Some Additional Questions for Minimum-Wage Proponents

by Don Boudreaux on December 7, 2013

in Seen and Unseen, Work

Many of you proponents of a higher minimum wage justify this price-setting policy by asserting, alternatively, that (1) there is monopsony power in the market for low-skilled workers, or (2) empirical studies reveal that any unemployment caused by a higher minimum wage is ‘small’ or ‘not large.’

Which is it?  The two justifications are very different from each other, and you can’t reasonably alternate between reliance on one and then reliance upon the other depending upon your mood or on the nature of the objections offered by minimum-wage opponents.

If argument #(1) is correct, then - if the minimum wage is appropriately calibrated to existing market and monopsonistic conditions, and if monopsonistic employers’ predominant response to a higher minimum wage is indeed to hire more workers rather than, say, to substitute machines for human workers or to work existing employees harder – then the minimum wage increases employment.*  The standard economists’ argument against the minimum wage – namely, that it reduces the number of jobs for low-skilled workers – is undercut.  There is no trade-off to consider (at least as far as our focus is on the well-being of low-skilled workers as workers): not only do they all get a higher hourly wage, more of them are employed at that higher wage.

Sometimes, though, you proponents of minimum-wage legislation shift to a completely different argument.  With this different argument you accept the basic economic criticism of minimum-wage legislation (namely, that it reduces the employment prospects of low-skilled workers), but argue that the negative effects of that legislation are “small.”  With this different argument, you are doing something in addition to economics.  You are sneaking in an ethical judgment by arguing that the higher wages enjoyed by some workers (because of the legislated minimum wage) justify the forced unemployment (at, of course, a wage rate of $0.00) of some other workers.

I’m not opposed to using ethical judgments for weighing the inevitable trade-offs that attend almost any policy move.  Quite the contrary.  But ethical judgments are best when they are informed and thoughtful and out in the open.  So, what are your criteria for weighing the loss in the employment prospects of the ‘losers’ from minimum-wage legislation – which include, for these unemployed workers, lost income and lost opportunities for gaining job experience and skills – against the higher wages paid to the ‘winners’?  Can you tell us just how large the ‘small’ unemployment effects of minimum-wage legislation must be, relative to the higher pay of the ‘winners,’ before you begin to worry that the ‘social’ cost of minimum-wage legislation exceeds its ‘social’ benefit?

Suppose, for example, that the number of low-skilled workers in an economy is 4,400,000.  Does a 10-percent rise in the hourly wages of 4,000,000 of these workers justify the resulting unemployment of the other 400,000 workers?  What about a 15-percent rise in the hourly wages of those four-million workers?  Or suppose that a 10-percent hike in the minimum wage causes the unemployment of  ’only’ 200,000 workers?  Is this effect sufficiently small?  Can you give us some guidance on what you mean by ‘sufficiently small’ effects on unemployment?

And what is the base that you use to judge the negative employment effects to be ‘small’?  All workers in the U.S.?  If so, then you are not engaging the argument, as no serious opponent of the minimum wage has ever argued that, at the dollar levels that that wage typically is imposed in the U.S., raising the minimum wage will have a large effect on overall employment.

If the base you have in mind is not ‘all workers in the U.S.’ (or ‘the entire U.S. civilian workforce’), is that base – what?  All teenagers?  All low-skilled workers?  All workers currently in jobs paying wages at or near the legislated minimum?  (I suspect it’s the latter – which is perhaps the most appropriate base for you to use.)

But when you calculate the employment effects of a hike in the minimum wage, do you look only at the employees who actually lose their jobs as a result, or do you also count the employees who would have been hired but who are not hired?  Counting this latter group of workers increases the number of workers kept unemployed by minimum-wage legislation.  How large a number do these ‘not-hired’ workers have to be to cause you to start to consider the negative employment effects of minimum-wage legislation to be, in fact, high enough to warrant concern?

Does your assessment of employment consequences of a higher minimum wage change if the ‘sufficiently large’ number of workers who keep their jobs and are paid the higher wage are obliged by their employers, in response to the legislation, to work harder, to take fewer breaks, or otherwise to endure job conditions less attractive than before the minimum wage was raised?  If so, how does your answer change?  How do you combine these negative effects on low-skilled workers’ job conditions with the ‘small’ number of other workers who are simply priced out of employment in order to weigh these cumulative negative effects against the happy effects of higher wages for workers who keep their jobs?

Assuming now that minimum-wage legislation causes no deterioration of low-skilled workers’ job conditions (and no reductions in these workers’ fringe benefits), from where do the resources come to pay the ‘large’ number of workers who keep their jobs at the higher minimum wage?  If a higher minimum wage results in higher pay for the (vast?) majority (Or is it just “most”?  Or is it simply “many”?) low-skilled workers – with the rise in unemployment being ‘small’ – is it the case that the higher wage bill is paid out of employers’ profits?  That seems unlikely, given how very competitive are fast-food retailing and the other industries that employ lots of low-skilled workers.  So the resources to pay these higher wages must come from somewhere else?  Where?  Lower pay for other input suppliers?  Higher prices for the outputs the production of which uses lots of low-skilled labor?

When making your ethical assessment that a hike in the minimum wage is justified because the resulting unemployment consequences are sufficiently ‘small,’ do you count the negative effects of the possible lower pay for suppliers of inputs other than low-skilled workers?  Do you count the negative effects of the possible higher prices of outputs?  If so, how?  What weight do you give these negative consequences?

Finally, does it matter to you just how the ‘small’ unemployment increases play out?  That is, how relevant to your value judgment would be, say, a finding that black teenagers are 50 percent more likely to suffer unemployment than white teenagers?  What about 25 percent more likely?  What about twice as likely?  Or do you simply suppose that the negative employment consequences of a higher minimum wage are distributed randomly across all low-skilled workers?

….

* Each of these “ifs” is, of course, quite iffy in reality.

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