Effects of increasing the minimum wage

I am often perplexed by public policies people push for without recognizing the many negative effects they can have. Mark Perry in “Minimum wage hikes and reductions in ‘non-wage job attributes’” states his opinion that “politicians and minimum wage proponents almost never consider…real-world and economic realities when advocating for a…minimum wage law.” Despite good intentions of minimum wage laws, the results can often be quite different than intended.

The minimum wage is a classic example of a price floor, and when a price floor is regulated above the price equilibrium there will be a surplus supplied beyond the quantity demanded. Thus, with a minimum wage above the equilibrium price, the quantity of labor demanded will be less than the labor supplied by the work force. (I am convinced that one hidden variable explaining the reduction in the national unemployment rate is people exiting the work force when they realize the quantity of labor supplied is above the quantity demanded.)

But in addition to less labor being demanded than being supplied, Mark Perry, in referencing Don Boudreaux’s article “More on the Principles of Economic Principles”, points out that there are other “non-wage job attributes” that employers will reduce in response to minimum wage hikes, so that even if unskilled workers are paid more, their overall conditions may not be improved at all. Among these other non-wage job attributes that affect an employee’s work experience are upward mobility, health insurance, on-the-job-training, workplace comfort, workplace safety, and more. As employers are forced to pay a higher minimum wage, they adjust by reducing costs spent on these other benefits. Because of these negative effects, I think the government should avoid increasing the minimum wage.


Dr. Tufte said...

JP: 100/100

I think the issue JP raises in the first paragraph is that many people willingly choose to judge policies by intentions rather than outcomes or consequences. Personally, I don't like this. Economically, I think it's at best inappropriate, and often flat out wrong. But as a social scientist, I have to acknowledge that a lot of people do this by choice, and so it's my job to both accept that and try to explain it, rather than focus on its negatives.

So, with the minimum wage, I think it's realistic to say that a lot of people are in favor of an increase because it is well-intentioned. While pointing out to those people that there are other consequences is professionally necessary ... I'm not always sure it's constructive. What if people just tune that out?

Minimum wages are a popular topic on this blog this semester, so let me add a different thought to this thread. Part of the problem in convincing people that a (national) minimum wage is problematic is because it's a national minimum wage. Most of the things we talk about in texts compare a before and after: the market without a minimum wage versus one with a minimum wage. Which sounds really good until you realize that almost none of us have ever seen a market without a minimum wage. So we're really comparing a fairy tale to the world we live in. Is it any wonder that the fairy tale has trouble competing?

If we really want the public to understand how problematic the minimum wage is, perhaps we need to focus on letting some states opt out of it. Then we could see if people move to or from the states that dropped the minimum wage. Of course, we already to this with state income taxes, and the evidence is pretty convincing that people recognize those as a bad thing to be avoided. Maybe we need to put the minimum wage up to the same test.

Hank Hill said...

This is definitely a hot topic today. I enjoyed reading the post, and more specifically I enjoyed the section highlighting "non-wage attributes". It made me think about all the consequences resulting from a minimum wage increase. One consequence that comes to mind is the possible price increase consumers will incur for the products and services in our economy. If an employer is forced to pay their employees a higher wage, then the cost to produce a product or service will be higher. Businesses will have to charge more to maintain the same profit margins. Some firms, with extra cash or liquid assets, may keep prices down for a while in order to steal market share while other firms are forced to either decrease profit margins, or exit the market.

On a side note, what about the lower career aspirations that will take place within the workforce? Many people in this country may be happy to make $15/hour and settle with flipping burgers for the rest of their life. What effects will this lowered vision have on the economy?

Great post!

Dave Tufte said...

Hank Hill: 50/50

I must sound like a broken record. Essentially everyone writing posts or comments in any of the threads about the minimum wage is presuming that a legally mandated minimum wage increase will not be met with a productivity improvement.

I will admit that just saying "there will be a productivity improvement" is lame.

But I think all of you are missing basic managerial practice in your rush to jump to some other conclusion.

Labor is just another input into production.

The primary response of any manager anywhere, when faced with an increase in the price of an input, is to try to improve productivity on the inside of the production process. It is always secondary to try and cover those cost increases by getting consumers — who are already volunteering to buy your product — to pony up more cash.

This can take many forms. For example, you can let less productive workers go. This is the presumed increase in unemployment from a minimum wage increase — but please keep in mind that it also reduced pressure for price increases. Another example is that you can provide more capital to the workers — like the automation of order taking that everyone talks about — which will also reduce pressure to raise prices.