Imagining a world of minimum wages

by Russ Roberts on February 19, 2013

in Curious Task, Work

The biggest problem I have with the standard analysis of the minimum wage–on either side of the ideological divide–is that it shows a certain lack of imagination. It presumes that market forces work only on quantity and price. So that when legislation artificially raises price, the debate is over the impact on quantity–how many jobs will be lost (or gained if you’re on the other side.)

But price and quantity are not the only way market forces work. And they are certainly not the only attributes of a job. There is how hard you have to work, how many breaks you get, how much training or mentoring or kindness. What amenities are in the workplace–snack bar, vending machine, nicely decorated walls and so on. When the government requires that wages be higher than what they would otherwise be, that creates an increase in the number of people who would like to work and reduces the number of opportunities available.

Ironically, the minimum wage creates a reserve army of the unemployed. That in turn allows employers to be less thoughtful, helpful, and kind. It destroys the civilizing effect of competition by muting it. That encourages exploitation. It reduces the cost to employers of racism or cruelty. Before the increase, being obnoxious or racist made it much harder to find employees. A minimum wage makes it easier to indulge in bad behavior. The costs are lower. Before the minimum wage, a cruel, selfish employer might have had to mentor his employees or train them or be nice to them despite his nature. Now he won’t have to. He can still get workers to work for him. Even more cruelly, the minimum wage encourages workers to exploit themselves. They work harder and put up with more abuse from the boss because the minimum wage reduces the alternatives that are available. Don’s quote from Armen Alchian says it very well. Or listen to this podcast with Mike Munger where I lay out the case starting around the 37 minute work.

I know–there is now some peer-reviewed evidence that shows the minimum wage doesn’t reduce employment. (This is, alas, just another example of how people on both sides of the debate use empirical analysis to indulge their prejudices. Whose mind gets changed by this kind of econometric evidence. It’s all scientism. For more details on the minimum wage literature, see this earlier post.) Those who dispute my story of market forces argue that the labor market isn’t really competitive, there is what is called monopsony, a limited number of sellers, so the Econ 101 analysis of the minimum wage is flawed.

So here’s a thought experiment. You’re a senior in college, a superb writer with a keen eye. You’re interested in journalism and you want to work for the best paper in the world, the New York Times. Suppose the government requires that the Times increases the salaries of all entry level jobs by 25%. Would you think for a minute that that will be good for you? Would you seek comfort from those economists who argue for the prevalence of monopsony in the labor market? After all, there aren’t very many first-rate publications that can hire talented young people–surely that market isn’t all that competitive they would argue. Will that reassure you? Will you be excited that now your New York Times salary will be 25% higher or will you worry that that just might make it harder to for the Times to hire new employees? Would you worry that it might affect other aspects of the job, way beyond fringe benefits–how hard you work and how much mentoring and help you get from more senior colleagues? Would it encourage or discourage job opportunities at the Times? Do you think you’d have more competition getting the job in the first place? That may be hard to imagine–doesn’t every young journalist want to work at the Times? Maybe, but it’s possible that there are people who weren’t considering journalism when it paid less who will now compete with you now that it pays more.

And let’s not stop at entry level jobs. Consider any job, the job you, dear reader, has right now, or at least that I hope you have. How would you feel if you were told that the government was now requiring everyone in your office to get a 25% raise? Maybe you feel underpaid. But would you jump for joy at that raise thinking that you’re now going to get what you deserve? Wouldn’t you worry that your employer will reduce the number of employees? Wouldn’t you worry that your firm might go out of business? Wouldn’t you worry that you will now have to work harder and receive fewer amenities on the job? And if you had those worries, would you be comforted by a telephone survey of fast-food employers or a complex econometric analysis that showed everything would be just fine?

The people who are pushing for a large increase in the minimum wage are playing with people’s lives. I don’t understand their certainty. As Hayek wrote, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

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