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Why do (some) economists support the minimum wage?
My colleague Dan Klein continues his pathbreaking work on the sociology of the economics profession. He asked petition signatories why they favor increasing the minimum wage. The results are striking, most of all for how far they stand outside traditional economic reasoning:
Alan Blinder: I would not put large weight on this, but I think that to some extent attitudes and mores matter. Regardless of Pareto efficiency, we do not allow indentured servitude or child labor. Similarly, a $7.25 minimum wage would state that society deems it wrong to pay less.
Peter Dorman: Since Tocqueville (at least) there is a well-established argument that greater equality of income and respect is associated with better democratic performance. This is a near-consensus position in political theory.
Arindrajit Dube: Increased income (and reduced inequality) has broad effects throughout society and polity; this includes (but is not limited to) increased self worth, increased ability to use added time to spend with kids, attend community college, etc., from an income effect.
Amitava Dutt: Reducing poverty, reducing inequality. Creating a culture where people realize that some basic needs of people should be satisfied.
Robert M. Feinberg: I'm not sure if this is exactly what is meant here, but I would see notions of fairness playing a role.
John R. Morris: Economic justice for low income people.
Jesse Rothstein: I believe that a great deal of bargaining happens within parameters that are determined, in part, by societal expectations. Government policy has some role in determining those expectations.
Paul Swaim: ...I think it is important that adults working full time can earn enough to make a substantial contribution to supporting a decent living standard and take pride in their status as workers. Put differently, people playing by the rules should not feel like total losers (or be considered as such by their fellow citizens). The minimum wage can probably make a modest contribution to approaching this objective.
William Van Lear: Suggests a society committed to fairness and recognizes that power has a role in determining outcomes.
Mark Votruba: Vast disparities in wealth and income stability of democratic capitalism, as suggested by Alan Greenspan. I would add that our sense of community is undermined, which in turn undermines the social norms towards “appropriate” social behaviors, especially by those at the bottom.
Jeffrey Waddoups: Reducing wage inequality will increase the quality of democratic institutions.
Bernard Wasow: A low cost demonstration of concern for low wage workers that causes little damage. Elicits a buy-in by low wage workers to the polity
Henry W. Zaretsky: Improved living conditions for affected workers and their families. Less likely to become dependent on public programs such as welfare and Medicaid. More incentive to seek work. More stake in the system. More independence.
It is easy to read these and think "Ah, how narrow is neoclassical economics in contrast to these fine thoughts." My response is instead: "These people are making a mountain out of a molehill." Bernard Wasow is the guy who makes the most sense.
If you wish to understand the gap between market-oriented and more left-wing economists, this piece is an excellent place to start.
Posted by Tyler Cowen on January 24, 2007 at 06:14 AM in Economics | Permalink
Comments
Wasow's remark struck me as the most cynical of the lot. Zaretsky's "more stake in the system" is also revealing.
Posted by: A Tykhyy at Jan 24, 2007 6:48:31 AM
Very interesting, while I oppose the minimum wage increase, I believe that there may be more than a grain of truth to Jesse Rothstein's explanation. I think that an explanation like this is better at explaining rising CEO compensation. Paul Swaim's explanation strikes me as attractive but wrong headed, I'd expect an increase in the minimum wage to, in the medium/long term to make more people feel like losers as I'd expect more people to be paid the minimum wage. And minimum wage is kind of (this is terrible but true to an extent) a social shorthand for loser, regardless of what that wage is.
Posted by: Michael Foody at Jan 24, 2007 7:03:47 AM
Is there any reaason at all to suppose that raising the minimum wage will do much to alter the distribution of wealth and income? Even if it has negligible employment effects, I really doubt that this is the best way to address concerns about income distribution.
When Tyler says they are making a mountain out of molehill, isn't he really saying that he believes they are grossly overstating the benefits? And I'd add that they are understating the costs.
Posted by: EclectEcon at Jan 24, 2007 7:18:07 AM
I'll read the article a little later, but I have to ask: Do any of them express concern for the well being of people priced out of the job market (or just not lucky enough to land one of the more valuable but less available jobs)?
I'm inclined to oppose the miminum wage on equity grounds. I don't think it's fair for some people to thrown out of the job market while other, no less deserving people, end up with an extra benefit.
Posted by: Scott Wood at Jan 24, 2007 7:39:56 AM
The results are striking, most of all for how far they stand outside traditional economic reasoning
I'd say that's exactly why they are right. Human beings are not homo economus, and the comments here reflect that the minimum wage policies (and many other economic debates) have a much wider effect that simply the economic effects that they generate.
Bryan Caplin goes on endlessly about why don't people listen to economists. He consistently fails to understand that there is a lot more to economic policy than economics and that people recognize this implicitly, even if he doesn't.
Now having said that, it's quite possible that one can overweigh the non-economic effects of economic policy, but to ignore them entirely is just as much a mistake.
Posted by: Tom West at Jan 24, 2007 7:40:00 AM
What is the "science fiction blackboard story" to which Klein refers in his mini-bio?
Posted by: Ted F at Jan 24, 2007 7:55:05 AM
I understand the sentiment, but this line of thinking still seems incredibly short-sighted. Sure, by raising the minimum wage we can make certain low income families better off RIGHT AWAY, a rise in unemployment notwithstanding. But whatever happened to the "bring tomorrow's laggards above today's mean" method?
Posted by: Robb at Jan 24, 2007 8:12:02 AM
Can anyone here give an explanation for why the minimum wage isn't tied to inflation that isn't "so that Democrats can make political hay out of beating Republicans with it every few years"? As long as we're going to have a minimum wage, I'd prefer not to keep fighting over it every five or ten years.
Posted by: billb at Jan 24, 2007 8:56:23 AM
Ted F asked what I mean by the "science fiction blackboard story." I mean the standard supply and demand diagram story.
Posted by: Daniel Klein at Jan 24, 2007 8:59:33 AM
Maybe I missed it, but I didn't see a question asking if, given the choice, would one prefer an EITC expansion or a minimum-wage hike.
Posted by: jason braswell at Jan 24, 2007 9:02:40 AM
I also think Jesse Rothstein's comment is the most interesting and, I think, the most accurate in explaining why having a wage floor is important.
Posted by: K. Williams at Jan 24, 2007 9:05:10 AM
The listed responses are political responses and not economic ones. They are an attempt to alter reality by wishful thinking. Wasow comes closest to calling a spade a spade. Really sad.
Posted by: Al Abbott at Jan 24, 2007 9:29:51 AM
I too thought that Wasow's comment was the most interesting. To respond to Tom West, the problem with the fact that 98% of the reasoning for a minimum wage increase is non-economic, that means that as economists these commenters have no special standing. That is, we have no reason to respect their political theory ideas any more than their ideas on football or baby names. It makes the fact that "X economists support the increase" irrelevant.
Posted by: T. Hicks at Jan 24, 2007 9:33:56 AM
Blinder's argument is the one I expected: that there are things that are economically efficient which are still wrong or greatly undesirable. Economics is, after all, a value-neutral science. One can accept neoclassical economics as the correct description of the economy, yet still think politics ought to trump when more important things are at stake.
Wasow's response is surprisingly Thrasymachian.
- Josh
Posted by: Wild Pegasus at Jan 24, 2007 9:41:32 AM
Why doesn't anyone ever make an optimal social insurance-type argument here? Minimum wage laws clearly raise wages at the bottom of the distribution (visibly in figures from papers by DFL and David Lee) while the efficiency (disemployment) costs seem small, at least for small changes in the minimum wage (Katz&Kruger; even Neumark and Wascher find small effects). An optimal transfer program trades the benefit of raising low wages against the costs of disemployment. The inital disemployment effect of introducing a small minimum wage is small (it's second order) while the redistributive benefit is larger (it's a first order increase in income). Hence, the optimal level of the minimum wage is NEVER zero.
Posted by: adam o'neill at Jan 24, 2007 9:41:48 AM
I agree with Blinder for workers in his neighborhood -- it is probably wrong to pay someone in New York or New Jersey less than $7 an hour. I am less inclined to agree for workers in the Marianas, American Samoa, or even in some Southern states.
Posted by: DK at Jan 24, 2007 9:52:12 AM
"Why do....?". Self-interest, presumably. Isn't that what Economics teaches?
Posted by: dearieme at Jan 24, 2007 10:06:55 AM
"The self-ordained professors toungue, too serious to fool,
spouted out that liberty is just equality in school,
Equality, I spoke that word as if a wedding vow,
but I was so much older then I'm younger than that, now."
-Bob Dylan
Posted by: snoopy at Jan 24, 2007 10:15:17 AM
Hence, the optimal level of the minimum wage is NEVER zero.
And exactly how much of those benefits cannot be obtained with the EITC, or a negative income tax or guaranteed minimum income system?
If any of them had given the answer, "Well, raising the EITC would be a better idea, but the mimimum wage is more politically popular and likely to happen," that would have also been interesting.
Posted by: John Thacker at Jan 24, 2007 10:39:46 AM
Like Tyler (and others above), I also thought that Wasow's comment made the most sense. (OK, I feel smart this morning!)
Posted by: jp at Jan 24, 2007 10:43:52 AM
Some of those comments by the economists seem quite divorced from reality. They seem to claim that the minimum wage is important to people working full time to support children. That simply doesn't describe the vast majority of minimum wage earners. While the net benefits may be close to flat, it seems likely that much of the net benefits will go to children from middle-class families working part time (with low-skill people wanting to work full time seeing much of the negative side).
See for example this CBO study, which points out that the majority of people who earn the minimum wage, or even minimum wage to $7.25, come from households making twice the poverty line, and only about 10-20% from households below the poverty line.
There are much better ways to help the poor.
Posted by: John Thacker at Jan 24, 2007 11:26:20 AM
The question was "tell us how you think about those socio-political mechanisms" so it seems unfair to complain that it does not sound like economics. It would be nice if more had explicitly phrased the response as a cost-benefit comparison, but that wasn't the question.
Posted by: Douglas Knight at Jan 24, 2007 11:31:40 AM
This list of responses is in answer to the question:
If you agreed with the previous statement (in Q4), kindly tell us how you think
about those socio-political mechanisms (a few words, or, you are welcome to elaborate and to cite recommended sources):
So obviously they are non-economic - the question was designed to elicit non-economic motivations. If you look earlier in the survey, you find that 75% of respondents marked
"Inducing a transfer from employers to (generally less well off) workers, albeit with possible small disemployment effects."
As one of their ECONOMIC motivations. The underlying unmentioned concept is potentially a non-economic 'fairness' preference, but it also could be a totally economic diminishing marginal utility argument. (Above some inflection point, the marginal utility of additional units of a given good is lower than the marginal utility of the lower units of that good. Your 1st hamburger is great, the 5th one doesn't do much for you. If you generalize that money is a good, it too will have diminishing marginal utility - you can see that from the tendency for 'willingness to accept' to be greater than 'willingness to pay' in externality studies. (Yes, I know this is generally explained by the different budgetary sets. One of those budgetary sets - the fixed amount of time each person has to optimize his utility over, coupled with the perception that money represents productive time surrendered to others in exchange for the product of that time - is a nice place to hang a
Generalizing across people, we can say that someone with a lot of money will value the additional dollar lower than someone with a small amount. So redistribution is economic, even with a smallish dead-weight loss in overall monetary gains. (And, yes, I know it is an economics rule that utilities can't be compared across people. It is a rule observed in the breach, not one that is ever obeyed.)
Posted by: rvman at Jan 24, 2007 11:42:36 AM
'hang an analogy to diminishing marginal returns to labor, given fixed capital' is the rest of that sentence.
Posted by: rvman at Jan 24, 2007 11:45:02 AM
To prevent people race to the bottom we need minimum wages.
Posted by: Known at Jan 24, 2007 11:53:36 AM
