May 2012 – Page 3 – the _

[2543] Safety bought through ransom is a cost to society

Amid the political wrangling on Bersih and its aftermath, a son of two expatriates living in Kuala Lumpur was kidnapped. The kidnapping of Nayati became a minor sensation. Twitter was abuzzed with it. Posters were put up across the city and flyers handed out. Just outside of my office in Damansara Heights, just by the busy road, somebody hang a large poster of Nayati, appealing for information and help. Judging by the impressive and expensive effort, the parents are well-off.

He was found later outside of the city in Rawang and it was reported that the parents paid the kidnappers some unknown ransom.

I am glad Nayati was found and I am glad he is safe.

Nevertheless, it must be highlighted that Nayati is one person. The more important fact here is that we live in a society. The handling of the case gives signal to the society. That signal will inform future decision of both victims and criminals.

The “ransom solution” creates an expectation on the side of the criminals that crime pays. That creates adverse incentive.

When the incentive is big enough over the cost of crime (either through the increase of actual payoff or the higher probability of payoff), we can expect greater occurrence of kidnapping in the future. The ransom solution will create a systemic problem and it will make the society less safe.

For Nayati’s parents, the police may have helped them. Nayati’s father has thanked the police. In fact, if I were the father, I would thank the police for their aid despite paying off the kidnappers with my own money. In tough times, any help will be appreciated. And I do not blame the parents for paying off the ransom. No money worth more than the life of your loved ones.

But, from societal point of view, such emotional attachment should be stripped in favor of pure rational economic analysis.

When it is stripped, then the incentive structure will tell us that each ransom solution represents a failure of the societal institutions.

Any safety bought through ransom is a cost to the society as a whole. Call it negative externality; each time you pay, you may make somebody else worse off.

So, from societal perspective, the Nayati case is a failure. It will continue to be a failure until the kidnappers are caught and sufficiently punished to tell everybody that crime does not pay.

[2542] The ageism of minimum wage

In general, minimum wage affects the labor market negatively. At some level, it will increase the unemployment rate. That may happen either through direct disemployment as employers struggle to meet the cost, or through the freezing or insufficient job creation growth as the labor force increase. Whatever it is, I believe the relationship between minimum wage and unemployment rate is relatively well-publicized and many who are serious about the issue do know of the relationship. The lay proponents of minimum wage still promote their policy but they do know that relationship is a wall to scale.

There are other less publicly known effects. Discrimination against small firms is one. The adverse impact on low-skilled workers is two. There are others.

Here is another and it is the distribution effect across age.

Consider two workers of the same skills. Worker A is 25 years old. Worker B is 50 years old.

Both qualify for minimum wage.

If an employer had to choose between the two for a low-skilled job, which would the employer employ?

Without hesitation, I would take the younger one if I was the employer.

Between a 25 years old and at 50 years old, it is very likely that the 25 years old will be the preferred choice of anyone with profit-motive. He is young and that means he has better health than his older counterpart in general. There are other factors of course like attitude and initiative (if the particular person in his 20s is a damn punk and the 50 years old person is a nice old lady, I will employ the lady) but there are many reasons to think that an employer can squeeze more productivity out of the young worker than out of the older worker for a given wage, on average.

For those who know their economic jargon, then that means the younger worker offers better marginal product than the older worker will on average. In simpler terms, the younger worker offers greater productivity than the older worker.

How about experience? Surely experience works in favor of the older workers, right? Remember however that low-skilled jobs require little training. The kind of jobs requires no or little experience. That effectively discounts experience as a consideration.

When one pays a person according to his or her productivity without any restriction on compensation, then one can employ anybody up to any number until your last marginal product of labor is no longer positive. Note the causality: your productivity determines your wage. The first determination is your productivity and your wage is a function of your productivity.

Under minimum wage, the wage is the first determination and your productivity now is a function of your wages. Here, wage is the first determination because an employ know his cost and he will want to find workers with the productivity that matches the cost that is minimum wage. This immediately limit the kind of workers that the employer will employ.

Now, go back to the productivity of the young and the older workers mentioned in the beginning. Older workers will have lower productivity to younger workers. That is an immediate disadvantage in terms of employability in the age of minimum wage.

I think this point is important because a lot of younger workers do not really need a job. Many are out of school and are merely looking for extra pocket money to have some fun. These young workers will qualify for minimum wage. They do not need the jobs. The jobs are merely summer job so-to-speak, not necessarily part-time too.

Compare this to older workers who qualify for minimum wage. This type of older workers will likely need the minimum wage jobs more than the younger workers. They are in it to survive.

Controlling for everything else, minimum wage can hurt the workers that, arguably, the policy of minimum wage is supposed to help. Yet, the policy hurt those that it is set out to help.

[2541] He wants a clean election