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A Response to MinMan and Other Critics

Posted By Don Boudreaux On February 23, 2013 @ 5:13 pm In Prices,Reality Is Not Optional,Seen and Unseen,Work | Comments Disabled

My neighbor and six (so far) e-mail correspondents (including one with the interesting nom de plume “MinMan” – not a moniker that I’d choose for myself) insist that I am off-base to compare a government mandate that employers increase by nearly 25 percent the monetary pay of their low-wage workers with an alternative, hypothetical government mandate that employers decrease by 25 percent the work time that each low-paid worker is permitted to work each hour [1].

There are several defenses that I can mount to my earlier comparison, but I’ve time now only for a few words on the matter.

The basic idea is that employers of low-wage workers – even employers with long-run monopsony power in the low-wage labor market – (1) have the capacity to adjust along several different margins to government-mandated increases in the costs of employing such workers, and (2) surely will adjust to such mandates in ways that reduce as much as possible the additional, mandated costs of employing such workers.

So I’ve some questions for my inquisitors.

Do you doubt that a minimum-break-time mandate for low-paid workers would arbitrarily raise the cost to employers of employing such workers?

Assuming that you answer “No, I don’t doubt it,” then I ask: Do you not doubt that employers would try to reduce this cost as much as possible, or do you suppose that employers would just shrug and each think to itself ‘Damn, I hate higher mandated costs, but I’ll just absorb those costs.  Nothing else to do.’?

If you understand that employers would attempt to minimize the effects they incur from this mandated higher cost, then my point is made.

Why would employers respond in cost-reducing ways to a mandate that, via means X, forcibly raises the per-hour cost of employing low-skilled workers, but simply absorb such higher costs, without any offsetting adjustments, when the mandate raises costs by the same amount via means Y?

What, after all, is the difference between a government mandate that commands employers to pay a minimum-wage of, say, $0.15 per minute or a wage of $9.00 per hour?   The per-minute wage is the same in both cases.  Or asked somewhat differently: What’s the difference between government ordering employers of low-paid workers to raise those workers’ wages by $0.03 per minute and government ordering employers to raise those wages by $1.80 per hour?  The mandate is the same in both cases.  (I round here, so my numbers aren’t precisely those of the $7.25/hour or $9.00/hour scenario.)  Do you, Dear Inquisitor, imagine that employers are sensitive to mandated minimum-wages-per-minute but insensitive to mandated minimum-wages per hour?  If so, please explain why the time unit in which the minimum-pay mandate is expressed is economically relevant.

If you’re still skeptical of my point, I ask this further question: Do you not see that a mandated minimum break time is monetarily identical to a mandated minimum wage?

I want now to be a bit more precise with my numbers.  A worker earning $7.25 per hour earns $0.12 per minute.  A worker earning $9.00 per hour earns $0.15 per minute.  If the prevailing wage for unskilled workers is indeed $7.25 per hour, a government mandate that no low-paid worker can work more than 48 minutes per hour – that is, a government mandate forcing each low-paid worker to take a break of at least 12-minutes duration each and every hour while on the job – will raise the per-minute wage of such workers from $0.12 per to $0.15, or, when reckoned on an hourly basis, to $9.00 per hour.

Anyone who insists that an increase in the minimum wage from $7.25/hour to $9.00/hour will have no, or only minuscule, negative effects on the employment options of low-paid workers must also believe that an increase in the minimum wage from $0.12/minute to $0.15/minute will likewise have no, or only minuscule, negative effects on the employment options of low-paid workers.

Yet one effect of a mandated minimum break time is to raise employers’ per-minute wage cost of employing low-paid workers.  In the example here (of a mandated minimum 12-minute per hour break time), employers’ cost of employing workers earning $7.25 for every hour those workers are clocked in is forced up by three cents per minute.

If employers were kinda, sorta close before the mandated minimum break time to optimizing their operations – to ‘maximizing profits’ – these employers would unnecessarily lose money if they simply continue to pay $7.25 per hour.  They would now be buying, for a price of $7.25, 48 minutes of output per hour per worker rather than 60 minutes of output per hour per worker.

So is it really so bizarre or tentative a proposition to point out that employers will adjust to this minimum-break-time mandate by cutting the wage paid for each hour that an unskilled worker is clocked in from $7.25 to $5.80?  Such a cut will mean that each of these unskilled workers is paid $0.12 for every minute of actual work that they perform – the same rate of pay that these workers received before government mandated the 12-minute minimum break time.

The basic point of my earlier post was not to speculate on the particular form that employer adjustments would take in response to a legislated minimum break time (although, practically, the most obvious form of adjustment would indeed be a cut in the amount paid per hour each such worker is clocked in).  Rather, my basic point was to show that employers of unskilled workers aren’t likely simply to absorb, without adjustments that generate unintended negative consequences for low-paid workers, a government mandated increase in their costs of employing low-paid workers.  Employers will adjust to costly mandates that make workers better off on one margin (e.g., more time off for breaks each hour) by making workers worse off on other margins (e.g., lower monetary pay per every 60 minutes clocked in at work).

So I ask yet again: If employers of unskilled workers will adjust to a mandated minimum break time by trying, as best as they can, to bring their production costs back into line with pre-mandate cost levels, why would employers of unskilled workers not adjust to a mandated minimum wage by trying, as best as they can, to bring their production costs back into line with pre-mandate cost levels?

And one of the most obvious means of employer adjustment to a mandated minimum wage, although not the only possible adjustment, is to employ fewer hours of unskilled workers.

….

Note, by the way, that a clever theorist can show that some workers would experience net improvements as a result of the minimum-break-time mandate even after employers adjust by cutting hourly pay from $7.25 to $5.80.  Some employees might well prefer to be paid $5.80 per hour and have 12 minutes of down-time each hour than to be paid $7.25 per hour and have to work each of the 60 minutes in each hour.  It would, however, be a very tricky – indeed, a very dubious – business to try to make a plausible case that such a possibility justifies government forcibly setting minimum break times for workers.

If the spirit moves me later today or tomorrow, I might elaborate even further. Pretty exciting, eh? ;-)

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