Raising Rival’s Costs

by on July 24, 2009 at 7:27 am in Uncategorized | Permalink

Catherine Rampell at Economix is somewhat surprised that some employers have signed a petition supporting today's increase in the minimum wage.  Put aside the fact that this so-called petition is coming after the law is already passed–can anyone say cheap talk–it's really not surprising that some employers support the minimum wage.  Rather than a violation of Econ 101, as Rampell suggests, it's more an implication of Econ 101.  Simply take a look at why the employers say they are supporting the law.  Uniformly the responses go like this:

Social justice, honest day's labor, inequality…. followed by:

I have always paid above minimum wage.

I’m a small business owner but don’t have any minimum wage employees, nor would I ever.

I’ve always paid my workers, even unskilled laborers, more than minimum wage …

I’m one of those businesses that supports a so-called “living wage” and refuse to pay less than $12/hour…

Note that I don't think that these employers are being dishonest in their support for "social justice" but I do think that it's easy to be in favor of the minimum wage when it doesn't cost you anything. 

Indeed, these employers will benefit from an increase in the minimum wage because it will raise the costs of their rivals.  This is why unions have typically been in favor of the minimum wage even when their own workers make much more than the minimum.

Finally, note that the opinions of employers are quite irrelevant as to the effects of the minimum wage.  

Alan Gunn July 24, 2009 at 8:05 am

Back when the first federal minimum-wage legislation was being considered, its boosters included high-wage northern industries with low-wage southern competitors. And the ILGWU, which represents people in New York, used to advocate for increasing the minimum wage for Puerto Rico. Social justice, indeed.

conchis July 24, 2009 at 9:03 am

Note that I don’t think that these employers are being dishonest in their support for “social justice” but I do think that it’s easy to be in favor of the minimum wage when it doesn’t cost you anything.

If they’re already paying above minimum wage because they support social justice, then their commitment to that ideal is already costing them.

capitalistimperialistpig July 24, 2009 at 9:09 am

…the opinions of employers are quite irrelevant as to the effects of the minimum wage

But not quite so irrelevant as the opinions of economists. Unlike the economists, employers will actually make decisions that affect employment, and those decisions will be based in part on their opinions. Of course economists might have more insight into how those effects will propagate, but recent experience with the insights of economists is not encouraging…

Dirk July 24, 2009 at 9:25 am

I’m a (very) small business owner who pays his people more than minimum wage. This increase won’t directly affect me in the short run, but it’s still a bad idea as far as I’m concerned. Especially at this point in our business cycle. We should be trying to cut wages in many sectors, not increase them.

Further, an increase for the lowest status workers effectively decreases the status of those making a little more. They feel bad because those unskilled lazy minimum wage people don’t make much less than them. Leading to a decrease in job satisfaction throughout the economy.

Anyway, the social justice do-gooders should be concerned with higher income workers, not the minimum wage. There’s a lot more injustice in somebody being paid $100/hr when someone else could do the job at $20/hr than there is in a small business paying someone $5/hr.

Andrew July 24, 2009 at 10:03 am

I had a manager at my last job who appreciated diversity standards because our company always went above and beyond them. Same tortured logic.

john pertz July 24, 2009 at 10:21 am

Empirical testing of minimum wage impacts is like pissing in the wind. I can not do anything but yawn when listening to someone trot out a survey showing evidence either in support or against the wage. What I want to see is some city or town get really ambitious and raise the minimum wage to 15 dollars an hour. Let’s see what the employment impacts are then!

All this talk or raising the wage from 6 to 7 to 8 dollars an hour, when barely anyone is earning the minimum wage to begin with, is a waste of time. Let’s get ambitious. Let’s raise the wage a hundred percent and then check for carnage.

moron July 24, 2009 at 11:13 am

a maximum wage would work better

Peter July 24, 2009 at 11:33 am

@farmer: It’s not quite true that no one legally pays less than the minimum wage. State governments are exempt from the federal minimum wage law, and a number of states pay home health care aides, for example, less than the federal minimum wage.

Richard A. July 24, 2009 at 11:59 am

I see that the CEO of Costco has signed on to this but I don’t see Walmart. Where is Walmart? Walmart is associating itself with groups that are pushing for guest worker programs to solve labor shortages.

Anywhere and everywhere where there is a labor shortage, it is due to the employer underpaying its employees. The hard right (not to be confused with the rational right) has a hard time understanding this basic econ 101 concept.

Sean P. July 24, 2009 at 12:24 pm

San Francisco has a $10/hour minimum wage. It mostly acts as a transfer of wealth from tourists and the wealthy to the waitstaff of the city’s many restaurants.

Ironman July 24, 2009 at 12:48 pm

@Richard A: If you don’t see Wal-Mart pushing for a higher minimum wage, it’s because you’re not looking.

spencer July 24, 2009 at 1:11 pm

Ironman probably has a very good point that the major impact of the minimum wage is on small business profits rather than on employees at the bottom of the pay scale.

Yet it is virtually impossible to see any economist looking at this issue.

I wonder why they will not touch it with a ten foot pole.

Maybe because it is not politically correct.

john pertz July 24, 2009 at 1:35 pm

Again, why is the left so romantically inclined to the minimum wage? I enjoy talking about this issue because it shows just how anti business the left is. Trust me, the minimum wage is not about improving the lives of the working poor. It is about going into the market and getting their pound of flesh. Milton Friedman gave the left a tool to help the working poor and not cause labor displacement. It is called the earned income tax credit or more to the point, a negative income tax.

However, the left wants to puts along talking in circles about the minimum wage, whose effects we can not confirm. However, here we are with the EITC, which we know for sure will improve the lot of the working poor without the nasty side effects. Yet, the left goes stone cold silent, WHY?

Richard A. July 24, 2009 at 2:18 pm

Ironman,
I suspect that the CEO of Wal-Mart calling for a raise in the minimum wage back in 2005, is no more sincere than a Republican running for office coming out in favor of raising the minimum wage.

Wal-Mart has the option of signing the Business for a Fair Minimum Wage petition.

Jonathan Biggar July 24, 2009 at 2:38 pm

Since the employers are already paying over the new minimum wage, signing a petition supporting it is a freebie way to signal that the employer supports “social justice”, whatever that might be in the eye of the beholder. We shouldn’t be surprised to see them grasp a free way to generate goodwill.

Rob July 24, 2009 at 3:39 pm

When I was 18-19 most retail jobs in the Southwest DID pay at or around minimum wage. I’m sure my employer would have paid me less if he legally could have. I supplemented my income by dipping into the cash register, otherwise I would have been short the rent.

So what has changed in the economy that most retail workers apparently earn more than minimum wage now? Does this imply things are better or worse?

Mr. Econotarian July 25, 2009 at 5:15 am

Here is a chamber of commerce pushing a petition to reduce the minimum wage:

http://amsamoachamber.com/?p=552

“WE the undersigned residents of the Territory of American Samoa petition the Honorable Barrack Obama, President of the United States to intervene on our behalf to reverse the minimum wage increases that are causing undue economic turmoil and hardship in the territory.”

American Samoa’s one industry (tuna canning) is about to get wiped away!

Punditus Maximus July 25, 2009 at 5:52 am

I support the minimum wage, but for dynamic reasons — firstly, because I think it’s an affront to dignity to pay below a certain amount for a human being’s time in a country as rich as ours, and I feel the minimum wage is below that amount.

The second reason is more complex; in a world in which we can develop technologies which rely on cheap labor or technologies which rely on high-productivity skilled labor, I’d rather incentivize the latter. I want to create a situation where the power differentials inherent to employer-employee interactions are ameliorated by the increasingly skilled nature of employees.

At the end of the day, very few employers don’t pay their mortgages if they don’t fill one of their slots at their company. And very few employees do, if they don’t find a job. Desperation is a hard driver, and those of us who have been gifted with talents great enough that we actually do stand out from the crowd should remember that the masses of ordinary people have little incentive to accede to a society in which it is very hard for the masses of ordinary people to get by.

joan July 25, 2009 at 9:38 am

Granting that an increase in the minimum wage would reduce the number of jobs for unskilled workers, but would this not be an incentive for workers to become more skilled. If employers had to pay higher wages, might they not respond by hiring people with more skills so they would be worth the wage they receive. We do not assume that all else remains fixed when we look at the effect of taxes, we also consider the effect they have on peoples incentives, but we ignore incentives when we look at the effect of the minimum wage.

Rob July 25, 2009 at 1:10 pm

What if there were no min wage?

I live in a large city in Texas in which nearly all the kitchen staff at every restaurant is illegal labor and everyone knows it and hardly anyone who lives in the city has a problem with that. If there were no min wage, these illegal workers would likely get paid much less, there would be more restaurants able to exist since costs would be lower, and there would be a much greater influx illegal workers. In fact, wages overall would be pushed down for all non-skilled labor.

Then all these jerks who think that illegal workers are costing Americans there jobs or lowering their incomes would start to be right.

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