Friday, February 10, 2012

Jared Bernstein On Minimum Wages

Jared Bernstein calls for an increase in the U.S. federal minimum wage.

I should clarify that I think it is unlikely to lead to much job losses unless it's really dramatic. Remember that the current rate is only $7.25 per hour which can be compared with average hourly pay of $23.29 per hour and an average pay of $13.29 per hour in the lowest paid sector, "leisure and hospitality". So as long as it stays below $10 per hour it should only cause minor job losses-but it also means that very few workers would see their pay actually increased as a result of a minimum wage hike.

More interesting is the mostly absurd arguments that Bernstein uses. For example, he asserts that

"the textbook theory implies that a one penny increase in a market wage should lead to massive unemployment, and that, I can say with 100% confidence is not at all what we’ve seen."

I'm not sure what textbooks he has read but I've read a lot and none of those I've read have claimed that a one cent [per hour, presumably] increase in minimum wages would cause "mass unemployment". What they've usually said, quite correctly, is instead that higher minimum wages will increase unemployment if set above the marginal productity of more workers.

Bernstein futhermore provides argument for why higher minimum wages won't reduce employment, arguing that they will be "absorbed" through the following channels:

–profits: to the extent that the increase is paid for out of profits, we shouldn’t expect job losses. And in an economy where profits have dazzled while paychecks have fizzled, that ain’t a bad thing.

Not correct. If it becomes less profitable to hire workers, fewer employers will want to do it.

–prices: some studies find that a small bit gets passed through to higher prices.

Well, it is indeed reasonable to expect that to the extent that minimum wages affects actual workers, it will cause prices to increase. But since higher prices reduces demand for the goods and services they produce, this means that there will be less need for workers, reducing employment.

–reasonable rates: it matters what the level you raise it to, and historically, increases have affected less than 10% of the workforce, often even smaller shares. With relatively few in the “affected range” we wouldn’t expect to see large distortions.

True, as I pointed out above, but as I also wrote above, this also means that fewer workers get their pay increased.

–productivity: to the extent that higher wages reduce turnover and vacancies, a higher minimum can partially pay for itself by squeezing out such inefficiencies. It’s not wishful thinking—some studies have found just that.

This point is actually partially true. If a job pays more then employees will be less inclined to quit, which in turn will reduce turnover of workers. But for most low wage businesses the cost of high turnover is relatively low since the tasks don't require much skills or training, and it is usually quite easy to find replacements. So while basically true, it is of only very limited relevance.
–it’s stimulus! Minimum wage workers tend to spend the extra cash, so there’s more economic activity than otherwise would occur—btw, even under the redistributive scenario described under “profits” above, you’ll get this effect if low-wage workers consume more of their last dollar than those in the sky boxes.

Well, while it might be true that minimum wage workers save a lower share of income increases than others. is really America's problem that its savings rate is too low? Given its trade deficit and relatively low investment rate, I'd say the opposite is true.


Blogger Ralph Musgrave said...


You claim that the text books say that “higher minimum wages will increase unemployment if set above the marginal productivity of more workers.” I suggest the latter statement is meaningless (or it’s a circular argument) because minimum wages themselves (along with union wages and other factors) determine what level of remuneration corresponds to the marginal worker. I’ll explain.

As unemployment falls, the marginal product of labour falls because it becomes increasingly difficult for employers to find suitable labour amongst the unemployed. And employers will continue hiring from the ranks of the unemployed till the marginal product equals the minimum wage / unions wage, etc. At which point employers tend to begin poaching labour from each other, rather than hire from the unemployed.

I set out a chart or graph to illustrate the latter idea here:

For a more detailed treatment of this point, see here

See section 8 in particular.

3:16 PM  
Blogger stefankarlsson said...

Ralph, I have replied to you argument in a new post.

8:43 PM  

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