Bryan Caplan  

What Say You? The Intuitive Case Against the Minimum Wage

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Don Boudreaux asks minimum wage supporters to answer two questions they should have asked themselves long ago.

Question #1:
Name some other goods or services for which a government-mandated price hike of 25 percent will not cause fewer units of those goods and services to be purchased.

Beer?  Broccoli?  Bulldozers?  Coffee?  Haircuts?  Natural gas?  Automobiles?  Housing?  Preventive health-care?  Lawn-care service?  Tickets to the movies?  Smart phones?  Subscriptions to the New York Times?  Books by Paul Krugman?  Professors of sociology?  Assistant professors of economics?  Any of these products work for you?  If none of these work, surely you can name at least one other for which a 25-percent price hike will not cause fewer units of that product to be purchased.  Or does low-skilled labor just happen to be the one good or service in the entire world for which a government-mandated 25-percent rise in the price that its buyers must pay for it will not diminish buyers' willingness to buy it?

Seriously, name just one other good or service for which you believe that a government-mandated price-hike of  25 percent will not reduce the quantity demanded of that good or service.

Question 2:

[B]ecause if Mr. Obama's full proposal is enacted the national minimum wage will also from here on in be indexed to inflation, here's another challenge to anyone who dismisses as unscientific or ideological the standard economic argument against the minimum wage: name one other good or service whose real price, according to economic theory, should never fall relative to the prices of other goods or services?

The least-bad answers to Boudreaux's Question #1 that occur to me probably salt and soap.  As Oskar Lange asked in 1937: "[W]ould a decline of the price of soap to zero induce them [the "well-to-do"] to be so much more liberal in its use?"  By the standard of 1937, almost everyone in the First World is well-to-do today.  For Question #2, I'm utterly stumped.



COMMENTS (28 to date)
Andrew_FL writes:

I somehow strongly doubt low/unskilled labor is either a Giffen or Veblen good. Is there any actual argument why or how that could be the case?

GabbyD writes:

Why is uniqueness such an important issue? suppose labor is the ONLY good with this property, why is that such a problem?

Dan Hill writes:

@Bryan - The answer to question 2 is any product or service produced by a sufficiently politically connected constituency. Just get the government to force people to buy your ever more expensive product - see health care.

@GabbyD - I think the point is that the extraordinary propostion that labor is the only resource known to humanity to which this condition applies would require extraordinary evidence to prove. Note: "some politicians and political pundits told us it wouldn't" is not evidence, extraordinary or otherwise.

[comment edited by commenter--Econlib Ed.]

Nick writes:

Most supporters of the minimum wage argue that labor is a very different good than other goods.

Name one other good with long term persistent 'unemployment'. Name a single good you buy where you sign a unique and complicated personalized contract with the seller that governs how much of that good will be provided under what conditions. Name a single good that arguably has such broad general equilibrium effects as labor. And so on. There's a reason there's a whole subfield of economics called 'Labor economics', and not a subfield called, e.g., 'Shoe economics': Labor is perceived to be different in many important and fundamental ways.

abh writes:

Doesn't it depend on demand elasticity. There are goods like medicine (even if the patient pays himself) for which the demand wouldn't change even if the price is increased.
There is no substitutability between labour and capital (can't use extra computer to replace a waiter); especially at jobs that require minimum wage workers.

ColoComment writes:

abh: Restaurants are using iPad menu ordering, payment, and receipting. Warehouses are using programmed robots to pick and pack.

http://www.huffingtonpost.com/2012/03/05/restaurant-tablets_n_1322021.html

http://youtu.be/3UxZDJ1HiPE

Sure there are some jobs where substitution may not work, but where the developing relative economics begin to make sense, human ingenuity will figure out a way to make it happen.

When you add together the costs of: cash and non-cash compensation, breaks & time off, HR administration, EEOC complaint response and/or employee lawsuit settlements (to make nuisance lawsuits go away), inter-personal conflict resolution, the costs of hiring & firing/replacement, and the like, human employees are very expensive.

Andrew_FL writes:

@abh-

There are goods like medicine (even if the patient pays himself) for which the demand wouldn't change even if the price is increased.

Medicine most definitely does not have a perfectly inelastic demand curve. It may have a very inelastic demand curve. But people's incomes are not infinite, you can't just raise the price indefinitely. They may still want and need medicine at a much high price. But demand is not want and need. Demand is want and need and capacity and willingness to back it up.

There is no substitutability between labour and capital (can't use extra computer to replace a waiter); especially at jobs that require minimum wage workers.

Oh, but you can.

Never underestimate human ingenuity.

Tom West writes:

I think it's fairly undeniable that there's less demand as the price goes up. The real question is "how much less demand"? And then the real, real question is "is the cost of the greater unemployment and the higher prices worth the benefits?"

Of course, given how politics works, one side will have to argue that there are no benefits, and the other side will have to argue there are no costs.

curtis writes:

I think the fact that unemployment isn't any more of a problem in, say, Australia than it is in the USA disproves point 1.

James writes:

GabbyD:

Uniqueness is important because special cases are, by definition, rare. Therefore claims of special cases are especially improbable.

Nick:

If governments intervened in other markets as much as they intervene in labor markets, we'd see those markets develop a lot of the same features that are prevalent in labor markets.

Nick writes:

James:

I completely disagree. There are so many features of labor markets that seem unique to labor markets and have existed for centuries. In no other market does a single buyer contract with a single seller, sometimes over decades, no other market has such a general effect on the entire population. Also, I cannot think of many markets that have a large number of sellers versus a few buyers. In general, just as an inherent feature, the labor market is almost unique is having strong adverse selection and moral hazard problems.

These aren't the result of government regulations, they've been around for centuries!

Richard Besserer writes:

Pfff. Number two is easy. The value of the unit of account (money) should not fall in real terms.

Thiago writes:

If you use labor theory of value, any good will do for the second question.

Pajser writes:

What Tom West said.

But I have one: dental care services. If state doubles the price of dental care services, poor people will procrastinate their visits to dentist, and it will result in worse condition of their teeths and subsequently, more frequent total number of visits, when they start feeling toothache.

Kevin L writes:

Bryan, your answers of salt and soap reveal another problem with minimum wage. If there were a price floor on salt and soap, I would buy fancy sea salt and bacon soap all the time.

@Curtis, of there is truly low unemployment in Australia, isn't the minimum wage redundant? That is even if the minimum were removed, employers would have a hard time finding someone to replace the workers they think are currently overpaid. I suspect social welfare programs have increased the reserve wage for many to something close to the minimum wage.

Pajser writes:

Question 2: "name one other good or service whose real price, according to economic theory, should never fall relative to the prices of other goods or services?"

The weapons of mass destruction?


andy writes:

Name one other good with long term persistent 'unemployment'

Housing. Property markets. Software. Fresh food.

Most supporters of the minimum wage argue that labor is a very different good than other goods.

So is housing. So is food. So is software.

It's different. That means nothing. You should first show, how the difference affects the demand curve. Not maybe. Show hard data why is that. Otherwise it is perfectly rational to believe that the complex statistical models that lead to the conclusion that minimum wage doesn't cause unemployment are simply wrong/look on wrong data.

Bill Woolsey writes:

While the possibility of substituting capital for labor is relevant, a more direct avenue is through the impact on the supply of the products of unskilled labor.

The minimum wage increases, and the cost of producing fast food increases. The supply of fast food decreases. At the current price of fast food, there would be a shortage. The firms raise the price of fast food. Unless the demand for fast food is perfectly inelastic, less fast food is purchased. This is the decrease in quantity demanded. The higher price helps cover the cost of the higher minimum wage, which increases quantity supplied. By raising quantity supplied and reducing the quantity demanded, the higher price clears up or prevents any shortage. But due to the higher price, less is purchased and so produced. With less fast food being produced, less unskilled labor is needed to produce it. And that is why a higher minimum wage reduces the employment of unskilled labor even if the technology used to produce the products of unskilled labor is unchanged.

The more inelastic the demand for the products of unskilled labor, the greater the increase in the price and so the greater the real economic loss to all of those who purchase the products of unskilled labor, and at the same time, the smaller the reduction in the employment of unskilled labor.

The more elastic the demand for the products of unskilled labor, the smaller the increase in the price and so the smaller the real economic loss of those consuming the products of unskilled labor and at the same time, the greater the loss of employment for unskilled labor.

In the short run, where firms have substantial fixed investment, much of the cost may come out quasi-rents. From a business perspective, that is a failure to cover depreciation. In the long run, this effect disappears. The capital invested in the products of unskilled labor is nonspecific.

Why do many economists favor increasing the minimum wage? They believe that you can't make an omelet without breaking eggs. And so, some unskilled workers must be sacrificed to benefit the rest of society.

There are many benefits to society from electing liberal Democrats. However, that requires a Democrat voting coalition, and promising a higher minimum wage helps build that coalition.


With Democrat rule, it is possible to provide social welfare benefits to help those who are unemployed. Special counselors can be hired to help keep them in school. Special training can be provided. This not only will help solve the fundamental problem of unskilled labor by giving the workers skills, it provides jobs to social workers and teachers--proven supporters of the Democratic coalition!

Further, the politicians can directly hire enough unskilled workers for government programs. Have the government subsidize industries that provide high paying union jobs for unskilled workers. The businessmen receiving the subsidies will even provide campaign contributions to the Democrats!

There are better solutions to unemployment of unskilled workers than letting them earn what the private sector thinks they are worth.

Unfortunately, many voters are not so enlightened. They don't like big government, social welfare, and high taxes.

If the Democrats cannot win, then we will suffer the horrors of Republican rule.

That is why noble lies told about the minimum wage provide so many benefits society--cleaner environment, socialized health care--well, a society as wonderful as Sweden.

QED An increase in the minimum wage will cause little or no increase in employment.

Jon writes:

I think you have to consider the way revenues are distributed in a capitalist society to understand why this isn't the problem Bryan thinks it is.

Revenue is created by laborers using tools. That revenue is distributed to the laborers and also to the capitalist. The capitalist doesn't actually do anything. He basically grants permission to the laborer to use the tools, and otherwise sits on the sidelines sleeping. When the laborer creates the value using those tools he's compelled to give whatever is left over to the capitalist.

The capitalist has a great thing going of course, but without laborers he gets nothing. Remember, he doesn't do anything that actually contributes to the production process. He grants the laborer permission, and the laborer does the sweating. What happens if the cost of labor goes up? Without labor there is no revenue. The capitalist is really lucky to get anything, given that he does nothing and is basically superfluous. He could die and nothing would change. He could will his stock to his cat and nothing would change. He doesn't do anything, he's not really needed. But he's collecting the lions share of the revenue (thanks to property rights which are enforced with the threat of violence by the state).

So will less labor be purchased? Without labor there is no product, and the capitalist already hires the fewest laborers possible because he wants profits maximized (actually the capitalist doesn't do the hiring, the management does on behalf of the sleeping capitalist, but you get my point).

Of course the capitalist prefers to eliminate labor costs and will continue to do so as he had in the past. Automation for instance (of course the capitalist doesn't develop automation, but pays laborers to do it). As labor costs go up automation, when possible, will appear more profitable. So there's some push here to reduce labor.

But the flip side is that with labor collecting a larger share of the revenue they've created, instead of sending a larger share to the sleeping capitalist, poorer people now have money. They spend a larger portion of the money they earn. This stimulates demand, which could require the company to hire more people and meet that demand. Like what happened when Ford increased wages.

Things can be more complicated than Don Boudreaux imagines. For him I think simplistic arguments that justify funneling more money into the pockets of the rich are about as far as an argument needs to go.

Daublin writes:

@Nick, cell phones, cable service, computer software, and housing rental all have contracts of the kind you describe.

I believe it better to frame your position as a moral one rather than an economic one. More broadly, I wish more minimum-wage proponents would be open on the expected economic outcomes rather than hide behind pseudo-science. To the extent I've managed to ask them--they usually drift quickly into "Republicans hate poor people"--they tend to say they really are happy to see teenagers and uneducated people not working. They have this world view where there are professionals and there are bohemian welfare babies; trying to make the bohemians do a low-paying 9-5 job is oppressive.

@Arnold, good one on soap, but for salt, don't forget all the industrial usage.

Nick writes:

@Daublin

No, they don't. For example, cell phones don't have a moral hazard and adverse selection problem, they don't have a few buyers and many sellers.

Look, if you think that economists who think the minimum wage doesn't cause unemployment are hiding behind psuedo-science, then you're not talking to the right people. What's sort of insulting about the original question is that it somehow suggests that these economists haven't yet considered the notion that labor is somehow unique. People who disagree with you aren't stupid.

Every economist involved in this area is aware of the studies showing small/zero unemployment effects. And they ALL consider it a massive puzzle -- for the very reason that it's hard to think of other industries where a 25% hike in the price leads to no change in quantity. So then the question becomes: Is there a reason why the labor market is unique?

Some explanations: The labor market is characterized by monopsonies. There are a few buyers and many sellers, so wages are 'too low'. This is a nice explanation because very few other markets have this characteristic, including the ones you mention. I don't know how realistic this is though.

Another explanation: The labor market is unique in that it affects every consumer's spending ability, so minimum wages might have weird general equilibrium effects. In fact, if you set up a general equilibrium model with minimum wages and frictions, depending on parameter values you can get more unemployment or LESS unemployment! This isn't a feature of, for example, the market for cell phones.

Basically my point is that this question fails the ideological Turing test. If you don't think that economists aren't grappling with this question, then you're not talking with the right people! Saying that minimum wage supporters haven't asked themselves this question is just completely wrong.

Les Cargill writes:


Minimum wage jobs are driven by franchise-based "fast food" style jobs.

The reason a McDonald's ( the prototype for McJobs ) uses labor much at all is that Ray Kroc set this pattern early in the belief that a "freshly scrubbed face" was good for the brand. McD's has a "university" and does other PR-related things to try to have a communitarian glow. The core McDonalds business model is in charging rents for franchises, rents on prepared goods, rents for land and such.

So there exists a hard-to-measure "component" in the metaphoric force-vector for calculating price at the minimum wage.

*At the edges*, price theory may or may not hold, much as at the edges, dynamic mechanical systems may or may not follow our models.

Tracy W writes:

Jon: if the capitalist does nothing, who hires the worker and chooses which tools to buy in the first place?

Seeing an opportunity to provide a good more efficiently is a skill in itself, and a rare and difficult one. It's like undertaking a scientific discovery. Very often scientific discoveries look obvious once discovered and explained, but were very hard to discover in the first place (eg Newton's Laws of Motion). No wonder that skill gets rewarded.

Now, some capitalists hire managers to do this work. But in that case, if they are successful capitalists then that means they're good at locating people with the ability to spot new uses to provide goods more efficiently, and providing them with the resources to use them. This is like the manager of a scientific research institute deciding to hire Feynman, putting the right person in the right place at the right time is a valuable social skill as well.

There are of course plenty of savers who are passive investors, I include myself. What we're doing is refraining from consuming our full income for a time, which makes more resources available for investment.

Jeff writes:

For question #2, I think there is an argument that for some metals with relatively finite supplies (though new advances in mining effectively increase the supply), price should keep up with inflation for copper, lithium, platinum, palladium, etc. The main problem with this argument that I see, is that historically this is false.

LD Bottorff writes:

I think Bill Woolsey may be on the right track, except that I think the issue may be simpler; raising the minimum wage rarely causes unemployment among the legislators who vote for it. I have never known a politician to run on a platform of "I fought against the increase in the minimum wage!"

Ken Schulz writes:

Q1: Labor is a factor of production; short-term, employers will purchase the labor they need to produce what they anticipate selling. Long-term, higher labor costs accelerate investment (in automation and other productivity improvements). That's a step toward returning to a high-wage, high-rate-of-productivity-gains economic regime. I'm more than OK with that.

Q2: Full-time workers who don't make a living wage are selling their labor at less than cost, making up the difference through government assistance programs, support from relatives and friends, etc. This is a classic externality and as such a classic case for government correction. A business that can't sell its output for more than the cost of production can discontinue the line. People are reluctant to liquidate themselves, and a decent society doesn't expect them to. And a high-wage economy can afford a generous safety net.

ThomasH writes:

I do not believe that the case for an increase in the minimum wage is that it will have zero employment impact. Rather, that given the political difficulty of transferring income to low income workers in less costly ways -- like the EITC -- the increase in the minimum wage improves the welfare of a significant number of people at relatively low cost.

KPres writes:

@Bill Woolsley

That is why noble lies told about the minimum wage provide so many benefits society--cleaner environment, socialized health care--well, a society as wonderful as Sweden.

But Sweden doesn't have a minimum wage...

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