the rights to harvest (with necessary requirements for replanting etc.) The auction would permit the market to ensure that the wood products would go to their most valuable use. The consequent higher prices are likely to lead to less use for biofuels.
• Water use can also be taxed so that the cost of water depletion is also properly considered in the decision to “go biofuel”.

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[1] http://www.sierraclubmass.org/issues/conservation/biomass/biomass.html

Stewardship: Some Implications

In my previous post, I discussed that we as God's stewards, must develop the world to enable man to glorify God. Our stewardship role defines the true meaning of Christian economics, “oikonomia”. As stewards, we merely have the temporary use of God’s property which we use to carry out His mandate. In this current blog, we will take a brief look at some implications that appear to follow from this understanding. These implications are directional in nature; they point us to important biblical goals. How these goals are, in practice, to be achieved will provide scope for much further discussion.

As we discuss these implications, the reader may well wonder to what extent this mandate applies to us individually and to what degree the government has a task as well. After all, this blog deals with political economy. As a preview of future discussion, I reiterate my stance that Christians should have a conditional preference for the free market. From that it follows, that the government has a only a residual responsibility in the cultural mandate; only to the extent that individuals and private groups in society have not or are unable to adequately carry out the task, should government be involved. In practice, that will normally mean that governments will need only to create conditions that permit individuals and the market to carry out this God-given mandate.

Employment: The cultural mandate (which has been called "the first job description"[i]), and the related stewardship principle, are basic to the Christian view of work as a God-given task. Labour is, obviously, necessary to develop the world and exercise stewardship. In fact, Chewning points to the cultural mandate as the basis for his Foundation Principle 1: God created us to work and have dominion over the created order.[ii] Claar & Klay note, that “human beings are called to develop resources and apply their talents” and refer to the shepherds commended in the Bible, to those who worked in bronze & iron (Gen. 4:20-22), and to  the wife, mother and business person described in Prov. 31.[iii] Certainly, the cultural mandate includes in it the requirement for people to work. Unemployment, consequently, is a significant problem because, "The unemployed are seriously restricted in their ability to devote their talents to God's glory in the development of the earth.”[iv] Consequently, a Christian approach to political economics should give high priority to the goal of putting to work all those who are able[v].

The Environment: Proper application of the cultural mandate will entail a strong concern for the environment–for God’s creation. Veling, for example, has concluded that "A central component of the cultural mandate is systematic resistance to pollution and exploitation of creation."[vi] Griffiths, noting the emphasis on "till it and keep it"--preserving and caring, observes that "the creation mandate is no excuse for an ecological crisis."[vii] The Oxford Declaration notes that

The dominion which God gave human beings over creation (Gen 1:30) does not give them license to abuse creation. First, they are responsible to God, in whose image they were made, not to ravish creation but to sustain it, as God sustains it in divine providential care.[viii]

As God's stewards, we are not free to develop our possessions according to our own selfish wants but must seek to serve Him with the possessions He has entrusted to us. That is, of course, particularly relevant when considering our treatment of the environment. Obedience to the cultural mandate as God's steward implies that economic policies need to be sensitive to this environmental degradation and seek instead to "maintain" and restore God's creation.

To Meet Needs rather than Wants: Being God's stewards also means that we do not strive to attain the maximum satisfaction of human material wants. Our goal cannot simply be to give people what they want. Rather, our focus should be on "needs", that which is needed to allow people to serve the Lord. That also, is a starting point, of course. Even "needs" are not clearly defined and change over time. Nor, does it, necessarily, follow that a government should prevent the production of goods and services which are directed at excessive wants. Those are issues to be further discussed in particular contexts.

Efficiency: Good stewardship also means that we need to use our God-given resources as effectively and efficiently as possible. That does not mean efficiency in a pure "economic" sense--using the minimum input for maximum output. Efficiency in a Christian sense will recognize also the externalities or unquantifiable impacts: on the poor, the environment, etc. Nevertheless, it seems inconceivable that God would condone that His stewards waste His possessions. 

Jesus in Mt 25, for example, condemns the lazy servant who merely buried his talent in the ground. Deut. 21:20 condemns the "profligate" to death. Prov 23:20-21 and 28:7 castigate gluttons. Condemnation of wastefulness is evident also in the parable of the prodigal son who "squandered his wealth in wild living" (Lk 15:13). Furthermore, Jesus refused to waste the bountiful excess of his miraculous feeding of the multitudes but instructed his disciples to "Gather the pieces that are left over. Let nothing be wasted" (Jn 6:12)[ix].

While these references relate, in the first instance, to individuals, good stewardship no doubt implies also that we ought to choose that economic system which (all other things being equal) is least wasteful of resources. Of course, Christians should not make an idol of efficiency and productivity. Other biblical goals--employment, the environment, etc--are likely to be as important when trade-offs need to be made. A false dichotomy should, however, be avoided--i.e. efficiency versus biblical goals. Stewardship includes efficiency.

Counting the Cost: A related implication of stewardship is that of "counting the cost"--the title of a book by Robin Kendrick Klay.[x] In this most useful book, she sought to "identify the costs (and the unintended consequences) of important social measures to help the poor, protect workers, and safeguard the environment." These costs and consequences must be made explicit and considered before effective solutions can be developed. When politicians try to address economics, failure to "count the cost" is probably the most common source of error. Henry Hazlitt, author of a book entitled Economics in One Lesson, has, in fact, boiled all economic analysis down to this one lesson:

One must trace not merely the immediate results but the results in the long run, not merely the primary consequences but the secondary consequences, and not merely the effects on some special group but the effects on everyone.[xi]

Because of scarcity, economics is very much a matter of making choices--of allocating scarce resources among competing demands. That is a question of analyzing costs and benefits--although, by no means, only those that can be quantified or only the financial ones. Good stewardship requires the use of all our talents to come to a responsible use of the available resources; we must act prudently. That, includes using all our knowledge to consider all aspects of a problem--to get, as Hay has stated, "an accurate perception of reality" in the areas where we wish to apply our biblical principles.[xii]

Luke, in Chapter 14 verse 28, makes explicit reference to counting the cost:

Suppose one of you wants to build a tower. Will he not first sit down and estimate the cost, to see if he has enough money to complete it? 

And, adds in verse 31:

Or suppose a king is about to go to war against another king. Will he not first sit down and consider whether he is able with ten thousand men to oppose the one coming against him with twenty thousand?

While the point of Jesus' teaching here is, of course, to stress the cost of being His disciple, the illustrations used suggest that deliberate weighing of costs and benefits is a normal, necessary prerequisite for action. As Douma concluded in connection with the above passage, "not only good intentions but also the consideration of the consequences is a part of every ethical action.”[xiii] In fact, weighing the consequences--counting the cost--is an essential part of planning, a process also commended in Scripture. Prov 21:5, for example, teaches that "The plans of the diligent lead to profit as surely as haste leads to poverty."[xiv]

Christians have, in the past, been prone to put forward simple answers to complex questions. For instance, "Free Enterprise is the Christian solution" or "The love of our neighbour demands that we support socialism." Moreover, politicians have a tendency, whether intentionally or not, to oversimplify and focus on the simple solutions--the easy, attractive answers. Unfortunately, there are few simple solutions. A responsible economic approach--especially a Christian one–needs to consider many facets of the situation. It must count the cost of any proposed solution. For instance, in considering a possible increase of the minimum wage to help the "working poor", the likelihood that the higher wage costs will increase unemployment (because business will be able to hire less employees at that higher wage) should be kept prominently in mind. Similarly, well-intentioned efforts to fight unemployment through massive government spending may well increase inflation and saddle the country with an uncontrollable debt. Our goal should be to carefully weigh all relevant Christian principles and the practical realities and, then, come to a considered response to the economic choices to be made. It is not enough to have the right motive, e.g., stewardship. We must also seek the optimal implementation. Otherwise, our perspectival efforts will consist merely of a "Christian sauce" on a poorly cooked meal. 

Looking for unintended consequences is crucial when determining the degree of government involvement in the market. A recent study, for example, reviewed a government regulation in Quebec in 1980 to outlaw advertising directed at children. Who would not want to prevent these immature minds from being manipulated by greedy advertisers? Yet, the study concluded that in Quebec the price of children’s breakfast cereal was higher and the originally established brands had a bigger share of the market than in provinces without the ban. A well-intended ban made it more difficult for new cereals to enter the market and caused parents to pay higher prices! 

Similarly, government subsidies for ethanol production and requirements to mix ethanol with gasoline have had the unintended consequence of increasing the demand for corn--raising the price of basic foods for the poor. Since, it is impossible to perfectly “count the cost” of government action, we need to be most careful before accepting government solutions to economic problems.[xv]

Endnotes

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[i] John Bernbaum & Simon M. Steer, Why Work?: Careers and Employment in Biblical Perspective, Christian College Coalition Study Guides, Baker, 1986, p.3.

[ii] Chewning, Vol. 2, p. 28.

[iii] Op. cit. p.23.

[iv] Groen van Prinsterer Stichting, Wegen Naar Werk [Ways towards Work], Rapport van Commissie Collectieve Uitgaven, Groen van Prinsterer Stichting, # 38, and GSEV, # 35, De Vuurbaak, Goningen, 1979, p.75.

[v] The cultural mandate is not the only Biblical given that would encourage that.

[vi] In J. van der Jagt, M. van der Groep, W. I. Meijer and A.H. Poelman, eds., Politiek Mozaïek: Opstellen aangeboden aan dr. A.J. Verbrugh, [Political Mosaic: Essays presented to Dr. A. J. Verbrugh], Gereformeerd Politiek Verbond & Groen van Prinsterer Stichting, De Vuurbaak, Barneveld, 1992 , p.173.

[vii] Op. cit., p.51

[viii] Paragraph 6. See also Mouw, op.cit., p.184; Herbert; Schlossberg, Samuel Vinay and Ronald J. Sider, Christianity & Economics in the Post-Cold War Era: The Oxford Declaration and Beyond, Eerdmans, 1994, p.127 and Tiemstra, et. al., p.320.

[ix] Grudem, op. cit., p.35.

[x] Klay, op. cit. Claar & Klay, op. cit., p.218. now refer to it as the virtue of wisdom

[xi] Economics in One Lesson, New Rochelle, Arlington House, 1979, p.103. See also  James D. Gwartney and Richard L. Stroup, What everyone should know about economics and prosperity, Vancouver, Fraser Institute, 1993, pp.28 & 83.and A.M.C. Waterman, “’Mind your own business’: Unintended Consequences in the Body of Christ”, Faith and Economics, Spring 200, p.1.

[xii] Hay, op. cit., p.62. See also Gregg, op. cit, p.33 & 67.

[xiii] J. Douma, Christian Morals and Ethics, translation by John P. Elliott and Andrew Pol, Premier, Winnipeg, 1980, p.10.

[xiv] Cf. Prov 15:22; 21:5; 24:6. See Beisner, 1988, p.87. and Jeffrey E. Hammond, “The Proverbs 31 Woman: Entrepreneurial Epitome?, Faith & Economics, Fall 2012, P.7

[xv] See William Watson, “Coca Puff conservatism”, National Post, May 7, 2008, FP. 4