Are your views on sticky nominal wages and the minimum wage consistent?

by on February 18, 2013 at 9:40 am in Uncategorized | Permalink

Let’s say your labor is worth $10 an hour but you won’t go back to work for less than $12, thereby leading to the unemployment of you.

In essence you are self-imposing a minimum wage on that market, but the employer is responding by leaving you jobless.  (Analogous to “self-deportation,” a sarcastic wag might suggest.)

Let’s say, alternatively, that you finally decided to settle for $10 but the law now stipulates $12.  It’s not quite the same (“the public regime has shifted”), but still I can imagine that an employer, if he did not hire you in the first setting, also would not hire you in the second setting with the higher legal minimum.

Keynesians believe that worker-imposed minimum wages do not lead to reemployment very readily.  Other people, some of whom are also Keynesians, believe that state-imposed minimum wages are reasonably consistent with employment/reemployment.

If there is significant monopsony in labor markets, can a worker-imposed minimum wage improve outcomes?

I know many economists who will argue: “let’s raise the state-imposed minimum wage.  Employers will respond by creating higher-productivity jobs, or by paying more, and few jobs will be lost.”  I do not know many Keynesians who will argue: “In light of the worker-imposed minimum wage, employers will respond by creating higher-productivity jobs, or by paying more, and few jobs will be lost.”

Again, I am not saying that the worker-imposed minimum wage and the state-imposed minimum wage are identical in their nature.  Still, it would be interesting, in terms of a model, to deduce where the relevant difference comes from.

Is the difference that the worker-imposed minimum wage is too high?  That the worker has not publicly precommitted to his or her personal stubbornness?  That a legal minimum wage applies to a larger and broader class of workers?  Something else?

In policy terms, does it suffice to argue that minimum wage increases should be restricted to periods of high or at least adequate demand?  Have you noticed that is not what we are seeing?

Addendum: For an additional exercise, under what model are your views on the minimum wage, sticky nominal wages, and payroll tax cuts consistent?  Consider please a payroll tax for each side of the market.  Toss in the liquidity trap for true extra credit.

Frederic Mari February 18, 2013 at 9:54 am

“Let’s say your labor is worth $10 an hour but you won’t go back to work for less than $12 thereby leading to the unemployment of you…”

Why? Your labor might well be worth $10 an hour but who knows it? Depending on circumstances not specified in your set-up, you might easily find an employer willing to pay $12.

“Ooooh, he’ll go out of business fast” I can hear adept of the neoclassical school of thinking.

Since when? Labor is just one cost, overpaying for one employees or even for the whole of the employees does not mean anything except either raised prices or compressed profit margin.

More generally, economists have got to stop reasoning about salaries or work as if it had a ‘worth’. You’re paid replacement cost – whatever it would take your employer to find (and keep) a new you. If you’re a rare gem, good for you. If not, well, whether your work is ‘worth’ $10, $12 or $15 a hour is irrelevant. You’ll get paid the lowest your boss can get away with.

That would be the difference between the two set-ups…

JWatts February 18, 2013 at 10:07 am

“Why? Your labor might well be worth $10 an hour but who knows it? Depending on circumstances not specified in your set-up, you might easily find an employer willing to pay $12.”

If that’s your base line assumption, then there is no reason to have a minimum wage.

Frederic Mari February 18, 2013 at 10:24 am

And, generally speaking, while I wouldn’t go as far as calling it ‘ridiculous’, because of the glut of low skill workers you mention, I am not all that keen on minimum wages. Studies on this are a bit all over the place but the basic reasoning that it might lead to some people becoming unemployable would slow me down in imposing minimum wage.

I prefer market-based salaries, knowing they will reflect replacement cost (i.e. they’ll get as low as survival cost or even below) – absent other factors… and then strengthen “other factors” such as employees’ bargaining power and/or increase transfer from corporations’ profits to employees by other means such as subsidies for the low end employees.

I am all for realism in our economic modelling… :)

john personna February 18, 2013 at 1:56 pm

(put another way, I believe that an employer’s offer of $10/hr is actually an offer of $10/hr plus food stamps, etc.)

john personna February 18, 2013 at 1:45 pm

If you believe strongly that employers skillfully set wages at productive value, and that there are human endeavours which are worth one or two dollar an hour, then sure, you can let employers pay them, and let the government safety net pick up the slack on the maintenance of those same workers. You can call it workfare.

Though, if you think employers can bid wages below productive value, and still pick up remaining worker compensation from the government safety net, you might think twice.

Rich Berger February 18, 2013 at 12:01 pm

“You’ll get paid the lowest your boss can get away with.” So you are being paid $12. Why doesn’t your employer simply cut your wage to $10? What’s stopping him?

Frederic Mari February 18, 2013 at 12:24 pm

Mostly because he can’t quite get away with that? Wages ARE somewhat sticky in that sense.

If a boss wants to pay you $10 instead of $12, he got a couple of options. First, he can appeal to your loyalty, mixed in with some not so discreet threat. “In those difficult times, we all need to make sacrifices. If you don’t take a voluntary pay cut, I will be forced to fire someone. That would make me very sad. Won’t you take a salary cut?” Second, he can actually just fire you. After not so long, your reservation price of $12 goes down to $10, at which point he can re-hire you.

NB: The second option works best when it’s not quite the exact same person… :)

And, for your info: What has happened to real hourly wages in the last 30 years for the least educated, the guys/gals at the bottom? Wanna Google a chart on that one? Wages are not so sticky over the long run…

Sam February 18, 2013 at 1:54 pm

No, you’re paid the minimum of replacement cost and the worth of your work. Yes, if your work is “worth” $30, but the next man is prepared to do the job for $15, you won’t be making more than $15. If your work is only worth $5, it doesn’t matter whether it would cost $10, $15 or $30 to hire someone to do the job – the job won’t get done. Your putative employer will buy a machine to do your job, or decide one way or another that the job isn’t necessary.

Daublin February 18, 2013 at 6:33 pm

Not so fast, Sam. If your boss has any competitors, you can split the difference and offer $25/hour to whoever will take you. You’ll get a job unless they have a way to collude with each other.

If your boss has no competitors, perhaps you should become one yourself. You can pay $25/hour and attract all the talent.

These race to the bottom examples only work in a really restricted economy, like a factory town in the middle of the desert. At soon as the economic participants have some flexibility to change jobs and career paths, you see wages approach productivity.

ohwilleke February 18, 2013 at 8:14 pm

Of course, one way that jobs with marginal productivity lower than the wage get filled anyway is because the employer uses a broader definition of productivity that incorporates other “budget line items.”

Maybe hiring mentally challenged young men to retrieve grocery carts from the parking lot is inefficient and costs $20 a day more than what could be done without more efficient replacement workers, but creates good will with the public and regulators as a form of charity and public relations.

Maybe hiring you son or son in law who would otherwise be unemployed allows you to recover some of the costs of supporting him.

Maybe you are a non-profit with grant money ear marked only for a particular purpose (perhaps decades ago in someone’s testamentary charitable trust) even if it isn’t a particularly efficient purpose.

Maybe your religion dictates that you hire someone and it won’t make the entire firm go under to do that.

Maybe the most efficient way to train good managers is to hire overpaid management trainees and then promote the one’s that work out, even though trainees are paid more than they produce while they are trainees.

There are times when business owners just make bad decisions that ultimately lose them money. About half of small businesses fail in five years and the ones that fail often subsidize workers by overpaying them relative to marginal productivity out of working capital. Individually, that may not be sustainable for any given business. But, as long as the dream keeps people opening businesses with a high probability of failure, it can be sustainable for a worker or even a whole class of workers to hop from firm to firm before that happens in any given firm – just like lotteries make money from irrational purchasing decisions.

JWatts February 18, 2013 at 10:01 am

Raising the minimum wage in a high unemployment period with the current glut of low skill workers is a completely ridiculous idea.

Dan Weber February 18, 2013 at 11:23 am

If the employee’s labor is worth $10 an hour to the employer, but he can only bargain for $8 an hour because of the large number of unemployed, then he will be better off with a state-imposed minimum wage of $9 to $10 an hour.

NB: I’m not saying this is the end of the story or that my predicate is always true. But if there were ever a time when the employee cannot bargain his way up to the worth of his labor, it would seem to be now.

derek February 18, 2013 at 11:36 am

And we know what happens when employees have bargaining power to gain wages above market rates. There are very few of them.

Andrew' February 18, 2013 at 11:43 am

That worker might be better off but what about those for whom his job is protected from?

john personna February 18, 2013 at 1:49 pm

When a full time worker at the current minimum wage is also eligible for government assistance, that pretty much moves the discussion from the abstract to the concrete. At what minimum wage is the government spending minimized? Does anyone solve for that?

JWatts February 18, 2013 at 4:38 pm

“When a full time worker at the current minimum wage is also eligible for government assistance”

Every worker in the US is eligible for some kind of government assistance in various cases. Millionaire’s qualify for government mortgage assistance.

john personna February 18, 2013 at 5:35 pm

To say that Walmart workers are therefore like air traffic controllers seems a reduction to absurdity. We are talking about a class at once considered too poor to care for themselves (food stamps) and at the same time demanding excess wages. If both of those are true, something is seriouslhy wrong.

For what it’s worth, I started to think about what human endeavor really is worth less than $10. All I came up with was shopgirls in shops never visited. Surely anything doing active business is worth $10 in this day and age. (Is a dirty office worth more to you than $10/hr cleaning?)

john personna February 18, 2013 at 5:40 pm

(It is also possible that “the rent is too damn high,” leading to much of the public assistance and the low income end.)

maguro February 18, 2013 at 7:42 pm

So what should be done? Raise the minimum wage to the point where no one who has a job is eligible for food stamps?

john personna February 18, 2013 at 8:46 pm

It might be interesting to model a minimum wage leading to minimum safety net spending. To high and too low would likely lead to higher social costs. So there must be a happy medium.

Bryant February 22, 2013 at 10:38 am

Theoretically speaking, a worker imposed minimum wage without federal input, would be the best way to balance out the unemployment which is facing the United States. Labor works the same way as most other goods; it has a supply, demand, and an equilibrium point. When the quantity demanded is greater than the quantity supplied there is a shortage of workers. On the other hand, when the quantity supplied is greater than the quantity demanded there is unemployment. In order to lower the unemployment rates, the amount of workers than employers are able to hire must rise to meet the equilibrium of the supply and demand curves.

Unfortunately, the government mandated minimum wage works like a price floor in any other market, preventing the market from reaching equilibrium, causing a surplus in labor. Given the current economic situation, businesses are not demanding the amount of labor which would lower unemployment because they cannot afford to do so. Plenty of people have been out of work long enough for them to agree to work for less than the legal minimum wage. A gas station owner may not be able to hire more employees if he must pay them $7.50 an hour, but what if there were people who would willingly work for $5.00 an hour? When the economy begins to recover, those workers could begin to negotiate higher wages, but in the meantime, working for $5.00 an hour is better than being unemployed. Eliminating or at least reducing the legal minimum wage and allowing the workers themselves to determine the wage they will accept, should begin to reduce unemployment rates.

Erik Hultgren February 18, 2013 at 10:07 am

I do not have a full answer, though an obvious difference is that a legal minimum wage is the same for everyone in the country, while a worker-imposed minimum wage will be different for everyone. A worker-imposed minimum wage will be very high for doctors, engineers et cetera but very low for janitors and fast food-workers. Someone with lots of experience will have a higher worker-imposed minimum wage, compared to someone with less experience as, (s)he probably will have a higher salary.

In the event of a sudden fall in demand, i.e. due to a crisis, a worker-imposed minimum wage will be a problem for companies in many different types of industries and for workes with all kind of wages. The state-imposed minimum wage however, will only affect a small share of all workers, those that are slightly above the minimum wage.

Another way to look at it, is that state-imposed minimum wages are much more stable than worker-imposed minimum wages, thus making it possible for companies to make plans and create strategies that takes this minimum wage into account. The worker-imposed minimum wage is mostly an effect of “sticky wages” and will thus change constantly and will be a temporary problem during extreme crises, when demand falls drasticly. This is much more difficult to counter for companies.

I don’t know if those arguments hold (I am no keynesian economist, actually not an economist at all), I am just spawning ideas.

Ray Lopez February 18, 2013 at 12:32 pm

+1 – I was going to say the exact same thing. I’m no economist either but nobody else got this simple point (except guest890 and Chris D below). A minimum wage is a floor that cannot be broken even by the worker who wants to work for $1 an hour (that would be illegal). It’s like a government mandated union then.

ohwilleke February 18, 2013 at 8:19 pm

When lots of people are willing to work for less than the minimum wage, gray markets, self-emloyment, or other non-wage compensation (honoraria or gratitute gifts for “volunteer work”) that are legally or practically beyond the scope of effective minimum wage enforcement become the norm. Minimum wage laws implicitly acknowlege this with the option of “tipped work”.

Seth February 18, 2013 at 10:19 am

These are really good points. But I honestly thought that you would be asking about employers freeloading social services to keep able to work. Interesting choice.

derek February 18, 2013 at 10:38 am

You mean the various social welfare systems conspire to keep workers poor and employers rich? Golly gee.

So is the proposed raising of the minimum wage a way to raise the income of folks in this situation high enough so that they don’t qualify for government assistance in healthcare?

Jay February 18, 2013 at 10:03 pm

Some of us are consistent in our assumptions regarding elasticities of supply/demand for labor. It is pretty well accepted that workers bear the incidence of labor income taxes. For the honest economists out there, that would imply labor income subsidies accrue to the worker not the employer.

Then there are the religious economists that flip flop on their assumptions of elasticities to fit their dogmatic beliefs.

Seth February 19, 2013 at 2:53 pm

I think we can all agree that an average elasticity across all labor in a population can be different than an average of any or all finite subgroups of said population. No dogma here.

Owe February 18, 2013 at 10:25 am

What’s your view if the alternative is a state subsidy as in Germany, where there is a practical lower bound (social security entitlements), where employers may game the system (employing below the comparable minimum wage), and let the employee top it of (where the employee is better of as he can keep ~50% of the earned wage).

Claudia February 18, 2013 at 10:29 am

It seems to me that the partial and general equilibrium effects of a worker-imposed versus a state-imposed change in the minimum wage differ due to the temporary versus permanent nature of the different cutoffs. (The reservation wage of a long-term unemployed person is likely lower than when they were first unemployed.) Not a clean apples to apples comparison, but worth pondering.

Ritwik February 18, 2013 at 10:36 am

So you specifically wish to target those Keynesians who think that sticky nominal wages are the crux of Keynesian unemployment theory (1) but are still ok with state imposed minimum wages (2).

That leaves you in an earlier generation with Solow-Sameulson from the older generation. Not Tobin, who didn’t care for 1 or Modigliani who disliked 2.

In the current crop, you’re left with Krugman and De Long (though it’s never clear if he believes in 1, because he does show a deeper understanding of these matters). Ok yes. They’re wrong. Naive neoKeynesian macroeconomics pre Fischer, Phelps et al is mistaken.

But who else?

Shall we re-title this post : Paul Krugman is wrong?

Frederic Mari February 18, 2013 at 11:08 am

Where does Krugman say that the sticky wages are the crux of his unemployment theory? I think he’d argue it’s AD deficit all the way?

Alex Godofsky February 18, 2013 at 11:43 am

Saying “AD deficit” on its own doesn’t mean anything. You have to provide an actual mechanism for the lack of market clearing. One of the traditional mechanisms is sticky wages and/or prices.

Ben Nader February 18, 2013 at 12:15 pm

To expand very slightly on the estimable comment from Alex Godofsky: lower AD isn’t a problem if prices can’t adjust; synonymously: lower AD is only a problem if prices can’t just. Therefore it is the price adjustment that is the problem. That’s why a better way of writing “AD shortfall” is “nominal shock” – the recession is the difficult period of slow adjustment to the new level of prices, hampered by both market and non-market rigidities.

Frederic Mari February 19, 2013 at 3:14 am

This would be a New Keynesian way of thinking. Not entirely sure Krugman would agree?

primedprimate February 18, 2013 at 9:02 pm

Perhaps a multi-sector model could explain this although I am rather skeptical… In this unlikely model, perhaps the nominal wage is stuck at too ‘low’ a value in some markets (for unskilled labor) either due to a coordination problem with efficiency wages or due to a monopsony and a change in minimum wage could have an impact on demand through compositional effects while the nominal wage is stuck at too high a level in other markets leading to the recession. I am too tired to think as hard as I should.

Frederic Mari February 19, 2013 at 3:53 am

Thinking by segment is probably not a bad idea but I don’t see it here. With labor share of GDP falling and the corporate profit one rising, it is fairly hard to argue that ANY wage is stuck too high (except for corporate top managers where CEO salaries are deem a ‘signal’ to the stock market…).

Rahul February 18, 2013 at 10:49 am

>>>”Still I can imagine that an employer, if he did not hire you in the first setting, also would not hire you in the second setting with the higher legal minimum.”<<<

Why? In the first setting the employer would probably have alternatives willing to work at $10.

In the govt. mandated setting he wouldn't. The work might indeed be worth $12 or even $20 but the employer is not going to pay $20 if he finds workers who work at $10.

JWatts February 18, 2013 at 11:00 am

You apparently misread the assumptions. The very first line says: “Let’s say your labor is worth $10 an hour “.

So it’s specified that the profit margin is marginal above $10 per hour and the employer will not pay anybody above that rate.

Rahul February 18, 2013 at 11:25 am

I say it’s a bad assumption.

JWatts February 18, 2013 at 4:40 pm

““Let’s say your labor is worth $10 an hour”…”I say it’s a bad assumption.”

At the upper or lower bound? ;)

Ryan February 18, 2013 at 12:09 pm

Things don’t have an intrinsic price. Prices are determined by supply and demand. Assuming that the market price of someone’s labor remains unchanged after a major change in the labor market leads to bad economics.

Anon. February 18, 2013 at 1:26 pm

Productivity isn’t a price.

derek February 18, 2013 at 11:13 am

So why not raise the minimum wage to $20 then?

I would suggest that the reality of low wage workers being forced to have multiple part time jobs, where you only work the few hours during the day when there is high demand, is due to minimum wage. All it does is raise the cost of an input. So you find ways to use less of it.

Incremental changes in the minimum wage don’t show dramatic changes in the economy. Over time the increased cost simply mean that the work done by these folks either isn’t done or is done elsewhere. The reality of US workers is that we are all in competition with a billion or so Chinese, and another billion or so Indians, plus another billion or so Africans, middle easterners and other hangers on. Especially low skilled entry level positions paying minimum wage. Mandating that your labor costs will be higher by law is simply pissing in the wind; it will be done cheaper somewhere else. Jobs that need to be done here end up becoming worse; instead of paying someone to hang around and fill time sweeping the warehouse floor, they are sent home because they are too expensive.

It ends up not mattering too much anyways. The service jobs require a market, and with the uncompetitive nature of an economy that attempts to fix prices means there will be less demand for those folks.

Rahul February 18, 2013 at 11:33 am

Isn’t a large fraction of minimum wage positions those from service sectors which cannot be shipped abroad?

I don’t think the offshoring of (say) assembly line jobs is affected that much; even in the absence of minimum wage laws there’s no way you could compete with, say, a $10/day Indian clothing assembly line worker no matter what the US minimum wage.

derek February 18, 2013 at 12:00 pm

Maybe so. In my experience minimum wage jobs are usually entry level low skill jobs where individuals start at that wage and get small increases if they stay around and are worth keeping around. Typically there is a very high turnover as well. Typically they work few hours as well, at least in my jurisdiction which has a high minimum wage.

Essentially they are positions where the employer finds out whether they are worth having around. If they are cheap enough, there will be lots of them, and the good workers will be kept by increasing hours and pay. If they aren’t cheap, the hours will be less, the assessment period will be shorter. The awkward situation where a young person with no marketable skills, even lacking basic work skills or understanding of the expectations of an employer needs someone to show some slack, to allow them to learn. They cost money, and with high minimum wage rates, cost too much money. Throw in the extra bonus for the employer that he can be criminally liable if the person hurts themselves, which is more likely the less skilled and experienced they are. What the government programs do is raise the risk and cost of an investment. You will get less of it.

As for service industries in particular, what I see are more and more curtailing of hours and even closing shop during periods of slack. So the employee may get a 10% raise but get 30% less hours.

An anecdote. When I moved to this area in the early 80′s, grocery stores and small businesses had in their employ developmentally challenged people. They had limitations in what they could do, but there is always minor chores needing done that are low skilled. These folks had a place, felt needed and valued, and were appreciated by their fellow workers and the customers. There may have been some incentives for the employer, but the important point was that they didn’t cost very much. We don’t see that any more. If the costs are too high, the ones who would ostensibly benefit the most from minimum wage schemes simply end up not being in the market at all.

I’m starting to feel old because I can remember a world where the middle class ate out a couple times a year, workers all had lunch boxes with sandwiches made at home. To go out for a coffee was a treat. I also remember when grocery stores started experimenting with warehouse style stocking of shelves, similar to Costco. These service type jobs can and will disappear if they are too expensive for the economy to support.

Things like the minimum wage fall into the category of ‘lets make ourselves poorer then we will get rich’.

bryan willman February 18, 2013 at 10:52 am

is it an issue of setting up “norms” for parts of the market that produce a socially or politically unsatisfactory result?

meaning that for some jobs, often called “minimum wage jobs”, the minimum wage is used to force a particular convention – if the job isn’t valuable enough to earn at least the minimum, then the convention is that it is not a job a person should be doing. the minimum wage may have more to do with the mind sets that prohibit prostitution or using drugs than with any issue related to markets.

bryan willman February 18, 2013 at 10:55 am

theory B – it is about lack of information rather than markets themselves – in effect designed to keep workers with an inadequate understanding of the labor market from selling their effort too cheaply. again, it is not about market rates, it is about combating asymmetric information.

in neither theory is the welfare of any one person, nor the unemployment rate, actually the main concern.

aram February 18, 2013 at 11:22 am

One big difference is that sticky nominal wages affect people at all income levels, while the minimum wage affects people only at the bottom.

mw February 18, 2013 at 11:27 am

On a related note, what is the difference between 50 different state-based carbon emission regulations, and one federal one? What is the difference between uncoordinated unpredictably-varying national tariff regimes and one normalized under a trade union? What is the difference between the bar and a dating website?

Nick February 18, 2013 at 11:38 am

Sir, your points make sense in a descriptive matter but minimum wages are a normative argument (a normative argument that one cannot separate from the context). The relative increase in energy prices combined with the relative increase in food prices has not consistently matched income levels.

I agree with the flawed nature of self imposed labour values by individuals due to our inherent irrational nature but a state imposed minimum wage seems to be of a different nature and should be looked at so. Economists have pointed out that demand for cheap fast food and wal mart based products actually rises in a downed economy. These labour markets are the one’s that employ cheaper labour. If aggregate demand rises in these markets due to a poor economy then it is these markets that should be able to shoulder the burden of rising minimum wages.

Gridlock February 18, 2013 at 11:44 am

The difference between a worker imposed minimum wage and a state imposed minimum wage is rather obvious when you consider the time factor. Over time, a worker imposed minimum wage begins to erode. The longer a worker is out of work, the hungrier he gets. He may have set a $12 minimum initially, but he can only hold that wage if he is able to find someone to pay it. The longer he is unemployed the more likely he will be to lower his minimum. So all the employer has to do is wait.

With a state imposed minimum, it doesn’t matter how long the employer waits the minimum wage is locked-in. So in fact, a minimum wage may actually clear the market (where there is excess labor) quicker.

BeardedCynic February 19, 2013 at 6:32 pm

Unfortunately (from a certain perspective), this is America in 2013 and no one is going hungry anymore due to SNAP, TANF, WIC, SSI, SSD and a whole host of other gov’t programs designed for the needy but increasingly marketed by the various agencies to the middle-class as well. There are plenty of incentives for those who could (and should, for their own personal/professional development if nothing else) be employed to set their own personal minimum wage above the state imposed minimum wage regardless of their possession or lack of marketable skills.

Get a minimum wage job or two to earn maybe $20000 per year but, in so doing, give up more than that in gov’t benefits? Plus, obviously, the lack of free time that comes from being employed? What’s the name of this site again, something about margins?

We’re in another Great Depression at this point, it’s just that there aren’t the photo-ops of bread lines because the government checks now arrive quietly in the mail and the SNAP (food stamp) cards quietly get loaded up with more tax-payer money every month. The stigmatization of being on the dole is a relic of a by-gone era and lo, lazy people gonna be lazy.

Chris D February 18, 2013 at 11:50 am

The implementation of a worker-imposed minimum wage sounds like a union, so a comparison of the pros and cons of unions vs. governmentally-imposed wages and regulations might be informative.

Bill February 18, 2013 at 12:10 pm

The biggest sticky wage is a tenured faculty member who has no incentive to perform.

Attend to that issue before talking about someone making $10 an hour.

You can offer to be a contract employee and lead the way.

Therapsid February 18, 2013 at 12:12 pm

+1

FYI February 18, 2013 at 2:29 pm

Oh sure, ad hominem is always the easy way out. By the way, you being here and bringing more audience to this blog contributes to the problem (if it is a problem like you say). You should go back to your job instead of reading what Tyler writes.

guest890 February 18, 2013 at 12:16 pm

I’m not sure whether the government-imposed minimum wage is different, but if it is, it’s likely because it applies to a broad class of workers. Say that an employer has their business structured that each employee can realistically provide $10 worth of work. If your work is worth $10, and you demand $12, the employer will find someone else willing to work $10–and has no incentive to restructure his business, because the current system works for him. If the government sets a minimum wage of $12, the employer can’t profitably hire someone to do work worth $10…but they may still need workers, and will have to make changes in their business to increase productivity, such that they can get $12 worth of work from someone.
It may be the case that this results in the employer hiring five workers at $12 instead of six at $10, but that’s not the question being asked in this post. This post asks about differences between individuals maintaining a minimum wage for themselves, and a government-mandated minimum wage. The former is unlikely to make businesses change their organization in order to hire workers; the latter might.
As mentioned, I don’t know if this analysis is true, but it strikes me as at least plausible.

Alex February 18, 2013 at 12:22 pm

Isn’t one of the main Keynesian justifications for raising the minimum wage in the current liquidity trap economy that it would, on balance, increase aggregate demand? Some people will lose jobs, but more people will see raises. That will increase AD and firms will then see need to hire more to meet the new AD.

Alex February 18, 2013 at 12:46 pm

That’s not to say it’s the most effective way to increase AD – which would probably be direct payments at this point.

mulp February 18, 2013 at 4:18 pm

Won’t direct payments subsidize employers by encouraging them to pay less and have government pay for food and housing? The employer would only pay enough to afford workers buying beer, iPhones, pay the wireless bill, and pay to play video games.

AndrewL February 18, 2013 at 1:06 pm

Don’t you have to consider price elasticity of demand? Food and Fuel demand is relatively constant w.r.t prices. Food and fuel production is labor intensive and sensitive to cost of labor. Wouldn’t any new money that would increase AD, instead be offset by higher priced, labor intensive commodities?

mulp February 18, 2013 at 4:24 pm

Labor intensive food is imported.

Fuel is from pillage and plunder because sustainable fuel is too labor intensive – forest product fuel, wind power and solar power involve labor to build the productive capital and then service it over the long term.

Production costs for oil in Saudi Arabia are certainly no more than 25% of the market price.

Arin February 18, 2013 at 1:09 pm

I think the differences are easier to see with a standard search model. The effects (minimum wage versus self-exile) should be identical if reservation wage (b) is identical across workers and search intensity is constant. But when there is heterogeneity, if a small number of people see increase in their “b” that will hardly have the same effect as raising the minimum wage. Employers will not become more generous just because a small number of people have gotten more choosy. If all workers could coordinate in raising b, however, then that would become like a minimum wage increase.

Add to this the following: when minimum wage rises, one of the channels for mitigating disemployment effect is that it may induce worker entry and/or increase search intensity. From the matching function E=m(V,U) and the effective “U” rises from increased search, increasing E potentially even if vacancies V fall.

This contrasts with a shift in the distribution of b, where the “self-exiles” may be less incentivized to search.

so that’s why in general we would expect more positive impact of a minimum wage on employment than a self-imposed exile from the labor market by a small group of people.

Troy Camplin February 18, 2013 at 1:13 pm

The difference between a self-imposed minimum wage and a government minimum wage is like the difference between Post-It notes and super glue. You can detach yourself from a self-imposed minimum wage — and, once the bills start stacking up and you get hungry enough, you will — but a government-imposed minimum wage is an absolute floor for you. And this only considers people who value their work at or above the minimum wage, ignoring those who value their own labor below the minimum wage already.

One might expect increasing wage flexibility in a deflationary situation as well. If prices are going down generally, it is less painful to work for a lower wage.

This also ignores the fact that most wage stickiness is likely to take place when you are already working at a given wage. If you have to face layoffs or wage reduction, you have some incentive to play the layoff lottery and hope you keep your job. Not that employees deciding together to accept a lower wage is entirely unheard of.

mulp February 18, 2013 at 4:14 pm

When in history have debt payments, transportation costs, and food prices gone down at the same rate wages should go down to clear the labor market?

If your costs of living in a fashion required to work exceeds the market clearing wage, how does that work in reality or theory? A person is judged insolvent and chopped up and sold for parts to satisfy creditors? It solves the shortage of body parts for transplants.

Troy Camplin February 19, 2013 at 3:05 pm

What, supply and demand don’t work for food and fuel? There aren’t bankruptcy laws?

Further you assume equilibrium is a realistic model of anything in a far-from-equlibrium process like the economy.

The last isn’t worth commenting upon, the pathetic rehtoric is so transparent.

AndrewL February 18, 2013 at 1:20 pm

Does this “self-imposed minimum wage” really exist? or is it the price you set for your own labor? You believe that your experience/skills/personality is worth x$/hr and that no one can do the work that you do for less, then that is the price of your labor.

Free Market principles then put you in your place. With enough experience you have an intuitive grasp of what your labor should be worth, and rationally – you wouldn’t take jobs that offer a lot more or less than what you think you are worth. You would be suspicious of employers offering you too much for you labor because you can probably correctly assume your employer is not likely going to be able to turn a profit or even stay afloat.

If your employer was able to find someone to do your job for way less, you would think: “no way can that person do my job for only that much” and you can probably correctly assume your employer is not likely going to be able to turn a profit or even stay afloat.

Now, what if by law the employer has to pay more than what you think the labor is worth? That is a distortion that is harder to quantify and I don’t think you can compare it to “self imposed minimum wage” that is apples and oranges.

mulp February 18, 2013 at 4:07 pm

So, no one would go to work for banks making bad loans on high leverage for pay packages worth tens of millions of dollars because those were banks certain to go insolvent?

Clearly your theory of rational workers was proved false in 2008-9 as a whole bunch of bankers were fired after collecting tens of millions in excess wages proving the banks were poorly managed.

My question: how do I qualify for the million dollar plus annual minimum wage?

Brock Hauser February 18, 2013 at 2:01 pm

Suppose the state-mandated minimum wage does change, wouldn’t the amount of investment in productive techology see a rapid one-time increase and the number of low-skilled positions decline in the long-term from higher technological productivity? And wouldn’t this problem be exacerbated by exceptionally low interest rates and a low cost of money?

JOnF February 18, 2013 at 2:19 pm

Re: Let’s say your labor is worth $10 an hour

Right there I think this piece goes off the rails. While it may be true that for a given type of labor the going market rate is 10$/hr, that may have little or nothing to do with the worth of that labor– it’s simply set by arbitrary accidents of supply and demand, not by any inherent rational calculation of what it’s worth. If next year a new Black Death killed off at third of humanity, even the most unskilled labor would be compensated at higher rates due to labor shortages– without getting one whit more productive or valuable.

Moreover as with all other goods in the economy there is a natural “minimum price”: the price the producer must pay to produce the good. If you try to force the producer to accept a lower price that that minimum you will not get the goods produced in the quantity desired. This is easily seen if we were talking about, say, gasoline: we’d all love $1/gal gas again, but we’d have terrible shortages if we tried to force that price. This is true of labor too– the natural minimum is the subsistence cost of living. Yet we act as if the long-running conspiracy to cram down the going rate for wages is perfectly sustainable and “natural”.

HM February 18, 2013 at 2:25 pm

Assume a firm faces a perfectly competitive market but has diminishing marginal product in labor. It faces a labor supply curve which means that wage as a function of labor is positively sloping, w(l). Profit is

p * f(l) – l*w(l)

F.o.c.

pf’(l)=w(l)+lw’(l)

The distortion arises from the second term, in that the employer takes into account the upward slope of the supply curve. A minimum wage can improve allocation if it sets w_min such that

w(l_monopsonist) < w_min < w(l_optimal).

The most reasonable way of viewing wage stickiness might be to say that you shift the supply curve to the left. This means that w(l) is higher for all values of l (leading to lower production), but does not necessarily say anything about w'(l) which is the source of the distortion. Thus, it looks like the two cases aren't readily comparable.

They are only comparable if all workers commit to a specific fixed level which changes w' in a good way.

joan February 18, 2013 at 2:43 pm

If increasing the minimum wage and a significant effect on unemployment the evidence that is does would not be so ambiguous. If economics was a science economists would be looking for a theory that explained the evidence. This reasoning sound more like a debate about the number of angels that could dance on the head of a pin.

mulp February 18, 2013 at 3:57 pm

The problem is economists do not believe in micro – just as you do: workers are never consumers. Higher wages only increase costs to firms, and never increase demand for the production of firms.

Except, very little of low wage income is not immediately spent on consumption.

On the other hand, reduced profits has little impact on demand for production, just reduced demand for derivatives: the value of shares in firms goes down reducing demand and thus reducing share price.

Of course, then the argument is “the low wage workers paid minimum are so small a part of the economy, raising their wage and income will never increase demand by a significant amount…. Higher wages are too big a cost they harm the economy but they are never big enough to help the economy.

VTprof February 18, 2013 at 2:59 pm

Another consistency question: can you simultaneously believe that minimum wages have small disemployment effects (implying inelastic demand for labor) and that higher immigration has small negative wage effects (implying elastic demand for labor). Sign me up for relatively elastic demand for labor (in the long run) – that’s why I support immigration and am skeptical about min wage!

chris February 18, 2013 at 3:12 pm

In the current labor market, employers have pricing power. In other words, wages are in general set at less than marginal product. Raising the minimum wage by a few dollars will have very little impact on employment, and may actually increase employment due to increases in aggregate demand driven by low-income workers.

Benny Lava February 18, 2013 at 3:44 pm

No one mentioned the regional variation in purchasing power?

JWatts February 18, 2013 at 4:44 pm

This is actually a good point and a strong argument against a national minimum wage. The difference between a minimum wage of $9 in Mississippi versus New York is substantial.

mulp February 18, 2013 at 3:46 pm

“Let’s say your labor is worth $10 an hour but you won’t go back to work for less than $12, thereby leading to the unemployment of you.”

Let’s explain the reason you won’t continue to work for $10 an hour:

You are required to have a reliable car to do the job, but the job has worn out your car and you need a new one, but you can’t get a loan to buy a new one on $10/hr but you can at $12/hr. (The $2000 car that you buy for $5000 with weekly $50 payments for two years).

Without the new car, your car breaks down and you are fired. Reluctantly because finding delivery people who have reliable cars willing to work for $10 is hard – you need the laid off high wage worker with a fairly new car who is desperate for work who will take the job for $10 in the expectation he will get a new high wage job soon.

As the long term unemployed become increasingly distinct from the short term unemployed, the pool of unemployed with acceptable cars will fall as the convention recycling of the unemployed deprives you of the pool of unemployed with reliable cars willing to work for $10, but will the long term unemployed be able to buy even the $2000 car for $5000 given his being forced to live in his broken down car. Thus the wage will be forced to rise to get the high school grad who has parents to supply a car to do the work and keep him long enough to have another batch of high school grads with parent supplied cars – they will use the extra $2 buying beer and video games.

Larry February 18, 2013 at 6:11 pm

Matt doesn’t argue that there are no losses, but that the benefits are greater than the losses. I’d love to see more data and less theory. If nothing else, while the labor supply curve slopes downward, its slope is certainly not constant. Where are we on the curve?

ohwilleke February 18, 2013 at 8:04 pm

The theory of union-management negotiation, as I was taught it in the later 1980s, argued that workers had a minimum reserve price at which they were willing to work (based upon the need to meet survival needs on a sustainable basis and opportunities in other careers and geographic markets), and employers had a maximum reserve price that they were willing to pay (based upon marginal productivity). Usually, the employer maximum price is higher than the worker minimum price and the place that the actual wage falls between the two when a deal is research depends upon the negotiation process.

In negotiations, a well organized industry union and a fragmented group of employers (e.g. in the acting field) commands the highest percentage of the “gap”, a single employer and single union usually ends up someplace in the middle although it depends upon both sides negotiating skills, and a disorganized non-union employee is typically going to end up taking a price that is at the bottom of an employer’s range in ordinary times.

At the margins, the prevailing industry wages set in the negotiation will impact aggregate employment. But, usually, for the vast majority of the workers, the difference between the two reserve prices is great enough that employment won’t budge much based upon wages.

Incidentally, in matching programs, like those used to match residents to residencies in medicine, the party modeled as the “offering party” in the model gets consistently better results than the other party.

Minimum wage laws typically have almost no impact on the vast majority of the market where the prevailing market wage materially exceeds the minimum wage. Many employers who pay the minimum wage, moreover, are not really balancing marginal productivity and reward – they are paying the lowest wage that they are permitted to in the face of a disorganized, unskilled workforce, even though marginal productivity for the job often greatly exceeds that amount. For all jobs where marginal productivity exceeds minimum wage, which may be a large share of the total minimum wage market, increases in the minimum wage don’t have much of an impact on employment. You need (1) low marginal productivity relative to wages (typically seen in economically unimportant firms, engaged in not very productive activities, in industries with very thin profit margins on average) and (2) a large pool of workers who can afford to work for less than their own economic expenses of survival because someone else is paying their bills, for a minimum wage set relative to economic expenses of survival, for minimum wages to have a big impact on employment. In other words, the biggest impacts will be on the least skilled workers doing work commonly done on a part-time basis by teens and housewives and retirees, like babysitting and drying cars at car washes and twirling signs and being a greeter at Wal-Mart.

A “monopsomy” reserve price is often driven by minimal cost of living, because even disorganized workers can’t accept that wage on a sustained basis and continue to work, even if they are willing to do so.

MyName February 18, 2013 at 8:33 pm

My view is that the minimum wage doesn’t matter very much since most people make more than that to begin with.

More to the point, the original example left out an important case: the case of someone who is willing to work for $10 in the informal economy because no one will hire them at the $12 minimum wage. And the higher the difference between the minimum, and the amount employers will pay at the low end, the more incentive there is to work under the table for cash.

So I guess my view is, the market has a much larger role than anything governments can decide to do.

john personna February 18, 2013 at 8:52 pm

Well, historicaly we set a minimum (with great sound and fury) in a place where it will affect few workers. This says both sides in the debate are unserious.

chuck martel February 18, 2013 at 10:08 pm

In the current and foreseeable future demographic in the US, a substantial amount of the work force is composed of individuals that are receiving some form of retirement benefits from a previous job and are now working somewhere else. Cops and firemen that can retire in their early fifties aren’t home watching Seinfeld re-runs, they’re working for other departments or in private positions. A stroll through a big box merchandiser reveals a work force of geriatrics, using their low wages to supplement retirement or simply trying to keep busy. These people will work for less because they can.

Brian Donohue February 19, 2013 at 9:09 am

I thought the minimum wage issue was an easy one. Maybe economists DON’T agree on anything.

ezra abrams February 19, 2013 at 5:10 pm

well, in the real world, one thing we know for sure is that many employers pay by greed:
better that you should go without health insurance so i can get a new Mercedes S class every year.
so what employers want shouldn’t be all that relevant. – their moral obtuseness means they are not qualified to have a say

also, as i understand the last 200 years or so of world history, perhaps the single dominant trend in politics and society has been that as a middle class emerges, it demands that gov’t do something about that horrible thing called free market capitilism, and that when gov’ts don’t provide healthcare and retirement and things like the EPA and FDA and NTSB, well, those govts go out of biz.

Maximilian February 20, 2013 at 4:59 am

IMO the relevant difference comes from the probaility to be able to employ another person for the very 10$, which is exactly zero in case of the state-imposed minimum wage. Thus there is a need to upgrade the very job, that has to be done. In the other case there is just a need to wait for the next person.

Ethan A February 21, 2013 at 11:17 pm

In regards to the state or federal goverment raising minimum wage, it must be taken into account that could have negitive effects on the labor force. In general most people tend to believe that a higher minimum wage will always result in a positive way, when In reality that is not always the case. It must be taken into consideration that forcing employers to pay more for basic labor may end in a decrease in demand for labor. An increase in minimum wages may initally have a positve effect on the worker, but as businesses continue to suffer losses in their profits due to the increased labor expenses they may react by cutting back on the amount of labor that thay are willing to support. This would possibly result in a negative outcome on many younger workers such as collage and high school students. These younger workers would begin to find it even more difficult to find jobs to help support themselfs throughout collage or allow them to have decreased reliability on their parents income. With this in mind it is possible to find an equilibrum point at witch the amount an employer is willing to pay is equal to the amount that workers are willing to work for. If this equilibrum point is greater than the amount of minimum wage then an increase in the amount of minimum wage would have a positive effect on the economy from a micro to macro level.

Test February 26, 2013 at 5:07 pm

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