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More on How Minimum Wage Legislation Harms Even Employed Workers

Posted By Don Boudreaux On March 25, 2014 @ 2:44 pm In Seen and Unseen,Work | Comments Disabled

WARNING: More speculative than usual.

I’m thinking further about the claim made by minimum-wage proponents that minimum-wage legislation improves firms’ efficiencies by improving worker morale.  That claim remains dubious in the extreme.  Because the positive net returns of improved worker morale would be captured chiefly by each firm that raised its workers’ wages, no ‘publicness’ aspect of the efficiency gains from higher wages would prevent any firm that can profit from raising its workers’ wages from raising those wages.

Put more succinctly, if gains are available to firms from improved worker morale resulting from higher worker pay, each individual firm can successfully capture those gains by raising the wages it pays to its workers, whether or not other firms choose to raise their workers’ wages.

But suppose the minimum wage is raised.  As I argue in this earlier post [1], worker morale is likely reduced as a result.  Nevertheless, despite the reduced worker morale resulting from a higher minimum wage, firms that employ large numbers of low-skilled workers might nevertheless enjoy gains – gains that could not be captured individually by each employer.

Remember, minimum-wage legislation strips from workers an important bargaining chip – namely, the ability to offer to work for an hourly wage below the legislated minimum.  So in addition to destroying some job opportunities for low-skilled workers, minimum-wage legislation also prompts employers to offer worse non-wage employment terms to those workers who are not rendered unemployable by minimum-wage legislation.  Employee morale thereby generally falls.  But because minimum-wage legislation reduces low-skilled-workers’ job opportunities across the board, workers are less able to shift jobs from their current employers to other employers.  (And because nearly all employers who continue to hire some low-skilled workers at the now-higher minimum wage worsen their non-wage employment terms, the relative attractiveness of shifting jobs also falls.  At the very least, each employee is denied by government the opportunity to offer a different employer the option of paying him or her a below-minimum wage in return for the employer offering to that worker especially attractive non-wage benefits.)

With each employed minimum-wage worker being less able to switch jobs, employee turnover does indeed fall – but, again [1], that’s not a good thing here for low-skilled workers.  And firms are now – as a result of minimum-wage legislation – better able to ‘exploit’ their minimum-wage workers.  With employment options so reduced by minimum-wage legislation, employers of low-skilled workers might well, as a consequence of that legislation, be better able to work their workers harder so as to extract more net profit per hour from each minimum-wage worker.

Minimum-wage legislation might, in short, give to employers of low-skilled workers a kind of monopsony power.  (Ironic, yes?!)

I’m not certain that this possible consequence of minimum-wage legislation actually comes to pass in reality – or, if it does come to pass, how prevalent it is.  Perhaps it is swamped by other adjustments.  And I’m also quite sure that as time passes any extra net profit per hour extracted by employers of low-skilled workers under a regime of minimum wage would be competed away in some form or fashion.  Yet the possibility of such exploitation existing in the short-run seems worth noting.  More generally, it’s vital always to remember that when many possible margins of adjustment exist (for example, nominal hourly wage, number of hours of work, the rate of worker output per hour demanded by employers, etc.), it’s unlikely that the welfare of a class of workers will be improved if government denies to each of them a bargaining chip along one significant margin of adjustment (here, the nominal hourly wage margin).

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