Economics Never Stops: What's Missing from the Minimum Wage Debate?
In yesterday’s Wall Street Journal, David Neumark argued that even though “modest increases” in the minimum wage won’t have large disemployment effects, the minimum wage is a poorly-targeted anti-poverty measure: “Minimum wages are ineffective at helping poor families because such a small share of the benefits flow to them.”
The broader discussion doesn’t appreciate the ways in which firms and workers can adjust to a higher minimum wage without people losing their jobs or even without reductions in the number of hours worked. People do not work for wages alone but for a combination of wages, benefits, workplace amenities, and job satisfaction. Forcing people to pay and accept higher wages means they can compensate on other margins. Maybe you don’t get as much general workplace training now (and make no mistake: that is valuable). Maybe you have to pay for your uniform. Maybe you don’t get the same employee discount you otherwise would have received. Maybe you don’t have as much scheduling flexibility. And so on. I haven’t seen a good argument for why we shouldn’t think these adjustments are important or for why we are better as a society by forcing people to trade a more flexible schedule for higher wages.
In addition, a minimum wage creates an economic rent and, therefore, wasteful competition over that economic rent. As I wrote last summer:
When politicians impose binding price floors on competitive markets, they take prices off the bargaining table. This encourages wasteful forms of competition. To make this concrete, suppose you and another person are each willing to work for $5 per hour but you are not allowed to accept less than $9 per hour. There is only one job opening. How do you make sure you get it?
Corruption is an obvious option: you can simply bribe your prospective employer. Assuming that isn’t an option, though, what can you do? The simplest option is to play the waiting game: whoever waits the longest outside the employer’s office gets the job, just like whoever waits the longest for price-controlled gas after a natural disaster will get the gas. This represents pure waste: the time and energy you devote to waiting is time and energy you’re not spending doing something else.
People can also compete by investing in signals that make them more attractive to employers. Maybe they get their hair cut and shave more often. Perhaps they get more college degrees. Maybe they buy nicer suits for their job interviews. On their own merits, these might be nice things. However, they’re superfluous if they’re used to get artificially-scarce jobs that, in the absence of a minimum wage, could be had just by offering to work for less.
It’s tempting to think that the higher wages for workers is worth it, but it isn’t. The minimum wage shifts the margins on which people compete with one another from wages to wasteful competitive endeavors like waiting or investing in too many quality signals. Competition in a price-controlled market can erode the entire value of the difference between the minimum workers are willing to accept and the minimum they are allowed to accept. The cruel irony is that a policy designed to pick the pockets of employers for the benefit of workers ultimately leaves everyone worse off.
In a February Featured Article, Robert Murphy discussed economists and minimum wages in detail. It’s worth a careful read. Regular EconLog readers know that Economics Never Stops. Maybe you even have that on a t-shirt. Particularly when we’re dealing with a question like poverty, we can’t pretend that people suddenly stop responding to incentives just because we’ve reached a conclusion we find politically appealing.
I decided to take up Bryan’s challenge in his post on “Liberal Authoritarianism.” Watch for “Conservative Authoritarianism” by the end of the week.