On the Minimum Wage

The featured op-ed in the RTD Tuesday is a relatively lengthy piece on the economics of the minimum wage by David Henderson of the Hoover Institution. Not surprisingly, Henderson concludes that the minimum wage has perverse effects, and certainly should not be increased.

This piece is actually more sophisticated than many standard conservative statements about the minimum wage, which simply ignore the mass of empirical evidence indicating that the employment effects of minimum wage increases are negligible, especially among adult workers. Henderson at least takes the trouble to cite influential research by David Card and Alan Krueger on the (limited to non-existent) impact of minimum wage increases on fast food employment.

Along the way, however, Henderson makes some baffling claims. For instance, Henderson charges the pro-labor, pro-minimum wage Economic Policy Institute with “admitting” that a higher minimum wage may lead not to reduced employment but reduced training and increased productivity. Henderson concludes that this must mean cutbacks in training of workers and a faster work pace. Wrong. Productivity might increase and training costs decline if turnover among low-wage workers decreases in response to a higher minimum wage. When wages go up, the cost to workers of losing their job go up as well, so they may become inclined to work harder to hold onto it even in the absence of greater workplace discipline. Likewise, if there is less turnover in a firm, there will be less need for firms to spend money training new workers.

Second, Henderson argues that the minimum wage doesn’t really benefit the least well off, since “only” 9% of those affected (some 1.4 million workers) are likely to be affected by the increase are single parents with children. (Never mind that this is a higher proportion than the percentage of single parents with children in the workforce as a whole–here is the data.) So we shouldn’t care about poor households in which both parents are working, or individuals who happen to be poor? In any case, Henderson draws a seriously misleading picture: some 80% of affected wage earners are adults, 54% are full time workers, and 26% are parents.

Third, in his conclusion, Henderson makes the bizarre claim that unions’ support for the minimum wage is motivated by “greed” and is akin to protectionism. Well, it’s no secret that unions support increases in the price of labor–if that is “greed,” then fair enough. But Henderson implies that unions’ interest is in reducing the jobs available at the bottom of the labor market. This is just silly: higher unemployment rates weaken, not strengthen, unions’ bargaining power and their ability to organize new workers. No one has a more vested interest in a full employment economy than labor unions.

The empirical evidence for large employment affects resulting from an increased minimum wage is suspect at best. Interested readers might check out Card and Krueger’s 2000 article, this summary of the issue from a “neutral” government economist that explores some of the theoretical reasons why minimum wages don’t damage employment, or a recent journalistic piece on economists’ shifting views on the minimum wage.

A few orienting observations might help put the discussion in perspective: the debate about raising the minimum wage can be more accurately characterized as a debate about keeping the minimum wage level from falling further. With each passing day, Americans earning the minimum wage effectively recieve a wage cut.

Indeed, the real value of the minimum wage is now about one-third lower than in the 1960s. The value of the minimum wage rose over the course of the 1960s from around $6/hr (current dollars) to nearly $8/hr by 1969. Yet unemployment fell during that same decade from 5.5% in 1961-1965 to just 3.9% during 1966-1970.

Three decades later, history repeated itself. Unemployment during the first Clinton term (1993-1996) averaged 6.0%; although the minimum wage was increased in 1997, unemployment during the second term (1997-2000) fell to just 4.4%.

In short, even if the increased minimum wage had some slight negative impact on employment during these periods, that effect was simply overwhelmed by larger macroeconomic factors.

One more example: In 1999, the United Kingdom implemented a minimum wage for the first time; according to this study (and others), the sky has hardly fallen.

Given this set of experiences, it’s not reasonable to assert that a modest increase in the minimum wage will have serious perverse effects on employment, especially when combined with sensible macroeconomic policies. And if we reject that conclusion, two fundamental moral reasons for maintaining and increasing the minimum wage carry the day.

The first as that we as a society have an interest in forbidding certain kinds of deeply exploitative relationships. A fundamental tenet of American labor law (and that of every other advanced nation) is that there is an asymmetry in power between employers and employees. The employment relationship is not a simple transaction like buying a banana, but represents an “incomplete contract”; employers and employees agree on what wage will be paid, but not on how much work will be performed. That depends on how much labor is extracted during the labor process. Employers use the threat of unemployment as well as systems of authority to extract as much labor as possible from their workers. The role of the minimum wage is simply to provide a counterweight to the power employers wield, by establishing a minimum threshold of compensation and prohibiting purely exploitative relationships between employers and workers.

Contrary to conventional economic theory, the wages paid by employers are not determined by the marginal contribution made by a given employee; rather they are based on how easily the employee in question can be replaced by a functional equivalent.

Current fast food technology, for instance, might allow a worker to produce $10 of “value” an hour. In a full employment economy in which it is not so easy to find a replacement worker, the employer may feel it necessary to pay $9/hour to a fast food worker. But in an economy with 10% unemployment and the employer is receiving dozens of job applications a day, the employer might be able to hire an equivalent employee who will produce the same value of goods for as little as $4/hour–or much less, in the absence of a minimum wage law. While a minimum wage law does not limit on what some might term the “rate of exploitation” in a given employment relationship, it does put a limit on how little a worker can receive. Indeed, taken to its logical conclusion, the argument against minimum wage morphs into what is in effect an argument for legalizing voluntary slavery.

The second point is more straightforward: Our aim as a society should be to reach the point where if you work, you will not be poor. A higher (and eventually, inflation-indexed) minimum wage is one tool for reaching that goal; the Earned Income Tax Credit is another.

In theory, the EITC could do all the work–some economists claim this is a more efficient approach. But this is at best a politically unrealistic proposition (since it would depend on greater taxation of the better off), and flat out cynical when proposed by conservatives who know that a Republican Congress will never approve large increases in the EITC. Moreover, not all eligible workers claim the EITC to which they are entitled, meaning its efficiency as an anti-poverty measure is often overrrated.

Independent of that concern about the EITC, there is also a strong case to be made for the notion that a higher minimum wage will contribute to the social respect conferred upon low-wage workers. Americans tend to regard income received from employers–whether it’s our own income or someone else’s–as “earned,” and a greater source of moral worth and pride than income channelled through the government.

Seen in this light, higher minimum wages have a key role to play in securing what should be seen as a central goal of social policy: to ensure that all citizens and especially all workers are treated with basic respect.

Published in: on August 22, 2006 at 4:19 pm  Comments (1)  

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  1. […] Most of these arguments have already been discussed in this space, so I won’t rehearseĀ  them now. Instead I’m going to be working in the next couple of days on an op-ed submission to the paper on this topic. […]

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