Economics, Ideology and the Minimum Wage
We’ve had several discussions about the economics of the minimum wage. Over at Crooked Timber, there’s a very interesting and instructive discussion of the way ideology permeates economic analysis, with particular attention to the question of the impact of the minimum wage on employment. (HT Leiter) Included in the post are a series of links to and discussions of the econometric literature on the issue. Here’s a taste:
What economics has done is to take the models of the supply and demand of consumer goods and apply them to the supply and demand of labor. This, I believe, is fundamentally wrong-headed. Human labor and consumer goods are categorically different, and it’s a big mistake to treat them as if they were interchangeable. There are a slew of institutions, norms, and other features of labor markets that do not apply to product markets.
When I first read that paper by Murphy and company, I was struck by the passages in it about “the law of demand” and how you can’t “repeal” the law of demand. It was so literal! Now, I should mention that I’ve taken one of Kevin Murphy’s classes and I am familiar with his work. I have great respect for him. He is a first-rate economist, a brilliant econometrician, a gifted teacher, and, so far as my limited dealings with him go, a really nice guy to boot. But he is a University of Chicago economist in every sense of the word. I’ve heard him speak, and he is quite contemptuous of the idea that regulation can ever improve anything, or that the government can ever do a better job of anything than the free market.
I also believe, based on his writings, that Kevin Murphy, like all too many economists, takes the models literally. He is so enamored of them that he sees them, I think, not as tools for understanding, but as God’s revealed truth, handed down to Moses on stone tablets. He’s an economic fundamentalist, if you will. Fortunately, though, the old-fashioned theories about labor markets that Murphy and others hold are gradually being displaced.
My own opinion is that traditional theorists like Murphy are basically correct, but that there is a lot of imperfection in the real world labor market that allows both employers and employees to ameliorate the effect of an imposition of, or increase in, the minimum wage. E.g. employers in the lower rungs of the labor market tend to be in local-service industries (retail, lawn care) that don’t have the option of shifting jobs to Mexico or India. When the minimum wage rises, those employers need to suck it up.
At some point, the real-world elasticity is such that the employer is going to really feel the pain if her wage structure is forced upward too much. We’ve seen something analogous with gasoline costs: when the cost is $3/gallon, Americans were able to absorb the increase without changing behavior; but at $4/gallon, suddenly public transportation usage is up markedly.
And so, in the real world, if a large enough minimum wage / minimum wage increase is imposed, the employer will do things like freeze employment, cut benefits, implement labor-replacement technology, employ illegal immigrants, and/or search out ways to reduce costs in other areas to make up for the imposed increase in wages.
I don’t know enough economics to know the effect that raising the minimum wage has on the economy, but morally shouldn’t we be talking about paying a living wage. A few years (maybe more than that) a book came out “Nickel and Dimed”. It certainly convince me that nobody can live on the minimum wage. Maybe, if a little was sacrificed from the top, this would be a feasible solution. I think years ago owners and heads of company 50% more than their employees, but there was a connect between the owners or CEO’s of companies and their employees(cetainly not in all cases), but in many. Today I think that gap is so great that there is no relationship between highest management and workers. I don’t know how but I think we should really be talking about to structure to pay living wage.
There’s no way the minimum wage should be raised! If we did then these guys might feel slighted: http://www.spiegel.de/international/0,1518,560142,00.html
“And so, in the real world, if a large enough minimum wage / minimum wage increase is imposed, the employer will do things like freeze employment, cut benefits, implement labor-replacement technology, employ illegal immigrants, and/or search out ways to reduce costs in other areas to make up for the imposed increase in wages.”
I think that the “law” of supply and demand would be expected to compel the business owner to do these things anyway. If they are not doing some or all of these things, then something else is already operating.
Or, the market isn’t as “free” as it looks on paper and economic rationality isn’t as rational as the algorithm supposes (or perhaps, proposes).