Questions about the minimum wage

by on February 24, 2013 at 6:37 am in Economics | Permalink

This is by kebko, from the MR comments section:

Is there any other issue where any economists insist that price floors benefit the lowest added-value suppliers?

Not that I know of, although feel free to correct that impression in the comments of this post.  This is one reason, by the way, why I do not find the monopsony explanations of minimum wage benefits convincing.   Monopsony should not be particularly strong across labor, if anything the contrary (more employers hire labor than say aluminum).

If labor does differ from other factors of production, one feature is that labor can “decide to work harder.”  So perhaps a minimum wage pushes people into tougher jobs.  As I’ve argued in the past, this may be bad for them but good for their families.

David Henderson offers some remarks about the minimum wage and monopsony.

Statspotting February 24, 2013 at 6:42 am

I find it surprising that there is so much focus on the minimum wage part, with very little focus on the maximum part – just look at this one stat, there are companies that pay more to their CEOs than what they pay in US taxes.And these are big companies.

http://statspotting.com/ceo-pay-statistics-companies-paid-more-to-ceos-than-in-us-tax/

Emil February 24, 2013 at 7:33 am

so what? Is there a government mandate that they need to pay them so much?

Anon. February 24, 2013 at 8:19 am

There’s actually significant evidence that CEOs are underpaid. It’s easy to measure the expected value of a CEO at a public company by using the market value reaction when they are hired. Their salaries, bonuses, etc. are nowhere near their expected contribution to the firm.

joan February 24, 2013 at 9:29 am

What they are measuring is the extra value over the CEO that was fired for screwing up, not the extra value over the next most competent person than they could have hired.

Rahul February 24, 2013 at 12:41 pm

So how do you impute a CEO’s worth when the valuation falls over his tenure? Does the evidence adjust for that?

Ashok Rao February 24, 2013 at 8:26 am

That doesn’t change the huge amount of rent they earn (taxing which, Jamie Dimon argues, is a better way of progressive taxation).

Also, aren’t they supposed to add more to market cap than they bring in? It also does not establish the increase in market value is the hiring of this particular CEO as much as the change itself.

Richard A. February 24, 2013 at 2:16 pm

The way to contain excessive compensation for CEOs is to increase the ability of the stock holders (the actual owners) to determine CEO compensation.

Ashok Rao February 24, 2013 at 7:11 am

Re: the maximum wage -

If that ever became a real problem (and hey, maybe it is) it’s easy to solve (theoretically) with redistribution. Now I don’t think that’s a good idea, but it explains why a maximum wage isn’t really necessary.

The only other area where I can really see some support for a price floor is agriculture, and even that is more political than economic. But I suppose it follows a similar argument to that for minimum wage – i.e. price floor as a “minimum productivity” of sorts.

Tangent to the monopsony argument is that a worker vying for a minimum-wage job doesn’t really have “choice” in a real sense of the word. Need to put food on the table and complete inability to loose even a day of work changes the dynamics, right?

Bob Knaus February 24, 2013 at 7:27 am

Agriculture is an excellent example of price floors benefitting the lowest quality suppliers the most. They are often implemented by paying farmers to take land out of production, reduce herd size, etc. The farmers respond by idling their worst land, culling the weakest animals, etc. Have a candid conversation with any farmer who has participated in these programs.

This only works if the monopsony buyer is unable to discern quality. For the USDA, a good assumption. For private employers, not so much.

Ashok Rao February 24, 2013 at 7:32 am

Right. The most striking example of which is probably depression-era crop burning endorsed by the center.

Similar in some ways I feel to minimum wage, I feel.

mrpinto February 25, 2013 at 3:42 pm

The teenager earning minimum wage isn’t putting food on the table, he’s being paid partly in wages and partly in the experience that will ultimately allow him to put food on the table, later.

The immigrant making minimum wage is better able to put food on his table now than he was before he came here.

How many natives in their 20s or 30s are actually trying to support themselves and a possible family on minimum wage? If they ARE, what were they doing as teenagers and in their young 20s that left them in their position in the labor market?

DocMerlin February 24, 2013 at 9:01 am

“Is there any other issue where any economists insist that price floors benefit the lowest added-value suppliers?”

No, and most economists don’t here either. The economist consensus is that minimum wages are bad. Its a small minority that claims otherwise, though its growing because in the social sciences politics trumps everything else.

Ricardo February 25, 2013 at 4:53 am

The lack of self-awareness in this comment is remarkable.

Actual surveys done among actual economists show that your statement about consensus is incorrect: http://economix.blogs.nytimes.com/2010/11/01/along-the-minimum-wage-battle-front/

I would conclude with a general observation about how science — which social sciences are supposed to at least aspire to — operates. In the sciences, even an extremely elegant and convincing model of the world gets scrapped when experiments or data falsify the model’s predictions. As it turns out, lots of studies on the minimum wage have been done (I reference them in another comment) and they all seem to point to an unemployment effect somewhere between “too small to measure” and “0.” A scientist ought to look at this evidence and update his or her model of how the world works. Updating that understanding regardless of whether or not is ideologically convenient is what science is about.

James A. Donald February 26, 2013 at 4:41 am

When academics know what results are good for them, they proceed to manufacture those results. Politics trumped science long ago. The reason there was not a big reaction to the climategate files is that it is all like that. If results are politically incorrect, they get corrected.

Bill February 24, 2013 at 9:23 am

What is interesting is that you focus on the price of the marginal worker, and not the quality aspect of the marginal worker.

Do we have regimes which make it impossible to fire a marginal worker? I bet the cost of carrying a worker who becomes unproductive is more deadweight loss for a minimum wage.

Of course I am talking about tenure and EU labor laws.

Lord February 24, 2013 at 9:39 am

I would say there is one. Railroad tariffs preventing price wars during the latter 19th and early 20th centuries. I don’t think any economists believe they did not help the least productive railroads. Certainly the companies involved did not think they did not help them.

Joe Torben February 25, 2013 at 7:23 am

These tariffs did help the railways in the short run. Then the trucks came and basically killed the railways. Except for the fact that politicians then created various ways to prohibit truckers from operating efficiently. This sad order lasted well into the 1980′s, and made internal transports some 30% more expensive in the US than what they would otherwise have been.

And it didn’t help the railways much in the long run either.

mulp February 24, 2013 at 10:09 am

“If labor does differ from other factors of production, one feature is that labor can “decide to work harder.””

We, the biggest difference between the lowest cost labor and all other factors of production is a hike in price translates directly into a hike in consumption.

If ROIC is hiked, the price of capital increases, but Apple going from $500 to $600 per share does not translate to $100 of increased consumption.

If Apple brand name on an MP3 player translate into $100 higher prices and $50 in Apple profit, that does not translate into $50 more consumption.

When gas prices went from $1 to $4, that does not result in $3 in increased consumption. “Spending” the dividend from Exxon from that $3 hike on Exxon drives the price of Exxon up without any production of anything – nothing is consumed, so there was no $3 of labor demand created.

But if a minimum wage worker sees a $50 hike in weekly wages, that worker will almost certainly spend $50 more each week, which translates to $50 of labor demand.

John February 24, 2013 at 11:46 am

That’s only trivially true. You need to consider any quantity adjustments before you can claim that any net increase in either labor demanded or any increase in effective aggregate demand has been achieved.

Hazel Meade February 24, 2013 at 1:42 pm

But consider the effect on OTHER consumers spending if the minimum wage increase translates into higher consumer prices. Even supposing that the employer does not immediately lay off minimum wage workers, but charges higher prices instead. The consumer then will respond by either reducing consumption of that good, or reducing consumption of some other good, by approximately the dollar amount of the price increase, which in turn is approximately the same as the amount of increased wages to the minimum wage worker.
Ultimately all you are doing is shifting consumption from one place to another. You’re not increasing consumption, unless you think that all the people purchasing products made with minimum wage labor are rich people with money stuffed in their matresses.

anon February 24, 2013 at 3:56 pm

The wealth effect (apple stock goes up means that the shareholders are wealthier, and thus spend more), is quite well documented.

http://en.wikipedia.org/wiki/Wealth_effect

Hazel Meade February 24, 2013 at 1:28 pm

If I understand the monosony argument, it would seem to imply that the employer can sell all of the additional product produced by the added employees.
But I don’t see very many markets that actually act like that. The fast-food industry is constrained by consumer demand. Just because you have an extra worker flipping burgers doesn’t mean you can sell that extra burger. If you want to sell more burgers you need to lower the price. At some point, the price you need to set to sell all those burgers is going to drop below the cost of hiring that additional worker. I would think with how competitive the fast-food industry is that all of them are already operating at that equilibrium. Hiring an additional worker could only be useful if the worker is either (a) productive enough to make up for the price drop needed to sell the additional burgers, or (b) demand for burgers is inelastic – the market will absorb all the burgers you can produce.

Lord February 24, 2013 at 3:02 pm

But nearly all fast food establishments face the same costs in the case of the minimum wage, as would their customers and if they choose to reduce their spending, do they cut it on fast food or something else, not primarily produced by minimum wage workers?

Hazel Meade February 24, 2013 at 4:05 pm

Does it really matter what they cut spending on? If they reduce spending on something produced by high-wage workers, and you end up with fewer high-wage workers or lower paid high-wage workers, those people will in turn reduce their consumer spending, including on fast food.

Lord February 24, 2013 at 4:15 pm

Yes, it matters. Fewer luxury goods and lower asset prices vs more consumer staples and higher inflation.

Hazel Meade February 24, 2013 at 9:16 pm

Who exactly buys “luxury goods”? The same people who eat at McDonalds?

steve February 24, 2013 at 1:53 pm

Is there any example of a minimum wage cut leading to more jobs? The only cut of which I am aware is the one in Greece, but UE kept rising. Since Greece is likely a special case, I am not sure that counts for much.

Steve

Greg Ransom February 24, 2013 at 2:14 pm

Let’s set a $900,000 per year minimum wage for economics …

Larry February 24, 2013 at 3:51 pm

It isn’t enough to quote Econ 101. It is necessary to explain the data that steadily do not show disemployment from minimum wage changes. Maybe it’s too low to be significant. Maybe firms adjust in other ways. I don’t know the answer, but the data are the data, no?

Greg Ransom February 24, 2013 at 3:59 pm

The problem is the ‘data’ are crap in respect to the questions at issue.

How hard is it for any good microeconomist not to appreciate this ‘crap’ problem?

Hazel Meade February 24, 2013 at 4:08 pm

Agreed. As others have pointed out, the bulk of the evidence continues to show that the minimum wage does reduce employment. The problem is there are a few outlier studies being cherry-picked by minimum wage supporters, which the liberal media allow them to present as the modern consensus view.

Lord February 24, 2013 at 4:16 pm

No, it doesn’t, in particular, the best does not, though that is more indicative of just how low the minimum wage is.

Dick King February 24, 2013 at 7:03 pm

Is there any more such data than the Card and Kreuger paper [which seems to pop up every time the minimum wage pops up]?

I present Card and Kreuger here, …

http://www.nber.org/papers/w4509

and then another author’s looking at his “study” by looking at primary sources rather than taking a phone survey, …

http://www.nber.org/papers/w5224

-dk

Ricardo February 25, 2013 at 4:39 am

“Is there any more such data than the Card and Kreuger paper?”

Yes:

Doucouliagos and Stanley (2009)
Dube, Lester and Reich (2010)
Allegretto, Dube and Reich (2011)
Hirsch, Kaufman and Zelenska (2011)
Sabia, Burkhauser and Hansen (2012)

Greg Ransom February 24, 2013 at 3:55 pm

Imagine a $900,000 per year minimum wage set for economists in the US in 1972.

Solve for equilibrium.

Bonus: Explain Paul Krugman’s likely career path in this alternative scenario.

Shelly Duffer February 24, 2013 at 7:34 pm

Why can’t the U.S. Government address one of the most important issues concerning most Americans? The minimum wage; because that is what the majority of Americans earn and for most, it simply is not enough to sustain a family. Give people a raise in minimum wage to at least $10.00 an hour. In this economy that would be a tremendous help for families who are struggling to make ends meet. How the hell can anyone make a living on 7 or 8 dollars an hour? It’s no wonder that more and more people are filing disability claims and unemployment claims. They can draw more sitting on their asses at home than working a minimum wage job. What is the incentive to get a job when you can ride somebody-else’s coat-tail? Wake up congress to the REAL fucking world! We middle people are being weeded out as I speak and that is a shame and a disgrace. Fix the system and maybe people will have a renewed faith in government.

Jayson Virissimo February 24, 2013 at 8:35 pm

Where did you get the idea that a majority of Americans earn the minimum wage? According to the BLS, “among employed teenagers paid by the hour, about 23 percent earned the minimum wage or less, compared with about 3 percent of workers age 25 and over.”

Shelly Duffer February 24, 2013 at 11:20 pm

Maybe the BLS got the wrong memo!

John February 24, 2013 at 9:33 pm

“more employers hire labor than say aluminum”

In fact, 100% of employers hire labor. DUCY? :)

Brandon Berg February 25, 2013 at 3:32 am

In the US, very nearly 100% of employers say “aluminum” every now and then.

Douglas Levene February 25, 2013 at 12:06 am

Richard A – The single best way to constrain agency problems in public corporations, including agency problems such as “excessive” executive compensation, would be to free up the market for corporate control. See, e.g., Jonathan Macey, Corporate Governance (2010).

Maurice de Sully February 26, 2013 at 1:09 am

If we just make the price of X a little higher, I’m sure people will buy more of X than they would have if X was at a lower price.

Oh wait, that’s ridiculous.

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