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Maximum wage laws
...the ambitious plan for the new free-trade zone -- nicknamed Zip Choluteca -- rests on a controversial low-wage pact, made in the spring among the project's developers, the Honduran government and national labor unions. In return for luring investors to an untested and undeveloped region, the agreement guarantees them a minimum profit by keeping wages below the legal daily minimum for five to 10 years.
Here is the full story, which is about recent attempts to make Honduras a regional economic powerhouse.
Do maximum wage laws make more or less sense than minimum wage laws?
Posted by Tyler Cowen on July 1, 2007 at 07:53 AM in Economics | Permalink
Comments
Both are infringements on liberty and, thus, illegitimate.
Posted by: Yancey Ward at Jul 1, 2007 2:04:28 PM
I'm trying to figure out how they're much different from the perspective of a person that doesn't like minimum wage laws.
Posted by: perianwyr at Jul 1, 2007 2:17:32 PM
Neither. They make the same amount of sense. Minimum wage makes workers at the low end of the scale less attractive to employers, who may find it cheaper to substitute capital. Maximum wage laws make employment at the low end less attractive to workers, who may find it cheaper to substitute scratching their [** CENSORED by DHS **] for getting a job.
What did I win?
Posted by: Brad Hutchings at Jul 1, 2007 2:19:05 PM
I don't think it is a maximum wage law. I read it as an exemption from the minimum wage law.
For maximum wage laws, look at salary caps in pro sports.
Posted by: TomHynes at Jul 1, 2007 2:38:46 PM
Maximum wage laws make less sense if what you care about is maximizing the surplus of your own citizens. A minimum wage at least has the potential to increase average surplus (or the cost is lessened) because those lucky enough to get a job get paid more. With a maximum wage you get lower employment and a lower wage, which is going to be strictly worse.
That said, a maximum wage won't accidently give jobs to workers on the far right of the demand curve, but I think that can't outweigh unless the demand curve is concave.
Posted by: Kyle at Jul 1, 2007 3:57:41 PM
If they're concerned about the risk of labor prices increasing what they really need is a foward market for labor or some way to go short Honduran wages.
Posted by: Kyle at Jul 1, 2007 4:04:32 PM
Minimum wage laws at least may be designed to encourage "efficiency wages", dubious but possible. A maximum wage law would then combine disequilibrium with "inefficiency wages"... wow...
Posted by: Jack at Jul 1, 2007 4:14:39 PM
As others have said, it makes less sense. Both reduce employment, but maximum wage laws also reduce the surplus given to the workers.
Unless Honduras is making more money from the companies than it would be from the workers, and redistributing it to its citizens, it's a bad deal.
Posted by: jb at Jul 1, 2007 5:00:52 PM
There are several historical examples I can think of, for the maximum wage. The price controls of WWII and the 1970s, as well as some early puritan American colonies. The (predictable) response is that employers find ways to compensate employees in ways that don't count as a "wage".
So I don't see how meaningful this wage cap is going to be if foreign investors suddenly find they have to offer more to get workers to show up.
Kyle: If you can get a functioning futures or forward market in labor, you will win the Nobel. They would be very nice to have, but run into enforceability problems. You end up having to compel performance if the contract is "in the money". And even if the legal system will play along, the worker will probably just do shoddy work, making the contracts hopelessly difficult to adjudicate.
Posted by: Person at Jul 1, 2007 10:22:37 PM
The more interesting part of the article is that they are going to guarantee a profit-- supposedly by allowing wages below the minimum wage. Why should anyone work, just set up a business that is guaranteed a profit.
Of course it does not say who is guaranteeing the profit or how they will carry out the guarantee. I presume it is the government doing the guaranteeing, right? but maybe it is the union?
Posted by: spencer at Jul 2, 2007 9:51:56 AM
Living in Honduras, I can tell you that the standard minimum wage isn't enough for one person to live on, much less a family. The 20% reduction in Choluteca is a travesty which will only make the rich richer. But jobs are so hard to come by that people will take them anyway.
The companies that come here are competing with China. The only way they can do that is to treat the employees like they are treated in China.
BTW, the money received by the government goes into the pockets of the rich politicians and only pennies on the dollar ever makes it to the poor.
Good discussion.
Posted by: La Gringa at Jul 2, 2007 1:34:46 PM
Person: I wasn't thinking that you would contract with one person for several years (like in sports), but rather you would purchase 1000 hour contracts on the market for labor that could come from anyone. The (huge) problem is that labor isn't anywhere near a commodity. You could have something like a temp agency deliver workers, but this might provide lower quality workers than if you hired directly. Anyway, I think it would make more sense to hedge with contracts based on the average wage for 20-25 year olds with a tenth grade education or something instead and avoid nasty delivery problems.
Posted by: Kyle at Jul 2, 2007 3:51:12 PM
Kyle: I agree with your analysis. If you wanted to hedge against labor costs, it would make much more sense to have some kind of "prediction market" keyed to some publicly available index, in which fulfilment of the contract would not actually involve purchase of labor, just an insurance-like payout.
Incidentally, are there barriers preventing workers themselves from doing something like this as insurance against e.g. declining wages due to globalization?
Posted by: Person at Jul 2, 2007 4:31:31 PM
I think it needs to be made clear what is meant by "makes sense". Economically, a minimum wage is a price floor in a labor market and a maximum wage is a price ceiling. The similarities between the two are that they create roughly the same deadweight loss and no tax revenue is generated. They also both reduce the equilibrium quantity of labor in a market in similar ways, since this quantity is determined by the lesser of quantity supplied and quantity demanded at the mandated price (assuming the price control is binding). The difference is that workers overall gain from a minimum wage while firms lose, and vice versa with a maximum wage. I find a gain for workers (or a loss for firms) more palatable, but that's just my viewpoint. (I doubt these workers have stock in the firms, so the argument that firm gains go back to workers is not a reasonable one.) My justification for this is that the basic economic models of labor supply assume that people don't need to eat- in reality, the decision to sit around and, as other put it so nicely, scratch things because wages are too low is not one that is likely to be made. (In more grown-up terms, labor supply is likely to be pretty inelastic or even downward sloping at low wages.) This implies that the lion's share of the deadweight loss also comes from workers, and thus they suffer a double whammy, whereas the firm would likely not have this problem.
Posted by: Jodi N. Beggs at Jul 2, 2007 5:06:40 PM
Living in Honduras, I can tell you that the standard minimum wage isn't enough for one person to live on, much less a family. ...But jobs are so hard to come by that people will take them anyway.
How do people live then?
Or is the answer that they don't?
Posted by: Tracy W at Jul 2, 2007 10:40:27 PM
I imagine that the odds of workers doing this themselves is incredibly unlikely. Workers in developing countries have enough trouble getting a mortgage let alone fancy hedging instruments. Even in rich countries people don't do the easy hedges against overall wage fluctuations like international diversification.
Posted by: Kyle at Jul 2, 2007 10:44:54 PM
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Posted by: Bill at Mar 31, 2008 8:19:06 PM
Maximum wage caps are indeed an 'infringement' on the magical Free Market. Trying to enact a solid cap (say at 10 million $ a year) would never be passed while the fat cats have Congress in their pockets.
A better solution might be the Ben-And-Jerry's model---the top-payed position can only earn X times what the lowest-paid worker does (benefits included!). Thus before Jenkins the CEO can vote himself another salary increase, he first has to raise the pay of Joe the Janitor. This prevents massive financial abuses whereby the company gets the gold mine while the worker drones get the shaft. Want an example? Look no further than Wal-Mart.
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