What sets wages

by Russ Roberts on January 23, 2008

in Work

I often ask students or people attending my lectures to guess the proportion of the US work force that earns the Federal minimum wage or less. The median guess is usually around 20%. In 2006 (the latest numbers available), the BLS reports that the answer was 2.2%:

According to Current Population Survey estimates for 2006, 76.5
million American workers were paid at hourly rates, representing 59.7
percent of all wage and salary workers.1
Of those paid by the hour, 409,000 were reported as earning exactly
$5.15, the prevailing Federal minimum wage. Another 1.3 million were
reported as earning wages below the minimum.2
Together, these 1.7 million workers with wages at or below the minimum
made up 2.2 percent of all hourly-paid workers. Tables 1-10 present
data on a wide array of demographic and socioeconomic characteristics
for hourly-paid workers earning at or below the Federal minimum wage.
The following are some highlights from the 2006 data.

  • Minimum wage workers tend to be young. About half of workers
    earning $5.15 or less were under age 25, and about one-fourth of
    workers earning at or below the minimum wage were age 16-19. Among
    employed teenagers, about 8 percent earned $5.15 or less. About 1
    percent of workers age 25 and over earned the minimum wage or less.
    Among those age 65 and over, the proportion was about 2 percent. (See table 1 and table 7.)
  • About 3 percent of women paid hourly rates reported wages at or
    below the prevailing Federal minimum, compared with under 2 percent of
    men. (See table 1.)
  • About 2 percent of white, black, and Hispanic hourly-paid workers
    earned $5.15 or less. Among Asian hourly-paid workers, about 1 percent
    earned the Federal minimum wage or less. For whites, women were twice
    as likely as men to earn $5.15 or less. (See table 1.)

Because this is only for workers who are paid hourly, the actual proportion is probably much lower than 2.2%.

And this does include some illegal immigrants These numbers are taken from the CPS that tries to capture a representative sample of all residents. Of course, it may not capture illegal immigrants precisely—I’d assume illegal immigrants try and find ways to avoid be surveying out of a general nervousness that it could lead to being caught.

Pretty amazing, isn’t it. Over 97% of hourly workers make more than the law requires. How can that be? One answer is state minimum wage laws that require payment above the federal minimum wage. Thirty-two states require paying more than $5.15 per hour. That leaves 18 states where it’s legal to pay $5.15 an hour. What is the proportion of workers in those states earn $5.15 or less?

Even in those states without a minimum above $5.15, (scroll down to Table 3), at least 96% of all hourly workers earn more than $5.15. So state minimum wage statutes can’t explain why so many employees earn more than the legal minimum.

So why would greedy employers pay more than the legal minimum?

The answer is simple: competition among employers to attract workers.

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{ 37 comments }

Objectivist January 23, 2008 at 12:05 pm

Listen up, pal. You are a bloody tenured professor. You can't be laid off. You don't have to do any work, save teach some indolent under grads. You aren't living in the free market which you trumpet. You are basically living off of a socialist system in academia and then praising the free market, which you never had to face. So, really, if you want to say the free market is great, then actually go and compete in it, and see how it is!

anotherObjectivist January 23, 2008 at 12:21 pm

There are plenty of respected Objectivist scholars in academia. Tara Smith just to name one…

rpl January 23, 2008 at 12:36 pm

Objectivist:

I'm confused. Are you agreeing or disagreeing with the conclusion Russ drew from the data? Seems to me his personal employment situation has little if anything to do with the validity of his argument.

tw January 23, 2008 at 12:39 pm

Objectivist, you really think that colleges don't compete against each other for professors and students? Or especially student-athletes who show special proficiency in a revenue sport??? C'mon…."a socialist system in academia"???

Okay, it may not be textbook perfect competition, but where do we find that in the U.S. these days? Where do we have any truly free markets???

As for Russ' statistics, it illustrates the disconnect between perceptions and reality…what people think versus what really is. It's a lot more helpful than what we get from the news readers on the local TV newscasts.

shawn January 23, 2008 at 2:01 pm

…funny that *this week*, following the exact comments in the econtalk, this 'you're a tenured professor' gibberish shows up.

I don't think i'd ever seen that before…but then, I remember seeing a lot of telephone poles all of a sudden after my parents told me what they were; maybe it was always there and I never noticed it.

Mcwop January 23, 2008 at 2:06 pm

How many workers have pay tied to minimum wage? Many union contract are set that way.

shawn January 23, 2008 at 2:10 pm

incidentally, Professor Roberts: you've mentioned this 2.2% (which, as you alluded, is more like 1.3% when you factor in salaried employees), and also the "how much has the standard of living increased since the turn of the century" factoid.

Do you have any other fascinating factoids like this that would be helpful in discussing common political/economic ideas in general discussions?

(I also tend to remember a line from Sowell's Basic Economics, stating something to the effect that the Fortune 500 companies all make less than 10% profit…it's helpful all the time when people start complaining about 'obscene profits' that 'evil corporations' make, and how this justifies government action)

Martin Brock January 23, 2008 at 2:33 pm

I acknowledge the facts. I don't see the point. So the Federal minimum wage accounts for few wages. That's not a shocker to me. What sets wages? The article doesn't answer this question. The article says, "The Federal minimum wage doesn't set wages, so it's competition among employers." That sounds like a non-sequitur to me, unless the conclusion is tautological.

We've discussed in this forum a Cato study finding that the average wage of a Federal employee is much greater than the average wage of others and that Federal employee wages rise faster, especially during the Bush II administration.

How many Federal employees leave Federal employment after obtaining it? [I'm one myself, but I'm looking for statistics, not anecdotes.] If "competition among employers" accounts for these wages, I expect more Federal employees to be leaving Federal employment; otherwise, how is competition driving the wages up so fast?

[Competition didn't account for my exit from the Federal workforce. I was fired. It wasn't easy, mind you. You wouldn't believe what I had to do to be fired, but that's irrelevant. The point is that a competitive offer didn't draw me away.]

So the minimum wage is … well … the minimum, and most people earn more than the minimum. Why conclude competition? Why conclude market driven wages? How does the conclusion follow from the premise? Why not leap to some other conclusion, like wages reflect entitlements, and most people are entitled to more than the minimum.

Chris January 23, 2008 at 2:51 pm

tw –

I think Objectivist was being sarcastic after having listened to the most recent EconTalk podcast.

The unfortunate thing about the BLS study is that it ignores the people who are outside the work force because they are unable to work below the minimum wage.

In Charleston a few years ago, I came across a disabled woman in a wheelchair who made roses with her feet out of ribbon. It takes here about 45 minutes to make one and more time to sell them. The price per rose was something like $5.

Now, she worked for herself, largely because she had to — nobody would be willing to pay her $5.15 an hour when her work, after accounting for materials, would pay less than that.

Now, certainly, if the minimum wage were abolished, some percentage of the folks currently making the minimum wage or slightly more would start making less than minimum, at least for a short time. But, many other people, like the Charleston woman, would start working.

Instead of helping out the poorest members of our society, the minimum wage has the opposite effect: those truly on the fringes of society, with significant mental or physical disabilities, are prevented from working.

John Dewey January 23, 2008 at 3:12 pm

Chris: "Now, certainly, if the minimum wage were abolished, some percentage of the folks currently making the minimum wage or slightly more would start making less than minimum, at least for a short time."

Why do you conclude this? Can you explain the process by which workers would be paid less? Do you think there are employers who could simply lower wages and retain workers? Are you suggesting that jobs which have been offshored to take advantage of lower wage rates would somehow return to the U.S.?

John Dewey January 23, 2008 at 3:37 pm

Martin Brock,

I can understand the economic reasoning by which one would conclude that competition sets wage rates. I can also understand how government can set wage rates for workers. Other than those two processes, how else can wages be set?

The forces of competitive markets are present even when wages are negotiated with unions – even in closed shop states. Employers generally can relocate production to other states or other nations. Employers can outsource specific functions to non-unionized companies. Entrepreneurs can propose automated solutions for replacing an employers' workforce.

Why shouldn't Professor Roberts conclude that competition determines wages?

Sorry, but I don't understand what process you are implying by "wages reflect entitlements". Can you explain?

Martin Brock January 23, 2008 at 3:58 pm

Instead of helping out the poorest members of our society, the minimum wage has the opposite effect: those truly on the fringes of society, with significant mental or physical disabilities, are prevented from working.

Your friend probably doesn't work for an employer for fear of losing her disability benefits. That she makes the roses with her feet probably contributes to their value, so I'm not sure how much an employer could contribute, and she wouldn't surrender her disability benefits to work for an employer paying her $3.00 an hour anyway.

Lars January 23, 2008 at 4:20 pm

Your post got me to thinking about the number of times I've hired illegal aliens off the street corner here in Los Angeles to help me move. You know, it never even OCCURRED to me to offer to hire them for the prevailing minimum wage- and had I offered that wage to them, they probably would have laughed in my face. The last time I hire illegals, I paid them nine or ten dollars an hour (when the minimum was around $5).

Chris January 23, 2008 at 4:34 pm

John Dewey –

I believe the minimum wage law forces some companies to pay a wage above what the market would otherwise set. Maybe you're a bagel shop hiring teenagers and there are hundreds of teenagers willing to take the job. If it were legal to do so, you could probably pay a teenager $4.50 instead of $5.15. But, you can't, so that teenager you employ makes $5.15.

You'd be willing to pay that $5.15 if hiring the teenager lets you make more than $5.15 /hr in profit.

In economic terms (I hope this is right), the minimum wage allows the teenager to capture more of the surplus than he would absent the minimum wage.

Martin Brock –

First of all, not my friend, just somebody I met and talked to a bit. Secondly, a disabled person is generally allowed to work some without losing benefits (at least under social security, which I presume this woman was covered by.)

John Dewey January 23, 2008 at 4:51 pm

Chris,

I've owned retail businesses in low wage sections of the U.S. for the past 15 years. I can't keep even parttime workers for less than $6.50 an hour. Any retail business that pays minimum wage will be constantly replacing and retraining workers.

Do you believe a minimum wage of $8.00 an hour would force me to pay those parttime workers that much? Nope. The $6.50 an hour students make that wage because that's what they're worth to me. At $8.00 an hour, I'd hire only full time workers, reduce my hours of operation, and probably eliminate other services we provide to our customers.

I just do not believe our governments can force employers to pay workers more than they are worth. That's what you are implying if you believe employers could reduce wages after elimination of minimum wage laws.

spencer January 23, 2008 at 4:54 pm

From 1980 to 2007, before the last minimum wage increase, the real minimum wage has fallen from $3.97 to $2.48– deflated by the CPI- or about 38%.

Many argue that the minimum wage prevents the employment of poorly qualified individuals and consequently hurts the poor. In theory, this sharp fall in the real minimum wage should have been accompanied by a large increase in the number of minimum wage employees.

But from 1980 to 2007 the number of minimum wage employees actually fell from 7.8 million to 1.7 million.

Why do you think we have gotten the exact opposite results that the opponents of the minimum wage argue we should have gotten?

Saum January 23, 2008 at 5:07 pm

A post by Don Boudreax Aug 22, 2007 titled 'On Skies and Airports' elicited the following comment from John Dewey in response to a comment I posted. In this post John claims to be an airline industry insider. In a comment on the current post, John claims to have owned retail businesses in various low wage areas of the US for the past 15 years.

It's possible to be able to do both, but still it strikes me as a little fishy.

————
"In fact (a) lower prices have made service worse, and (b) overcrowding of the skies without adequate infrastructure growth has made service worse."

Saum, I agree with (b). The government-owned and antiquated air traffic control system has made service much worse. The lack of runway and gate capacity in Chicago, especially, and in a few other cities has sharply increased flight delays.

I'm not sure I agree that lower prices have made service worse. Air travelers in most cities have many more destinations and frequencies than 20 or 30 years ago. Economies of scale have enabled advances in ticketing, check-in, and monitoring of flight status. Small regional jets have replaced prop planes on many routes, reducing flight times as well as increasing passenger comfort.

As an industry insider, I can say with certainty that competition motivates airlines every day to tweak the mix of better service and reduced prices. Every airline is trying to give customers what they want. Legacy carriers learned that most customers are unwilling to pay for meals, which you may view as a reduction in service.

At the same time, we should acknowledge that the post-September 11 security challenges of the airline industry have damaged the public's perception of service. Long lines at the government operated security checkpoints establish a customer mood that is hard to overcome.

Posted by: John Dewey | Aug 22, 2007 6:09:27 PM
———–

Randy January 23, 2008 at 5:16 pm

Spencer,

Why would we expect people who are willing to work to accept employment for less than the market rate?

Mcwop January 23, 2008 at 5:32 pm

Spencer, I think it is becuase the min wage is at a level that it has zero effect. If it were jacked up to $10 or $20 then we might see textbook economic arguments play out.

John Dewey January 23, 2008 at 6:17 pm

saum: "In this post John claims to be an airline industry insider. In a comment on the current post, John claims to have owned retail businesses in various low wage areas of the US for the past 15 years.

It's possible to be able to do both, but still it strikes me as a little fishy."

Why would you think it "fishy"? I've been doing both for 15 years now. I did reduce my retail business considerably a few years ago, and I hired someone else to run what's left of it.

FYI, many retail businesses have absentee owners – owners with second careers. Nothing "fishy" about that. You shouldn't be so suspicious!

I'm flattered, though, that you even remembered another comment I had written.

Brian-NJ January 23, 2008 at 6:34 pm

I don't whole heartedly disagree with the idea that competition sets wages, it seems obvious to my life experiences that certain trades thrive on paying technicians higher wages to have a more qualified workforce. The better qualified the crew, the better the jobs or jobs with a higher degree of difficulty they receive, the higher the price tag will be, the more demand their service receives. What I thought was interesting was the numbers are misleading, after reading the link I noticed the numbers were not there for people on wage making within $1 to a $1.5 of minimum wage. I would imagine the percentage rising swiftly from 2%. It is good marketing to advertise that your business pays a whole dollar more than minimum wage, and the competition is usually over a quarter or two. In my opinion that is not so far off from minimum wage and might as well be. I've noticed through my own experiences that you chase the money no matter how small, for instance at eighteen years old I worked the midnight shift for two months because it paid fifty cents more. For an extra twenty dollars a week, which made no serious bump in my weekly check I lost out on a lot of resources mainly my body function and social life.

I also would add to the statement made by a previous poster who hires illegal workers the $10 hr rate is misleading. If you hire a guy for a day or a few days you can expect to pay $100 a day, but the guys who work for months and years get paid weekly, usually around $300-$400 a week, more than minimum wage but not $10 an hour. The day labor thing is more costly because of the convenience of getting someone at a moments notice, but if they know they will work all year they will come down in price.

Martin Brock January 23, 2008 at 7:37 pm

John Dewey:

The forces of competitive markets are present even when wages are negotiated with unions – even in closed shop states. Employers generally can relocate production to other states or other nations. Employers can outsource specific functions to non-unionized companies. Entrepreneurs can propose automated solutions for replacing an employers' workforce.

Competition exists to some extent, and entitlement also exists. The question is: To what extent? Which organizational model is more dominant?

Why shouldn't Professor Roberts conclude that competition determines wages?

He may conclude anything he likes. He presents no evidence for the conclusion. "Why shouldn't he?" is not this evidence either.

Sorry, but I don't understand what process you are implying by "wages reflect entitlements". Can you explain?

We don't have a pure market economy. I don't even know what a "pure market economy" would look like, but I can say what a marketless economy might look like. We elect a monarch somehow. He owns (governs) everything. He delegates authority over particular territories or other resources or categories of industry to others who in turn delegate authority and so on until all resources are divided, including common laborers on the bottom rung.

Everyone in this chain of command has a title, a name associated with his particular rights and obligations in the governance of resources. Wages aren't strictly a matter of distance from the top of the hierarchy, but some titles are associated with higher wages and others with lower wages. A nurse might be on the bottom rung but earn more than streetsweeper elsewhere on the org chart.

Reality isn't strictly ordered this way, of course, but this sort of arrangement is what I call "entitlement". [I'm certainly not advocating it.] It's essentially the corporative state (fascism) and the command economy (state socialism). Reality isn't strictly ordered by markets either.

There's absolutely no reason to suppose that a corporative state would pay everyone the same wage or pay many people a minimum wage. Why would it?

Since we can't expect a corporative state to pay many people a minimum wage, we can't observe a few people earning a minimum wage and conclude that markets rather than a corporative state dominates the formation of wages. That people accept their wages is no evidence to the contrary either. What else would I do but accept my wage? Freely starve instead?

I've worked for the state, and I've worked for corporate firms. I've never truly worked for the market in the way that my father (an attorney in private practice) did, and even he earned a large chunk of his income as a county attorney. If we all have "contracts" with the state, this arrangement needn't differ substantially from the organization described above. My sister is a veterinarian in private practice, and her commercial relationships are more like a market (though she deals with banks and such a lot too), but mine really aren't, and neither are the good Professor's. Are yours?

How market driven are wages really? It's a fair question, and Roberts doesn't address it much. He just assumes the answer.

Reach Upward January 23, 2008 at 7:47 pm

Do the data presented include minimum wage earners that also collect tips, as is common in some lines of work? For some workers, tips far exceed base wages. If these people are included in these figures, the actual percentage of minimum wage earners is lower than stated.

Martin Brock January 23, 2008 at 8:16 pm

John Dewey:

I've owned retail businesses in low wage sections of the U.S. for the past 15 years.

You seem to be closer to the market than Roberts and I. I'm closer than I once was, when I was a Federal employee, but not so close really. I still work for corporations doing business largely with other large corporations, including heavily regulated industries like electric utilities. Telecoms are a little freer and more competitive these days, but the business models are still often very corporatist. I don't simply mean that businesses incorporate. I mean that more central authorities arrange relationships hierarchically with a semblance of market organization but not so much like a market in fact.

Do you believe a minimum wage of $8.00 an hour would force me to pay those parttime workers that much? Nope. The $6.50 an hour students make that wage because that's what they're worth to me. At $8.00 an hour, I'd hire only full time workers, reduce my hours of operation, and probably eliminate other services we provide to our customers.

I believe other retailers would continue paying part-time workers $8.00 an hour and providing the same services. I don't know whether their business model would ultimately be more profitable than your new model. If customers pay the higher prices, your competitors would benefit from your retreat.

I just do not believe our governments can force employers to pay workers more than they are worth. That's what you are implying if you believe employers could reduce wages after elimination of minimum wage laws.

Suppose governments offer your employees a higher wage and they accept the offer? Does the offer and acceptance imply that a "market wage" exists? Is it reasonable under the circumstances to say "competition sets the wages"? That's my issue with Roberts here.

I can't link it for you at the moment, but again, we've discussed a Cato study finding that Federal employees earn considerably higher incomes, on average, than other employees, and Federal wages also rise considerably faster, especially during the Bush II administration.

Honestly, I've always wanted to work more like my father, closer to the market. I think lots of people have. I don't much want to spend my entire career at the bottom of a corporate hierarchy, and I have no interest in middle management either. The problem for me is: that's where all the money seems to be, where my services are concerned anyway. Granted, I haven't put myself out there much except as a corporate employee, but I can't seem to avoid it. You wouldn't believe how I get myself fired sometimes, and I just stumble right back onto the corporatist teat, sometimes hardly trying.

Tell me about your journey into entrepreneurship. I'd really like to hear about it.

The Albatross January 24, 2008 at 12:43 am

Ok, I say this with all curiosity and not a hint of snarkiness, but I would like opposing points of view, so that I can present them clearly to my students, so that they can make up their minds. In class I treat wages as a typical supply and demand thing with the traditional price floor. I also reference Baldy Harper’s, Why Wages Rise to show the almost exact correlation between rising wages and productivity. I cross-reference that with Abernathy’s the Sin of Wages to highlight how people are compensated differently according to the value they place on different forms of compensation. Then I bring in Levitt’s Freakonomics, and we explore why crack dealers make less than minimum wage and suffer a much higher incidence of being hurt on the job (which I believe gives an insight into minimum wages). Since I don’t want to be Johnny academic, I will compare all the above with my brother’s experience (he runs a restaurant). My brother has to pay dishwashers nine bucks an hour. This is not money mandated by the state—it basically boils down to no dinero, no trabajo. Ok, so if wages are not set by supply or demand, or how people value compensation (benefits, v. wages, v. job security, v. ability to do little or nothing), then how are wages set? Again, not being mr. market jerk, but I would like an education so that my students will not pull up their “ideolog protection screens.”

Gil January 24, 2008 at 1:53 am

"So state minimum wage statutes can't explain why so many employees earn more than the legal minimum."

I thought the point of a minimum wage is that it's a wage floor, not a wage ceiling. Employers are free to pay their workers as much as they like but no less. A similar analogy might one of safety regulations – too much is no good but who wants to work without safety standards? Perhaps similarly if people can't be productive enough to make it to the minimum wage how 'productive' are they going to be anyway? Don't employers expect a certain minimum level of productivity anyway?

P.S. I likewise believe in competition between employees for low-skill jobs (which drives down pay) and competition between employers for rare highly desirable skilled jobs (which drives up pay). It sounds like simple supply and demand for skills to me.

John Dewey January 24, 2008 at 4:16 am

Martin Brock: "Tell me about your journey into entrepreneurship. I'd really like to hear about it."

Not much to tell, really. We made good money at first. I was working fulltime for one of the nation's most admired companies and pursued entrepreneurship parttime. I left my corporate job to expand the business into another state. Expansion wasn't successful, so I closed the new parts and returned to the corporate world. I now work for another one of the nation's most admired companies.

There's not much more I wish to share.

Whatever January 24, 2008 at 10:38 am

can't help but wonder why 'dependent' teenagers are paid minimum wage anyway. They make far too much money for most of them to use in any significant way. They are overpaid and usually spoiled– at least the middle class teenagers that I have lived with and around. I truly think dependent teenagers should be paid less than the minimum wage ~ "living wage". Just look at the teenagers' markets– pricey electronics, expensive clothes and cosmetics, music and concerts. Gas money. Entertainment 'scripts'. C'mon. They aren't even a voting block. It wouldn't be hard at all to have a tiered system for minimum wagers, dependent upon their circumstances. Shoot, maybe some of these kids might learn the value of a buck and their employers could invest money more usefully.

Our society has evolved from teenagers getting married early and having to support themselves into an entirely different animal. Our wage system should evolve also.

Chris January 24, 2008 at 12:19 pm

John Dewey –

What if the minimum wage were raised to $6.75? How about $6.60? Would you keep any of those workers then? You've already said that the market rate for those workers is $6.50. If you would keep any of them, then you'd be paying above the rate that would be set in a free market because of the minimum wage. And, that was my point.

John Dewey January 24, 2008 at 2:35 pm

chris: "What if the minimum wage were raised to $6.75? How about $6.60? Would you keep any of those workers then?"

I would do whatever I could to restore the value-wage balance:
- eliminate Christmas bonuses;
- demand more productivity from my employees than they were providing at $6.50 an hour;
- reduce store operating hours, probably by eliminating marginal Sunday evening operations;
- dock employees for the paid 20 minute in-store lunch breaks they now receive;
- outsource cleaning functions to more efficient firms.

I just do not think government cannot legislate value. The market will find a way to correct.

John Dewey January 24, 2008 at 2:45 pm

Last post should read:

"I just do not think government CAN legislate value. The market will find a way to correct."

Chris January 24, 2008 at 4:30 pm

John Dewey,

But you would keep the workers, correct? Ignoring the "demand more productivity" line for the moment, you've just shown ways of offsetting some of the hit to your profit margin. You would still keep the employees, and they would still be getting paid more than the $6.50 free market wage. And, you probably would not be making quite as much as you did before.

As far as the "demand more productivity" assertion: Why didn't you do that when you were only paying them $6.50? It certainly would have been in your interest to do so — having more productive employees improves your bottom line. If you could increase productivity, you would, even without a minimum wage law.

I deny that a "value-wage" balance exists. The only relationship between the two is that value >= wage.

John Dewey January 24, 2008 at 4:51 pm

Chris: "You would still keep the employees, and they would still be getting paid more than the $6.50 free market wage."

I would not pay the same employees more wages for the same work. As I pointed out, I would:

- demand more work from them;
- eliminate non-wage benefits;
- find workers who can provide more value;
- eliminate workers who cannot provide more value.

Chris: "As far as the "demand more productivity" assertion: Why didn't you do that when you were only paying them $6.50?"

There was no need to do so. Each hour they worked they were providing $6.50 in value to me.

When I increase their workload, some will leave because they cannot work that hard or do not want to. Those who remain – and the replacements for those who did not remain – have demonstrated they are worth more than $6.50 an hour.

Chris: "I deny that a "value-wage" balance exists."

Fine. Open a small business and prove it.

Randy January 24, 2008 at 4:58 pm

Just noticed that John didn't mention raising prices. With a mandated wage increase that effects all businesses the same, prices can and will rise. There may be some hestitation, but it won't take long. The equilibrium will be restored. The minimum wage won't really change at all, though the party that gave the supposed free lunch will benefit from the perception that it has.

Martin Brock January 24, 2008 at 5:20 pm

As I pointed out, I would:

You might or might not keep your employees and customers this way. The question is: would other employers respond similarly to an minimum wage hike? Would employees and customers ultimately demand this response by favoring businesses like yours?

Fine. Open a small business and prove it.

Chris doesn't deny that particular services have particular value, only that wages need not reflect the full value. If wages always reflect the full value of a resource, resource mobility never adds any value, so competition can't possibly operate. If you're always paying me precisely what I'm worth, how can I ever increase my wage by changing employers?

Chris presumably suggests, rightly I think, that a minimum wage hike itself can be the proof that the lowest wages don't reflect marginal value. If a minimum wage rises and employment does not contract in fact, then consumers are paying the higher price for the services. The question is: do we then call the minimum wage "competitive"? Is it a "market wage"? Does this description make any sense?

Again, consider the Federal work force. Congress routinely awards Federal employees "cost of living" increases and practically automatic promotions in pay grade, not to mention much more attractive benefits. A labor market (individual employees negotiating with individual employers) doesn't set these wages. Central planners create a government-wide pay scale, and Congress approves it.

Federal employees get richer and richer each year, faster than private sector employees. Every so often, Congress raises the minimum wage, and Federal employees and others then pay more for the services of people who aren't very mobile, don't compete much for wage increases and aren't on the Federal payroll.

The latter obviously happens. The question is: how much is it a factor in wage formation compared with market forces? It's not obvious to me that market forces play the dominant role, unless we simply define any wage that anyone accepts from anyone else a "market wage", in which case all the wages on the the central planner's pay scale are, de facto, "market wages", since some people earn them.

John Dewey January 25, 2008 at 8:07 am

martin brock: "If wages always reflect the full value of a resource, resource mobility never adds any value, so competition can't possibly operate. "

I think wages reflect the full value of the work being performed, not the full value of the worker. That's why I said I would, and could, demand more of my employees if the government forced me to pay them more.

Most of my employees do not want to work as hard as a check out cashier in a supermarket or a cook in a diner. That's why they willingly accept lower wages for the low stress environment I offer. A minimum wage increase prevents an arrangement between me and my employee that both of us favor. It takes away our freedom. I think both Professor Boudreaux and Professor Roberts have made this point in the past – that employees and employers should have the freedom to decide the details of employment.

capitalism can't survive without socialism October 15, 2008 at 2:11 am

He forgot to mention that the minimum wage hasn't been keeping up with inflation. In fact, minimum wage would of had to of been moved up to $9.88 an hour just to keep up.

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