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Thoughts on the Minimum-Wage

Posted By Don Boudreaux On February 15, 2013 @ 10:45 am In Hubris and humility,Reality Is Not Optional,Seen and Unseen,Work | Comments Disabled

One of the arguments regarded by the cognoscenti as being too pedestrian to use against minimum-wage legislation goes like this: “Heck, if raising the minimum-wage from $7.25 to (say) $9.00 per hour will make unskilled workers better off, why not raise the minimum-wage to $90.00 per hour and make unskilled workers much better off?”

Minimum-wage proponents understand (correctly) that such a huge increase in the legislated minimum would indeed catastrophically reduce the (legal) employment options open many workers, and especially to workers further down the skills ladder.  These proponents grant, without any hesitation, that such a massive hike in the minimum-wage would cause unemployment to rise exactly as textbook supply-and-demand analysis predicts.

So why are these same minimum-wage proponents – some of whom, I’m embarrassed to say, are professional economists – so sanguine about smaller increases in the minimum-wage?  I can think of four possible reasons.  (Whether or not one or more of these reasons is held consciously by any particular minimum-wage proponent is irrelevant.)  I offer the following four reasons in order of what I believe to the the prevalence of the reason in the popular mind.

First, monopsony power among employers of unskilled labor really is rampant enough to justify minimum-wage legislation.  (Wonkee: In theory, monpsonist purchasers of labor will, under certain conditions, hire more labor if the wage those purchasers are obliged to pay is forcibly raised by legislation.)

The empirical absurdity of the monpsony-labor-market argument seems to me to be obvious.  But if unskilled labor really were bought and sold in a market infected by monopsony power, a relatively modest hike in the legislated minimum might well benefit workers while a huge hike would indeed harm them.

….

Second, while a hike in the legislated minimum-wage will indeed cause some regrettable unemployment of unskilled workers, the resulting losses to these out-of-work employees are more than made up for by the higher earnings taken home by those unskilled workers who remain employed at the higher minimum-wage.

Obviously, though, at some point the rise in the minimum-wage becomes so large that the gains to the few unskilled workers who do remain employed at the absurdly high minimum-age are too small to compensate the large losses of the many additional workers who are pushed into unemployment by such a high minimum-wage.

….

Third, employers of unskilled labor will indeed react predictably to a legislated hike in the minimum-wage, but that reaction is likely to take the form of employers extracting more value-per-hour from their workers rather than the form of hiring fewer workers (or, more precisely, hiring fewer hours of work from workers).  Employers of unskilled and low-skilled workers affected by the minimum-wage hike will work their employees harder: fewer breaks; less leniency regarding arriving at work late and leaving early; greater strictness in enforcing rules against using work time to attend to personal business; etc.  (We can toss into this second reason the reduction also of monetary non-wage benefits such as employer contributions to worker pensions and employer willingness to help cover part of their workers’ child-care expenses.)

Some employers no doubt do react in this way, to a degree, to increases in the legislate minimum-wage.  And such reactions, being substitutes for hiring fewer hours of labor, reduce the amount of unemployment that would otherwise be caused by the rise in the minimum-wage.  (Whether or not minimum-wage employees who keep their jobs because of such employer responses are made better off or worse off as a result is a separate question.)  Here, too, a modest rise in the minimum-wage might cause very little, or even no, increase in the unemployment of unskilled workers, while a substantial hike would indeed cause significant unemployment.  (Employers of unskilled workers might well be able to re-arrange work conditions so that each unskilled worker produces an extra, say, 20 percent more value for the employer per hour.  Re-arranging work conditions so that each unskilled workers produces an extra 200 percent more value for the employer per hour is far less likely.)

….

Fourth (and I suspect most commonly held), employers can “afford it.”  Employers can afford to absorb small, legislatively prompted increases in their wage bill.  Employers’ profits might fall a bit, of course, but not by enough to cause them to go out of business or even to scale back business significantly enough to reduce the number of hours of work that they hire.  Alternatively, employers can simply raise the prices they charge for their outputs, recovering in the (assumed) higher revenues the higher costs they incur by hiring workers.  [Note, by the way, that it does not work for minimum-wage opponents simply to retort with the rhetorical question "Well, why don't those employers raise the prices they charge anyway, without being prompted to do so by a hike in the minimum-wage?"  This retort, I believe, has much merit, but a great deal more explanation and explication of background assumptions must be offered for it to carry the day among people who know economics.  I leave it to the comments section for Cafe patrons to divine what I have in mind here.]

Relatively small hikes, therefore, in the minimum-wage are paid for by employers taking home a tad fewer profits or consumers paying a tad more for the products they purchase (or a combination of the two).  A large hike in the minimum-wage, in contrast, would indeed reduce profits, or raise product prices, far too much.  The effects of these large reductions employers’ profits would indeed cause significant unemployment of unskilled workers.

This fourth reason is a squirrel’s nest of economic misconceptions.  I content myself here, though, to mention just one – namely, even if it’s true that all, or the great majority, of employers of unskilled workers have enough lee-way in their profits and prices to enable them to absorb, without negative effects on their employees, modest legislated increases in their costs of operation, focusing on the modest effects of only one such legislated increase (the minimum-wage hike) is to mistakenly ignore many other such mandated ‘modest’ increases in costs of operation.

Consider, for example, just some other such ‘modest’ legislated increases:

- higher health-care-insurance-premium costs mandated by Obamacare

- higher costs of operation due to compliance with OSHA regulations

- higher taxes on business-owners’ incomes

- higher taxes, in many locales, on business-owners’ property

- costs of complying with Americans With Disabilities Act mandates

I could, of course, list many other regulations on employment and business operation, each of which ‘modestly’ raises the costs of operation.

Let’s grant here that each and every one of these regulations that each raises the costs of opening and operating a business produces, standing alone, a net benefit to society.  Let’s grant also that the modest increase in business-operations costs caused by any one of these regulations, standing alone, is small enough to be completely absorbed by employers taking lower profits and without any other negative effect anywhere in the individual firms or in the economy writ large.  (I do not believe that either of these ‘grants’ holds true in reality, but that fact doesn’t mean that we can’t treat them as empirically valid for the sake of argument.)

What holds true (here by assumption) for any one, or perhaps a few, of these cost-raising mandates does not necessarily hold true for all of these cost-raising mandates taken together.  (Beware, as I warn my students, of committing the fallacy of composition.)

My sense is that each cost-raising government regulation passes muster with the general public because the general public simply assumes that the costs of any one such regulation, considered alone, are easily absorbed fully by employers (or by consumers as a large group in the form of slightly higher prices), with no residual negative consequences unleashed to infect the economy.  Even if the general public’s sense is correct about any one, or a few, regulations standing alone, it is inconceivable that the costs of all, or even of a large subset of, regulations are absorbed exclusively by employers (or by consumers in the form of barely noticeable higher prices).  Taken together, the additional costs – whatever the corresponding benefits – of regulations such as a legislated minimum-wage surely are real and extend well beyond lower (presumably lower excess) profits for employers.

In short, given the plethora of existing regulations that artificially raise the costs of operating businesses and employing workers, it’s mistaken to believe that there will be no negative consequences – probably higher unemployment – inflicted upon unsuspecting unskilled workers by a higher legislated minimum-wage.

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