Are recessions a good time to boost the minimum wage?

One empirical regularity is that many minimum wage boosts come during recessions or downturns, as many of you pointed out here.  Yet I take this repeated pattern to be an argument for having a low, zero, or quite “fettered” minimum wage.

Let’s think through the economics.  One of the main pro-minimum wage arguments — arguably the #1 argument — cites labor market monopsony.  Let’s say you have a monopsonistic employer who holds back on bidding for more labor, out of fear that hiring more labor raises the price paid on all labor units of a certain quality (by assumption, there is no perfect price discrimination here).  The minimum wage can get you out of this trap.  By forcing the higher wage on all workers in any case, the employer now doesn’t hesitate to hire more of them because the “fear of bidding up the price of labor” effect is gone or diminished.  And that is how, in some situations, a higher minimum wage can boost employment.

Now let’s say the economy is in a demand-driven downturn, which creates a surplus in the labor market.  Now, to get more workers, the monopsonist firm does not have to raise the wage and it can get more workers at the prevailing wage.  But employers just don’t want more workers, because of demand-side constraints.  So employers could in fact hire more workers without pushing up wage rates at all, once again that is for all units of labor of a particular quality.  Yes there is still monopsony, but the potential wage effects of hiring more labor are muted by the labor surplus.  And that means boosting the minimum wage won’t create the beneficial hiring effects which operate in the more traditional monopsony scenario, explained in the paragraph directly above.

In other words, if you think we are now seeing a slow labor market for demand-side reasons, you should be skeptical of the monopsony argument for minimum wage hikes, at least for the time being.

By the way, demand-side problems often wreck the notion that the EITC and minimum wage are complements.

The bottom line is that a lot of the arguments for a higher minimum wage are inconsistent with or in tension with a demand-driven labor market slowdown.  And I don’t exactly see the world rushing to point this out.

Here is my earlier argument that slow labor markets are the worst times to boost minimum wages.  Here is my earlier post drawing a parallel between minimum wages (government-enforced sticky wages) and privately-enforced sticky wages.  Here is an excerpt from that post:

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.”

Addendum: By the way, here are some graphs and regressions about the minimum wage and recessions, from  Kevin Erdmann.  I think he is attempting the impossible, but you still might find it instructive to look at some of the pictures.


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