Reply to Student on Minimum Wage
By David Henderson
Two weeks ago today, I gave a talk at Susquehanna University in Selinsgrove, Pennsylvania. I had a good time, by the way, and I estimate that, in the midst of a small snow storm, over 150 students and faculty attended.
One of the students I met and talked to afterward sent me the following query this morning:
I had a question on your stance about minimum wage and its effects on the economy. I have read a few articles about some positives and negatives, mostly negatives. Most articles site the low percentage of wage earners that actually work on minimum wage, and of those people many of which are high school or college age.
I have yet to find an argument that makes economic sense that would be in favor of raising the minimum wage and I was wondering if you could play devil’s advocate and make a point about why it would be beneficial if there is any.
Also, if you had any personal experience with the topic while working through your professional career I would like know how that went.
The reason I ask is a lot of my liberal friends are arguing for the cause and I want to make a complete and well thought out argument against it to perhaps educate them on basic economics. Also, I just want to improve my knowledge on the subject for my future, wherever that may take me.
I wasn’t sure what he meant by “personal experience with the topic” and so I answered about my personal experience, as a young man, with the minimum wage.
Here’s my answer:
Let me give some context to the minimum wage discussion before answering your specific question about the devil’s advocate part. It’s very hard to deny the law of demand: so, when the minimum wage rises, there will be fewer low-productivity people employed at that higher wage. Most of the discussion has been about how many fewer. Is the demand for low-skilled workers elastic or inelastic? One thing that seems to be agreed on is that the reduction in employment for the kinds of minimum wage increases we’ve seen in this country in the last 2 or 3 decades is not large. But remember that “not large” could mean that a given increase in the minimum wage destroys a few hundred thousand jobs. That could well be “large” for many of those people in the few hundred thousand.
There is another reason besides, or instead of, inelasticity of demand that could cause the reduction in jobs to be not large: employers adjusting on other margins. So, for example, if they had previously provided food on the job to their low-wage workers, they might cut back on that. They might limit break time more. They might reduce the amount of time they spend training the workers to be in higher-wage jobs in the firm. Etc.
Most of the economically informed proponents of the minimum wage will admit the above points even if they don’t talk about them. How do I know they will admit them? I don’t. But here’s why I strongly believe they admit it. It’s BECAUSE most of them don’t talk about it. If they thought there were a problem with these arguments, they would point out the problem(s).
So how do they argue for the minimum wage not having these effects? Here comes the devil’s advocate part. They would say, “No, David, you’re right if employers are hiring based on their demand curve. But we think there are pockets of monopsony (monopoly on the buyer’s side) throughout the economy. When there’s monopsony, employers, unconstrained by a minimum wage, will hire up to point where the value of marginal product equals the marginal factor cost. If employers have monopsony power,that is, if they on their own face an upward-sloping supply curve of labor, they know that a 10 cent increase granted to keep or hire one employee will not cost them only 10 cents: it will cost them 10 cents times the number of employees in that skill category. So the marginal factor cost is much more than than 10 cents an hour. So they keep wages lower than otherwise. A skillfully set minimum wage can cause employment to increase.”
That monopsony explanation could explain why the reduction in jobs from a given minimum wage is not large. On the one hand, the standard analysis is right for the parts of the economy where there’s no monopsony: in those parts, the minimum wage increase will cause the number of workers employed to fall. On the other hand, in the parts of the economy where there is monopsony, the minimum wage increase, if small enough, will cause the number of jobs to rise. Net effect: a small loss in jobs.
Now to my argument against the devil. I don’t find the monopsony claim persuasive. Monopsony requires that the employer have no or few competitors trying to hire the same kind of labor. It is precisely the fact that the workers are unskilled that gives them many potential employers.
Now to the second part of your question. I think my first job, mopping floors and cleaning the bathrooms in the basement of the main building at the Minaki Lodge in Minaki, Ontario, paid slightly above the minimum wage. I didn’t even think to ask. I was 16 and didn’t even know the term “minimum wage.” But when I was 21, I quit a relatively high-paying summer internship in the Canadian government bureaucracy, where I was learning very little, so that I could work as an unskilled laborer for some friends in southern Ontario who were installing swimming pools. They paid me the minimum wage at that time. We worked 6 days a week and typically 10 hours a day. So I made good money. They didn’t pay me overtime even though, I’m guessing, the law required them to. By that time, I understood a lot about labor markets, having studied a lot of economics in those intervening years, and it never occurred to either them or me to have extra pay for overtime. Both sides understood that what we had agreed on was a good deal for all concerned.
P.S. I must hustle off to work now, but I’ll write a further note explaining a more-sophisticated way of understanding the harmful effects of the minimum wage, that is, if you’re interested.
That’s my response. I will post further on the more-sophisticated case.