Topic: International Economics and Development

We Shouldn’t Follow Germany on Minimum Wage

President Obama included a much discussed proposal to increase the national minimum wage to $10.10, from its current level of $7.25.  To date, the proposal has gone nowhere in Congress. In the meantime, some cities and states have introduced or approved increases in their minimum wage rates. Ten states and the District of Columbia have enacted increases in the 2014 session so far. In June, the Seattle City Council unanimously voted to increase their minimum wage to $15. In San Francisco, Mayor Ed Lee followed suit and has introduced a ballot measure to increase their minimum wage to $15 an hour.

Germany is currently grappling with the ramifications of imposing a national minimum wage, and the lessons we can learn from their experience should deter calls for raising the minimum wage here.

Earlier this month, the German parliament’s lower house adopted a new national minimum wage of €8.50 ($11.61) an hour, beginning in 2015. Before this, there had been no national minimum wage in the country, with trade unions and employers negotiating wages by sector. Just as the Congressional Budget Office estimated that raising the minimum wage here could reduce employment by 500,000 workers by 2016, one of Germany’s most respected economic institutes warned that Germany could lose the equivalent of 340,000 full-time jobs. While there are some factors, such as a high proportion of apprenticeships, which could dilute the harmful effects of such a minimum wage in Germany, this adoption is a step backwards for the country that is often an economic leader in the EU.

Young workers are disproportionately affected by the minimum wage as they are more likely to have jobs that pay below the new statutory minimum.

Currently, Germany’s youth unemployment rate is roughly a third of the euro area average, and Germany outperforms every other country in the EU on this metric. In fact, since 2007, Germany is the only country in the euro area to see a decrease in youth unemployment.

Source: European Commission, “Euro area unemployment rate at 11.8%,” Eurostat, May 2, 2014.

There is thus some concern that their new minimum wage could increase unemployment and limit opportunities for young people. As Cato’s Steve H. Hanke has pointed out, in “the twenty-one E.U. countries where there are minimum wage laws, 27.7% of the youth … was unemployed in 2012. This is considerably higher than the youth unemployment rate in the seven E.U. countries without minimum wage laws — 19.5% in 2012.”

This week the International Monetary Fund (IMF) released its latest report on the German economy, in which the authors raised numerous concerns about the imposition of a new national minimum wage (strange that they did not give voice to  these concerns when advocating that the US raise its minimum wage in an earlier report this year).

As previous work by the Cato Institute has shown, the benefits of a minimum wage increase are poorly targeted to households in poverty. The IMF report notes that the “effects of the minimum wage on income redistribution toward the working poor may be limited, as the population of minimum wage earners and that of the working poor overlap only partially.”

The IMF authors also seem to recognize that the imposition of the minimum wage could have outsized adverse effects in some regions of Germany because a higher proportion of affected low wage workers live in East Germany (27 percent in the East compared to 15 percent in the West). While the variation between U.S. states is not as clear cut as the difference between East and West Germany, the employment outcome would be the same were a higher national minimum wage implemented here: in poorer states, where many workers would be affected by the increase, there would likely be significant job loss.

Local minimum wage increases, like the one in Seattle, are not as affected by this last mechanism, but they face the added danger of losing jobs to nearby jurisdictions that have not raised the minimum wage, as it is easier to outsource jobs to a neighboring city than it is to another state or country in many cases.

The new minimum wage in Germany will prove ineffective in improving the lot of low-income workers, and will likely lead to some job loss for the very people it is trying to help. Both countries would be better served exploring other means to improve outcomes for low-income workers. There are other, potentially more effective policy options to explore such as expanding apprenticeships (as Germany has already done) or  introducing a lower provisional minimum wage for teens and the long-term employed.  One thing is certain: in Germany, and the United States, a blunt policy instrument like the minimum wage is not the answer.

Inventions to Eagerly Await

Humans are progress seekers. Those with an entrepreneurial drive use their intellect to invent novel solutions to our problems. Sometimes, their solutions alleviate widespread suffering and let us live better than kings of centuries past. Thomson Reuters released just such a list of welfare-enhancing inventions to expect by 2025:

Dementia, Alzheimer’s, cancer drug-induced deaths, and Type I diabetes should afflict far fewer individuals by 2025. See below that cancer–one of the most common causes of death in several countries–is already on the decline (with a graph made on HumanProgress.org):

Life in Britain on the Eve of the First World War

The Telegraph has an interesting series of short articles about life in Britain at the start of WWI. While all of the articles are worth reading, here are the best parts for those who like to compare standard of living then and now.

Work and leisure

Most Edwardians worked in dark, noisy factories, cut hay in fields, toiled down dirty and dangerous mines; had bones bent by rickets and lungs racked by tuberculosis. Life expectancy then was 49 years for a man and 53 years for a woman, compared with 79 and 82 years today. They lived in back to back tenements or jerry-built terraces, wore cloth caps or bonnets (rather than boaters, bowlers and toppers) and they had never taken a holiday - beyond a day trip to Brighton or Blackpool - in their entire lives.

Transport

Mrs Patrick Campbell was invoked in court on the eve of the war to prove that a driver charged with ‘exceeding the motor-car speed limit’ (20mph) was really driving ‘very carefully.’

In the last full year before the war, 2,099 people died on the road (compared with 1,754 in 2012).

In 1910 of the 500 pilots active, 29 died, in half a million miles of flying. Much safer were the 5,800 pilots of 1912, of whom 140 died in 12.5 million miles… present-day aviation fatalities run at one every 1.24 billion miles.

Diet

Beyond the average purse, 5lbs for 1s and 2d – they [Jersey potatoes] are a luxury as are fresh peas. To have them you are going to have to economise on other articles of diet.

Entertainment

Alongside reels from Charlie Chaplin and Mary Pickford which delighted the masses came more artistically ambitious fare: from Italy, according to a review published on 11 March, came The Passions of the Renaissance, ‘a masterpiece of cinematography’ which ‘simply enthralls the spectator’, and a ‘startling’ documentary about the British army which featured ‘some very wonderful pictures of bursting shrapnel.’

Women’s rights

[One] of the abiding images of the women’s suffragette movement is the arrest of its militant leader Mrs Emmeline Pankhurst as she tried to present a petition to the King at Buckingham Palace in May 1914. She was lifted off her feet in a bear hug by Chief Inspector Rolfe… The day after the Buckingham Palace protest some 60 women appeared at Bow Street and there was utter chaos as they shouted, sang the Marseillaise, threw newspapers and launched a shoe at the magistrate which he neatly caught and passed to an attendant. The Telegraph coverage was headlined ‘Suffragette Orgie [sic], Pandemonium in Court.’

Foreign Policy Hawks Ignore Data

As 2016 presidential contender Rand Paul catches flack for his so-called foreign policy “isolationism,” the neocons go on frightening the public. According to the hawks, the world is getting more dangerous.

In a Politico interview last Monday, Dick Cheney said, “The world’s not getting safer, it’s getting far more dangerous.” On the same day, Newt Gingrich said on CNN:

After 9/11, the United States is not safer … in an increasingly dangerous world… If you look at what’s happening around the world today, it’s almost impossible to say that we’re safer… The worldwide scene is not a very safe scene.”

Senator John McCain also said on CNN that the world is “in greater turmoil than at any time in my lifetime.”

While 2014 may in some ways be less safe than 2013, foreign policy hawks ignore long-term trends that show an increasingly safer world. Consider the following evidence from HumanProgress.org. First, all types of wars, from civil to interstate, are less deadly:

Latvia, the Country Prof. Krugman Loves to Hate, Wins 1st Prize

I constructed a misery index and ranked 89 countries from most to least miserable based on the available data from the Economist Intelligence Unit. My methodology is a simple sum of inflation, bank lending and unemployment rates, minus year-on-year per capita GDP growth. The table below is a sub-ranking of all former Soviet Union (FSU) states contained in my misery index.

For these FSU states, the main contributing factors to misery are high levels of unemployment and high interest rates.

The low misery index scores in Estonia and Lithuania don’t surprise me as I helped both countries establish sound money with the installation of currency boards in 1992 and 1994, respectively. Latvia, a country Paul Krugman loves to hate, takes the prize for the least miserable of the former Soviet Union countries in this sub-ranking.

In Memory of Carlos Ball

I’m sad to report that Venezuelan journalist and Cato adjunct scholar Carlos Ball passed away last week. He was 75. Carlos was a champion of liberty and a long-time friend to so many of us in the freedom movement in the Americas. His life was a testimony to the power of ideas, and he lived it true to his classical-liberal convictions.

Carlos was a co-founder of CEDICE, the market-liberal think tank in Caracas that celebrated its 30th anniversary this year and with whom Cato has worked closely for many years (and that has been severely harassed by the Chavista regime). In the 1980s, Carlos was the editor of El Diario de Caracas, an important daily that was critical of government policies. It was when Carlos represented Venezuelan journalists at an Inter-American Press Association conference in 1987 in San Antonio, Texas and denounced then-President Lusinchi’s attacks on freedom of the press, that Lusinchi demanded that Carlos be fired from the newspaper, conditioning the renewal of the license of the popular television station RCTV—part of the same media company—on that outcome. Carlos was let go from the paper, he was criminally charged by the government, and was told by the judge presiding his case that “I have orders from above.” It was at that time that Carlos left Venezuela, moving to Florida where he would live the rest of his life. RCTV received a 20-year license. It was the expiration of that license in 2007—that Hugo Chavez refused to renew, thus shutting down the television station—that triggered the massive student uprising against the government that year. (As a result, Chavez lost a constitutional referendum and temporarily slowed down his accumulation of power.)

The idea that Venezuela was doomed to repeat such experiences and that the country would only lose more freedoms if economic freedom was not also respected was a long-time theme in Carlos’s writings. In that regard, he was among a very small group of Venezuelan intellectuals who decades ago warned against the ideology of socialism predominant in the political system and much of Venezuelan society. Indeed, he very correctly viewed Hugo Chavez’s regime as a logical, though more extreme, extension of what had come before. “Chavez,” he wrote, “has intensified, accelerated and exacerbated corruption, the concentration of power, the violation of property rights” and the power of the bureaucracy in people’s lives. In a 1992 essay, Carlos wrote that the “fatal date” for his country was January 1976, when President Perez nationalized the petroleum industry. That “meant a radical change; for the first time since the death of General Gomez [1935], political and economic power was again concentrated in the same hands: in those of the head of state.”

He would later write: “Without that concentration of wealth in political hands, Chavez would never have been able to Cubanize Venezuela because it was the economic power of oil that allowed the government to crush the individual liberties of the Venezuelans.” How right he was.

Bulgaria Wins Balkan Prize

Every country aims to lower inflation, unemployment, and lending rates, while increasing gross domestic product (GDP) per capita. Through a simple sum of the former three rates, minus year-on-year per capita GDP growth, I constructed a misery index that comprehensively ranks 89 countries based on misery. The table below is a sub-ranking of all Balkan states presented in the full index.

 

All of the Balkan states in my index suffer from high unemployment and relatively high levels of misery.

That said, the least miserable Balkan country is Bulgaria. For all of its problems, including a recent bank run, the country’s currency board system - which I, as President Stoyanov’s adviser, helped design and install in 1997 - provides monetary and fiscal discipline, and produces positive results in a region plagued with problems. 

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