Conservative case for raising the minimum wage

Well 8 out of 10 economist know enough about labour that if the government pushes a minimum wage above the equilibrium wage of a group of people will make that group of people less attractive to employ.

Increased productivity from workers that comes increased wages by minimum wage laws does not make up for the increase in structural unemployment, minimum wage laws reduces the potentional output of the economy.

 

Only in conditions of perfect competition. And can perfect competition exist? Nope! We just need labour market frictions (i.e. the adoption of a reservation wage) to derive monopsony power.

This doesn't make sense. If productivity increases then we could have the result that unit labour costs are unaffected. Even if wages reflected productivity criteria (and they don't as underpayment is the norm) we'd then have no reason to expect an increase in unemployment

 

Perfect competition is not necessary for the minimum wage to have negative effects.

Because the productivity of a worker does not go up by 15 percent when his wage goes up 15 percent, not even close and if the was true then we could minimum wage hike us wealthy. But what increases when a minimum wage is enacted or hiked is the number of workers who have their equilibrium wage below the minimum wage, this increases structural unemployment and therefore a smaller potentional output.

 

It is, otherwise we can assume underpayment. With job search frictions we actually predict greater underpayment in apparently more competitive industries (explaining the positive relationship between wages and firm size).

How do you know? Given productivity is endogeneous, we have no means to make any conclusion over unemployment. Note also that the introduction of the minimum wage in the UK didn't generate the disemployment effects predicted by perfect competition. Note also that positive productivity effects were secured.

Its called a minimum wage for a reason.

If firms have wage making power (which they will if perfect competition doesn't hold) then a minimum wage can increase both wages and employment. Basic supply & demand!

 

A minimum wage above the equilibrium wage of a group of workers increase hurts that group of workers.

 

Not necessarily if there is monopsony power. And to derive that power we merely need the existence of labour market frictions. Your whole argument is based on an utopian understanding of the labour market that cannot exist

 

Really? I suppose there is a large body of speculation on this by any number of economists that may support your point but there is no actual empirical study of the real world economic impact of the minimum wage that does. What these studies seem to point to is that the equilibrium wage was higher than the paid wage before the increase since the studies discovered that increases in the minimum wage appeared to have no measurable effect on employment. The best explanation for this is that employers enjoy an unequal advantage over workers and can pay them less than the equilibrium wage and increase their productivity without paying them more. This is something that Adam Smith recognized as a pernicious and pervasive economic reality in times of less than full employment almost 200 years ago.

Anyway, eliminating the minimum wage might increase the differential between the the equilibrium wage and the paid wage in terms of productivity measured in dollars per hour of labour in favour of the employer but probably not by much because there is a level of wages that will find no takers regardless of the unemployment rate. In many places there are so few takers for minimum wage jobs that the de-facto minimum wage is often much higher. China has this problem, which is predictable in any nation where people expect a rising standard of living. Low wage manufacturers have been moving away for a while now, just as they did from the US as rising living standards made their business model less profitable.

The history of economic development is also a history of rising standards of living. The argument against the minimum wage fails entirely to recognize that rising wages go hand in hand with higher living standards. It is a position that the standard of living in the US has gotten too high and must be reduced because bottom rung employer's profit margins are being unreasonably besieged by demands for raising the minimum wage, something they have successfully stifled for years through political influence as they increased worker productivity and reaped all the benefits while foisting ever more of their workers well being on the public purse. Well the game is up, or will be soon. Taxpayers are becoming more and more aware that minimum wage employers depend almost entirely on public charity for their profits because their workers would not be able to continue in their jobs without it. They are starting to become outraged that their charitable impulses are being played by $multibillion corporations.

Of course, it is entirely possible that economic arguments against the minimum wage are really about returning the US economy to its state a hundred years ago. It seems that way to me, the arguments are no different, the economic theorizing used to support it is much the same as that used to support the status quo then.

 

No, wrong wrong wrong. You did not read the actual Berkely report you linked.

Assuming the report uses accurate data, in going to a $12 an hour min wage effects 64% of Walmart workers and Walmart labor costs go up 16%, which drives the total expenses up 2.3%.

The Berkeley report drives that 2.3% figure down further by making assumptions about Walmart employee distributions and applying the min wage by poverty level - at that point they left the world of accounting and the Walmart financial statements and entered pure politics.

The bottom line is an increase to a $12 min wage increases the cost to the consumer 2.3%.

Don't forget that the min wage applies to all businesses, not just Walmart. It will be like a sudden 2.3% increase in the cost of living for the country.

Now the big "wrong" in your claim. Jump the min wage to $25 an hour and it is NOT a simple doubling of the 2.3%, a $25 min wage increases the cost to the Walmart consumer by 14%. Thats because a $25 min wage affects almost all the workers. The payroll delta is much larger - for example, go from $8 to $12, a 50% increase; go from $8 to $25, a 212% increase.

And again the min wage effects all companies - this would be like a 14% increase in the cost of living.

Are you going to give social security, federal and military retirement programs, all a 14% cost of living adjustment? How about the family living off of $30 an hour, you just increased their household costs significantly, do they get a raise?

Do the $25 min wage, all costs and wages will go up accordingly, and we will be right back were we started. Maybe worse. We dont see problems when the min wage goes from $7 to $7.50 or some little change because so few people make min wage. Go from $7 to $25 and you impact a huge segment of the population.

 

Let's just refer to a review of the empirical evidence: Lemos (2008, A Survey of the Effects of the Minimum Wage on Price, Journal of Economic Surveys, Vol 22 Issue 1, pp 187-212). This concludes price effects are small and that "policy makers can use the minimum wage to increase the wages of the poor".

 

A perfect labor market is not necessary. Structural unemployment is increased when very low paying mutually beneficial jobs become illegal. As long as the minimum wage rate is bigger then the prevailing market wage for a specific category of labor as in this case primarily low-skilled teen workers, especially blacks then there will be negative effects. If the hourly wage rate for low-skilled workers, determined by market supply and demand, is $5.50 and the government imposes a minimum wage of $9, workers who will not have jobs in the first place will have a wage rate of 0.

 

Repeating your error won't work! A perfectly competitive environment is indeed required. That delivers the standard supply & demand approach where there is a 'market wage' which firms have to provide. Its that which is used to make the disemployment claim (where a wage above this hypothetical market wage will necessarily lead to a reduction in labour demand and excess supply of labour). As soon as we allow imperfect competition we will deriving the monopsony result: where the firm faces an upward sloping labour supply such that, given the separation of marginal cost and average cost of labour, it will reduce labour demanded in order to reduce wage. A minimum wage will then increase wages and employment.

The standard argument is that "this is rarely relevant" as we do not have "one buyer" criteria. However, as I said, the same result is derived when we drop the assumption of perfect information. Labour market frictions, which undoubtedly exist, ensure monopsonistic power and therefore the same result: a minimum wage can increase both wages and employment. Indeed, in this form of monopsony, the minimum wage is vital in reducing market failure. As originally demonstrated by Burdett and Mortensen, the minimum wage actually then allows for further mutually beneficial exchange (and therefore a reduction in the equilibrium unemployment rate)

 

Perfect competition is needed for the supply and demand approach to get perfect results, this is never happens since the market never reches a perfect equilibrium. The problem is that the minimum wage makes things worse by preventing wages below the minimum wage to reach close to an equilibrium and thus replaces a minor market failure with a big government failure. The bigger the minimum wage the more wages that are far from their equilibrium and a bigger deadweight loss.

 

Wrong! Perfect competition is needed to ensure firms are wage-takers. As soon as they are wage-makers then there will be market failure and the minimum wage becomes a mechanism to partially remove that failure.

There is no minor market failure. Job search frictions, for example, ensure that mutually beneficial exchange is not exhausted. That ensures higher unemployment. You're simply ignoring the reality of supply & demand to peddle the 'perfect competition' myth displayed in the diagram you presented

 

Lack of perfect competition does not cause the laws of supply and demand not to matter, it simply prevents the market from reaching a perfect equilibrium. The minimum wage makes things worse.

Replacing the failure of markets to reach a perfect equilibrium with a minimum wage thats prevents the market from reaching a perfect equilibrium equilibrium is nonesense.

 

This is just repetition of your error. Without perfect competition we do not have a 'market wage' as we ensure that firms have wage making power. Its that wage making power that ensures market failure, given we have monopsony conditions which lead to an inefficiently high unemployment rate. The minimum wage then certainly provides a means to aid exchange.

No, what is nonsense is to assume a market wage when no such market wage can exist. Is there perfect information? Nope! Supply & demand therefore predicts that a minimum wage can increase wage and employment. To ignore that result is simply to misunderstand supply & demand

 

Workable competition.

A minimum wage rarely if ever causes increased effiency in the market by pushing wages who are below their equilibrium closer towards their equilibrium. The most common result is that it pushes wages further from their equilibrium then the other way around.

 

Meaningless expression, particularly when referring to job search frictions. As already noted, job search explain the positive relationship between firm size and wages. As already noted, it predicts greater underpayment in apparently competitive industries. The nature of the market failure is such that wage making power is the norm.

Again, you have to assume perfect competition. Answer the question: Is there perfect information in the labour market? (The answer destroys the credibility of your argument, by definition)

 

Why not raise the hourly minimum wage 50 € and index it to inflation. Because it is above the equilibrium for many workers and they would be unemployed. Lack of perfect competition does not change the fact that if you put the wage above the equilibrium wage of some workers it will reduce economic effiency. If you deny workable competition then WOW, the economy is NEVER at perfect competition.

 

This is a red herring. Its called the minimum wage for a reason. The market failure is understood though the existence of underpayment. Could we increase the minimum wage such that we create unemployment. Of course. However, it just happens that the minimum wage is vital in reducing market failure. Supply & demand informs us that, given firms have wage making power, the minimum wage can increase wages and employment.

Repetition of your error! There is only a market wage under perfect competition conditions. There isn't one when there is monopsonistic power.

Again, you ignore my simple question. Is there perfect information in the labour market? You should of course answer "no" and you should therefore conclude that the minimum wage increases efficiency.

 

You misunderstand supply and demand. If the wages for unskilled labor were below their equilibrium we would have a shortage of unskilled labor. This will result in higher wages because the unskilled laborers will demand higher wages as a result of the shortage.

The equilibrium wage exist even if the economy is not at perfect competition. It is just that when the economy is not at perfect competition the wages and the equilibrium wage are not the same. In workable competition the wages would move close to the equilibrium wage. Altough wages are sticky-downwards in the short run.

I do not believe in perfect information in the market, or perfect information in the government.

 

Nope! The misunderstanding is all from you. You haven't realised that the 'equilibrium wage' you keep talking about is reliant on wage-taking behaviour (i.e. the law of one price holds and the wage is set where labour supply and labour demand intersect). There is no market wage in actual labour markets. Firms have wage making power. Its the fact that the firm faces an upward sloping labour supply curve that has confused you. You haven't realised the consequences: the separation between average and marginal costs will destroy your argument, given market failure necessarily occurs.

There is no such beast. We've rejected the 'law of one price' for yonks in labour analysis. There is a distribution of wages. As shown by job search models, that distribution will be inefficient and the minimum wage will partially eliminate underpayment (essentially a form of rent generated by monopsony power)

Of course you don't. The idea of perfect information is a nonsense. You simply have ignored the consequences: monopsony will be the norm as job search frictions certainly ensure that firms have wage-making power. Without knowing it, you've destroyed your own argument

 

Your whole arguement is based on monopsony power. But monopsony powers are not the norm. There is competition in labor markets and supply and demand counts here.

Lack of perfect information does not prevent the market from adjusting for shortages and surpluses by use of non-perfect information, lack of perfect competition does not prevent workable competition from taking place. Lack of perfection does not mean lack of significant existance.

 

Wrong! I've referred to the obvious: monopsony is the norm, whilst also referring to alternative analysis (such as the efficiency wage hypothesis). We can of course add to that. Monopsony, for example, comes in different forms. As already mentioned, its derived through worker preferences and also derived through job search frictions. Then there are other explanations for productivity effects, such as shock effects created by agency problems and the failure of the manager to cost minimise.

You're being inconsistent. To argue that monopsony isn't the norm you need perfect information. Job search models show that monopsony conditions are created in all labour markets. Further, they also show that underpayment increases in apparently competitive industries with a large number of buyers of labour.

This only tells me that you don't understand supply & demand. Imperfect information ensures that a firm faces an upward sloping labour supply curve. That cannot be denied. That destroys the law of one price and ensures inefficient wage differentials.

 

Lack of perfect information does not make monopsony powers the norm. Monopsony powers are clearly not the norm.

I know that the supply for labor is upward sloping and the demand for labor is downward sloping.

 

It does, by definition. Labour market frictions eliminate the notion of the market wage. There is no debate in it. You've simply not understood the required supply & demand theory

Again, we know that they are. We know that the law of one price is not supported by the evidence (we've known that since the 40s). We also know that job search frictions guarantee that firms have wage making power. We also have numerous ways of investigating the extent of underpayment. The original analysis by Hofler and Murphy, for example, used a stochastic frontier approach.

You don't understand that, as the firm faces an upward sloping labour supply curve, it has wage making power. That has ensured your error, where you've copied in the diagram which is reliant on perfect competition