Sunday, January 05, 2014

Ideology Trumps Economics For Some On Minimum Wage Issue

As Obamacare remains largely unpopular and partially dysfunctional, Democrats have decided they should change the subject by bringing up the issue of raising minimum wages, an issue where polls show they have strong popular support.

An increase in the federal minimum wage of $7.25 isn't going to happen as long as Republicans control the House of representatives, but many states and cities have decided to implement higher minimum wages, and Democrats have organized initiatives to raise them in even more states through referendums.

The economics of a higher mimimum wage is very clear: it will mean that some low paid workers will get raises while others will get pink slips (be fired). Theory doesn't tell us the exact proportion of low paid workers who will get higher pay and workers who will get no pay, but it does say that there will be a mix of the two.

Interestingly, both some of the opponents and some of the advocates of a higher minimum wage lets what seems ideologically convenient trump what theory says.

Some opponents of a higher minimum wage argue that the only effect is to reduce employment and that no workers will get higher pay. Their argument is that  a minimum wage doesn't compel employers to employ at higher wages, it simply forbids employment contracts with lower pay, and if those employment contracts are destroyed then there won't be any employment contracts.

But that is of course false, because many (but not all) contracts will be renewed but at the higher wage level mandated by minimum wage laws. The idea that all will lose their jobs seems to be based on the idea that marginal productivity in the sense of the extra net revenue that the employees help facilitate is necessarily equal to the existing wage level. But the existing wage level is in fact often lower, sometimes significantly lower, than marginal productivity, as wages are also influenced by what options the employee and employer have to each other. If the employee can't find a better position elsewhere and if the employer have a large number of people to choose from then wages will be significantly lower than the extra revenue that the employee help create.

A minimum wage will in such a situation raise wages for employees (at the expense of employers' profits) as long as it remains below the level where the business becomes loss making.

Many advocates of higher minimum wages however make the opposite but related mistake of assuming that all a minimum wage does is raise wages for low paid workers.

That is because a mimimum wage will in some cases be higher than marginal productivity for workers, and in such cases the employer will fire the workers.

Since there is no universal level of marginal productivity any attempt to benefit workers at the expense of employers will mean that some workers will be unprofitable for the employer, and result in more unemployment.

Presumably, many leftists will think that is a price worth paying for redistributing income from capitalists to the workers who keep their jobs, but if so they should openly say "getting some workers unemployed is worth it to help other workers receive better pay at the expense of their employers", and not pretend that it will have no negative effect on the number of employed.


Blogger Robert Boxer said...

I recently wrote an article about how an increase in the minimum wage rate increases unemployment. You can read it here:

5:15 PM  

Post a Comment

<< Home