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A controlled experiment
Average wage in Northern Mariana: About half the U.S. federal minimum wage
Current plans of the Democratic Congress: Raise the U.S. minimum wage to $7.25, and apply that raise to Northern Mariana, although maybe not to American Samoa.
Posted by Tyler Cowen on January 9, 2007 at 07:54 AM in Current Affairs | Permalink
Comments
By including the Northern Marianas, Democrats say they hope to end abusive sweatshops, especially in the garment industry.
Yep -- I expect that establishing a minimum wage double the current average wage will end the garment sweatshops (by shutting down the Marianas garment industry in its entirety).
Posted by: Slocum at Jan 9, 2007 8:31:55 AM
Yes, it is a controlled experiment, but the implication is that it would provide some evidence about the more general minimum wage argument in the US. I hope this is not the implication, because if it is, then you are distorting the pro-minimum wage argument (granted that a doubling of the minimum wage in the Marianas will provide some outerbound evidence that may be useful, but its lessons will be just that -- outer bound, and not really applicaple to the general debate).
No one is arguing, at least no one serious, that the minimum wage can be raised indefinitely, without affecting the quantity of jobs. The argument is that within a very narrow range, raising the minimum wage has very limited, whether positive or negative, and that if the effect is negative, the increase in income offsets that.
The Northern Marianas is more interesting, IMO, from a political perspective, and very different effects may be taken away from substantially raising the minimum wage there. Through corrupt Republican efforts, capital interests in the Northern Marianas were able to influence US policy toward the area. On switching majorities, we now might see what amounts to political payback for those efforts. Obviously, this is not optimum policy, but the reversal of US policy toward the Marianas might act as a significant disincentive toward corrupting US policy, at least in a partisan way.
Posted by: theCoach at Jan 9, 2007 9:12:58 AM
Also note from the article that American Samoa has a Democratic delegate, whereas the Northern Marianas currently have a Republican. But none of that's surprising.
Posted by: John Thacker at Jan 9, 2007 9:13:12 AM
I don't think that punishing people for partisan corruption when their opponents take office will _ever_ work. All it does is to tell you that next time, you need to pay off both parties. It's just another way to increase the levels of the implicit corruption tax.
Posted by: DK at Jan 9, 2007 9:49:29 AM
Through corrupt Republican efforts, capital interests in the Northern Marianas were able to influence US policy toward the area. On switching majorities, we now might see what amounts to political payback for those efforts. Obviously, this is not optimum policy, but the reversal of US policy toward the Marianas might act as a significant disincentive toward corrupting US policy, at least in a partisan way.
So exempting American Samoa, which no so coicidentally has a Democratic Representative, is supposed to be a disincentive for corruption?
The Republicans exempted *both* the Northern Marianas *and* American Samoa from the minimum wage legislation. That sounds a lot less like partisan corruption. I'd like more evidence of corruption than "Republicans didn't impose the minimum wage." Especially since I oppose the minimum wage myself; I see it's imposition in the Northern Marianas (and not in American Samoa) as the corruption.
Posted by: John Thacker at Jan 9, 2007 10:14:21 AM
A controlled experiment? Don't you actually need like A CONTROL GROUP for one of those?
Unless you're gonna tell me that American Samoa and Northern Marianas are 100% alike.
This is a natural experiment, just like most other policy choices...
Posted by: Dan K at Jan 9, 2007 10:59:15 AM
What is the connection between doubling minimum wages and stopping labor abuse?
Posted by: John Mansfield at Jan 9, 2007 11:05:02 AM
What is the connection between doubling minimum wages and stopping labor abuse?
If you double the minimum wage, then all the jobs go away. Then the labor abuse stops!
*snicker*
Posted by: Jeremy W at Jan 9, 2007 11:59:00 AM
What is the connection between doubling minimum wages and stopping labor abuse?
Doubling the minimum wage is labor abuse by the government.
Posted by: happyjuggler0 at Jan 9, 2007 1:13:45 PM
http://www.npr.org/templates/story/story.php?storyId=5492833
I do not know the details, only that the Northern Marianas was part of the Delay/Abramoff connection.
DK, I think I make it pretty clear in my post that this is not my view of optimum policy, and that I specifically mention that it disincentivizes partisan corruption. There is some reason to believe that bipartisan corruption is of a better sort than partisan corruption (counteracting interests and all).
Posted by: theCoach at Jan 9, 2007 1:24:58 PM
It's closer to trebling than doubling.
Posted by: Brandon Berg at Jan 9, 2007 1:43:50 PM
The notion that the Northern Marianas and American Samoa can be used as a natural experiment in economics strikes me as somewhat naïve. A quick Google check shows that the garment industry in the region is more a textbook example of ‘crony capitalism’ and the evils thereof. Note the unsavory case of characters involved, including Jack Abramoff. See Wage bill will iron out an Abramoff wrinkle for one article on the subject. The same Google search also reveals large scale labor abuses.
The CNMI textile industry was the product of a host of government interventions. Producers were allowed to claim “Made in USA” status while enjoying exemptions from immigration laws and the minimum wage. At the same time a freer global market in textiles (MFA expired at the end of 2004) has reduced the advantages enjoyed by “domestic” producers.
This is not exactly free market capitalism at its finest…
Posted by: Peter Schaeffer at Jan 9, 2007 1:45:01 PM
Brandon,
Actually (I did not notice this at first), unless there is more information at the link, it is more like apples and oranges -
"Average wage in Northern Mariana: About half the U.S. federal minimum wage"
I am pretty sure that although the minimum wage in the US will soon be $7.25, that the average wage is and will be substantially higher.
Posted by: theCoach at Jan 9, 2007 1:47:36 PM
The Northern Marianas sweatshop scandal (e.g., "guest workers" kept behind barbed wire) was interesting because it says a lot about what similar guest worker plans favored by the Establishment will be like in America. The most striking fact is that no Latin Americans were imported as workers, just Asians. I suspect that will be the model if President Bush gets his way on guest workers -- employers will bring in legally Asian workers (because, in the words of one broker who currently brings in Thais for apple picking, "they are less likely to run away), while encouraging Latin Americans to continue to illegally immigrate.
Whether that will be the best of both worlds, or the worst, is a matter of taste.
Posted by: Steve Sailer at Jan 9, 2007 5:48:40 PM
@theCoach
If there is a small range in which wages can actually increase without affecting employment, unions will happily fill in that gap. You don't need to create a government bureaucracy just because people do not know they could increase their wage demands.
Posted by: kurt at Jan 9, 2007 10:46:36 PM
It is certainly a quasi-natural experiment, if not literary a "controlled" one. The control is obviously Mariana before the hike, not Samoa.
This is actually a very good idea, because we can reasonably see the rise as exogenous and large, which is not the case for most minimum wage increases. A good labour economist should get a good article out of this.
If the Democrats are right we should expect to see little employment effect. Our libraltarian friends indeed suggest that we might expect to see employment rise in Mariana:
http://www.huffingtonpost.com/steven-hill/henry-ford-and-the-minimu_b_38140.html
“In other words, raising the minimum wage will positively impact the entire American economy, not just low-wage earners. From a macroeconomic point of view, if low wage workers have more money to buy things, then businesses selling their products and services will have more customers. And more customers will mean greater sales, higher profit, and a "trickle up" effect that creates a more robust economy.”
Can’t wait for those “tricke up” effecst in Mariana!
Posted by: Tino at Jan 10, 2007 1:34:22 AM
Non-monetary inflation can be stopped.
"People today use the term `inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise." Ludwig von Mises - "Inflation: An Unworkable Fiscal Policy".
All prices do not rise. Only the prices of variable real value non-monetary items while many constant real value non-monetary items are not fully updated and many are not updated at all.
The second inevitable consequence of inflation is the tendency of many constant real value non-monetary items NOT to rise at all - during the Historical Cost era while some constant real value non-monetary items are not fully updated.
Inflation today has and always had a second consequence during the 700 year old Historical Cost era.
Inflation has a monetary consequence, called cash inflation refered to above by Ludwig von Mises and defined as the economic process that results in the destruction of real economic value in depreciating money and depreciating monetary values over time as indicated by the change in the Consumer Price Index.
Inflation´s second consequence is a non-monetary consequence defined as Historical Cost Accounting inflation which is always and everywhere the destruction of real economic value in constant real value non-monetary items not fully or never updated (increased) over time due to the use of the Historical Cost Accounting model or any other accounting model which does not allow the continuous updating (increasing) in constant real value non-monetary items in an economy subject to cash inflation.
Inflation´s second consequence is solely caused by the global stable measuring unit assumption.
The stable measuring unit assumption means that we regard the annual destruction of a portion of the real value of our monetary unit by cash inflation in low inflation economies as of not sufficient importance to update the real values of constant real value non-monetary items in our financial statements.
This results in the destruction of at least $31bn in the real value of Dow companies´ Retained Income balances each and every year. Globally this value probably reaches in excess of $200bn per annum for the real value thus destroyed in all companies´ Retained Income balances.
The International Accounting Standards Board recognizes two economic items:
1) Monetary items: money held and "items to be received or paid in money" – in terms of the IASB definition.
2) Non-monetary items: All items that are not monetary items.
Non-monetary items include variable real value non-monetary items valued, for example, at fair value, market value, present value, net realizable value or recoverable value.
Historical Cost items valued at cost in terms of the stable measuring unit assumption are also included in non-monetary items. This makes these HC items, unfortunately, equal to monetary items in the case of companies´ Retained Income balances and the issued share capital values of companies without well located and well maintained land and/or buildings or without other variable real value non-monetary items able to be revalued at least equal to the original real value of each contribution of issued share capital.
The stable measuring unit assumption thus allows the IASB and the Financial Accounting Standards Board to conveniently side-step the split between variable and constant real value non-monetary items. This is a very costly mistake in low cash inflation economies - or 99.9% of the world economy.
Retained Income is a constant real value non-monetary item, but, it has been in the past and is, for now, valued at Historical Cost which makes it, very logically, subject to the destruction of its real value by cash inflation in low inflation economies - just like in cash.
It is an undeniable fact that the functional currency's internal real value is constantly being destroyed by cash inflation in the case of low inflation economies, but this is considered as of not sufficient importance to adjust the real values of constant real value non-monetary items in the financial statements – the universal stable measuring unit assumption which is the cornerstone of the Historical Cost Accounting model.
The combination of the implementation of the stable measuring unit assumption and low inflation is thus indirectly responsible for the destruction of the real value of Retained Income equal to the annual average value of Retained Income times the average annual rate of inflation. This value is easy to calculate in the case of each and very company in the world with Retained Income for any given period.
Everybody agrees that the destruction of the internal real value of the monetary unit of account is a very important matter and that cash inflation thus destroys the real value of all variable real value non-monetary items when they are not valued at fair value, market value, present value, net realizable value or recoverable value.
But, everybody suddenly agrees, in the same breath, that for the purpose of valuing Retained Income – a constant real value non-monetary item – the change in the real value of money is regarded as of not sufficient importance to update the real value of Retained Income in the financial statements. Everybody suddenly then agrees to destroy hundreds of billions of Dollars in real value in all companies´ Retained Income balances all around the world.
Yes, inflation is very important! All central banks and thousands of economists and commentators spend huge amounts of time on the matter. Thousands of books are available on the matter. Financial newspapers and economics journals devote thousands of columns to the discussion of the fight against inflation.
But, when it comes to constant real value non-monetary items:
No sir, inflation is not important! We happily destroy hundreds of billions of Dollars in Retained Income real value year after year after year.
However, when you are operating in an economy with hyperinflation, then we all agree that, yes sir, you have to update everything in terms of International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies: Variable and constant real value non-monetary items.
But ONLY as long as your annual inflation rate has been 26% for three years in a row adding up to 100% - the rate required for the implementation of IAS 29. Once you are not in hyperinflation anymore (for example, Turkey from 2005 onwards), then, with an annual inflation rate anywhere from 2% to 20% for as many years as you want, you are prohibited from updating constant real value non-monetary items. Then you are forced by the FASB´s US GAAP and the IASB´s International Accounting Standards and International Financial Reporting Standards to destroy their value again – at 2% to 20% per annum - as applicable!
For example:
Shareholder value permanently destroyed by the implementation of the Historical Cost Accounting model in Exxon Mobil’s accounting of their Retained Income during 2005 exceeded $4.7bn for the first time. This compares to the $4.5bn shareholder real value permanently destroyed in 2004 in this manner. (Dec 2005 values).
The application by BP, the global energy and petrochemical company, of the stable measuring unit assumption in the accounting of their Retained Income resulted in the destruction of at least $1.3bn of shareholder value during 2005. (Dec 2005 values).
Royal Dutch Shell Plc, a global group of energy and petrochemical companies, permanently destroyed $2.974 billion of shareholder value during 2005 as a result of their implementation of the stable measuring unit assumption in the valuation of their Retained Income. (Dec 2005 values).
Revoking the stable measuring unit assumption is actually allowed this very moment by IAS 29 but ONLY for companies in hyperinflationary economies. At 26% per annum for three years in a row, yes! At any lower rate, no!
It is prohibited by US GAAP and IASB International Standards for companies that are operating in a low inflation economy.
That means the following at this very moment in time: Today all companies in, most probably, only Zimbabwe (1000% inflation) are allowed to update all their variable real value non-monetary items as well as all their constant real value non-monetary items.
But not the rest of the world.
The rest of the world is forced by current US GAAP and IASB International Standards to destroy their/our Retained Income balances each and every year at the rate of inflation because of the implementation of the stable measuring unit assumption whereby we are all forced to regard the change in the value of the unit of account - our low inflation currencies - as of not sufficient importance to update the real values of constant real value non-monetary items in our financial statements.
We are forced to destroy them year after year at the rate of inflation till they will reach zero real value as in the case of Retained Income and the issued share capital values of all companies with no well located and well maintained land and/or buildings at least equal to the original real value of each contribution of issued share capital.
The 30 Dow companies destroy at least $31bn annually in the real value of their Retained Income balances as a result of the implementation of the stable measuring unit assumption. Every single year.
Retained Income can be paid out to shareholders as dividens. Poor Dow company shareholders. They will never see that $31bn of dividens destroyed each and every year.
We have all been doing this for the last 700 years: from around the year 1300 when the double entry accounting model was perfected in Venice.
When we do this at the rate of 2% inflation ("price stability" as per the European Central Bank and as per Mr Trichet, the president of the ECB) we are forced to destroy 51% of the real value of the Retained Income balances in all companies operating in the European Monetary Union over the next 35 years - when that Retained Income remains in the companies for the 35 years - all else except cash inflation being equal.
Each and every one of those 35 years will be classified as a year of "price stability" by the ECB and Mr Trichet. Mr Trichet will not be the president of the ECB in 35 years time.
I think we will do ourselves a great favour by revoking the stable measuring unit assumption as soon as possible.
FREE DOWNLOAD : You can download the book "RealValueAccounting.Com - The next step in our fundamental model of accounting." on the Social Science Research Network (SSRN) at http://ssrn.com/abstract=946775
--------------------
Nicolaas J Smith
http://www.realvalueaccounting.com/
Posted by: Nicolaas J Smith at Jan 10, 2007 2:21:53 AM
I specifically mention that it disincentivizes partisan corruption.
How? American Samoa gets a free ride because it supports Democrats, whereas the Commonwealth of the Northern Marianas gets punished because it supported Republicans. The Republicans were willing to exempt both from minimum wage regulation, rather than punishing American Samoa for supporting Democrats.
Seems to me that the Democrats are the ones encouraging partisan corruption.
Posted by: John Thacker at Jan 12, 2007 12:46:05 PM
“In other words, raising the minimum wage will positively impact the entire American economy, not just low-wage earners. From a macroeconomic point of view, if low wage workers have more money to buy things, then businesses selling their products and services will have more customers.”
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