- Cafe Hayek - https://cafehayek.com -

Competing Hypotheses About L.A.’s Minimum-Wage Hike

Tweet [1]

In this earlier post [2] I argued that if real-world hikes in the minimum wage were in fact premised on scientifically sound economics – the economics that pro-minimum-wage economists point to in order to justify such hikes and without at the same time denying that the law of demand applies to low-skill labor – then there is no reason why such hikes would be phased-in over time rather than increased immediately.

Daniel Kuehn very quickly accused me of error [3].  (He did so in the comments to the above-linked post.):

The increases are nominal, that’s why they’re introduced gradually – to smooth the real value. That’s why the same people that want gradual nominal increases also want to peg to inflation.

In other words, my argument is factually mistaken (according to Mr. Kuehn) because in reality the Los Angeles city government’s phased increases of the minimum wage are meant only to keep pace with expected inflation between now and 2020 (when that legislated wage is scheduled to hit $15 per hour).

Mr. Kuehn’s argument, alas, still fails and my criticism of the L.A. government’s action remains valid and germane.  The reason is that – according to the very legislation that Mr. Kuehn and others celebrate as a scientific effort to raise the pay of low-skilled Angelenos without simultaneously destroying some jobs for these workers – there will be no minimum-wage hike in Los Angeles until July 1, 2016 (when it rises from its current level of $9.00 per hour to $10.50 per hour [4].  That’s more than 13 months from now.  Further, because of inflation between now and then – inflation that Mr. Kuehn plausibly notes the L.A. city council anticipates – there will actually be a minimum-wage decrease, in real terms, between now and July 2016.

So even if every scheduled nominal increase in L.A.’s minimum wage between July 1, 2016, and July 1, 2020 is designed (however roughly and imperfectly) simply to keep the wage adjusted for expected inflation over those four years, why wait until July 1, 2016 to raise the minimum wage?  Why not raise it now, in full with no phase in, to whatever level the government thinks will correct for problems caused by monopsony power?  The fact that this wage is not being raised immediately – now, in Spring 2015 – is strong evidence against the proposition that governments raise minimum wages in order to correct for the baneful consequences of alleged employer monopsony power.  If such monopsony power exists, there’s absolutely no reason to delay raising raise the minimum wage; there’s no need for any phase in of increases in the real value of the wage to whatever level government officials deem is textbook appropriate.

The only even remotely plausible way that I can see to salvage the L.A. government’s action in order to square it with Mr. Kuehn’s theory of what motivates governments to raise minimum wages is to claim that L.A. government officials believe that today – May 2015 – the $9 minimum wage is pretty close to being the textbook appropriate wage, and that all the L.A. government did is to arrange to index today’s minimum wage for expected inflation between now and 2020.

But of course if this claim is to carry the day, why all the hoopla about L.A. raising its minimum wage?  On this account, all the L.A. government did was to rather noisily index that city’s minimum wage for expected inflation starting in 2016 – meaning, in other words, that despite all the news coverage of the past few days, there has been no move by the government there to really increase in the minimum wage.

So I’ve a question for Mr. Kuehn: Do you believe that the recent, much-discussed action by the L.A. government actually did raise the real minimum wage or did it not do so?  If your answer is the latter, fine; we can join each other in being mystified at all the hoopla and celebration.  But if your answer is the former, then how do you justify or explain the L.A. government’s decision to delay until July 2016 any increase in this wage?  How do you square this delay with the monopsony model?

….

A fun exercise, which I just did but will leave to Cafe patrons themselves to do on their own, is to calculate the annual rates of inflation that, if Mr. Kuehn’s explanation of their actions is correct, the L.A. city council likely anticipates over the next five years.

….

In my opinion (which is shared by a large number of other economists), minimum-wage hikes, such as that recently done in Los Angeles, are not remotely motivated by government officials’ belief in, or even awareness of, the real-world relevance of textbook theories of monopsony power.  Such legislation is instead the harmful consequence of a combination of politicians pandering to economic ignorance and political pressure by labor unions and other rent-seeking groups who do stand to gain from legislation that prices some of the most vulnerable low-skilled workers out of jobs.

Comments