What If There Were No Real Differences Between Minimum Wage Critics and Supporters?

24 Feb 2015 12:19 PM | Deleted user

The minimum wage debate in recent years has been so technical that what often gets lost is that the real difference between the various positions is one of degree and focus. Is it possible that opponents and proponents of the minimum wage are really saying the same thing about the effects? While this would appear to be counterintuitive, when we actually parse through the different positions, we find that they really are not that different.

Consider that opponents focus on teenagers. The standard argument since the 1980s has been that a 10 percent increase in the minimum wage results in a 1-3 percent reduction in employment among teenagers. Among adults, however, the employment consequences are much less, and almost inconsequential. If the essence of the argument against the minimum wage is that employers would rather pay the higher wage to adults over their children, is that necessarily undesirable?

From a policy standpoint, we as a society should want adults to earn wages sufficient to support themselves and their families. Or perhaps we should ask is this really the best that opponents can come up with? To date, minimum wage increases have not had any real adverse employment consequences for the simple reason that the minimum wage is so far below an equilibrium wage that it could not possibly have an effect. Even the standard model recognizes this. The standard model predicts a reduction in employment when the minimum is higher than equilibrium — the point where the supply of labor intersects the demand for labor.

But let’s consider the critics’ defense of no employment effects due to the minimum being below a market clearing wage. Is that not in effect conceding that the wage is too low? Critics will no doubt trumpet Walmart’s announcement last week that it will raise its workers’ minimum wage to $10.00 on the grounds that it cannot find decent workers. This they argue is a prime example of supply and demand. When the supply of quality workers is low and the demand is high, then the wage has to rise to the point where supply equals demand. Because the market is doing what it is supposed to, there is no need for an increase in the minimum wage.

Would if it were true if Walmart was effectively setting wage rates for the entire low-wage sector of the economy. Walmart has disproportionate market power and has been sufficiently profitable that it can absorb a higher wage bill. It is also likely that Walmart is also one of those companies that has seen productivity increases since the end of the Great Recession, but has not passed on those gains to the workers in the form of a higher wage. Even by raising their minimum to $10.00 an hour, it will still be paying below the market clearing wage which most likely hovers around $15.00 an hour.

Even if Walmart had not increased the wage on its own but was forced to through an increase in the minimum wage, there would likely not be a reduction in employment. On the contrary, by increasing the minimum wage to $10.00 an hour, we are likely to see the monopsony effect. This is when employment actually increases because those employers employing the largest numbers of low-wage workers increase their wages. More workers will be attracted to the market because of a higher wage’s supply side effects.

Now if an increase in the minimum wage leads to lower employment because of supply side effects — more workers attracted to the market who are now chasing the same number of jobs — is that not same as what Walmart is attempting to accomplish on its own? Of course, the critic will respond that Walmart’s decision is voluntary whereas a legislated minimum wage is coercive. But I have also noted in previous columns that in the absence of a legislated floor employers will not reward effort through higher wages for fear that they cannot compete with others paying lower wages.

Now let’s consider the argument that it really benefits the non- poor. Critics argue that most minimum wage workers aren’t primary earners, but secondary ones. By secondary, they mean spouses or teenagers. Since these workers are allegedly in households above the poverty line, a minimum wage as an anti-poverty measure is poorly targeted. There are a couple of ways to look at this. First of all, that few minimum wage earners are primary earners only illustrates the point that proponents of the minimum wage make which is that the minimum wage is too low to support anybody. Second of all, that most minimum wage earners may be secondary does not mean that their incomes aren’t essential to the maintenance of their households. But the real issue here is often lost.

The minimum wage was never intended to be an anti-poverty issue, but a labor market issue intended to give workers voice in labor-management relations where workers otherwise lacked voice. The minimum wage was needed because the asymmetrical power relations between workers and their employers prevented them from negotiating better wages. In other words, wages weren’t set according to natural forces, but by the market power enjoyed by employers which workers lacked. That is why the legal sanction given to collective bargaining through the NLRA was such a watershed event. It effectively granted workers power through the legitimation of unions. The so-called argument of natural market forces is no more than a rationalization of the power imbalance between workers and employers in the market place.

If it really helps the non- poor, might that not be the same as saying it benefits the middle class? In previous columns I have argued that the minimum wage is important because of the labor market it reflects. Those earning the statutory minimum wage are not important, rather those earning around the minimum wage — what we would call the “effective” minimum wage — are. Moreover, because the minimum wage has what we would call wage contour or interval effects, an increase in the statutory minimum wage will lead to workers in those intervals above the minimum wage also receiving wage increases as well. Again, critics might be asked if the minimum wage ultimately benefits the middle class, why is this necessarily a bad thing.

There is, of course, common ground here. The standard model that predicts lower employment also predicts increased productivity and efficiency. Those who argue the benefits of the minimum wage won’t deny that technology might be substituted for labor or that some of the workers aren’t worth the new wage. They would counter that employers should then invest in the human capital of their workers. Instead of creating straw men by focusing on the effects in inconsequential segments of the labor market, we really need to be focused on the type of society we really want to create.

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