Art Carden  

Economics Never Stops: What's Missing from the Minimum Wage Debate?

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In yesterday's Wall Street Journal, David Neumark argued that even though "modest increases" in the minimum wage won't have large disemployment effects, the minimum wage is a poorly-targeted anti-poverty measure: "Minimum wages are ineffective at helping poor families because such a small share of the benefits flow to them."

The broader discussion doesn't appreciate the ways in which firms and workers can adjust to a higher minimum wage without people losing their jobs or even without reductions in the number of hours worked. People do not work for wages alone but for a combination of wages, benefits, workplace amenities, and job satisfaction. Forcing people to pay and accept higher wages means they can compensate on other margins. Maybe you don't get as much general workplace training now (and make no mistake: that is valuable). Maybe you have to pay for your uniform. Maybe you don't get the same employee discount you otherwise would have received. Maybe you don't have as much scheduling flexibility. And so on. I haven't seen a good argument for why we shouldn't think these adjustments are important or for why we are better as a society by forcing people to trade a more flexible schedule for higher wages.

In addition, a minimum wage creates an economic rent and, therefore, wasteful competition over that economic rent. As I wrote last summer:

When politicians impose binding price floors on competitive markets, they take prices off the bargaining table. This encourages wasteful forms of competition. To make this concrete, suppose you and another person are each willing to work for $5 per hour but you are not allowed to accept less than $9 per hour. There is only one job opening. How do you make sure you get it?

Corruption is an obvious option: you can simply bribe your prospective employer. Assuming that isn't an option, though, what can you do? The simplest option is to play the waiting game: whoever waits the longest outside the employer's office gets the job, just like whoever waits the longest for price-controlled gas after a natural disaster will get the gas. This represents pure waste: the time and energy you devote to waiting is time and energy you're not spending doing something else.

People can also compete by investing in signals that make them more attractive to employers. Maybe they get their hair cut and shave more often. Perhaps they get more college degrees. Maybe they buy nicer suits for their job interviews. On their own merits, these might be nice things. However, they're superfluous if they're used to get artificially-scarce jobs that, in the absence of a minimum wage, could be had just by offering to work for less.

It's tempting to think that the higher wages for workers is worth it, but it isn't. The minimum wage shifts the margins on which people compete with one another from wages to wasteful competitive endeavors like waiting or investing in too many quality signals. Competition in a price-controlled market can erode the entire value of the difference between the minimum workers are willing to accept and the minimum they are allowed to accept. The cruel irony is that a policy designed to pick the pockets of employers for the benefit of workers ultimately leaves everyone worse off.

In a February Featured Article, Robert Murphy discussed economists and minimum wages in detail. It's worth a careful read. Regular EconLog readers know that Economics Never Stops. Maybe you even have that on a t-shirt. Particularly when we're dealing with a question like poverty, we can't pretend that people suddenly stop responding to incentives just because we've reached a conclusion we find politically appealing.

I decided to take up Bryan's challenge in his post on "Liberal Authoritarianism." Watch for "Conservative Authoritarianism" by the end of the week.

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COMMENTS (17 to date)
Tom West writes:

The broader discussion doesn't appreciate the ways in which firms and workers can adjust to a higher minimum wage without people losing their jobs or even without reductions in the number of hours worked. People do not work for wages alone but for a combination of wages, benefits, workplace amenities, and job satisfaction.

Funny, I've notice exactly the opposite. Most firms (at least smaller ones) aren't economists, they're people. And people almost always value something the more it costs them, even involuntarily. The $200 wine *does* taste better, even if it's identical to the $20 wine.

I noticed it first in India, but I find it all the time here. The more someone pays for someone, the *better* they treat them. And it seems to have little to do with their actual worth to the firm.

Training and safety are the most obvious. Almost nobody wastes training on someone you're paying $5/hour for. But at $10, they might be worth training. Safety is even worse. People who earn very little are easily considered almost disposable. But up their wage, even involuntarily, and most can't escape their brain telling them that the employee must be more worthy of basic respect.

These are my observations, but there pretty consistent with almost every organization I've dealt with.

We're simply not homo economus.

Daniel Kuehn writes:

I think Tom makes important points but I would not sum it up with his last line "We're simply not homo economus".

We do respond to incentives, there are multiple potential margins - the question is what margin is being worked on in the case of low wage workers. The idea that there's a lot of wiggle room in non-wage compensation or other goods associated with the labor contract is somewhat suspect. It's possible adjustment is happening on margins, but I think we need evidence of that particularly when we have alternative explanations of the zero or very small disemployment effects that are entirely consistent with economic theory and do not rely on these potentially implausible adjustments on other margins.

There's been much less work on the other margins - there should be more. But I don't think we have as clean an answer as Art suggests until there is more work on it.

Daublin writes:

It's a message well worth repeating, Art.

An analogy that might build intuition would be if there were a Lodging Mandate: any employee must be provided with a place to live. For contract work such as house cleaning and plumbing, you have to pay into the rent of an accomodation that the employee chooses.

How would this affect how you treat your house cleaner? You'd probably insist on them doing a very good job. You'd probably stop hiring a teenager from down the street. You'd probably stop counting their lunch hour as being on the clock, because you have to pay more rent the more hours they officially work.

Would house cleaners be better off? So-so house cleaners would be in bad shape, because they'd either be worked to the bone or just wouldn't be hired. The neighborhood teen just wouldn't get that job nor any other one, because they don't have enough skills to earn a living wage. Possibly the best of house cleaners would be winners, because they have so little competition left.

CC writes:

Daublin wrote: "Possibly the best of house cleaners would be winners, because they have so little competition left."

Right, and then someone might conclude that when people are paid more, the employer then values them more and treats them better.

This is why I think Tom W is indeed reporting accurately what he's seen, but I'm just not sure it implied what he thinks it implies. (I really don't know the answer... I'm just not ready to conclude anything from Tom's comment.)

Mike writes:

Tom, don't companies give training to unpaid interns? They're getting considerably less than $5 per hour.

Tom West writes:

Conceivably it doesn't imply what I think, but I have to say, after you see enough clear examples of the higher priced, less competent employee being treated better, I just figure the endowment effect applies all over.

Now, in a huge business where there's no human contact between the decision makers and the employees, that might not apply.

ThomasH writes:

What I find hard to explain is why people whose only objection to a higher minimum wage is that it is an inefficient way to redistribute income to low paid workers (with all the drawbacks that Econolog bloggers keep coming back to again and again as if they were unknown already!) would not advocate a higher earned income tax credit?

It's enough to make one think they have some other, unstated, reason not to redistribute income to low paid workers

ThomasH writes:

I read the Murphy article -- hardly anything there that anyone that did not cheat to pass Econ 101 would be surprised by -- and found no mention of alternative ways to achieve the objective of redistributing income to low wage workers.

Eli writes:

I'm an unusual Econ reader because I'm a low wage worker and have been for 7 years (I have high school diploma and make a bit over min wage). It is common to hear complaints among my colleagues when hours get cut, even if nobody has really moved from full-time to part time. Normally, if hours get cut, we all lose a couple hours a week, dispersing the cost makes it less noticeable. It doesn't appear that the full-time and part time categories that economists talk about capture the margins within those categories.

I will also say that nobody I have ever worked with is helped by the 40 hour workweek. No employer is crazy enough to pay overtime for work that can be easily replaced by paying a new employee. And no worker I have ever met complains about too many hours. It is quite the opposite. Many would love to work 45-50 hours a week if they could, and many have to take up second jobs, less desirable jobs, in order to make it possible.

john hare writes:

@ Eli,

My experience as an employer leads me to different answers. In my work, the only thing more expensive than qualified help, is unqualified help. In a small company like mine, it is dead obvious that it is cheaper to pay good people overtime than random laborers straight time.

In my neck of the woods, minimum wage people are probably not worth even that. The good ones get hired for more and the rest work for day labor companies or not at all. This is the construction field though. Some types of work simply don't pay well regardless of capability.

Daniel Kuehn writes:

Eli -
FWIW most of the widely cited studies look at both extensive margin and intensive margin (i.e., employment and hours). PT/FT is not really in the statistics anywhere although you could impose it on microdata with an hours rule.

Tom West writes:

Tom, don't companies give training to unpaid interns? They're getting considerably less than $5 per hour.

I find interns an interesting case. Even in the same company, I've seen interns treated as utterly disposable labour and given no respect whatsoever. They were paid zero, they must be worth zero.

Another group, on the other hand, because they were university students, were accorded much higher status - trained, fed, etc. There it was a mentoring issue.

Again, the straight economics played second fiddle to the social/personal aspect.

Seth writes:

The $200 wine tastes much better when someone else is paying. Probably not as good when the drinker is buying, but he or she may never indicate that for the same reason the emperor wasn't willing to admit that truth about his new clothes.

TMC writes:

Tom West@ 2:10 I think you are getting cause and effect wrong.
Those 'worthy' are both trained and paid better because they are more valuable to the company, not the other way around.

ThomasH - I don't think I've ever seen anyone argue that efficiency is the ONLY reason.
This argument comes up precisely because those who have failed Econ 101 are still arguing after the first four good reasons that the minimum wage is bad.
Murphy's article is Econ 101 because that's all you need to refute anti-min wage arguments.

Tom West 10:44 - Some interns are treated as disposable because they are, some treated well because the company is looking to recruit good talent in the future. Very straight economics at play here.

ThomasH writes:

I think most who favor a higher minimum wage recognize that it will result in somewhat lower employment. They just think (and they may be wrong) that the decrease in employment is small enough that the increased wage still results in more paid to low income workers in the aggregate. That's why I think the "inefficiency" argument does not work unless combined with the more efficient argument for the EITC which transfers income without the job losses.

Phil writes:

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AS writes:

We can't predict exactly which margin will be excercised, but we know with certainty that SOME margin will be exercised. Even if employers do nothing, some will be pushed out of business which lowers employment opportunities for workers and raises prices for consumers. No good can come from it.

Yet another scenario when a laissez faire approach to the economy works best.

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