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Yet More Minimum-Wage Questions

Posted By Don Boudreaux On February 19, 2013 @ 2:52 pm In Reality Is Not Optional,Seen and Unseen,Work | Comments Disabled

Here’s a question for those who believe that employers of low-paid workers – workers whose pay is at or near that of the legislated minimum-wage – enjoy such a quantum of monopsony power as to justify the state raising the minimum-wage on the theory that that increase will not decrease the quantity of labor hired (or, more generally, will not decrease the set of employment options available to low-skilled workers).

Suppose that Uncle Sam, rather than raise the legislated minimum-wage by 24 percent (from $7.25 to $9.00) as Mr. Obama proposes, instead imposes a special per-hour, per-worker tax on employers of workers paid hourly wages less than $9.00.  This special tax would be 24 percent of each low-paid workers’ hourly wage.  (For you really clever readers looking for a technicality to snag me on, I ask you to ignore the obvious discontinuity that kicks in as the hourly wage approaches $9.00.  That curiosity isn’t related to my point.)

So, for example, if Ann the Florist hires a high-school kid, Junior, to help out after school and pays Junior $7.25 per hour, Uncle Sam will tax Ann $1.75 for each hour that she employs Junior.  Suppose that Ann, before the tax, hires 120 hours of such unskilled workers weekly – perhaps, say, six different kids each working 20 hours weekly.  Ann – assuming that she pays nothing at all in fringe benefits – spends $870 weekly hiring these unskilled workers.  ($870 = 120 x $7.25)

If she doesn’t alter her employment practices, the tax will raise Ann’s weekly cost of employing such workers by $210 ($210 = 120 x $1.75)  With the tax, then, Ann’s total weekly cost of hiring 120 hours weekly of these low-skilled workers will rise from $870 to $1,080.

Do proponents of raising the legislated minimum-wage contend that this 24 percent tax on hiring low-wage workers will not dampen Ann’s willingness to employ these unskilled workers?  Yes or no?  I genuinely beg for an answer.  If Ann has long-run monopsony power in hiring low-wage workers, the blackboard model leads us to predict that this tax will not cause Ann to reduce the number of hours of work that she hires weekly from such employees.  At least, this conclusion seems solid if we accept the conclusion that the existence of monopsony power means that a government-mandated higher minimum-wage will not cause Ann to reduce the number of hours of work that she hires weekly from such employees.

From Ann’s perpective, she pays $9.00 per hour regardless of the arrangement.  If the arrangement is the special tax, she pays $7.25 to her employees for each hour that she employees them plus $1.75 to the IRS for each hour that she employes these workers.  If, instead, the arrangement is the $9.00 minimum-wage, she pays the entire $9.00 to her employees for each hour that she employes them.  In both cases, the blackboard theorist sees that Ann’s cost of hiring each worker is closer to the value of these worker’s marginal product.  As long as $9.00 is not higher than the value of these workers’ hourly marginal product, Ann will not, the blackboard model assures us, be led either by the special tax or by the higher mandated minimum-wage to hire fewer hours of workers.

Is this conclusion plausible?  Not to me.  And my sense is that if you asked the typical economist – indeed, even the typical person in the street – “What would happen to the employment prospects of low-skilled workers if government imposes as special 24-percent-of-wage per-hour tax on employers who employ such workers?” the economist (and person-in-the-street) would reply “That tax would reduce those employment prospects.”

I think they would be correct to respond in this way.

But change the question to ”What would happen to the employment prospects of low-skilled workers if government mandates that the minimum-wage rise by 24 percent?” and suddenly we are treated by the person-in-the-street to his instinct that employers will just suck up the added cost – and by the economist to blackboard models of monopsony power – all to justify the conclusion that a 24-percent increase in the cost of hiring low-paid workers will have no negative effects on the employment options of such workers.

….

Now, for a bonus question, explain what will happen if – in response either to the special tax or the higher minimum-wage – Ann can get the same value results (that she gets weekly from hiring 120 hours of unskilled work) by hiring instead two higher-skilled (and un-special-taxed) full-time workers at a wage of $12.50 per hour (with no fringe benefits).

Hint for answering the bonus question: What will be Ann’s weekly total cost of employing these two more-skilled workers (assuming that she employs each worker for 40 hours weekly)?  How does this total cost compare to Ann’s total cost of hiring the six unskilled workers (1) before the imposition of the special tax or of the higher minimum-wage, and (2) after the the imposition of the special tax or of the higher minimum-wage?

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