A Fallacy of Mood Affiliation

If you knew that a person believed that corporations primarily like to outsource production to poor countries to get lower labor costs, what would you predict about that person’s view on whether the minimum wage has significant disemployment effects?

Just from my observation of the world, I would predict that people believing that low labor costs drive outsourcing also likely believe that the minimum wage has no significant disemployment effects. Yet the first view depends on a position either that labor demand is nearly perfectly inelastic (unresponsive to wage rate), or that labor markets are monopsonistic, while the second view depends on the position that labor demand is highly elastic (responsive to wage rate), and implies that labor markets will be fairly competitive, not monopsonistic (because entry is easy).

This combination of beliefs therefore seems to be an example of what Tyler Cowen calls the fallacy of mood affiliation.

For what it is worth, my view is that labor demand is moderately elastic over a long time frame and that labor markets are competitive, and therefore that permanent increases in the minimum wage that include inflation indexing have nontrivial disemployment effects, while labor costs are similarly a nontrivial but not overwhelming consideration in outsourcing decisions.

4 thoughts on “A Fallacy of Mood Affiliation

    1. You’re right; it *is* rather jargon-y. But the bottom line is that it doesn’t make economic sense to hold both beliefs.

  1. Common sense & the conventional wisdom leads to this belief.

    Jobs that get outsourced to the third world are decent paying — manufacturing being the iconic example.

    Job that pay minimum wage can’t be outsourced. They’re in ‘service sector’ which in this case is euphamism for burger flipper. And the perception is that anyone – almost literally – can go out and find a lousy minimum wage job at McDonalds or wherever, hence it’s tough to see disemployment effects occuring with modest hikes in minimum wage.

    This reasoning is not foolproof…and ignores the likelhood that we’ll all be feudal serfs to capital-owning automation in the foreseabile future…but is basically sound.

    1. Not entirely true. Jobs that pay minimum wage DO include many jobs that could be defined as “manufacturing,” which, in addition to being outsourced, is also being taken over by automation and other efficiency improvements that reduced the number of people needed to get the task done (such as “self-checkouts” where four points of sale can be supervised by a single clerk). “Outsource-proof” jobs (most of which are indeed in the service sector), would be jobs that require more intelligence than machines are capable of (which is why “sales clerk” qualifies in some situations, but not others) AND are physically impossible to relocate (janitors have to work in the building they’re cleaning). In fact, most un-outsourceable jobs (custodial, construction, health care, mechanics, etc.) DO pay above minimum wage, and often have unions to make sure of it.

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