The Minimum Wage and Bargaining Power

by Don Boudreaux on April 12, 2014

in Myths and Fallacies, Seen and Unseen, Wal-Mart, Work

Ms. Josie Carrela

Dear Ms. Carrela:

Thank you for sending me the link to Prof. Charles M.A. Clark’s defense of the minimum wage.  You are impressed especially by his argument that “Minimum wage laws … will also support the bargaining power of workers.”

I’m less impressed than you are with this argument.  In fact, I believe it to be evidence of Prof. Clark’s weak grasp of economics.

A worker’s bargaining power is increased only if that worker is made more attractive to employers, which means only if that worker’s skills are made less abundantly available to employers.  This outcome can be achieved in several different ways, some socially productive and some not.  For example, worker Jones can master skills that are in shorter supply relative to the demand for those skills; consumer demands for outputs can change in ways that raise employers’ demands for workers with skill sets similar to those of Jones; or artificial restrictions, such as occupational licensing, can be used to reduce the number of workers who compete with Jones for jobs.

What does not increase the bargaining power of workers is for government to strip from them a bargaining chip - and such stripping is exactly what minimum-wage legislation accomplishes for workers with the fewest and least-valuable skills.  Just as these workers’ bargaining power would fall if government prevented them from, say, working after sundown or from working on Wednesdays, minimum-wage legislation reduces these workers’ bargaining power by preventing them from competing for jobs (or for better non-wage terms of employment) by offering to work at hourly wages below the minimum.  The minimum wage does nothing at all to make the skills of the lowest-skilled workers less abundantly available to employers while it simultaneously makes these workers less attractive to employers.

Some workers’ bargaining power, however, is indeed enhanced by the minimum wage, namely, workers who are somewhat more skilled than the lowest-skilled workers who lose their jobs.  By artificially removing the lowest-skilled workers from the ranks of the employable, minimum-wage legislation artificially increases employers’ demand for many higher-skilled (or otherwise more ‘desirable’) workers.  For example, employers’ demand for the skills of my private-school educated, upper-middle-class 17-year-old white son is raised by minimum-wage legislation.  The reason is that such legislation prevents many teenagers from poorer families – who are denied the bargaining chip of being able to offer to work for wages lower than the minimum - from competing with my son for a job.  Is that fair?  Is that just?  I think not.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

…..

I didn’t get into this matter with Ms. Carrela, but Prof. Clark is correct in one matter.  Here’s the full quotation containing the bargaining-power claim:

Minimum wage laws—along with other forms of social protection like a strong social safety net, universal education, and a commitment to full employment—will also support the bargaining power of workers.

Again, the claim that minimum-wage legislation increases the bargaining power of the lowest-skilled and least valued workers is sheer nonsense.  But Prof. Clarks is correct in his “strong social safety net” claim.  The reason is that a strong social safety net – at least in the short and medium run, and if we ignore the effects of such a policy on both human and non-human capital formation – decreases the supply of labor, which increases the marginal value of labor.  Note, though, that this correct claim is the opposite of the common claim, made most recently by Robert Reich, that a strong social safety net effectively reduces workers’ wages.  That argument is wrong.  I addressed it here at the Cafe nearly ten years ago, and my colleague Bryan Caplan did so much more recently and much better.

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