More on the Minimum-Wage

by Don Boudreaux on January 5, 2007

in Work

Half Sigma writes, in a comment on this post on the minimum-wage:

One of these dishonest arguments [made by Russ and myself], that they repeat over and over, is
that minimum wage laws somehow HURT the low wage workers, which I don’t
buy. If the minimum wage rises by 40% but 1% of minimum wage employees
lose their jobs, that’s a darn good deal for the class.

"Dishonest" is a strong word.  I know of no one who denies that raising the minimum-wage helps some low-skilled workers.  I certainly do not deny this claim; nor does Russ.  The argument against the minimum-wage is precisely that it helps some low-wage workers at the expense of other such workers — an argument that Half Sigma (despite his protest to the contrary) does seem to buy.

We can argue about the relative numbers of "helped" versus "hurt" workers.  Unlike Half Sigma, I suspect that a 40 percent hike in the minimum-wage would cause more than one percent of low-skilled workers to suffer unemployment.   But this question is an empirical one — and one that I don’t now wish to challenge.  Let’s accept Half Sigma’s numbers as valid, for the sake of argument.

I would still oppose minimum-wage legislation, for at least two reasons.

First, the more general form of the argument against legislated minimum-wages is that employers do not idly absorb these costs; they react in ways that minimize their exposure to the costly mandate.  These reactions include not only hiring fewer hours of low-skilled labor, but also cutting back such workers’ non-wage benefits (including the pleasantness and the safety of the work environment).  Unless a serious case can be made that low-skilled workers generally don’t know their best interests or that employers of low-skilled workers enjoy monopsony power, no good reason exists to suppose that most workers who retain their jobs and whose wages rise as a direct result of minimum-wage legislation are better off at these higher wages.

Second, and more fundamentally, I don’t share Half Sigma’s ethic.  If I agreed that it’s desirable to raise the minimum-wage by 40 percent if doing so throws only one-percent of low-wage workers into unemployment, then I should also agree that annually taking $10,000 or so from each member of one-percent of the population of low-skilled workers and giving the proceeds to the other 99 percent of low-skilled workers is an acceptable policy if, for example, some generous private philanthropist pledged to magnify the resulting gains enjoyed by each of the members of
the 99 percent of the low-wage population who enjoy the redistribution
of incomes confiscated from the unfortunate and abused one-percent.  Such confiscation would, according to Half Sigma’s calculation, be "a darn good deal for the class."

Of course, I would oppose any such policy.  Honestly.

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{ 27 comments }

JohnDewey January 5, 2007 at 10:12 am

"'Dishonest' is a strong word."

I was surprised to see someone accuse you guys of dishonesty. Perhaps Half Sigma meant something else, but responded too quickly. I'm sure he knows that two reasoable people can look at the same facts and derive different conclusions – without one being a liar.

KipEsquire January 5, 2007 at 10:28 am

So many economists and no one is using the word "elasticity"?

And the one non-economist, George Will, who does use it gets it wrong (i.e., by confusing "downward sloping" with "elastic").

Sigh.

Don Boudreaux January 5, 2007 at 11:01 am

Elasticity is not central to the argument against minimum-wage legislation. What's central is the downward-sloping demand curve for labor.

Impose a minimum-wage above the wages paid to some workers and some of those workers will suffer, either by losing jobs (or not being hired) or by fewer fringe benefits and worse work conditions. That's the argument. Period.

Unlike for a firm that uses monopoly power to raise its prices, any net increase enjoyed by low-skilled workers in their take-home pay, resulting from a hike in the minimum-wage, does not go to a single entity analogous to the firm with monopoly power. Any such increase goes to some workers and comes at the expense of other workers.

But if anyone wants to discuss elasticity, surely the demand for low-skilled workers is not inelastic. (Footnote: the punditocracy and new power-holders in Congress who worry about "outsourcing" should especially agree that the demand for low-skilled workers in the U.S. is elastic — that is, highly sensitive to changes in real wage rates.) If demand for this labor is elastic at and just above the current minimum-wage of $5.15 per hour, then raising the minimum-wage will cause the incomes paid to low-wage workers as a group to fall.

Again, though, apart from the implausible case in which the elasticity of demand for low-wage workers is perfectly inelastic, the elasticity of demand for low-skilled workers is not central to the economists' case against minimum-wage statutes.

Randy January 5, 2007 at 11:07 am

It occurs to me that elasticity may not be relevant. Because the only way there is going to be elasticity in hiring is if there is also elasticity in pricing. So;

If the employer can raise prices, the minimum wage becomes a regressive tax on lower income people on fixed or relatively fixed incomes.

If the employer cannot raise prices, the minimum wage becomes a regressive tax on struggling businesses and on those who become unemployed as a result.

Randy January 5, 2007 at 11:10 am

Don,

I was writing while you were posting – guess I could have saved the effort :)

Half Sigma January 5, 2007 at 12:04 pm

People in other countries earn $1/hour or less. We're not going to be able to compete with that. Someone earning $1/ hour would be homeless and die in the U.S.

Read the post at my blog about elasticity of demand and the minimum wage for an explanation of why demand for low wage workers is inelastic:

http://www.halfsigma.com/2007/01/elasticity_of_d.html

Eric H January 5, 2007 at 12:07 pm

Besides the 1% thrown out of their jobs, what about the X% who weren't affordable before the increase and whose number have now been increased somewhat? It's more than 1%.

My wife frequently accuses libertarians of selecting who will win and who will lose by "our" policies. I contend that (A) most such policies are utilitarian, not libertarian, and (B) every policy or policy change has winners and losers. It's just that the debate has been framed so that the "losers" of policies libertarians favor are more easily identified. Thanks to Messr. Bastiat, at least *we* understand that false argument, even if we haven't successfully fought it. But here at least one honest non-libertarian (Half Sigma) admits that the policies we oppose have losers, too, and it's the libertarians trying to prevent their being tossed overboard.

What's even more ironic is that the Left will look at the resulting increase to unemployment rolls, blame it on Bush and evil capitalists, and claim justification for further increase to the welfare state.

David Z January 5, 2007 at 12:12 pm

So your response, HS, is to make our wages higher, further reducing the incentives to employ American workers in favor of foreigners? There are often not insignifcant transaction costs involved in international trade and acquisition of products or their components, including a significantly elevated risk factor. Despite the fact that the workers in Third World countries earn far less, per hour, than their American counterparts, I'd be surprised to find out that the end result isn't simply a marginally cheaper cost of production.

Theory dictates that if wages are excessively low, and that profits are tremendously high, (i.e., above "normal" profits), that other businesses would soon fill the void, and the magical forces of competition assure us that the wages will approach an equilibrium.

Flynn January 5, 2007 at 1:32 pm

"demand for low wage workers is inelastic" – Half-Sigma

Apparently, Half-Sigma has never heard of the Industrial Revolution.

Matt C January 5, 2007 at 1:49 pm

I think Half Sigma misses the point even more than David Z. points out.

Workers are paid on their marginal product of labor. If an American laborer can make more per hour (being more productive) than a foreigner it would not benefit the employer to move overseas.

Productivity is more important that the actual wage number, so-to-speak. That's why LOW-skilled labor gets paid less than HIGH-skilled labor. As Don argued, the number of low-skilled labor would probably be much higher than 1%, employers would move to machines and have high-skilled employees operate those machines, why? Because they are more productive. This goes back to the argument about minimum workforce regulation. The steel industry was devistated because the unions wouldn't allow the mills to become more productive. The idea that having bodies working is better than productivity of the employer.

Not to mention if its such a good thing for a minimum wage, again as has been argued many times on this blog, why not just increase the minimum wage to any number higher. It could be $20/hr, $100/hr as long as it benefited a certain percentage of employees.

ben January 5, 2007 at 3:25 pm

Half Sigma

"People in other countries earn $1/hour or less. We're not going to be able to compete with that."

That is 100% wrong. Workers in developing countries earning that wage are also much less productive. In fact the data shows they are less productive in close to proportion to the difference in wages. See Figure 10.1 in Wolf 2004. This clears the way for comparative advantage to drive trade, to the advantage of everyone.

Half Sigma January 5, 2007 at 4:47 pm

"Workers are paid on their marginal product of labor."

Not true at all. Workers are paid the lowest salary that the employer can get away with and not lose the worker.

When one worker gets paid more than another, it's because the higher paid worker has more bargaining power.

TGGP January 5, 2007 at 4:54 pm

Half Sigma, do you believe there is any relationship between productivity and bargaining power?

Abhi January 5, 2007 at 5:52 pm

If the earnings of participants in an economy are relative to each other, (for e.g. a business owner earns x% of an employees salary), isn't a minimum wage increase irrelevant in the long run? I'm not very experienced in economics, but wouldn't inflation eventually catch up and render the wage increase ineffective?

I do not doubt that short term unemployment increase is inevitable. How can an employee
's contribution increase just because of a wage increase?

Gator80 January 5, 2007 at 6:05 pm

Interesting discussion. Professor Boudreaux, I agree with you that the "40% / 1%" tradeoff is undesirable, but I think there is a third important reason. It is called 'freedom.' If a person comes to me and freely offers me his labor for $1 or $2 or $3 an hour and I freely accept, why in the world should that be illegal?

Michael Sullivan January 5, 2007 at 6:09 pm

Abhi: surely you've never worked in a low wage sector if you can't see how an employee's contribuution could increaes just because of a wage increase. I won't argue that it is *likely*, but it is certainly possible.

In the low wage sector, few people actually give their all to their jobs, and one of the psychological justifications is on the order of "they aren't paying me enough to care". Increasing wage may have a large effect on morale that increases marginal productivity. How strong this effect is, and whether it compensates for the potential economic damage is unclear and will vary by job and individual, but to say it doesn't exist at all betrays a complete ignorance of what life is like working for minimum wage or close to it.

Abhi January 5, 2007 at 6:53 pm

Michael,

Yes, I've never worked in the low wage sector (except as a graduate assistant).

Since you do mention that the effect is unclear, should a min wage increase be implemented in good faith? It is not clear to me how productivity of *all* minimum wage employees would go up with this increase.

A wage increase helps the morale of a non-minimum wage employee as well, but if there is no need for the morale increse, then why bother?

Also, who's a better judge of the increase in productivity? The employers themselves, or poltical posers?

David Z January 5, 2007 at 7:14 pm

Half Sigma says that "Workers are paid the lowest salary that the employer can get away with and not lose the worker."

And what principle governs this lower-bound? Oh yes, inter-employer competition. And the market for low-skilled labor is very competitive. A minimum wage worker at Wal-mart can easily transition to a job at Target, or KMart, or Meijer. A worker at McDonald's can easily move to Burger King, Jack-in-the-Box, Del Taco, etc. A janitorial worker can work for Molly Maid, or the local school district, or any of the myriad office buildings and industrial complexes that require such work to be performed.

The idea that all of these employers face the same demand constraints is spurious at best. Half Sigma's notion sounds strikingly familiar to the "Iron Law of Wages," which has long since been out of fashion.

Nick January 5, 2007 at 8:45 pm

If Michael Sullivan is right, and all an employer needs to do to make his unproductive minimum wage workers much more productive is to pay them more, one wonders why employers simply don't do so. Perhaps they are stupid, in addition to being greedy and oppressive?

At any rate I spent several years working for minimum wage and from my personal observations I'm pretty doubtful about his thesis of a wellspring of increased productivity arising from estatic and grateful employees. I've also worked union jobs for $20+ dollars an hour and the "they aren't paying me enough to care" attitude he attributes to low wages is hardly uncommon in those circles.

KipEsquire January 5, 2007 at 9:47 pm

"Elasticity is not central to the argument against minimum-wage legislation. What's central is the downward-sloping demand curve for labor."

No, you have it exactly backwards. The argument — by the liberals, not us — is precisely that the wage bill will increase with increases in the minimum wage, even if quantity of labor demanded falls. That is the very definition of elasticity.

And since we're trying to debate liberals, not ourselves, your (highly inelastic)attitude is counterproductive.

Amanita January 5, 2007 at 11:30 pm

The companies that pay the least treat their workers as shitily as they can already- raising wages will NOT cause companies at the maximum capacity for crapiness to become crappier. Bottom of the barrel companies will always put out the minimum they can get away with, wages or otherwise.

I've worked at McDonalds, and the only reason I was willing to work there was because the minimum wage (which is what they pay) was raised to $7.15, and $7/hour was the minimum I was willing to work for. Were the red floor tiles suddenly harder? Did they deny unpaid breaks with increased frequency? Did they fire employees before they had a chance to quit with greater frequency? No. Same crappiness, but with slightly-better-paid taken-for-granted employees.

As far as 1% of low wage workers losing their jobs… do you realize it's the low wage workers who have two or three jobs to begin with? So 1% of total jobs are lost, but you have fewer people working two-three jobs at a time because they can now afford to live on the wages that ONE job pays. So Billy from company A can now take the job that Suzy from company B doesn't want anymore, because her job from company C now pays enough to live on. Honestly, I think you'd end up with a net gain in the percentage of employed workers.

Also consider the fact that the companies that pay the least are VERY cost minded already, and take great measures to make their companies more efficient, workforcewise. Working at McDonalds is like working on an assembly line. They have machines that dump the proper load of fries in a fry cooking basket, for goodness sakes. Trust me, they didn't suddenly spend an extra million dollars on equipment to try to squeeze out a little extra efficiency from their suddenly slightly-better-paid employees.

ben January 6, 2007 at 3:19 am

Half Sigma

>>"Workers are paid on their marginal product of labor."

>Not true at all. Workers are paid the lowest salary that the employer can get away with and not lose the worker.

This is non sequitur and does nothing to deny the empirical fact (see reference above) that productivity and wages are strongly related.

Michael Sullivan January 6, 2007 at 6:19 pm

If Michael Sullivan is right, and all an employer needs to do to make his unproductive minimum wage workers much more productive is to pay them more, one wonders why employers simply don't do so. Perhaps they are stupid, in addition to being greedy and oppressive?

You have overstepped your interpretation of my remarks. I said it's probably that *some* employees are in that situation. I doubt that all are. And as a small business owner whose competitors and customers are primarily small businesses whose owners I talk with regularly, a fair share of us are "stupid" in this sense. It's really a blind spot more than plain stupidity, but yes, a lot of businesses aren't aware of their best interest as far as paying workers optimally. When there is no bias in the aggregation, a "market" tends to converge to an optimal solution, but individuals make bad decisions all the time. The labor market has nowhere near the liquidity and efficiency of the stock market. A lot of people may well make bad decisions about paying workers too little for the jobs they have, and those very people will be overrepresented among minimum wage payers.

I'm *not* claiming that the minimum wage will definitely do more good in this way than any harm it may cause. In fact, I believe, along with the authors of this site, that a minimum wage of any kind is a conceptual error economically. Better and broader safety nets would reduce the oligopsony power of low-wage employers without befouling the market incentives.

I'm not deeply against it, though (in the way that I deeply against trade and people movement barriers), because I just don't think it will do the kind of damage that I see DB and RR predicting. So I can live with it as a political compromise as long it isn't raised too high (to European levels). If I have to choose between a $7.25 minimum wage and trade barriers or subsidies to protect domestic industries, I know where I'm standing.

Bill Woolsey January 6, 2007 at 9:31 pm

Perfectly inelastic demand is inconsistent with the "law of demand." That is, a "downward sloping" demand curve. Perfectly inelastic demand means that changes in price have no impact on quantity demanded. It is only _perfectly_ inelastic demand for labor that allows an increase in the minimum wage to have no impact on employment.

Inelastic demand means that the change in quantity demanded is less than proportional to the change in price. If the demand for unskilled labor is inelastic, then an increase in the minimum wage will result in a less than proportional decrease in employment. For example, a 10% increase in the minimum wage might lead to a 2% decrease in employment. That _is_ inelastic demand.

Unit elastic means that the change in quantity demanded is proportional to the change in price. And _elastic_ means the change in quantity demanded is more than proportional to the change in price.

The less inelastic and the more elastic is the demand for unskilled labor, the greater the reduction of employment due to an increase in the minimum wage. But unless the demand for unskilled labor is "perfectly inelastic" then there is at least some decrease in employment.

Anyway, suppose the equilibrium wage has increased above the current minimum. Employers are having difficulty finding employees. And they are raising wages here and there to solve their problems. The minimum wage increases. If the new minimum increases so that it is no greater than the new equilibrium wage, then it would seem likely that the increase in the minium wage brings the market to equilibrium and increases employment.

I oppose the existence of the minimum wage. But I can imagine scenarios where an increase in the minimum wage would increase employment. Disequilibrium scenarios. The larger the increase in the minimum, the less plausible such scenarios. And I don't think it is a good reason to raise the minimum wage.

I think it is a good thing to have the labor market be a sellers' market.

Russell Nelson January 9, 2007 at 3:33 am

I don't see why Half Sigma gets so much currency on this blog. Just because he can use economic terms correctly doesn't mean that his combination of economic terms is correct. He doesn't ever think like an economist, and it shows in his argumentation. For example, he claims in a comment here that productivity doesn't matter — and yet it is the ONLY thing that matters. Employees don't get paid for showing up. They get paid for doing the things that caused the employer to hire them. Anything else is charity on the part of the employer.

Globalized DOA September 12, 2007 at 11:57 pm

It seems reasonable then based on the many arguments against a minimum wage hike that we should actually look at lowering the minimum wage. This would actually increase the amount of people in the work force and thus benefit everyone.

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