Minding the Gap

I am always surprised at how quickly mentioning the minimum wage causes people to dig up all sorts of strange pseudo-economic concepts to justify their gut feeling that the poor people would be screwed over by “the system” without it. Let me note some very simple things.

The important thing about the minimum wage is that, in theory, there might be some people whose current value in the labor market is less than minimum wage. Having a job would mean that they could feel better about themselves, make at least some money and also have the option of gaining some useful skills and experience that will allow them to earn more money later as they ascend in the work hierarchy. Especially the last point should seem obvious to every student who has ever done an unpaid internship: even working for free can be a valuable investment in the future. What a minimum wage does, is telling these individuals that society would prefer them to be bored, poor, government transfer-dependent and unemployed with deteriorating job skills rather than letting them decide for themselves. But do these people exist? Some think not:

Are there jobs where it’s profitable to hire at $4.75 but not at $7.25? Well, there must be some, but we’re talking about such low skill levels here that there very well might not be many.

This seems just wrong to me. After all, we can definitely agree that in any job requiring no extensive training it would be profitable for an employer to hire someone at $0.01 an hour. If you disagree, I would love to hire you at that rate to hold doors open for me and carry my bag to work. Moreover, it is a safe assumption that many of the 7 million unemployed cannot find a job at minimum wage as evidenced by their status. Thus, it must be true that there are several million people for whom it would be profitable to hire them at below minimum wage and who could thus potentially find employment if minimum wage were abolished/lowered. I think this is a pretty strong case and it would take some pretty strong evidence to the contrary to advocate for raising the minimum wage instead, as Congress did during the financial crisis.

But what about those workers who have minimum wage job and might receive less money once the minimum wage is lowered? Who will protect them from the mean capitalists? Note the assumptions in this thinking: Firstly, there will be downward pressure on wages from labor competition once the minimum wage goes. This implies that there is workers who could be profitably hired at below minimum wages but who couldn’t compete beforehand because they were not allowed to. This confirms that the minimum wage lowers employment. The new market equilibrium will be at lower wages for some workers but higher employment. Whether this is good or bad in welfare terms is not clear. Previously employed workers might lose a little, newly employed workers gain some dignity, a job and a livelihood. In the long run, efficiency gains from market-based wages and positive social externalities from lowering the number of frustrated unemployed people might matter as well.

Secondly, the concern over a drop in wages for minimum wage workers assumes that so far the employer had been tricked into employing some workers at above their market wage by the benevolent sovereign force. In anything other than the very short run, it is not clear why the employer would not change tactics to avoid making a loss on that worker. As only the nominal amount of money is fixed by the minimum wage, the employer could simply start cutting other perks that are part of the implicit salary of a job (this idea is from someone in the blogosphere, but I don’t remember from whom) like the air-conditioning and the free coffee. Moreover, getting rid of the worker is the easiest way to avoid paying him more than he produces. Thus, it is not clear that the minimum wage can keep anyone employed in the long run who wouldn’t be employed otherwise.

But there is usually a last line of defense here: What if the worker does “deserve” above minimum wage due to his productivity but something in the system makes employers able to cheat them out of that “surplus” (Welcome back Karl M.!) by simply lowering wages due to their awesome bargaining power? Wouldn’t the consequence of dropping the minimum wage just be the following (same source as above)?:

It would increase corporate profits and dramatically reduce the wages of the poorest workers, and that’s about it. Employment would probably be affected only marginally, and nothing would take the place of that lost income.

This just makes me cringe. Where is the historical evidence that companies are able to just pay some random low wage to their workers in the long run? After all, America is one of the wealthiest places in the world because its most of its workers earn so much. Secondly, if the issue is poverty, why would forcing employers to overpay for work activity be a good way of redistributing wealth? You could also force all theaters to hand out free tickets to poor workers and then have a person on stage throw paper planes made from money at the workers in the audience…except for the fact that this seems really silly. What is wrong with lump sum transfers? If you want to redistribute money to the poor, why choose the one way to do it that distorts labor markets along the way and thereby…hurts the poor?

But don’t get distracted by these details. What matters is that employment and economic efficiency (also known as “more for everyone”) are negatively affected by the minimum wage. Given that the minimum wage exists and Congress keeps raising it, the burden should be on supporters to come up with a really strong case why this increases the welfare of poor people.

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