Nothing is more likely to cause me to spit out my morning coffee than coming upon an argument made by economists that minimum-wage legislation has no negative impacts on low-skilled workers. Non-economists can be forgiven for thinking that legislatively imposed minimum wages do nothing more than transfer income from employers to low-skilled workers, with no further consequences on these workers. But no economist should believe this fairy tale, much less trumpet it.
Alas, many people today boasting advanced degrees in economics do assert that minimum-wage legislation can be, and often is, a costless boon for low-skilled workers . Knowing some economics, these pro-minimum-wage economists seldom offer as justifications for minimum wages those narratives that are popular with the man-in-the-street. For example, most pro-minimum-wage economists know enough to reject the man-in-the-street conclusion that’s rooted in the assertion that employers will simply pass along to consumers the higher costs of labor by raising prices of the outputs they sell. Even mediocre economists understand that higher prices for consumer goods and services mean reduced consumer purchases — which, in turn, means lower demand for workers.
Instead, pro-minimum-wage economists know that the one theoretical condition under which an ‘appropriately’ set minimum wage might not cause harm to low-skilled workers is that employers possess monopsony power in the labor market. If a firm is the sole actual or potential employer of a particular kind of labor, that firm maximizes its profits by underpaying its workers. A very pretty graph can be drawn showing that a minimum wage, set just so by a wise and well-informed government, can raise these workers’ wages without causing the unemployment that sensible economists usually predict will be among the negative consequences of a minimum wage.
But this very pretty graph is a textbook curiosity; the graph’s geometric clarity is insufficient to prove that minimum wages do not negatively affect low-skilled workers in reality. First of all, it’s ludicrous to suppose that many, or even any, employers of low-skilled workers in America each has monopsony power over its low-skilled employees. Do clerks at McDonald’s really have no other employment options — say, at Burger King or Walmart or Roscoe’s Lawn Care Co.? For this reason alone the graph has no relevance in reality, or at least not in modern American reality.
Second, it’s also ludicrous to fail to realize that the very pretty graph is drawn under the unrealistic assumption that the only option open to monopsonistic employers when a minimum wage is imposed is to raise workers’ hourly wages. In reality, all employers — including the mythical monsters possessing monopsony power — can adjust to higher wages in many different ways. Employers can, for example, reduce the value of fringe benefits or increase the demands they put on workers while on the job. Ironically, employers with monopsony power over workers would, among all employers, be the most able and eager to adjust to a minimum wage by reducing workers’ non-wage employment amenities.
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