On Minimum Wage

In a recent Globe and Mail article, Reginald Stackhouse discusses the idea of indexing the minimum wage rate. In discussing this, I have to first state that I very much dislike this particular article. I think Stackhouse deliberately confuses the very separate questions of a) ought there to be a minimum wage, and b) conditional on there being a minimum wage, ought to be indexed. While I do dislike the specifics of the article, I do agree with the overall suggestion. Before getting to that, however, I've got a bunch of other comments on minimum wage in general.

As for the first issue--which isn't even his point--I think he shows complete disregard for the economic analysis underlying not having a minimum wage. Contrary to what he thinks, higher minimum wages (special situations involving monopsonies and labour shortages aside) will reduce employment. It's not just the case that companies may not be able to pay their workers, it's often the case that they won't find it be cost effective to pay their workers. Minimum wages have the same problems as unions, in that they provide greater benefits to those on the inside, while simultaneously increasing the number of people on the outside. Of course, that doesn't mean that they're necessarily bad. But the economic problems, including the ways that minimum wages can make the working poor worse off in some circumstances, shouldn't be ignored.

Personally, I believe that there are rights issues involved in these questions, as I believe that a society shouldn't let its most disadvantaged suffer terribly as everyone else gets rich. I believe passionately in equality of opportunity, and I also believe that everyone ought to have a very basic standard. But I believe it's society's responsibility as a whole, rather than the responsibility of certain employers, to make sure that people reach this standard. As a result, I think that a better way than simply forcing minimum wage laws on firms to address such "rights" issues (I think the underlying right is much more complex and may not simply be an unqualified right to a minimum standard of living, but I'll assume now that rights language is appropriate for the sake of argument) is for a better welfare system which guarantees everyone a minimum standard of living and comes out of general tax revenues. A stronger welfare system reaches everyone and distributes the burden on society, not on particular businesses. Under certain conditions, welfare coming from general taxation may also be less distortionary than minimum wage laws, as the increase in taxation required to increase welfare would be much more diffuse and minor than is the burden imposed by minimum wage laws, which are specifically concentrated on specific actors. Thus, I think welfare is probably a more economically efficient, comprehensive, and socially justifiable means of providing help to the working poor than is a minimum wage law.

Now, moving on to the actual argument which Stackhouse was trying to make, I wholeheartedly agree that given that minimum wage exists, it ought to be indexed to inflation. If minimum wage is meant to provide workers with a minimum standard, then it must account for inflation. Indexing minimum wage to inflation reduces workers' risk exposure to the possibility of significant inflation, allows for stability in both real costs for firms and wage rates for workers, and provides predictability for firms, who can accurately predict costs instead of being forced to guess when legislatures will act to change the minimum wage.

Indeed, other legislation recognizes the benefits of indexing. The Residential Tenancies Act 2006, for example, indexes rent increases to inflation. There's no reason why the same couldn't be done with respect to the minimum wage.

An Inefficient Form of Pollution Reduction

The Chinese government has recently announced an experimental plan to lower the amount of smog and pollution in its largest cities. In advance of the Olympics, it has instituted an odd-even license plate system in Beijing, whereby on certain days only cars with license plates ending in odd numbers will be allowed to drive, while on others, only cars with license plates ending in even numbers will be allowed to drive.

On the plus side, I applaud the Chinese government's efforts to tackle its massive air quality problem. Chinese growth has come at the significant cost of environmental degradation, and efforts to address this are good. If global warming and air quality problems are to be addressed, they will almost necessarily involve at least some reduction in the number of cars on the roads, at least given current emissions levels which cars generate.

However, this system is extremely economically inefficient. By arbitrarily prohibiting individuals from driving, this system randomly prevents people from driving, rather than targeting those who place the lowest value on driving. For some people, the inability to drive might prevent them from reaching their places of work or doing other necessary things. For others, driving might be more of a luxury.

Given this, it's significantly more efficient for the government to try to lower driving by imposing additional charges on driving, either in the form of gas taxes, or, if downtown air pollution is the primary concern, a congestion charge imposed specifically in certain areas. The same reductions can be made, but it can be done in a more efficient way.

(If driving distance could be taxed directly, an even more sophisticated and morally palatable solution might be to provide everyone with a certain number of kilometers of free driving, and then tax additional kilometers at an increasing marginal tax rate with respect to distance driven. Of course, this requires significantly more monitoring and enforcement capacity and entails substantial enforcement costs; thus, given current technology, it seems to be a rather implausible solution.)

In any event, this system of driving rationing is suboptimal. It's something which would have been expected to come out of pre-1978 China; it's not a 21st century environmental solution.

An Interesting Alternative to the Standard Approach to Contracts

Richard Brooks provides an exceptionally interesting approach to contract law in an article at the Yale Law Journal.

As a backgrounder, the standard approach to contracts is that when one party breaches, the other party gets expectation damages. As a result, some (e.g. Holmes) have characterized contract law not as putting obligations on parties to do X, but rather to do X or pay damages. Specific performance (i.e. forcing the party to do X) is a remedy which is only available in certain cases. Thus, for the most part, one is able to breach contracts, but one will be liable for it. This standard model of contract enforcement has a lot going for from an economic perspective, and its efficiency properties have been examined by numerous academics.

What Brooks does is propose to reverse the holder of the right to breach or pay. Instead of giving that power to the person breaking the contract, he suggests a model whereby that right falls to the non-breaching party, i.e. they can either receive damages or compel the party to perform the contract. It's meant to be a model of contract enforcement with identical efficiency properties to the standard model, but which accords slightly more with our moral intuitions about forcing people to actually fulfill their promises.

At first glance, I rather like it. I'm still working my way through other commentaries on it, but for the most part, I think it's an interesting proposal.

Of course, in many ways, this proposal is a second-best response to failures in the law of contract damages. (Interestingly, the tort of inducement to breach a contract is justified by many law and economics scholars as a similarly second-best solution given the failings of the law of damages) If contract damages actually fully compensated individuals, they'd be fully indifferent to the damages or the performance, in which case the status quo model wouldn't be morally problematic, especially given the availability of specific performance in certain exceptional cases. But as it is, expectation damages aren't always perfect and can leave people under-compensated. Thus, while Brooks' proposal provides a solution to this, a more direct one would be to remedy problems in the law of damages. Of course, because this may not be possible or damages may be difficult to quantify in some cases (e.g. intangible harms), Brooks' solution might be superior.

In any event, there's interesting things going on with this, and while I'm still not entirely sure what I think about it, I think it's worth further examination.

A Mostly Uninteresting Cabinet Shuffle

Some commentators think that the change in the Defence Ministry isn't the real change here. I am rather inclined to disagree. Obviously there were a number of goals that Harper was trying to achieve with this cabinet shuffle. But I think the main one was getting someone likeable and credible into the Defence portfolio. A lot of Canadians are grumpy about Afghanistan, and someone needs to remind Canadians why we're there. Maybe MacKay can pull it off. There are a lot of good reasons to be there, and I for one have no desire to abandon Afghanistan to the Taleban.

In any event, I'm quite curious to see how this goes.

After a long hiatus...

I've come back to the world of blogging. It was a busy many months, and this completely fell by the wayside. A lot more random ramblings will be posted here. There will still be a heavy dose of political content, but it will definitely be significantly less politically-oriented than previously.

On Income Trusts

Why are we fighting this? We're putting politics ahead of good policy, and that's the last thing we should be doing right now.

There are strong economic reasons to convert to income trusts, but we shouldn't be incentivizing the income trust-ization of our economy with the massive tax shelter which they've thus far enjoyed.

The theoretical economists who whine at the notion of double taxaton may be right, but they need to move past their abstract models and examine how they map onto the real world. There are exceptionally good reasons for taxing the hell out of income trusts.

Anonymous Liberal

It's been a while...

I haven't posted in quite a while, as I've been catching up on the rest of life after the DSMs. The blogs in general are a little slower, and libnews has been completely inactive for several weeks. So, I haven't had time to comment on a lot of issues. This post is an attempt to throw out a few random thoughts; forgive me for my lack of in-depth analysis for the time being.

1) Re: the leadership race, it's completely Ignatieff and Rae. They have strength across the country, they're comfortable in both languages, they have the media attention, and they have the most support in general. Both Dion and Kennedy have an outside chance, a chance which becomes much greater if any anybody-but-Ignatieff-or-Rae movement emerges. That being said, I don't think it will, and I think most delegates will end up choosing between a relative newcomer to politics and someone with so much baggage he'd have to buy the whole airplane for storage. It'll be an interesting choice, and, I think that if Liberals act strategically in looking at their prospects in the next election, they'll ultimately support Ignatieff. If this isn't their primary concern, all bets are off.

2) Re: North Korea,...yeah, there isn't much to say, except, as I said a few weeks ago, that it's going to be an interesting little while...

3) Re: Garth Turner, I respect him much more than I respect most tories (/former tories). Although I disagree with some of his views, I like many of them, and I like his blog, and I like that he feels comfortable criticizing his party. I feel bad for him politically that he was kicked out ("suspended indefinitely), but I hope he joins the Greens, serves as their first MP, builds credibility for himself, and is re-elected in Halton in the next election. He's for the most part an intelligent man.

4) More later...