The Walmart Living Wage Bill is a Bad Idea

The bill that recently passed the D.C. City Council  yet to be signed by the mayor, requiring Walmart to pay a “living wage” of $12.50 an hour is a bad idea[1]. At worst it will harm the poor and unskilled, at best it is a very inefficient way to benefit a small number of them.

Suburban Poverty

"...it is true that poverty rates tend to be higher in cities and the countryside. But the suburbs are where you will find America’s biggest and fastest-growing poor population."

Economics of Emigration and the American South

A while ago I posted about the immense benefits of freer migration for migrants, the places they leave, and the places they go. Most research focuses on immigration, and partly as a result there is concern that emigration makes a sending country worse off by reducing its productive capacity. As I outlined in my original post, emigration is a net benefit, and increases growth.

Since then, I came across a paper on emigration and growth in the Southern United States. At the beginning of the 20th century the South was proportionally poorer than the North. Starting in the 1940s, the South grew faster than the North and closed the gap significantly. At the same time, there was large black emigration out of the South.

To get at the causation, Richard Hornbeck and Suresh Naidu of Harvard and Columbia University respectively, look at The Great Mississippi Flood of 1927. 

Laissez-faire and the Triangle Shirtwaist Fire

Here’s a story illustrating the need for some level of regulation on businesses. It's not about needing more or less necessarily, it's that there's an optimal level above none. 


The Triangle Shirtwaist Company (TSC) was one of the largest of nearly 500 garment factories on Manhattan in the early 1900s. It was a competitive industry, with no monopoly power. Around 70% of the workers in the garment industry in New York City were female. Most of the women were recent immigrants, or their children. They worked 7 days a week at least 11 hours a day for around $1 to $2 a day[1] minus what their employer deducted for electricity and supplies (adjusting for inflation, $1 back then was worth around $24 today). Given that 20% of the world population still lives on less than $1.25[2] a day, the wages paid, while low and for sweat-shop work, were still an initially attractive way out of poverty. 

But the women and some men of the garment shops came to believe they were paid too little given the value of their output.

Poverty

Here's a simple post. There's a lot that's wrong in the world; but we should keep things in context. Poverty world wide is decreasing at the most rapid pace ever observed. It shows what good can be done when markets work, as opposed to corporatism masquerading as capitalism. No system has a better track record.

At the same time, this raises the question of what is happening in the United States. Whereas global inequality is decreasing, in the United States it is increasing. Whereas global poverty is decreasing, in the United States it is increasing (mostly due to the Great Recession but considering that it is at least not decreasing). As the graph below shows, while the United States has a lower poverty rate than many countries, it has a higher rate than pretty much every other developed country. And in a country of 310 million-ish people that results in a very large population in poverty.

Migration and its Benefits

Lower barriers to migration is by far the best policy option to increase economic growth, and reduce poverty. Yet there’s still debate and hypocrisy. How can a country, or person, who espouses the benefits of free markets be against the free flow of labor? It’s half the basic production function[1]. Anyway, if you click “read more” I intend to show that the evidence is overwhelmingly in support of freer migration. And opposition is only possible through ignorance, hypocrisy, or malice for the poor. Here are the basic conclusions showing freer migration, of both skilled and unskilled workers, is the single best policy option for the world economy.

1. Complete reduction of barriers would increase world GDP by between 67-147%. Even a small reduction in barriers would lead to welfare gains larger than the complete elimination of remaining barriers to goods and capital flows.

2. Migrants from the developing world themselves are the largest beneficiaries of migration. At the median, a migrant to the U.S. will experience a wage increase of around 4.11 times their pre-migration wage.

3. Immigration increases productivity and employment levels for all workers, including native workers.

4. No study has found large negative effects on GDP, wages, or government finances/service provision due to immigration.

5. Emigration from developing countries puts upward pressure on domestic wages, increases incentives for education, and leads to remittances. All of which make emigration a net benefit for poor countries.

Outsourcing is a Good Thing

Recently the topic of outsourcing has again become popular in the news. The scandal is currently over whether Mitt Romney was working at Bain Capital when they closed down some companies and moved jobs overseas. I would like to point out that if these companies had not either already gotten themselves into trouble or been out-competed elsewhere, a company like Bain wouldn't be buying them. It’s not Bain’s fault the most profitable thing they could do was declare bankruptcy. Second, it doesn’t matter if Romney was at Bain when they outsourced jobs. Outsourcing is in fact good for the world economy, and good for the poor. As economist Paul Krugman put it back when he was still cool:

“The lofty moral tone of the opponents of globalization is possible only because they have chosen not to think their position through. While fat-cat capitalists might benefit from globalization, the biggest beneficiaries are, yes, Third World workers.”

The jobs that have left the United States in search of cheap labor left because wages here are too high relative to destination countries to economically justify keeping them in the United States. This is a good thing; it means we are a developed country. The flip side of this is that the wages outsourced jobs offer to developing country workers are as good or better than the alternatives for those workers, otherwise they would not take the jobs. The increased availability of outsourced jobs increases competition for workers, and increases wages of the world’s poorest. And there is overwhelming evidence of this in the 1 billion people who have been raised out of poverty in the past couple decades.

It gets even better, because outsourcing is good in net for the countries that jobs leave. First, outsourcing, if rational, reduces the cost of production, which inevitably gets passed on to consumers. The effect is upward pressure on the real wages of consumers who can now buy more for the same money. And many of our imports are inputs for final production in the United States, meaning more profitable production, and thus more jobs here.

In spite of all this it could very well be possible that the effect on jobs and wages is negative for developed country workers, but only in the short run. Increasing wages in developing countries eventually reduce the incentive to outsource jobs in the first place. Already thousands of jobs that were outsourced to China are returning to the United States as wages rise in China. And there is much higher domestic demand for products all around the world in developing countries. The United States’ trade deficit has closed considerably in recent years. And despite decades of outsourcing the export sector in the remains one of the bright spots in our economy.

Mitt Romney should stand up for himself. He need not have been motivated by anything more than profits to have brought benefits to the poor in developing countries, and to consumers in developed countries. And the opponents of outsourcing and globalization should realize that their opposition keeps people poor for the benefit of the few, hardly a sound strategy to reduce inequality.

Banking for the Poor

from Kiva on Vimeo.

Because of kiva.org anyone can be a banker for the poor, like that baller Muhammad Yunus. Though most likely he's better at it than you will be. But still, lack of access to credit and banking services is a cause of inequality and continued poverty. And this model didn't explode into a horrible recession. Plus loans are paid back around 98.9% of the time.