The Wages of the Minimum-Wage

by Don Boudreaux on January 26, 2007

in Regulation, Seen and Unseen, Work

Gary Becker and Richard Posner offer, in today’s edition of the Wall Street Journal, a clear explanation of the perils of minimum-wage legislation.  Here’s the economic logic, tidily summarized:

An increase in the minimum wage raises the costs of fast foods and
other goods produced with large inputs of unskilled labor. Producers
adjust both by substituting capital inputs and/or high-skilled labor
for minimum-wage workers and, because the substitutes are more costly
(otherwise the substitutions would have been made already), by raising
prices. The higher prices reduce the producers’ output and thus their
demand for labor. The adjustments to the hike in the minimum wage are
inefficient because they are motivated not by a higher real cost of
low-skilled labor but by a government-mandated increase in the price of
that labor. That increase has the same misallocative effect as monopoly
pricing.

And here are these scholars’ thoughts on the empirical evidence:

Some economists deny that a minimum wage reduces
employment, though most disagree. And because most increases in the
minimum wage have been slight, their effects are difficult to
disentangle from other factors that affect employment. But a 40%
increase would be too large to have no employment effect; about a tenth
of the work force makes less than $7.25 an hour. Even defenders of
minimum-wage laws must believe that beyond some point a higher minimum
would cause unemployment. Otherwise why don’t they propose $10, or $15,
or an even higher figure?

A number of countries, including France, have
conducted such experiments; the ratio of the minimum wage to the
average wage is much higher in these countries than in the U.S.
Economists Guy Laroque and Bernard Salanie find that the high minimum
wage in France explains a significant part of the low employment rate
of married women. Mr. Salanie has argued that the minimum wage also
contributes to the dismal employment prospects of young persons in
France, including Muslim youths, an estimated 40% of whom are
unemployed.

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{ 26 comments }

Chris Meisenzahl January 26, 2007 at 8:49 am

Deadweight loss? My WSJ didn't show up this morning, I'll have to read this online. Thanks for the heads-up.

Sam January 26, 2007 at 1:13 pm

Apparently there are those who believe that businesses are formed for the purpose of creating jobs, or that businesses prefer to have more employees rather than fewer to produce a given output.

Ironman January 26, 2007 at 1:54 pm

The math certainly agrees with Becker and Posner's economic logic:

http://preview.tinyurl.com/332btx

Niket January 26, 2007 at 1:57 pm

"Apparently there are those who believe that businesses are formed for the purpose of creating jobs"
Why bother criticizing the proposed legislation on its merits when you can put much less effort in making a caricature and then show that it is ill-conceived. There are some people who believe that statement of yours. But there are a lot of people who favor increasing the minimum wage for exactly the opposite reason.

40 hour work week is an example. Environmental reforms is another. Both of these sound counter-intuitive to improving profits of companies. But they did exactly that. Former through an increase in productivity, latter through invention of better industrial routes that reduce pollution "at source".

Alright, I have babbled enough. But one final point: I agree with Don's thesis. I think the minimum wage increase will hurt the people whom it purports to help. I would still acknowledge that arguments "from the other side" still have some validity.

Sam January 26, 2007 at 3:33 pm

"Why bother criticizing the proposed legislation on its merits when you can put much less effort in making a caricature and then show that it is ill-conceived."

Because there are already those who are in a position and have the resources and time to research such things and make substantive criticisms.

Why have blogs to discuss such matters when blogging is mostly a matter of entertainment and argumentation?

A 40 hour work week is an example of what?
Shall we accept such an assertion on its face when such legislation was enacted at a time when the average work week had reached that point through the natural progression of competitive industrialization and increasing productivity?

And given that the work week had been getting shorter, what are we to think now that the work week has been fixed at 40 hours? Is that the natural minimum for a work week? Why hasn't it gotten even shorter?

Randy January 26, 2007 at 3:47 pm

Sam,

I've wondered the same thing – as I spend my Friday afternoon posting to blogs…

true dough January 26, 2007 at 7:01 pm

I realize that I’m taking this thread further off track (sorry), but regulations on hours worked can be just as painful to certain sectors as minimum wage requirements. First, it does seem odd that 40 hours is considered to be a “natural” and permanent level (although, I think the French have already proven what a failure the 35-hour week can be). Second, I can’t understand how an obligatory set of hours can be optimal for ALL industry sectors. Perhaps regulations on hours of work distorts the ability of each sector to find its own “natural” level through heuristic means, or whatever, thus hampering productivity and efficiency in certain sectors. I’ll explain.

Any strict regulation on hours worked, be it 40 hours or whatever, may not work for all sectors for at least two reasons: i) some sectors are productive in spurts (I’m reminded of a post on freexchange where a reader notes that "anyone building a house or undertaking a project that requires a number of diversified tasks comes up against the brick wall of inefficiency" when faced with regulations on hours worked); and ii) not all sectors have the same firm-size make-up. An IMF report shows that moving from a 40-hour to a 35-hour work week encouraged French workers in “large firms to take second jobs or to move to small firms where the 35-hour work week is not obligatory.” In other words, while a 35-hour work week might be optimal for sectors comprised of small firms, it is likely not optimal for larger corporations, the backbone of our economy.

true dough January 26, 2007 at 7:02 pm

Oh, cool. None of my html links are appearing.

Sam January 26, 2007 at 8:16 pm

The 40 hour work week was made possible by increasing productivity made possible by technological development.
It's been stuck there because the increasing cost of government and its policies has been sucking up the extra wealth.

Eric H January 26, 2007 at 10:24 pm

I think Sam has a point. There is no reason why increasing productivity shouldn't allow shorter weeks, just as the work week was gradually reduced from 84 hours (working on a farm, 12 hours a day, 7 days a week) to 72 (6 x 12) to 60 (6 x 10), 50 (5 x 10), and finally 40, a progression that started with the Industrial Revolution and ended with the … what, New Deal? Progressive Era? Or perhaps we stopped increasing productivity?

See the Wiki article on the Factory Acts for information on this progression in Britain.

Python January 27, 2007 at 12:06 am

As to the hours per week discussion…

Although it is true that we can now do things much more efficiently than in the past, that doesn't mean we should only attempt to match the same amount of productivity. Let's say 50 years ago I could harvest 10 bushels in a day's work, and now it only takes me 4 hours to harvest 10 bushels – obviously I won't stop after 4 hours. I will try to get another 10 bushels.

I know it's a simple example, but it's clear that because we can do things faster doesn't mean we stop when we are done. We have more time to do other work. Forty hours seems to be a sort of "reasonable" amount of time where you can get a lot done, but you aren't pushed over some psychological breaking point.

However, I agree that it should be up to the company how many hours one should work – up to some maximum allowed under law under at-will labor. I mean, as long as you know the terms before you agree to the work, companies should have a lot of flexibility.

The unions – although they take credit for helping to reduce work to 5 days a week and 8 hours a day – simply love to have their workers collect overtime at 1.5x or 2x. Some union guys I know average almost 10 hours a day. The unions would never budge a second over 40 hours for fear of losing the OT.

In general, one size rarely fits all.

Ian Random January 27, 2007 at 3:17 am

I'd be for the minimum wage if it was truly harmless, but it isn't. I often like to compare Oregon and Idaho because they're close to each other, but politically worlds apart. One has an high minimum and the other a low minimum.

Oregon 5.3% $7.25?
Idaho 3.3% $5.15

http://money.cnn.com/pf/features/lists/state_unemployment/index.html

Ray January 27, 2007 at 9:58 am

How convenient to ignore the issue of how someone making the minimum wage is supposed to live. Ignoring ethics and morality certainly helps economic efficiency. And, of course, if we can increase productivity we can skim off the benefits for the business ends without having to 'give' anything to the workers as has happened to the benefits of increased productivity for the past 10 years.
Corporations were given many benefits by Congress because they were supposed to take more risks and provide services for society that couldn't be taken by individuals – not just to make profit. If they exist just to make profit they are just as disfunctional as individuals who 'live to eat' rather than 'eat to live'.

cpurick January 27, 2007 at 1:08 pm

"How convenient to ignore the issue of how someone making the minimum wage is supposed to live."

You're asking the wrong question. The question is how anybody could come into the workforce without the skills necessary to provide for himself.

Wages are tied to productivity. A minimum wage is basically a law against hiring low-productivity employees at a profit. Given that law, how do you suppose the unskilled are supposed to get jobs?

Finally, I note that for all the arguing about whether minimum wages do the damage that economics says they should do, there's no evidence whatsoever that the wages bring the benefits you idiots say they do.

When was the last time you saw the U.S. advising another nation to solve its poverty problems with a higher minimum wage?

The minimum wage is a fraud, and you morons who advocate it are being played as fools by the special interests who benefit from it.

Sam January 27, 2007 at 1:13 pm

"If they exist just to make profit they are just as disfunctional as individuals who 'live to eat' rather than 'eat to live'."

Everyone endeavors to profit, IN SOME REGARD, by their actions, else why take action?

Profit is the incentive for taking risk and acton. The beneficial part (from the consumer's point of view) is that business can only make a profit by efficiently producing what consumers want and need. A business that doesn't make a profit will go out of business and will no longer produce what people want and need…nor offer jobs to people.

If you want to see an institution that ignores ethics and morality, though paying them much lip service, look at political government.

jpm January 27, 2007 at 6:32 pm

<>

this is typical liberal speak. Corporations are "given" "benefit" by the government. Corporations are are private property, not the "property" of Congress or of Government. It takes a liberal to turn that upside down on its head and make property the "gift" that government makes to citicens.

true dough January 27, 2007 at 7:33 pm

“Corporations were given many benefits by Congress because they were supposed to take more risks and provide services for society that couldn't be taken by individuals – not just to make profit."

Through profit-making and risk-taking, firms certainly do provide services to society. Watch the wages increase in China as firms become more productive and increase their profits. But if firms can’t make a profit, they’ll move. It’s called arbitrage. Why do firms in socialist countries always move to capitalist countries? North Korea to South Korea, Mexico to USA, China to Hong Kong…
Stifle profits and you’ll stifle welfare.

Sam January 27, 2007 at 8:56 pm

Progressives see government as a regulator, true liberals see government as a limiter.

A regulator government must always interfere in the lives of, well, everybody, making life more difficult and expensive. Strife is rampant as everybody tries to regulate someone else. A regulator government stifles the signals and produces chaos.

A limiter government has very little to do except when individuals exceed the limits of morality and violate the rights of other individuals. Within the limits, much is possible and harmony the norm.

spencer January 28, 2007 at 4:26 pm

Since 1967 the correlation between changes in the real minimum wage and changes in real restaurant prices has been 0.01, or essentially random.

What we seem to have here is Posner creating another great theory about the negative impact of the minimum wage with essentially no data to support the new theory.

Spencer January 28, 2007 at 5:40 pm

Spencer,

Are you suggesting that if the minimum wage were raised to $20 per hour that there would be no disruption in the unemployment rate?

What is new about Posner's "theories"? In fact, what makes it theoretical. Seems like Econ 101 stuff to me. Price floors cause surpluses in the supply of labor but suppress the demand for labor. Works for widgets too!

Steve

triticale January 28, 2007 at 7:31 pm

"How convenient to ignore the issue of how someone making the minimum wage is supposed to live."

At home in mommy's basement.

Yeah, that sounds snide, but the fact is that is true of a large percentage of minimum wage workers, who are, after all, just entering the work force.

Sam January 28, 2007 at 7:57 pm

What percentage of restaurant workers actually make minimum wage?

true dough January 28, 2007 at 8:49 pm

The BLS reported that about 17% of servers in the U.S. receive minimum wage (actually, I'm fairly sure kitchen help was included in that number too, but I could be wrong). And that would have been for the year 2005.

Tom January 29, 2007 at 11:10 am

You ignore that the price of food has been going down. Your meals should have been getting cheaper, but wages have kept them up.

spencer January 29, 2007 at 1:02 pm

No, I'm suggesting that past increases in the minimum wage have had no impact on restaurant prices. Posner states that it has.

So who do you accept, the actual data or Posner's theory?

BobDoyle January 29, 2007 at 5:12 pm

I don't understand the mean-spiritedness of those who oppose increases in the minimum wage, but I also do not understand the niggardliness of those who do support increases in the minimum wage. Clearly, we can just pass laws and the poor unskilled workers will make more money, but why just $7 or $8? Why not $10 or $20, or $100 if raising the wage by law can suspend any deleterious repercussions? Hey, while we're at it, why not raise the minimum wage to 110% of the average U.S. wage!! Then, like the kids in lake woebegone, every worker in America would have an above-average wage!

And while we're at it, let's pass a law against scarcity, so everybody can have everything the they want! And a law against cancer — why if we can simply solve our problems by dictating reality through laws have we not passed laws against cancer … and heart attacks … and broken hearts. etc.

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