Arnold Kling  

The Minimum Wage

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Why oh why can't we have a Brad DeLong who will put the adults in charge of the clown show that is John Kerry's campaign? (For those of you who do not read DeLong, I am borrowing his anti-Bush tropes) Don Boudreaux writes


Proposals, such as Kerry’s, to raise the minimum wage modestly will cause the rate of unemployment of low-skilled workers to be only modestly greater than it would be otherwise – an effect sufficiently modest that people who lose their jobs as a result, or who don’t get jobs, are unlikely to trace their misfortune to its source.

...I propose a genuine test of this absurd faith: raise the minimum wage to $70 and see what happens.


For Discussion. Make the best case that you can that raising the minimum wage to $7 and hour will have a high benefit/cost ratio but that raising the minimum wage to $17 an hour will not.


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COMMENTS (32 to date)
Bernard Yomtov writes:

Make the best case you can that raising the minimum wage to $7/hr will have an overall negative effect.

Note that the argument is that the loss to those who become unemployed will be less than the gain to those who get raises. Isn't it just an empirical question whether this is true or not, and if it is true isn't it perfectly possible that the effect goes the other way at $17/hr? Why does it have to be the same at both numbers?

I don't know why you find this form of argument so absurd. Isn't it the same as saying that even though free trade hurts some people the overall benefits outweigh the damage? So if you want to say it's a bad idea on a utilitarian basis, let's see your calculations, or Boudreaux's. If you haven't done them, stop the derision.

Jim Glass writes:

If it's obvious that the minimum wage would have a negative net effect at $17 make a case that it wouldn't at $7. You're the one assuming a reversal. Don't assume it, show it.

Those who assume such a thing have the burden of proof. After all, we want to set the optimum minimum wage -- if it's $12.50, we want to set it there, why would you want it at $7? True believers in such "reversal" would be derelict in their duty if they didn't quantify where it occurs, and instead set it too low just because it's so much easier to assume reversal occurs than to show it actually does -- and at what level.

As for me I'll skip all the formal studies on the minimum wage and happily relate anecdote from my days as a former exploi^H^H^H employer of minimum wage labor.

Nobody I ever hired at minumum wage ever stayed there for long, it was a test-training wage. Any person who showed any competence got a significant raise quickly, like in two months or less. Anyone who's work didn't justify even a minimum wage got bounced quickly. And nobody I ever hired was supporting a family or anything like that -- they were all recent school graduates or a family's supplemental income. All this is pretty representative of the larger picture from the data I've see.

We had to deal with mandatory wage increases (literally and effectively, when NYC piled on regulatory costs) on occassion and the result was we just hired fewer new people to test-train. On the overall wage scale the monetary benefit to the people we hired was near zilch, because nobody stayed at minimum wage for any time anyhow. But the wage and more important opportunity cost to those we didn't try out was 100%, at least as far as we were concerned. If a person doesn't get a chance at a first job, he's not going to get one at a second.

Something many folk don't realize is that a lot of people who show up for minimum wage jobs like we offered very literally *don't know how to work*. Not due to any character weakness or moral failure or anything like that -- just due to lack of experience, they just don't know. Nobody is born knowing acceptable workplace manners and behavior. If you've never done it you don't know. I mean, I could tell stories about what some or our *well intentioned* people did that are hard to believe. But a month or two at mimimum wage gives the chance to learn while getting some slack from the boss because you aren't getting paid that much. And if you pick it up in that time you leave minimum wage in the rearview mirror forver, that quickly.

At least that's how it worked in my case when I was hiring. Off of my experience, saying the minimum wage should be raised is pretty much the same as saying that private-sector financed job training that leads to real waiting higher-paying jobs should be cut.

Mcwop writes:

There are many factors that play into the discussion point.

1. $7 an hour will probably have little negative consequences, and I draw this conclusion from the fact that many employers already pay above the minimum wage:

BLS Wage Data

2. Type of job is another factor. Waiters usually get half the minimum wage, and the rest is tips.

3. Geographical: $17 per hour might really hurt an employer in a small rural area, but be meaningless in NYC.

4. Effect on other wages. If the min wage closely matches what many higher skilled workers are getting, that puts pressure on wages across the board. Example: nurses may not be very happy with their wages, if the McDonald’s fry guy is earning close to what they are. There probably is a tipping point.

Bernard Yomtov writes:

Jim,

Arnold and Boudreaux and you are the ones making unwarranted generalizations, not me.

Try this. A company is considering raising its prices 10%, thinking that the drop in unit sales will be more than made up for by the increased revenue per unit. Does it make sense to argue that this is a bad idea because a 100% price increase will cause sales to drop too far? Of course not. If it did then no one would ever raise a price, because there is always some increase that is too big. Yet that's the argument you are making.

Do you think the minimum wage should be abolished? That really is the only conclusion that is consistent with your argument.

Boonton writes:
For Discussion. Make the best case that you can that raising the minimum wage to $7 and hour will have a high benefit/cost ratio but that raising the minimum wage to $17 an hour will not.

I think you meant to ask for the best case that raising the wage to $7 will not hurt but raising to $17 will.

Here I go:

There is harm in either case if you are using the standard model of supply and demand. Either some people won't have jobs or will have their hours cut or will have non-wage benefits (like breaks, a nice lounge etc.) cut with either increase.

However, the standard model is just that, a model. In real life the model explains the big picture but there are plenty of micro-micro inefficiencies. For example, many people are imperfectly rational & suffer from imperfect information. If they do not know the true value of a low skilled worker, they may use the min. wage as the standard. If the min. wage is $6.50 but the true value is $6.75, it may not be worth the effort to gather the correct information and simply use the min. wage as a rule of thumb. This would happen even though the min. wage was sub-optimal when compared to what would be produced by a world of truly rational 'economic men'.

In such a case, a raise in the min wage may 'unstick' the market in such a way as to provide a net benefit to workers that is greater than the cost to employers. There was that one study which compared fast food employment in NJ to PA (just over the border) when NJ raised its wage and found that employment actually increased... Something that shouldn't have happened.

This 'quantum effect' is of only limited benefit. If you tried to get too greedy and push the wage up to $17 or more then the forces of traditional economics will dominate and you'll see unemployment and a rise in 'off the books' employment.

Boonton writes:

To tie this in with another topic, I would suggest that maybe human irrationality biass the market on both ends of the bell curve. The market may systematically undervalue the lowest paid workers as well as overvalue the highest paid workers (would Enron have been any worse off if Ken Lay's compensation was 20% less than what it was?). The effect, though, is smallish so that modest progressive policies may make the situation better but if you tried anything too radical (like a $17 min. wage or 100% income tax bracket) the costs would outweigh the benefits.

Nick writes:

...raising the minimum wage to $7 and hour will have a high benefit/cost ratio but that raising the minimum wage to $17 an hour will not.

I think of it like the converse of the Laffer curve logic. A smaller rise gets absorbed by employers, whereas a significant rise will more clearly modulate employer behaviour.

Jim Glass writes:

"A company is considering raising its prices 10%, thinking that the drop in unit sales will be more than made up for by the increased revenue per unit. Does it make sense to argue that this is a bad idea because a 100% price increase will cause sales to drop too far?"

Well ... do unsold items resulting from reduced sales go on the unemployment line and impoverish their families due to their loss of income?

This is seems a very strange comparison to me.

I note you ingored everything I wrote to get back to this, but OK....

You seem to be trying to claim that a minimum wage hike causes a net wage increase, after wages lost due to increased unemployment are subtracted from wages increased due to the legislated hike. *As if* the only cost of increased unemployment and lost entry-level jobs is lost current wages.

But let's take things even on those terms. It still seems like a rather data free wish.

Looking at a little data, back since the Congressionally mandated Minimum Wage Study Commission of the 1980s the consensus average estimate has been that raising the minimum wage by 10% increases unemployment among teenagers by 2%. That hike:loss ratio of 5:1 may sound pretty good.

However, even most teenagers make more than the minimum wage. A study of the 1996 minimum wage hike found that only 20% of teenage workers were at the wage level to be affected by it (the idea that there are masses of minimum wage workers out there who will be helped by a wage hike is a total myth) -- and of course the resulting unemployment increase is concentrated among *those* teenage workers. Since those represent only 1/5th of all teenage workers, the wage hike:wage lost ratio now becomes 1:1. Not such a good deal.

To that we can then add in all the *other* costs of increased unemployment and loss of entry-level jobs -- like larger numbers of people who don't get entry level "learning" jobs and so *never* get into the job market, or who when they finally do are forever behind on the wage ladder from where they would have been due to their delayed start.

Here's a Fed commentary on this with pointers to related formal studies.

"Do you think the minimum wage should be abolished?"

Sure do. Especially considering how the unemployment rate for low-family-income teenagers zoomed up after it was applied to them in 1956.

Until then, the unemployment rate for black teenagers was the same or *lower* than that for white teenagers. Then the black teenage unemployment rate zoomed right upwards. Do you suppose that might've affected adult employment patterns?

Boonton writes:

Jim,

If the harms you attribute to the min. wage are correct, then you should detect a distinct pattern. The min. wage is not indexed to inflation, therefore it is implicitly cut each year. The 'harm' should therefore be spiky, increasing dramatically whenever there is an increase with slow decreases as the increase is cut down by inflation each year. The 80's, then, should be an especially good time for those supposedly harmed by the min wage.

patrick writes:

Simplest cases:
I.Small raise-
$5.15 x %100 current employment = $5.15
$7.00 x %82 current employment = $5.74
(assumes 5% employment drop for
each 10% wage increase)
11% net gain to MWE (minumum wage earners).

II. Large raise-
$5.15 x %100 current employment = $5.15
$17.00 x %0 current employment = $0.00
(assumes 5% employment drop for
each 10% wage increase)
100% net loss to minumum wage earners.

Of course, these cases neglect several things:
First, elasticity of labor demand is certainly not constant. Still, labor demand in Case II would need to remain above 30% to see any net gain to MWE.
Second, these cases obviously don't address other externalities (loss of entry-level jobs, disincentive for leaving welfare, incentive for leaving school, etc.).
But those things aside, if you want to argue a net gain to society, you at least need start with a net gain to the intended targets, which the first case seems to offer and the second case almost certainly precludes.

rvman writes:

Most folks here are assuming it is only workers we care about. True cost-benefit analysis has to take into account owners(who have squeezed profits) and consumers(who face higher prices). Those are the folks, after all, who pay the "difference" between $5.50 and $7.00. (or $5.50 and $17.00 or $70.00 or whatever) In "normal" supply and demand analysis, a price floor will create a triangle of net waste below and to the right of where the demand curve and the price floor come together - period. The increased wage, the increase "average" wage, whatever you decide to calculate as your "benefit" is a pure transfer from the "Demander" to the "Supplier" of the good - in this case, low skill labor.

To play Devil's Advocate, I will attempt to make a reasonable case for a beneficial minimum wage, and lay out my assumptions.

(*WARNING* LONG WINDED VERBAL DESCRIPTION OF MATHLIKE STUFF FOLLOWS)

Assume:
1)"Normal" supply and demand framework. (No monopolists, monopsonists, externalities, etc.)

2)Total Social Welfare can be determined as the sum of individual welfares. Individual welfare is function(U) of income(Y) where
U'(Y)>0, U''(Y)<0.

That is, utility increases with income, but at a decreasing rate - the 10000th dollar of income adds less utility than the 9999th.

A minimum wage does several things. 1) It creates a "dead-weight-loss". (The aforementioned triangle of net waste.) This triangle's size is a function of the SQUARE of the difference between the minimum and the competitive equilibrium. So it increases in size at an increasing rate as floor gets higher. For example, if the competitive equilibrium is $5.00, then the triangle will be roughly (17-5)^2/(7-5)^2 larger when the minimum is 17 than when it is 7. (That is 36x.) (Assume for simplicity 45 degree Demand and supply curves)

D(P) = 100-P, S(P)=P, for example.

This is a pure loss. It also falls upon the workers who lose their jobs, and U(Compwage) - U(Not working) summed over that group is our "cost".

Our "Benefit" can be calculated as the utility to the poor workers of an additional dollar of income, minus the utility to the richer owners (and consumers) of an additional (reduced) dollar of income (or purchasing power, for consumers). That value will be larger for the first dollar transferred, and smaller for the last. The math gets messy, here, but IF the value

(U(Minwage)-U(Compwage)) for workers

minus the value

(U(Profits/purchasing from Compwage) -
U(Profits/purchasing from Minwage)) for owners and consumers

is larger than the "Cost" calculated above, then the Minimum wage is "worth it" in a social sense. The "Benefit" thus described is decreasing in the size of the minimum (the first dollar transferred from poor to rich does more "good" than the second or later). The cost increases at an increasing rate, both due to the squaring effect, described above, and the fact that the first workers to lose their jobs (under classic supply and demand) are those who least want their jobs(assumed - Supply and Demand framework). (they who inhabit the "right edge" of the used supply curve require the highest wage to be motivated to work)

As long as the first dollar transferred has a net positive effect(assumed), than there will be a "crossing point" where the marginal effect of increasing the minimum goes negative. If it were determined to be at $7.00 that this happens(or even $6.50 or $9.00) then $7.00 minimum could easily be "superior" socially to $5.50 competitive wage, but the $17.00 minimum could easily be inferior socially to the competitive wage. QED (OK, proof by example isn't exactly the best approach, but it's what I have.)

Lawrance George Lux writes:

"Make the best case that you can that raising the minimum wage to $7 and hour will have a high benefit/cost ratio but that raising the minimum wage to $17 an hour will not."

Raising the minimum wage to $7 an hour will lead to a temporary decline in labor rolls not estimated to extend longer than eight months--due to the fact Employers need the labor for under-employed business operations at present. The upside of the argument states several million employees will still not be able to pay their full living costs, but will be able to pay forty percent more of those expenses.

Raising the minimum wage to $17 an hour will lead to Product sales 8-11% higher in Consumer Goods in the short-run, but at the cost of a 14% annual Inflation rate with Consumer Goods sales dropping remarkedly within 18 months. lgl

rvman writes:

That should be
U'(Y)>0, U(double prime)(Y)<0. Somehow the part after the second open parenthesis disappeared.

rvman writes:

GRR!

U double prime of Y is less than zero.

TAKE THAT, You %*#@(&% programming codes!!!

rvman:

*chuckle* I've fixed the code for you in your post above. I agree it's an annoyance that you can't use the keyboard character for a less-than symbol in Econlib comments. Sorry about that! It's a constraint of allowing rudimentary html in comments. To type a less-than symbol, use the html-entity code & lt followed by a semi-colon.

Lauren

Bernard Yomtov writes:

Jim,

Calm down and reread my comments. I was objecting to the nature of the argument advanced, the lack of data to support it, and the generally smug tone of the post, and the Boudreaux article.

What I was trying to say with my 10% - 100% example is this: because raising prices 100% is stupid, it does not follow that raising them 10% is stupid. Similarly, just because raising the minimum wge to $17 is stupid it does not follow that raising it to $7 is stupid. Yet that is the core of the argument advanced.

Do I know what the ideal level is? No, though I think it's non-zero. Somehow I don't think the labor market is so perfectly
competitive that we can just let the chips fall where they may. I also think that, in keeping with some of the sensible points you make, that it would not be a bad idea to have a "training wage" that would be below the minimum.

I do commend you for two things. First for recognizing that factors other than pure financial considerations ought to enter into discussions about desirable policy. Second, for admitting that your argument implies that the minimum wage should be abolished. Now just get that into the Republican platform and I'll really be pleased.

DSpears writes:

The only people who will be significantly effected by this increase in the minimum wage are shameless politicians trying to show the poor voters that they care. If these poor people lose their jobs because of it chances are they will blame their employer, not the stupid pandering politician.

So it's a win-win for pandering politicians everywhere: They look like they are doing something about the worker's plight, and when they lose their job they can promise them that they will do something about the greedy scoundrel that fired them. The oldest political trick in the book. But it still works.

Tom Dougherty writes:

If someone’s productivity is such that the maximum output they can produce is $6 per hour, but you force that person to charge an employer $7 per hour then is does follow that a minimum wage of $7 per hour is stupid. What do you say to the employee who is only able to produce $6 worth of output an hour? Where is that employee going to develop the work skills necessary to increase his productivity to make him a more valuable employee?

The argument that the minimum wage causes unemployment has theoretical backing. It can be shown that a price floor above the market price will cause a surplus. In the labor market, a surplus of labor is unemployment. I would like the defenders of the minimum wage to show that the theory of price floors is faulty and to show an alternate theory that shows that a price floor in the labor market above the market price does not create unemployment.

Tom Dougherty writes:

It is ironic that Yomtov compares the benefits of free trade to the “benefits” of the minimum wage. In the case of free trade, the government gets out of the way and lets the consumers contract freely to buy goods. In case of the minimum wage, the government gets in the way to prevent the consumers of labor from contracting freely to buy labor services.

Bernard Yomtov writes:

I wasn't comparing benefits, but arguments. Actually, I'm all for free trade.

Still, I don't see the irony, or the contradiction you imply. What's wrong with thinking that sometimes the economy can benefit from government intervention and sometimes things are best left alone?

I fully understand the theoretical supply-demand argument against the minimum wage. I'm not as confident as you are that it is universally applicable.

Patrick R. Sullivan writes:

"What's wrong with thinking that sometimes the economy can benefit from government intervention and sometimes things are best left alone?"

But to come up with proof you have to use an example of a business testing higher prices in the market, where such higher prices can be accepted or rejected (and if they are, the business can quickly reverse course). This tells me you don't have any actual examples of government intervention being beneficial.

Boonton writes:
If someone’s productivity is such that the maximum output they can produce is $6 per hour, but you force that person to charge an employer $7 per hour then is does follow that a minimum wage of $7 per hour is stupid. What do you say to the employee who is only able to produce $6 worth of output an hour? Where is that employee going to develop the work skills necessary to increase his productivity to make him a more valuable employee?

The argument that the minimum wage causes unemployment has theoretical backing. It can be shown that a price floor above the market price will cause a surplus. In the labor market, a surplus of labor is unemployment. I would like the defenders of the minimum wage to show that the theory of price floors is faulty and to show an alternate theory that shows that a price floor in the labor market above the market price does not create unemployment.

Suppose that with information being limited (and expensive to obtain) & people being only imperfectly rational the productivity of a person is unknown. Suppose that it is believed, with say a 95% confidence interval, to be between $6-$7.50 an hour. If the min. wage was increased to $8 an hour, then the employer knows (with just a 5% chance of being wrong) that he is better off getting rid of the employee. But suppose the min. wage is $6 an hour and is raised to $7.

Since the employer is not sure if the optimal wage for the employee is $6, $7.50 or somewhere in between he simply takes the min. wage as a guideline or rule of thumb. In such a quantum zone (or micro-micro economics if you prefer), there may be a range of optimal wages. The min. wage increase may result in no loss of employment and actually benefit both parties if it pushes the market closer to the ideal optimal wage.

This effect, though, only works for small increases. If you got greedy and tried to push the wage higher (say to $10 an hour), the forces of classical micro-economics dominate and you see the bad results you predicted.

It's worth it sometimes to look beyond the textbook.

Bernard Yomtov writes:

But to come up with proof you have to use an example of a business testing higher prices in the market, where such higher prices can be accepted or rejected (and if they are, the business can quickly reverse course). This tells me you don't have any actual examples of government intervention being beneficial.

Huh? What is this about?

cispi writes:

Devil's Advocacy: it would be a good thing to put downward preassure on these sorts of jobs. As regards a person's personal finances, they suck! People need to take control of there financial destiny. Leaving it up to someone else is like eating a fish instead of learning to fish.

Oddly, therefore I don't mind if a raise in the minimum wage reduces the number of these quasi-communist jobs.

I would happy if this meant that people learned about business and started being a more proactive part of the economy.

Mark writes:

The argument that the minimum wage causes unemployment has theoretical backing. It can be shown that a price floor above the market price will cause a surplus. In the labor market, a surplus of labor is unemployment. I would like the defenders of the minimum wage to show that the theory of price floors is faulty and to show an alternate theory that shows that a price floor in the labor market above the market price does not create unemployment.

Tom, the supply and demand analysis you are referring to makes the assumption that everyone in the market is a price-taker (or a wage-taker in a labor market), which in turn requires a set of conditions which economists label pure competition or perfect competition. Anyone who has ever taken a good introductory microeconomics course knows that in the real world, you almost never see this set of conditions. And when you analyze the impact of a price floor on a market with imperfect competition--specifically, one where the employer has some degree of market power--the impact is more ambiguous. In this case, the predicted impact of a small increase in the minimum is different from a large increase. This is, of course, an answer to Arnold's $7 vs. $17 question (which, Arnold, I hope was purely rhetorical, as I am sure you are aware of this point).

A second point to note is that the simple, supply and demand analysiss of a price floor is static, and does not account for any dynamic feedback effects, such as the potential for increased wages to reduce job turnover and thereby increase productivity. There is at least some empirical evidence for such a feedback effect--as I recall, the Economist, hardly a fan of minimum wage laws, reported on the research showing this a few years back.

A third point, already touched on by other posters, is that demand elasticity is seldom, if ever, constant along an entire demand curve. The empirical research on the minimum wage has been done for situations where the inflation-adjusted value of the minimum wage is roughly $4-$7 or so. This research shows an implicit labor demand elasticity of no more than 0.3 (and that value applied only to teenagers, a minority of minimum wage workers). This of course is a highly inelastic demand, and when demand is inelastic, all microeconomics students know that an increase in price raises total revenue to the seller (in this case, total income for low-wage workers). Since Kerry proposes increasing the minimum to $7, it would be very reasonable to apply the empirical findings to his proposal. However, it would not be valid to assume that demand would be inelastic for an increase to $17.

Tom Dougherty writes:

Booton,

Your example makes no sense at all and totally lacks any theoretical backing.

Suppose that with information being limited (and expensive to obtain) & people being only imperfectly rational the productivity of a person is unknown.

You say information is expensive to obtain. Then go on to tell a story of how employers run econometric models to gain information on the productivity of each employee. Mind blowing. It just makes no sense at all.

Suppose that it [the productivity of a person] is believed, with say a 95% confidence interval, to be between $6-$7.50 an hour.

The probability that the productivity of a person is between $6 and $7.50 an hour is one or zero. It either is or it is not. Although, one’s productivity is unknown it is assumed to be some fixed number.

Since the employer is not sure if the optimal wage for the employee is $6, $7.50 or somewhere in between he simply takes the min. wage as a guideline or rule of thumb.

For the employer, the optimal wage for a given quality of worker is the lowest possible wage. Just as for the employee, the optimal wage for a given type of work is the highest possible wage. Again, you are not making much sense.

It is worth sometimes to look at a textbook.

Tom Dougherty writes:

Mark,

The wage received by unskilled labor tends to equal the marginal revenue product (MRP) of labor. This is true whether one is describing the perfectly competitive model or the monopoly model. The only case where this is not true is the monopsony model. The MRP is the firm’s demand for labor. The wage will be determined by where the supply curve crosses the MRP. I see nothing wrong with this model. You don’t like it. What is your alternative model? You refer to an imperfect competition model with a price floor where the “impact” is ambiguous. What is the reference for this model? What do you mean by an ambiguous impact?

There is no mystery on your second point. A higher wage will induce higher quality workers to apply for certain jobs. The supply curve represents homogeneous workers. A higher wage may cause better quality workers to be hired, hence, a new supply curve representing a different type of worker. Nevertheless, the lower quality workers are still priced out of work. Your musing about so-called efficiency wages is still no substitute for theory. And if the minimum wage has the effect of an efficiency wage as you claim (prove it), then why does the government have to mandate an efficiency wage, if as it implies, it will increase profits to the employer. I will repeat my request; I would like the defenders of the minimum wage to show that the theory of price floors is faulty and to show an alternate theory that shows that a price floor in the labor market above the market price does not create unemployment.

You third point is complete nonsense. If an employer’s selling price increases, then the quantity sold decreases. It is the same thing for workers. If the price for labor increases because of a minimum wage, the quantity demanded for labor decreases, while at the same time the quantity of labor worker are willing to supply increases. Those who retain their job, benefit. This is obvious, but your complete lack of concern for those who get fired mystifies me. Your willingness to prevent mutually beneficial contracts by prohibiting those contracts below an arbitrary minimum is arrogant in my opinion. The elasticity of demand is meaningless. The seller of a good may increase his revenue if the percent increase in price is greater than the percent decrease in quantity sold. However, the government does not own the supply of labor like the businessman who owns his supply of apples to sell on the market. The businessman makes a voluntary decision whether or not to raise his price. The minimum wage takes away the voluntary decision from the lowest skilled workers to decide how much to charge an employer. But by raising the minimum wage above the market wage, the government prices low skilled people out of work and makes them unemployed.

Boonton writes:
You say information is expensive to obtain. Then go on to tell a story of how employers run econometric models to gain information on the productivity of each employee. Mind blowing. It just makes no sense at all.

....

The probability that the productivity of a person is between $6 and $7.50 an hour is one or zero. It either is or it is not. Although, one’s productivity is unknown it is assumed to be some fixed number


I never said anything about econometric models & you don't get my argument. Many times it is impossible to compute a particular person's productivity so the employer must make a best estimate. Naturally, he will know that there his estimate isn't written in stone. It's not unreasonable for him to believe a particular employee ranges between $6.00-$7.50 per hour.

Instead of a thin line, imagine the demand and supply lines as thick. Instead of intersecting at a particular point, they intersect at a range of points. Here you have your case for a small increase in the min. wage, but not a large one. Such an increase may spur higher wages without cutting employment. But this effect is highly limited to the small scale.

Peter writes:

Arnold-
Speaking of basic economic concepts... did you ever revise your view on expensing stock options?
-PM

Beak writes:

Instead of thinking of the labor supply and demand curves as thick lines (as lines do not have thickness in geometry) let's think of them as a series of lines (offerings made by each company and employee respectively). This makes more sense since labor is a highly heterogenous commodity, by comparision. To make things more clear, lets boil it down to the market for one particular worker who may or may not already be employed.


Firstly, the potential hiring pool for these jobs consists of mostly those who currently have low skills, and those who are simply unproven or unknown. Since any other experience would tend to shift them into a higher paying market. Thus raising the minimum wage has two effects. Firstly it may price workers with "known" low productivity out of the market. This effect is obvious using traditional analysis. The effect on the "unknows" however is more interesting.


For someone who falls into this group there are three possible outcomes. The first is that they become a "known" as part of the low productivity group above, and thus what is said above applies to them. The second group becomes "known" as having higher producitvity and thus they only benefit from the higher minimum wage for a short period of time before their pay increases. Thus the benefits for this group are only transitive. The last group is those for whom the higher minimum wage keeps them unknowns (at least for a time period longer than under a lower market wage). This group is suffering the opportunity cost of the minimum wage. What this hike effectively does is increase the cost of obtaining information about entry level workers.


So the results are a known dead weight loss, and a transitive benefit that is AT LEAST partly, if not entirely (or negatively over the long run) offset by the lost opportunity for other potential workers.

Rick Stewart writes:

Raising the minimum wage to $7 will not have a cost/benefit ratio less than 1, for the obvious reasons, but it will also not have a ratio much above one, because the effective minimum wage, the market wage, is currently at or above $7 almost everywhere in the United States.

The effective minimum wage is far below $17 and so of course raising the legal minimum wage to that level would have strongly negative effects on the economy until the resulting inflation brought things back into equilibrium.

Politicians aren't stupid - they know the only time to raise the minimum wage is when it is significantly below the effective minimum wage. Check the history.

Jim writes:

No one is taking into consideration the real reasons that the government has and increases minimum wage.

A 50 cent inrease in wages for 5 million wage earners raises the tax base by 100 million dollars per week if they only average 40 hours. If you calculate the increase of government revenue at 5% income tax plus FICA that is over a billion dollars a year in increased tax revenue while the majority of the people think that you are helping them.

I live in a third world country and see the benefits first hand of minimum wage. The cost of living here goes up much greater than the wages do and the minimum wage earner actually looses ground here. Even the World Bank has admitted that and they forced the raise in minumum wages.

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