David Farrar just doesn't get it.

With regard to the mixed ownership model David Farrar writes,

This is the model that the unions and their allies have tried to destroy.

Everyone is a winner – the Bay of Plenty Regional Council and its ratepayers, Port of Tauranga’s minority shareholders and the company itself.

It is totally inappropriate to look at partial privatisation as a zero sum game, a game where there must be a loser for every winner. Partial privatisation can lead to a substantial increase in value and income for a regional council, or the government, if the listed company is well governed and managed.

Absolutely. There can be no argument that privately owned and managed companies do better overall than wholly owned public ones. By this I do not mean no private companies fail and no public companies succeed. Of course not. But if you look at decades of economic data across OECD countries, the difference is stark.

Yes and if you look at the economics literature you will also find that fully private companies outperform mixed ownership firms. Some insight on this is offered by a recent paper in the Scottish Journal of Political Economy (Volume 59, Issue 1, pages 1–27, February 2012). The paper "What Drives the Operating Performance of Privatised Firms?" by Laura Cabeza García and Silvia Gómez Ansón argues that the greater the amount of privatisation the better the performance of the firm. Not an entirely surprising result as the full force of market discipline can only be applied if the firm is fully in private hands but it is something for the government to keep in mind. It would suggest that any performance improvements due to the government's partial privatisation plans will be modest.

The abstract reads,

Using a panel data analysis of Spanish privatised firms, we study how different factors influence the operating performance of divested companies. The results show that it is not privatisation per se but other factors that matter. After controlling for possible sample selection bias related to government timing of divestments, we find that the greater the relinquishment of State control and the smaller the percentage of ownership held by managers and/or employees, the better the firms’ post-privatisation performance. Moreover, privatisations that are accompanied by liberalisation programmes and occur during buoyant economic cycles turn out to be more successful. (Emphasis added.)

When you look at the performance of mixed ownership firms they don't do as well as fully privately owned firms. For example, Aidan Vinning and Anthony Boardman in "Ownership and Performance in Competitive Environments: A Comparison of the Performance of Private, Mixed, and State-Owned Enterprises", Journal of Law and Economics vol. XXXII (April 1989) conclude

'The results provide evidence that after controlling for a wide variety of factors, large industrial MEs [mixed enterprises] and SOEs perform substantially worse than similar PCs [private corporations].'

So fully private firms out-perform mixed ownership firms. Thus if Farrar followed his own logic he would be arguing for 100% privatisation of SOEs.

A case study in privatisation

At the IEA blog Wayne A. Leighton discusses the telecom reforms undertaken in Guatemala. He writes,

In 1996, Guatemala adopted one of the most market-oriented telecom reforms in the world. The benefits to the country followed quickly as coverage expanded, competition surged, and prices plummeted.

He then asks the question, So, what is special about the Guatemalan experience? His answer:

Firstly, Guatemala’s reform was based solidly on market principles. Secondly, it was a huge success, providing greater consumer benefits than reforms in most other countries.

One of the most significant aspects of the Guatemalan experience is that the market was opened to competitors before the state-run telecom monopoly was privatised. Most countries did the opposite, selling the government’s monopoly phone company at a high price and promising to open the market at a later date. While such an approach put a lot of funds in these governments’ treasuries, it also created a private monopoly with the incentive to lobby for slow and cautious market liberalisation. By contrast, in Guatemala the buyer of the state phone company would have no special privileges and its competitors would face no special restrictions.

An interesting point here is that opening the telecom market to competition before privatisation highlights the importance of a point I have made before that getting the highest possible price when selling an SOE isn't always the best policy. Selling the SOE as a monopoly would have generated more money for the government but would have, as Leighton notes, slowed, or even stopped, the liberalisation of the telecom market and thus stopped the benefits that flowed to consumers from the privatisation and liberalisation.

In addition,

The other key aspect of reform is that it fostered a free market in the airwaves (electromagnetic spectrum). Guatemala created what are essentially property rights to the spectrum. This matters greatly, because access to spectrum is needed for wireless communications, and in low-income countries wireless is the most cost-effective way to extend service.

and

Significantly, the right to use spectrum in Guatemala for commercial purposes was not defined as a licence, as is the case in many other countries. Rather, usufruct titles were issued, which grant much more flexibility to determine how the spectrum will be used, subject to very basic restrictions on interference and international agreements. This closely approximates a property right. It creates greater certainty for wireless providers and greater potential for the spectrum to be put to its highest valued use.

The message here: getting property rights right matters.

EconTalk this week

Scott Sumner of Bentley University and blogger at The Money Illusion talks with EconTalk host Russ Roberts about the basics of money, monetary policy, and the Fed. After a discussion of some of the basics of the money supply, Sumner explains why he thinks monetary policy in the United States during and since the crisis has been inadequate. Sumner stresses the importance of the Fed setting expectations and he argues for the dominance of monetary policy over fiscal policy.

The architecture of innovation

From VoxEU.org comes this audio in which Josh Lerner of Harvard Business School talks to Romesh Vaitilingam about his book "The Architecture of Innovation: The Economics of Creative Organizations". They discuss a variety of issues around the challenges of innovation, including corporate venturing, venture capital-based enterprises, patents and public investment in science.

EconTalk for three weeks

Leigh Steinberg, legendary sports agent, talks with EconTalk host Russ Roberts about his career as a sports agent. He discusses the challenges of building a clientele, how sports agents spend their time, strategies for building a brand as an athlete, and safety issues currently affecting the National Football League.

Doc Searls, author of The Intention Economy and head of Project VRM at Harvard University's Berkman Center talks with EconTalk host Russ Roberts about the how the relationship between buyers and sellers might evolve as the internet evolves. Searls imagines a world where buyers would advertise their intentions and desires and sellers would respond with offers. Other topics discussed include Google and Apple's business strategies and the role of the cable and telephone companies in providing access to the internet.

Angus Burgin of Johns Hopkins University and the author of The Great Persuasion talks with EconTalk host Russ Roberts about the idea in his book--the return of free market economics in the aftermath of the Great Depression. Burgin describes the reaction to Hayek's Road to Serfdom, the creation of the Mont Pelerin Society, and the increasing influence of Milton Friedman on public policy.

Incomplete contracts and the internal organisation of firms

The theory of the firm - or organisational economics - spends much time on asking questions about the boundaries of the firm, about where one firm ends and the next one begins and where firms end and markets take over. But such questions are not the only ones asked by economists. Increasingly questions are also being asked about the internal organisation of firms. Like the boundary questions the standard approach to the internal structure of firms is that of incomplete contracts. Recently Philippe Aghion, Nicholas Bloom and John Van Reenen have released a NBER working paper that looks at the literature on the internal organisation of firms. Their paper is Incomplete Contracts and the Internal Organization of Firms and the abstract reads:

We survey the theoretical and empirical literature on decentralization within firms. We first discuss how the concept of incomplete contracts shapes our views about the organization of decision-making within firms. We then overview the empirical evidence on the determinants of decentralization and on the effects of decentralization on firm performance. A number of factors highlighted in the theory are shown to be important in accounting for delegation, such as heterogeneity and congruence of preferences as proxied by trust. Empirically, competition, human capital and IT also appear to foster decentralization. There are substantial gaps between theoretical and empirical work and we suggest avenues for future research in bridging this gap.

Unemployment is bad for employment

No really!

The following is a summary by Lester Picker, from the latest (March 2013) NBER Digest, of the findings of the paper, Duration Dependence and Labor Market Conditions: Theory and Evidence from a Field Experiment (NBER Working Paper No. 18387) by Kory Kroft, Fabian Lange and Matthew J. Notowidigdo. Lester writes,

According to a recent report by the Congressional Budget Office, long-term unemployment may "produce a self-perpetuating cycle wherein protracted spells of unemployment heighten employers' reluctance to hire those individuals, which in turn leads to even longer spells of joblessness." Policymakers and researchers alike tend to believe that this adverse effect of a long spell of unemployment undermines the smooth functioning of the labor market and entails large social costs. Economists refer to the phenomenon as "negative duration dependence."

In Duration Dependence and Labor Market Conditions: Theory and Evidence from a Field Experiment (NBER Working Paper No. 18387), authors Kory Kroft, Fabian Lange, and Matthew Notowidigdo confirm that the likelihood of receiving a callback for a job interview sharply declines with unemployment duration. This effect is especially pronounced during the first eight months after becoming unemployed. Their estimates suggest that this effect is quantitatively important, and that duration dependence is stronger when jobs are relatively abundant. These results imply that employers statistically discriminate against workers with longer unemployment durations and that employer screening plays an important role in generating duration dependence.

To study duration dependence, the authors submitted fictitious resumes to real, online job postings in each of the 100 largest metropolitan areas in the United States, and then tracked "callbacks" from employers for each submission. In total, they "applied" to roughly 3,000 job postings in Sales, Customer Service, Administrative Support, and Clerical job categories, submitting roughly 12,000 resumes. The resumes they created characterized the "applicant's" employment status and, if unemployed, the length of the current unemployment spell, which ranged from 1 to 36 months and was randomly assigned. As a result, this experiment directly uncovered duration dependence arising through employers' beliefs about unemployed workers.

In short, the longer you are unemployment the less likely it is that you will become employed.

The Presidency as theatre

From the Independent Institute comes an article by Mary Theroux on the shameless and hypocritical use of the Oscars to promote the Obama social and economic agenda. Theroux opens by saying,

The culmination of last night’s Oscars broadcast with a Live! feed from the White House with Mrs. Obama (hangin’ with her military BFs) marks the official recognition of the Presidency as theater: like the old Western sets, no substance required.

But I find myself asking, Isn't this what politics is about? Theatre, not substance? Can you imagine any politician turning down a chance to get their message across at an event like the Oscars?

Effects of pharmaceutical promotion (updated)

Pharmaceutical promotion, to doctors and consumers, is controversial in most countries. New Zealand has one of the more liberal sets of regulations on this topic. The effects of such promotion are surveyed in a a new NBER working paper: Effects of Pharmaceutical Promotion: A Review and Assessment by Dhaval M. Dave. The abstract reads,

This review discusses the role of consumer-directed and physician-directed promotion in the pharmaceutical market, based on the classic conceptual framework of whether such promotion is “persuasive” and/or “informative”. Implications for public health and welfare partly depend on whether, and to what extent, advertising: 1) raises “selective” or brand-specific demand versus “primary” or industry-wide demand; 2) impacts drug costs; and 3) impacts competition. Empirical evidence from the literature bearing on these effects is surveyed. These studies show that pharmaceutical promotion has both informative and persuasive elements. Consumer advertising is more effective at enlarging the market, educating consumers, inducing physician contact, expanding drug treatment, and promoting adherence among existing users. Physician advertising is primarily persuasive in nature, effectively increasing selective brand demand. Evidence bearing on the effects of promotion on competition and prices is more limited. However, there is no strong evidence that drug promotion deters entry, and there is some suggestive evidence that it may even be mildly pro-competitive. With respect to costs, some studies suggests that consumer advertising may weakly raise the average wholesale price, which is a manufacturer’s list price, but there is no strong indication that either consumer- or provider-directed promotion substantially raises retail-level prices. However, this is not to imply that potential promotion-driven substitution from non-advertised to advertised drugs cannot have effects on total drug costs. While most of these effects point to potential welfare improvements as a result of pharmaceutical promotion, there is also evidence that consumer ads may induce overuse and overtreatment in certain cases. Market expansion, overtreatment and shifting brands for non-therapeutic reasons further raise the concern of a sub-optimal patient-drug match at least for some marginal patients. A comprehensive evaluation of the welfare effects of pharmaceutical promotion requires a balanced assessment of these benefits and costs.

So, as one may have thought, there are both persuasive and informative aspects to pharmaceutical advertising and a welfare analysis of such promotion needs to take both into account.

Update: It looks like Crampton beat me to the draw on this one.

EconTalk this week

Yanis Varoufakis of the University of Athens, the University of Texas, and the economist-in-residence at Valve Software talks with EconTalk host Russ Roberts about the unusual structure of the workplace at Valve. Valve, a software company that creates online video games, has no hierarchy or bosses. Teams of software designers join spontaneously to create and ship video games without any top-down supervision. Varoufakis discusses the economics of this Hayekian workplace and how it actually functions alongside Steam--an open gaming platform created by Valve. The conversation concludes with a discussion of the economic crisis in Europe.

The minimum wage in the U.K.

The Gunderson report referred to in the previous posting on the effects of the minimum wage in Canada also has a short section on the effects in the U.K. The interesting point about the U.K. experience is that British studies of the effect of minimum wages are effectively divided into two periods. Prior to 1993, minimum wages in the U.K. were set at the industry level by Wage Councils.

A limited number of studies evaluated their effects and found no negative effect on employment and occasionally a positive effect, albeit not statistically significant (Machin and Manning 1994, Dickens, Machin and Manning 1999). Even though this evidence is consistent with that found by Card and Kruger in the U.S., Card and Kruger (1995, p. 271) raise the concern that this lack of effect may reflect the possibility that "Wage Councils might have set rates strategically, raising them in industries that were expected to grow, and lowering them in industries that were expected to shrink."

The second period started in 1999 when Britain adopted its first-ever national minimum wage.

The Low Pay Commission (2000) reported that its background studies did not find negative effects. However, these were essentially case studies or surveys indicating perceptions of the effect at the time the law was passed. More rigorous econometric evaluations, however, generally (but not always) come to a similar conclusion. More specifically:

• Overall, there does not appear to be an adverse employment effect economy-wide (Stewart 2004).
• There was a conventional adverse employment effect, however, in the low-wage sector where minimum wages would be expected to have an impact. The elasticity of employment with respect to the minimum wage increase ranged from about -0.01 to -0.03 in the low-wage nursing home care sector, indicating that a 10% increase in the minimum wage would reduce employment by about 1% to 3%. This is exactly the “consensus” range of estimates based on earlier US studies.
• There is no evidence of spillover effects on wages near the minimum nor of any impact on wage inequality (Dickens and Manning 2004)
• There is no evidence of a negative impact on training; if anything, the effects are positive (Arulampalam, Booth and Bryan 2004).

Thus the U.K. experience suggests that their more recent national minimum wage did not have negative effects except in the low-wage sector. Which is many ways is what you would expect. But Gunderson notes that there are four qualifications that should be kept in mind when looking at the recent British experience:

• The case studies and surveys are based on perceptions at the time of the policy.
• The econometric studies, while solid, were done shortly after the minimum wage came into effect so that longer-run effects are not observed.
• The policy was anticipated and some adjustments may have occurred prior, making the before-and-after comparisons appear small.
• The minimum wage increases were very small and were based on “what we believed the economy and business could manage” (Low Pay Commission, 2000, p. vii). In other words the wage increases were instituted at a time when they could more easily be absorbed.

So again, in the U.K., you see negative employment effects in the low-wage sectors of the economy.

The minimum wage in Canada

What we know about the effects of the minimum wage are largely based on work from the USA. But there is evidence from other countries including Canada. This 2005 report prepared for the Federal Labour Standards Review Commission by Morley Gunderson - CIBC Professor of Youth Employment at the University of Toronto, and a Professor at the Centre for Industrial Relations and the Department of Economics. He is also a Research Associate of the Institute for Policy Analysis, the Centre for International Studies, and the Institute for Human Development, Life Course and Aging. - reviews papers on the effects of changes in the minimum wage in Canada. A summary of the findings reads:

While there are substantial differences across the different Canadian studies, the following generalisations emerge:

• The earlier Canadian studies (based on data prior to the 1980s) tended to find adverse employment effects that were in the range of US consensus estimates, and sometimes higher, where a 10% increase in the minimum wage would give rise to a 1-3% reduction in employment.
• Studies based on data to include the 1980s tended to find smaller effects that were at the lower end of the consensus range, and possibly zero, as was often also the case in the US.21
• However, some more recent studies using different and more sophisticated methodologies as well as more recent data (e.g., Baker, Benjamin and Stanger 1999, Yeun 2003, Baker 2005, Campolieti, Fang and Gunderson 2005a, b, Campolieti, Gunderson and Riddell, forthcoming) find larger adverse employment effects at the higher end and beyond the consensus range, especially in the longer run. The elasticities typically range from -0.3 to -0.6 for teens (slightly lower for young adults), implying that at 10 percent increase in the minimum wage would lead to a 3 to 6 percent reduction in the employment of teens. The fact that they use different data sets and methodologies suggest that these results are robust.
• Overall it appears that the Canadian studies tend to find adverse employment effects that are at least as large and likely larger than US studies; certainly none find positive employment effects as occasionally occurs in the US.
• Minimum wage increases also tend to reduce the labour force participation rate inducing some to leave the labour force and this means that not all of the employment reductions get translated into unemployment rate increases.
• There is some evidence of wage spillover effects but not in all studies.
• There is no substantial impact on schooling, although there may be some weak positive effect for older youths.
• Although data problems preclude estimating robust results, the effects on training are generally negative, although sometimes small and statistically insignificant. The most likely negative effect, however, is indirect resulting from the more substantial adverse employment effect that precludes accumulating on-the-job training and experience.
• Minimum wages tend to reduce wage inequality and disproportionately benefit low-income families. As an anti-poverty device, however, they are an exceedingly blunt instrument and not well targeted towards the poor for various reasons:
• many of the poor do not work;
• those that do often work few hours;
• there is the risk of an adverse employment effect;
• minimum wages disproportionately affect teens who are distributed throughout the family income distribution; and
• minimum wages affect individual wages while poverty is defined in terms of family income and need.
• There is, perhaps surprisingly, no direct published evidence on the differential impact of raising minimum wages in times of high unemployment or low unemployment. Basic theoretical reasoning (and the experience of Britain discussed previously) would suggest that any adverse employment effect would be mitigated if minimum wages were raised in periods of low unemployment in part because it would more likely not to be a binding constraint. As stated by Sussman and Tabi (2004, p. 6) in commenting that only 1.1% of workers in Alberta were working at the minimum wage compared to 4.1% across all of Canada and 8.5% in Newfoundland and Labrador: “more opportunities in Alberta may have translated into greater bargaining power for workers.” Certainly, any adverse employment effect would be masked by a tight labour market where its manifestation would be only slower employment growth.

Perhaps the most interesting result given the discussions on the effects of the minimum wage here in New Zealand is the comment that Overall it appears that the Canadian studies tend to find adverse employment effects that are at least as large and likely larger than US studies; certainly none find positive employment effects as occasionally occurs in the US. So the Canadian studies find stronger evidence for adverse employment effects of the minimum wage.

Video of the Israel M. Kirzner FSSO Award ceremony

A video from a ceremony to honour Dr. Israel M. Kirzner's contributions to market process theory and entrepreneurship studies,


(HT: Coordination Probletm)

Moral hazard and SOEs

From the TVNZ website comes this comment:

Any Government bailout of beleaguered state-owned coalminer Solid Energy must not further devastate already struggling mining communities, the Engineering, Printing and Manufacturing Union (EPMU) says.

I can't help thinking that the correct comment would have been to say there should be no "bailout of beleaguered state-owned coalminer Solid Energy". One of the problems with SOEs is exactly the issue of bailouts. The fact that the bailout option is there crates a moral hazard problem since management know the government will bail them out if their plans don't work and thus they take more risk than a private company would. The correct response by the government would be to let Solid Energy go bankrupt if it can't workout a deal with its creditors.

The TVNZ article continues,

Labour's state-owned enterprises spokesman, Clayton Cosgrove, said National's "epic mismanagement" had turned it from an export-award-winning company into a basket-case.

"Solid Energy appears on the verge of collapse. This must be the first time any government has overseen such a massive failure in a state-owned asset . . . The big loser? Yet again, the taxpayer."

Yes indeed. One advantage of (full) privatisation is that it will depoliticise the firm. It will increase the political cost of the bailout option and thus reduce - as much as possible - the likelihood of a bailout. The aim of privatisation is to have the greatest possible "distance" between the government and the firm. Government interference in the running of a firm is impossible to eliminate completely but a good privatisation plan will result in a situation where any government interference is as obvious and politically costly as possible. But I'm guessing privatisation isn't what Cosgrove has in mind :-(

EconTalk this week

Glenn Reynolds of the University of Tennessee and blogger at Instapundit talks with EconTalk host Russ Roberts about the political malaise in America, whether it could lead to a Constitutional Convention, and what might emerge were such an event to occur. Reynolds also gives his thoughts on the suggestion advanced in a recent episode of EconTalk that we should ignore the Constitution. The conversation concludes with Reynolds's views on the decentralizing power of technology and Reynolds's music career.

More on Alchian

• Bob Higgs on Alchian
• Alex Tabarrok on Alchian
• Peter Boettke on Alchian
• Barkley Rosser on Alchian
• Doug Allen on Alchian
• David Henderson on Alchian
  
• Peter Klein on Alchian
• Matt Nolan on Alchian
• Thomas N. Hubbard on Alchian
• David Henderson in The Wall Street Journal
• David Henderson, again

Armen Alchian dies at age 98

Another of the great old guard of economics has gone. As a theory of the firm man I think of Armen Alchian as one of the developers of the nexus of contracts view of the firm.

This approach to the firm was developed in papers by Alchian and Demsetz (1972), Jensen and Meckling (1976), Barzel (1997), Fama (1980) and Cheung (1983). The important innovation here was the recognition that it is difficult to draw a line between firms and markets, firms are seen as a special type of market contracting. What distinguishes firms from other forms of market contract is the continuity of the relationship between input owners.

Most famously in the Alchian and Demsetz version of this approach, they argue that the authority relationship between the employer and employee is in no way the defining characteristic of a firm. The employer has no more authority over an employee than a customer has over his grocer. ‘Firing’, of either the employee or grocer, is the ultimate punishment that either the employer or customer can use in cases of ‘disobedience’. Alchian and Demsetz argue that, in economic terms, the customer ‘firing’ his grocer is no different from the employer firing his employee. In both cases one party stops dealing with the other, terminating the ‘contract’ between them. In this approach the firm is seen as little more than a nexus of contracts, special in its legal standing and characterised by long term nature of the relationship between the input owners. In this approach it is not generally useful to talk about firms as distinctive entities, a nexus of contracts could be called more firm-like if, for example, the residual claimants belong to a concentrated group but the term ‘firm’ has little meaning beyond this.

Roberts (2004: 104) responds to this line of argument:

“[w]hile there are several objections to this argument, we focus on one. It is that, when a customer “fires” a butcher, the butcher keeps the inventory, tools, shop, and other customers she had previously. When an employee leaves a firm, in contrast, she is typically denied access to the firm’s resources. The employee cannot conduct business using the firm’s name; she cannot use its machines or patents; and she probably has limited access to the people and networks in the firm, certainly for commercial purposes and perhaps even socially”.

To be fair, in later work Alchian has stated that their assertion is incorrect (Alchian 1984: 38) while Demsetz (1995: 37) claims the idea “is a mere aside” in their paper.

Alchian and Demsetz (1972) extend their discussion by noting that the firm is more than just a special legal arrangement, it is also characterised by team production. The problem that arises here is that with team production, the marginal products of the individual members of the team are hard to measure. This means that free-rider behaviour is now possible since team production can act as a cover for shirking. The Alchian and Demsetz solution is to give the right to hire and fire the members of the team to a monitor who observes the employees and their marginal products. To ensure that the efficient amount of monitoring takes place, the monitor is given the rights to the residual income of the team. Here we see the start of the "firm as a solution to moral hazard in teams approach" to the firm.

You can find this work and a lot more worth reading in Alchian’s Collected Works.

A new paper on reviwing what we know about multinational firms

Multinational firms are an obvious part of the economic landscape, and have been for a long time, perhaps the oldest still existing multinational firm is the Catholic Church having emerged in its official capacity as a result of the Edict of Milan in A.D. 313. There is a new paper out that reviews the literature on the multinational firm: Multinational Firms and the Structure of International Trade by Pol Antràs and Stephen R.Yeaple, NBER Working Paper No. 18775, February 2013.

The abstract reads,

This article reviews the state of the international trade literature on multinational firms. This literature addresses three main questions. First, why do some firms operate in more than one country while others do not? Second, what determines in which countries production facilities are located? Finally, why do firms own foreign facilities rather than simply contract with local producers or distributors? We organize our exposition of the trade literature on multinational firms around the workhorse monopolistic competition model with constant-elasticity-of-substitution (CES) preferences. On the theoretical side, we review alternative ways to introduce multinational activity into this unifying framework, illustrating some key mechanisms emphasized in the literature. On the empirical side, we discuss the key studies and provide updated empirical results and further robustness tests using new sources of data.

Some people seem to see multinationals as a great evil but they don't seem to have ever asked why such firms exist and why is there structure what it is. A quick read of this paper may help them.

Tim Harford on Bill Phillips

This is the latest video from the recording of Tim Harford's radio series, “Pop Up Economics“.

In which Matt gets it right

Over at TVHE Matt Nolan has a good rant and gets things right in the process. He writes,

Let me start this by underlying everything with a certain point – living wages are idiotic if our concern is to make sure that the worst off in society have a sufficient income. By imposing a “price floor”, you are ensuring that there are a group of people who can’t get jobs and will get hurt – unions don’t care because they don’t represent the unemployed, but I find it morally abhorrent. You want a minimum standard of living for societies worst off – have a minimum income, it’s as easy as that.

One point worth emphasising is that demand curves slope downwards. Yes even labour demand curves are downwards sloping, unless you think labour is a Giffen good. You can set a living wage at any level you want if you are willing to accept the unemployment that will follow if the wage is above the equilibrium wage. The higher the living wage the higher the unemployment it will cause.