EKIP– Expert Club for Economics and Politics A Different Opinion
At the very end of last week, the results of a study commissioned by the Ministry of Labor and Social Policy and conducted by the Bulgarian Academy of Sciences were published, which concluded that: “Minimum social security income (MSI) and minimum wage (MW) do not negatively affect employment and do not reduce it.” These are results that should not surprise us, given the sponsor of the study. However, here I will present some objections to both the methodology and the conclusions of this analysis.
The results of Assoc. Prof. Dr. Emilia Chengelova's research can be opposed by a significant number of academic studies that completely refute the theses she reaches. Some of them (only from the last two years) include: Mark Wilson, The Negative Effects of Minimum Wage Laws (Policy Analysys 701, 2012); Tony Fang and Carl Lin, Minimum Wages and Employment in China, (Institute for the Study of Labor, 2013); Jonathan Meer and Jeremy West, Effects of the Minimum Wage on Employment Dynamics (National Bureau of Economic Research, 2013), as well as a large number of articles and essays. Let's move on to the analysis of the specific study.
Special attention should be paid to the methodology used by the BAS scientists: they based their results on data obtained from surveys (“summarizing the opinions of 2,525 employers and 3,500 workers”). As is known, economic principles are not determined by anyone’s subjective opinion, although generations of economists have tried to adapt the theory to the needs of the day. [1] The economists of the Austrian School demonstrated a century ago that the role of the researcher is to discover generally valid principles. Of them, Ludwig von Mises wrote: “Its principles [of economics] are not deduced from experience. They are, like those of logic and mathematics [2], a priori. They do not lend themselves to confirmation or refutation on the basis of experience or facts.” [3]
The conclusion to which these considerations inevitably lead is that the methodology used is completely inapplicable to the study of the problem at hand – there is no way that the opinion of a small group of people (about 7,000 people) can be used to describe economic reality and the impact of government regulations on the economy. In fact, we encounter almost daily examples of how the subjective opinion of certain individuals is an extremely inaccurate way to determine the consequences of government interventions in economic life.
A great example is the stock market participants who always welcome new doses of inflation because it makes nominal stock market indices grow. However, and contrary to their views, economic science shows us that currency inflation and government intervention in the money supply, as well as the determination of the interest rate by the central bank, leads to disastrous consequences, some of which include:
1) crises begin to become more frequent and severe;
2) money for investments and financing new businesses disappears because savings are consumed;
3) companies are massively shifting towards the production of goods and services for immediate consumption, abandoning the true engine of the economy – the long structure of capital goods production;
4) more and more people are chronically in need of government assistance because the "easy money" policies of central banks are preventing the creation of sustainable and growing businesses, instead inflating more and heavier bubbles in various sectors of the economy;
5) without an efficient market structure of production that increases wealth measured in the quantity of goods, services, and production (to the extent that it generates much greater wealth in the economy than final consumption) and with more and more money being printed, the entire society becomes poorer, especially those to whom the new money reaches last.
The conclusions from the stock exchange case are fully applicable to the BAS study.
As mentioned above, there are many studies that reach exactly the opposite conclusions. Let us take a very brief look at what happens when the economic method is applied to the problem studied by Assoc. Prof. Dr. Emilia Chengelova: do the minimum social security thresholds and the minimum wage negatively affect employment? The obvious effect of increasing the minimum wage and/or social security thresholds will be to increase the cost of labor for the employer. Therefore, this increase will undoubtedly negatively affect precisely the group that it should “protect”, namely – people with low incomes and workers who do not have experience. This is because when the minimum social security threshold and the minimum wage increase, without an increase in labor productivity against the increased cost of labor, the relative cost of labor will become higher compared to the cost of substitutes (capital goods). This will undoubtedly prompt employers to replace some of their employees with machines or to completely abandon the particular production (because otherwise they will start to suffer losses and eventually go bankrupt).
This leads to an important conclusion: increasing the minimum wage (MLW and MOW), although it will increase the pay of some of the least skilled employees, condemns others to involuntary unemployment; the same applies to people with the least experience, because, for obvious reasons, they are less productive, ceteris paribus, than their more experienced colleagues. That is, although this is rarely noted, the administrative increase, or the very existence, of the MWL harms low-productivity workers in the economy and manufacturers, who either have to replace part of their employees with machines or go bankrupt. Their bankruptcy will also negatively affect consumers, forcing them to either consume less of a certain consumer good, or to consume the same amount, limiting the consumption of other goods and services (due to its increased price).
The administrative imposition and increase of minimum wage and minimum wage has another negative aspect – it violates the rights of free bargaining between individuals. When minimum wage or minimum wage laws are in place (under which employees are not allowed to be insured), workers are not able to offer their labor for a wage that truly reflects their productivity, but are forced to be valued higher.
If we proceed from the principle that the state should set the minimum wage in order to protect workers, it follows that if we want to achieve any efficiency, all types of contracts must be strictly regulated by it. Taking this logic to its extreme, we undoubtedly reach the conclusion that contracts should not exist at all - the state should simply set the specific conditions for the various types of contractual relationships. That is, if it is true that the state should set the minimum wage and the minimum wage, it follows that the “most optimal” world must be an Orwellian dystopia. In fact, the exact opposite is true - any intervention by the state is in violation of the individual rights of individuals, and this is valid for both the minimum wage and the minimum wage.
In conclusion, it must be said that the conclusions reached by the team of Assoc. Prof. Dr. Emilia Chengelova are wrong. Moreover, the minimum wage and insurance thresholds imposed by the state harm the economy and, above all, the workers they are supposed to "protect". Therefore, not only should the minimum wage and the minimum wage not be increased, but they should be completely abolished in order to ensure a decent existence for low-skilled employees, and indeed for all employed people.
[1] Here I include, for example, the creation of the concept of “natural monopoly,” which was developed to justify government-granted monopoly privileges to firms in certain industries (see Thomas DiLorenzo, The Myth of Natural Monopoly, (The Review of Austrian Economics 9 (2), 1996.), the concept of “public goods,” developed by Paul Samuelson (for a brief critique of this idea, see here ), and others.
[2] Here, a distinction must be made between the fact that economics and mathematics are based on similar logic, and the applicability – rather small – of mathematical models and formulas in economics.
[3] Ludwig von Mises, Human Action, (Chicago: Henry Regnery, 1966), p.32. Виж още: Hans-Herman Hoppe, Economic Science and the Austrian Method, (Ludwig von Mises Institute, 1995).
Indoctrination of the mind becomes easier in an economy with party ideologies or neoliberalism
In world finance, it's scary and needs to be handled very carefully, and I've explained what it's all about - https://www.facebook.com/atanas.shalapatov/posts/1442612112683685
Regarding the author's criticism of the methodology and results of the study, I must say that I absolutely agree.
The method of research is really extremely strange. To illustrate the problem, I will give a few examples: 90% of French people believe that they are above the average for their country in terms of sexuality, which is impossible, but people are convinced of the above; studies show that according to statistics, men on average have slept with more women than women with men, which is clearly untrue, but that is what the statistics show. What I am saying is that reality and what people think about it are two, sometimes completely different things. According to research, we Bulgarians are one of the unhappiest nations in the world, at least that is how we seem to feel. But do we have reason to? Has anyone compared ourselves to Congo, Iran and other such countries? That we are levels above them, however, does not matter at all. For people, what is important is the subjective (not objective) state of affairs.
Another criticism. I don't know exactly what the study claims, but judging by the statement above, it says in short that the minimum wage and thresholds DO NOT INCREASE unemployment. Very nice, but nothing follows from the above statement. Employment in a market economy is a dynamic process. Jobs are constantly being created and closed. People change jobs, new professions are being created, and old ones are being closed. The authors' claim (from the title) is that despite the minimum wage and thresholds, unemployment has remained the same. However: compared to what? What would unemployment be like if there were no minimum wage and thresholds? There is nothing to compare it to. And there is no because this is a story that never happened. Imagine that the economy is actually growing right now. This would mean that the trend is to create more jobs than they are being lost. That is, there is employment growth. And here comes the government with the minimum wage and thresholds and what happens is that this employment growth disappears. That is, we have lost potential jobs, but how can you see it? And then you can argue from a political point of view: "Minimum social security income (MSI) and the minimum wage (MSW) do not negatively affect employment and do not reduce it." The idea being pushed here is that there is no problem with imposing the minimum wage. That is, our policy is correct! Politics is a very dirty thing. It deals with what is visible and can be assessed. Things that are not visible are not taken into account. The electorate is simply not impressed by things that it does not see or that do not affect it emotionally.
Now let's take a look at the author's beliefs.
He apparently took Mises's statement, namely: "Its principles [of economics] are not deduced from experience. They are, like those of logic and mathematics, a priori. They do not lend themselves to confirmation or refutation on the basis of experience or facts." as absolutely true and unquestionable.
What Mises is saying with the above is, in short, "Trust me! You can't refute me and you can't confirm my views, so just trust me. I know better, because I simply know!"
The above is pure religion. And apparently the author adheres to it because Mises is a great economist and since he is great, according to the author he will know better than the author himself. According to Mises, his readers are not supposed to think and critically decide, but to accept what he said, because he said it. Pure faith!
More specifically:
1. Regarding the fact that principles are not derived from experience. And from what are they derived? How can I judge something when I don't know it? And if I know it, then I have experience with it. Here it depends on how I interpret my own (and other people's) experience.
2. Regarding: "They are not amenable to confirmation or refutation based on experience or facts". Apart from the fact that the above is a call to create a cult of personality, it is simply not acceptable. An example of this is the exact sciences. This is a field that is not so susceptible to faith and other subjective opinions. And if you haven't noticed, things are generally going well there. There, people know very well that theories mean nothing. You have to prove them. And when you prove them, then they accept them. This trick "Believe me because I said so" does not work. Good, but in economics it is not like in mathematics, where you can prove a theorem. In economics you cannot conduct an experiment like in physics. No one will allow you to play with people's well-being to prove a thesis, for example. However, what can be done is to see if there are no facts that contradict the theory. And if they contradict each other, let's ask ourselves: Is this theory really true or is it complete?
In short, of Mises's claim that the principles of economics ".. are neither verifiable nor falsifiable," only the first part is true, namely that they are not verifiable. The second part, namely that they are not falsifiable, is simply wrong. I have said it in this blog and I will say it again: And thousands of confirmations do not make a theory correct. But even a single contradiction makes it invalid or incomplete. An example is Newtonian mechanics. It has been confirmed millions, millions of times. But it turns out that it is only approximately true. At speeds close to the speed of light, it does not apply!
I emphasize again: When confronted with statements like "All swans are white," it is enough to show that ONE is not white and the WHOLE theory goes to hell. According to Mises, the above is not true.