Economics in the Media…

…from David Robinson, senior lecturer at Haas School of Business, University of California, Berkeley, published December 28, 2015: “Don’t Forget the ‘Social’ in Social Security”

Robinson writes – in response to this op-ed by Wharton professor Jeremy Siegel – “There is never any expectation that upper-income earners will do as well from the government as they would if they’d invested that money themselves. The system relies on higher contributions from those who are fortunate enough to earn handsome salaries. Social Security is by design a system to transfer wealth to low-wage earners in their retirement. There’s simply no way that a janitor could save enough in his working years to provide a decent retirement.”

Is this true? CafeHayek shines a light:

A janitor’s median annual salary today is $26,586. An 18-year old today who starts work as a janitor, who works until the full Social Security retirement age of 66, and who each year is paid this median salary can expect to receive, upon retirement in 2063, a monthly Social Security check for $1,108.

But suppose that this janitor is relieved of having to pay the now-required 6.2 percent of his wages – $1,648.33 annually – into Social Security and, instead, he invests each year this sum into financial instruments that pay, on average, a real annual return of 5 percent, compounded monthly. Saving and investing no more than this sum each year during his work life, this janitor, when he retires at age 66, will own a pension worth $337,591. Even assuming (unrealistically) that these funds earn no further returns for the rest of the retired janitor’s life, if this janitor lives for another 15 years, every month he can take from his retirement fund $1,875.51 – or 69 percent more than the monthly amount that he would instead have received from Social Security. Looked at differently, in order for this janitor’s monthly payment out of his private retirement account to fall short of the monthly payment he will get from Social Security, he would have to live past the age of 91.

Hmmm…

Question for advocates of increasing the minimum wage…

Inspired by, and drawing largely from, this post over Cafe Hayek, here is a question that must be answered by every person claiming they support raising the minimum wage:

Regarding the effects of an increase in the minimum wage on the employment prospects of low skilled workers, do you either

1) believe that raising the minimum wage for some low skilled workers will NOT price other low skilled workers out of the job altogether – in other words that there are no trade-offs, no downside, to raising the minimum wage – or,

2) believe there are trade-offs, and some low-skilled workers will be priced out of the labor market – specifically those whose skills are not sufficient to demand the higher wage, such as, for example, teens and recent high school graduates – but, also believe the resulting benefits to the now higher paid workers will outweigh the resulting losses to the now unemployed low skilled workers, and therefore justify the increase?

Believing the first premise is simply economically incorrect. It defies basic economics and few sane people would likely defend such a stance when applied to other goods besides labor. Playstation4 consoles are currently selling for about $400 on Amazon. No reasonable person would argue that were the government to set the price of that console to no less than $800, that there would be no decrease in sales of PS4. Most people would rightly point out that sales of alternative consoles would likely increase, while sales of the PS4 would decrease. This is economics 101. If the price is artificially increased, quantity supplied may go up, but quantity demanded will go down, creating a surplus. Or in the case of low-skilled labor, creating a bunch of teens willing and able to work, but unable to find jobs.

LABOR SUPPLY

Believing the second premise is, however, more of a statement of values than an economic question. I happen to think it contrary to American values to endorse a government policy that grants benefits to one group at the explicit expense of another group. You may have convinced yourself of the goodness of raising the minimum wage on utilitarian grounds, or you may simply not care if some are harmed, so long as others are helped. Either way, you are endorsing a policy that reduces the freedom of one group to artificially boost the wages of another group.

It is often unclear what exactly is being debated is discussions over the minimum wage. If advocates of raising the minimum wage could please just answer this question up front, it will make it a lot easier to refute all your arguments. Thanks.