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Raising Rival's Costs
Catherine Rampell at Economix is somewhat surprised that some employers have signed a petition supporting today's increase in the minimum wage. Put aside the fact that this so-called petition is coming after the law is already passed--can anyone say cheap talk--it's really not surprising that some employers support the minimum wage. Rather than a violation of Econ 101, as Rampell suggests, it's more an implication of Econ 101. Simply take a look at why the employers say they are supporting the law. Uniformly the responses go like this:
Social justice, honest day's labor, inequality.... followed by:
I have always paid above minimum wage.
I’m a small business owner but don’t have any minimum wage employees, nor would I ever.
I’ve always paid my workers, even unskilled laborers, more than minimum wage ...
I’m one of those businesses that supports a so-called “living wage” and refuse to pay less than $12/hour...
Note that I don't think that these employers are being dishonest in their support for "social justice" but I do think that it's easy to be in favor of the minimum wage when it doesn't cost you anything.
Indeed, these employers will benefit from an increase in the minimum wage because it will raise the costs of their rivals. This is why unions have typically been in favor of the minimum wage even when their own workers make much more than the minimum.
Finally, note that the opinions of employers are quite irrelevant as to the effects of the minimum wage.
Posted by Alex Tabarrok on July 24, 2009 at 07:27 AM | Permalink
Comments
Back when the first federal minimum-wage legislation was being considered, its boosters included high-wage northern industries with low-wage southern competitors. And the ILGWU, which represents people in New York, used to advocate for increasing the minimum wage for Puerto Rico. Social justice, indeed.
Posted by: Alan Gunn at Jul 24, 2009 8:05:24 AM
Samoa dissents: http://pidp.eastwestcenter.org/pireport/2009/July/07-15-03.htm
Posted by: Harkins at Jul 24, 2009 8:42:27 AM
Note that I don't think that these employers are being dishonest in their support for "social justice" but I do think that it's easy to be in favor of the minimum wage when it doesn't cost you anything.
If they're already paying above minimum wage because they support social justice, then their commitment to that ideal is already costing them.
Posted by: conchis at Jul 24, 2009 9:03:13 AM
"If they're already paying above minimum wage because they support social justice"
They're paying more because market rate is already more.
I live in a midwestern city with low cost of living and McDonalds will pay you $8/hr. If you want someone who can tie his shoes, price goes up to $10
Posted by: Tom at Jul 24, 2009 9:08:19 AM
...the opinions of employers are quite irrelevant as to the effects of the minimum wage
But not quite so irrelevant as the opinions of economists. Unlike the economists, employers will actually make decisions that affect employment, and those decisions will be based in part on their opinions. Of course economists might have more insight into how those effects will propagate, but recent experience with the insights of economists is not encouraging...
Posted by: capitalistimperialistpig at Jul 24, 2009 9:09:03 AM
The estimates of the impact of the minimum wage range from those opposing it demonstrating that it has a negative 0.02% elasticity on employment to those claiming that the impact on employment is zero.
In other words even the strongest opponents claim that the employment impact is much smaller than the income impact.
So you are left with a value judgment as to the impact -- ie, is a strong positive income impact less than or more than offset by a minimal employment impact.
So economist do not seem to able to make an objective determination that it is good or bad.
Posted by: spencer at Jul 24, 2009 9:15:56 AM
I'm a (very) small business owner who pays his people more than minimum wage. This increase won't directly affect me in the short run, but it's still a bad idea as far as I'm concerned. Especially at this point in our business cycle. We should be trying to cut wages in many sectors, not increase them.
Further, an increase for the lowest status workers effectively decreases the status of those making a little more. They feel bad because those unskilled lazy minimum wage people don't make much less than them. Leading to a decrease in job satisfaction throughout the economy.
Anyway, the social justice do-gooders should be concerned with higher income workers, not the minimum wage. There's a lot more injustice in somebody being paid $100/hr when someone else could do the job at $20/hr than there is in a small business paying someone $5/hr.
Posted by: Dirk at Jul 24, 2009 9:25:14 AM
Whenever the minimum wage increases, most places I go to use it as an excuse to raise their prices. I don't think they even pay anyone minimum wage, however, they usually raise everything by 25-50 cents. Lame.
Posted by: Andy at Jul 24, 2009 9:57:16 AM
I had a manager at my last job who appreciated diversity standards because our company always went above and beyond them. Same tortured logic.
Posted by: Andrew at Jul 24, 2009 10:03:05 AM
as a small biz guy, i sincerely don't think this is anythig other than a play at attacking people who employ illegals. no body, and i mean no body, pays less than min. wage...legally. i think this is just one more charge that could be brought against under-the-table or illegal immigrant employers. you can't get capone for murder? go for tax evasion. same thought
Posted by: farmer at Jul 24, 2009 10:17:17 AM
Empirical testing of minimum wage impacts is like pissing in the wind. I can not do anything but yawn when listening to someone trot out a survey showing evidence either in support or against the wage. What I want to see is some city or town get really ambitious and raise the minimum wage to 15 dollars an hour. Let's see what the employment impacts are then!
All this talk or raising the wage from 6 to 7 to 8 dollars an hour, when barely anyone is earning the minimum wage to begin with, is a waste of time. Let's get ambitious. Let's raise the wage a hundred percent and then check for carnage.
Posted by: john pertz at Jul 24, 2009 10:21:57 AM
If anyone's up for the challenge, here's a tool that will put you in the shoes of a small business owner having to cope with an increase in the minimum wage.
Posted by: Ironman at Jul 24, 2009 10:36:18 AM
a maximum wage would work better
Posted by: moron at Jul 24, 2009 11:13:44 AM
"What I want to see is some city or town get really ambitious and raise the minimum wage to 15 dollars an hour. Let's see what the employment impacts are then!"
Well, not $15/hr, but the Michigan Democratic Party are considering a whole series of 'genius' ideas for ballot proposals, including a minimum wage hike to $10/hr. It's actually such an amazing list, it's worth sharing the whole thing:
The potential measures include:
• Hiking the minimum wage to $10 an hour for all workers.
• Imposing a blanket moratorium on home foreclosures for 12 months.
• Cutting utility rates 20% across the board.
• Requiring all employers to provide health care to their employees.
• Hiking, by $100 a week, and extending, for six months, unemployment benefits.
http://www.freep.com/article/20090722/NEWS15/90722031/Dems-to-test-support-for--10-minimum-wage
The economic idiocy evident in that list of proposals is really mind-blowing.
Posted by: Slocum at Jul 24, 2009 11:15:41 AM
@farmer: It's not quite true that no one legally pays less than the minimum wage. State governments are exempt from the federal minimum wage law, and a number of states pay home health care aides, for example, less than the federal minimum wage.
Posted by: Peter at Jul 24, 2009 11:33:17 AM
Street thugs for gangs make less than minimum wage. Of course there are never unintended consequences when we push the market clearing price into the black market.
Posted by: kebko at Jul 24, 2009 11:43:05 AM
I see that the CEO of Costco has signed on to this but I don't see Walmart. Where is Walmart? Walmart is associating itself with groups that are pushing for guest worker programs to solve labor shortages.
Anywhere and everywhere where there is a labor shortage, it is due to the employer underpaying its employees. The hard right (not to be confused with the rational right) has a hard time understanding this basic econ 101 concept.
Posted by: Richard A. at Jul 24, 2009 11:59:08 AM
Noting that Milton Friedman argued for a small rate of inflation because he recognized that wages are sticky and not market clearing, I offer the following deal to those who think the minimum wages is a bad idea:
With the repeal of the minimum wage law would be a requirement that all wages be adjusted, up or down, by at least 10 cents at least once a year, unless unemployment (U-2) exceeds 6% in which case wages must be changed by at least 1% every six months.
Shouldn't the government act to ensure that the labor market is really a market in which prices move in response to the market conditions?
Posted by: mulp at Jul 24, 2009 11:59:54 AM
San Francisco has a $10/hour minimum wage. It mostly acts as a transfer of wealth from tourists and the wealthy to the waitstaff of the city's many restaurants.
Posted by: Sean P. at Jul 24, 2009 12:24:35 PM
Another good example of why the business of business should be solely business and not politics.
Posted by: bbb at Jul 24, 2009 12:36:31 PM
@Richard A: If you don't see Wal-Mart pushing for a higher minimum wage, it's because you're not looking.
Posted by: Ironman at Jul 24, 2009 12:48:55 PM
@spencer "So you are left with a value judgment as to the impact -- ie, is a strong positive income impact less than or more than offset by a minimal employment impact."
I think it's a bit more than a value judgment merely between employment impact and income impact; there are other costs at play, namely the effect this has on prices of products and services produced by minimum wage workers, many of which by the way are probably disproportionately consumed by low-income people to begin with. It's the same "hidden cost" inherent in globalisation discussions that so many people miss.
Even if none of this were true, the relevant question here isn't whether or not the addition to equality swamps the decrease in efficiency. It should always be the goal of policy makers to choose the _best_ policy among alternatives. Minimum wage is a fairly blunt tool relative to other policy tools at our disposal to increase equality. If your goal really is to increase equality at the expense of efficiency, at least choose the policy with the best tradeoff. This concept is entirely missing from most liberal discussions of minimum wage, and shouldn't be.
Posted by: Ben Hughes at Jul 24, 2009 1:06:05 PM
Ironman probably has a very good point that the major impact of the minimum wage is on small business profits rather than on employees at the bottom of the pay scale.
Yet it is virtually impossible to see any economist looking at this issue.
I wonder why they will not touch it with a ten foot pole.
Maybe because it is not politically correct.
Posted by: spencer at Jul 24, 2009 1:11:30 PM
@spencer "So you are left with a value judgment as to the impact -- ie, is a strong positive income impact less than or more than offset by a minimal employment impact."
I think it's a bit more than a value judgment merely between employment impact and income impact; there are other costs at play, namely the effect this has on prices of products and services produced by minimum wage workers, many of which by the way are probably disproportionately consumed by low-income people to begin with. It's the same "hidden cost" inherent in globalisation discussions that so many people miss.
Even if none of this were true, the relevant question here isn't whether or not the addition to equality swamps the decrease in efficiency. It should always be the goal of policy makers to choose the _best_ policy among alternatives. Minimum wage is a fairly blunt tool relative to other policy tools at our disposal to increase equality. If your goal really is to increase equality at the expense of efficiency, at least choose the policy with the best tradeoff. This concept is entirely missing from most liberal discussions of minimum wage, and shouldn't be.
Posted by: Ben Hughes at Jul 24, 2009 1:13:12 PM
Again, why is the left so romantically inclined to the minimum wage? I enjoy talking about this issue because it shows just how anti business the left is. Trust me, the minimum wage is not about improving the lives of the working poor. It is about going into the market and getting their pound of flesh. Milton Friedman gave the left a tool to help the working poor and not cause labor displacement. It is called the earned income tax credit or more to the point, a negative income tax.
However, the left wants to puts along talking in circles about the minimum wage, whose effects we can not confirm. However, here we are with the EITC, which we know for sure will improve the lot of the working poor without the nasty side effects. Yet, the left goes stone cold silent, WHY?
Posted by: john pertz at Jul 24, 2009 1:35:49 PM
It seems that minimum wage laws usually lag the actual minimum wage, and therefore don't have much effect on employment, because they don't have much effect on wages.
But it seems to me that they are dangerous in that they make the low-end labor market brittle. In an economic downturn, wages should be adjusted downwards as individual productivity falls. The only other alternative is layoffs. But by setting the unemployment rate at a level suitable for a strong economy, the goverment takes away the ability of minimum-wage employers to lower wages when profits fall, leading to large unemployment.
What would you rather have in a downturn? Your $8/hr job be reduced to $6/hr, or to be simply layed off and not have an income at all?
Posted by: Dan H. at Jul 24, 2009 1:48:58 PM
Ironman,
I suspect that the CEO of Wal-Mart calling for a raise in the minimum wage back in 2005, is no more sincere than a Republican running for office coming out in favor of raising the minimum wage.
Wal-Mart has the option of signing the Business for a Fair Minimum Wage petition.
Posted by: Richard A. at Jul 24, 2009 2:18:49 PM
"Indeed, these employers will benefit from an increase in the minimum wage because it will raise the costs of their rivals. This is why unions have typically been in favor of the minimum wage even when their own workers make much more than the minimum."
Ehh - often union wages are pinned to minimum wage plus something. They support the hike because it is a raise for them.
Posted by: jizay at Jul 24, 2009 2:30:01 PM
Since the employers are already paying over the new minimum wage, signing a petition supporting it is a freebie way to signal that the employer supports "social justice", whatever that might be in the eye of the beholder. We shouldn't be surprised to see them grasp a free way to generate goodwill.
Posted by: Jonathan Biggar at Jul 24, 2009 2:38:07 PM
@Richard A: I'm afraid the "Business for a Fair Minimum Wage" petition is irrelevant at this point in time. Wal-Mart is instead focusing its resources in favor of mandating health care for all businesses. Which coincidentally, is where the politicians in Washington are currently focused. Anything minimum wage related would likely be on hold for next year, when it would be trotted out to support re-election efforts.
If they eventually sign on, as they did in 2005 for the current series of minimum wage increases, they'll do so only if they can realize an advantage for doing so. You'll note that the two links indicate exactly the same considerations are at play in their support for both efforts, so you're correct in noting that the company is not sincere about its motives. It would then be fair to say that most of the companies that have signed the petition you're advocating are also not being sincere about their real motives - rather, it's more likely that they've already gotten what they need to justify signing it.
Posted by: Ironman at Jul 24, 2009 2:49:04 PM
When I was 18-19 most retail jobs in the Southwest DID pay at or around minimum wage. I'm sure my employer would have paid me less if he legally could have. I supplemented my income by dipping into the cash register, otherwise I would have been short the rent.
So what has changed in the economy that most retail workers apparently earn more than minimum wage now? Does this imply things are better or worse?
Posted by: Rob at Jul 24, 2009 3:39:16 PM
i assume that libertarians think there should be no minimum wage. i, slightly on the left, understand arguments for deleterous effects of too high a min wage. but on what data is the argument for no min wage? is it so hard to believe there might b an optimal sweet spot?
Posted by: rob at Jul 24, 2009 10:48:13 PM
Here is a chamber of commerce pushing a petition to reduce the minimum wage:
http://amsamoachamber.com/?p=552
"WE the undersigned residents of the Territory of American Samoa petition the Honorable Barrack Obama, President of the United States to intervene on our behalf to reverse the minimum wage increases that are causing undue economic turmoil and hardship in the territory."
American Samoa's one industry (tuna canning) is about to get wiped away!
Posted by: Mr. Econotarian at Jul 25, 2009 5:15:04 AM
"but I do think that it's easy to be in favor of the minimum wage when it doesn't cost you anything."
Actually, there is no evidence whatsoever in the statements that supporting the minimum wage doesn't cost these business owners anything. That would require that the market forces them to pay above minimum wage, but none of them actually say that. In fact, the last two indicate that they voluntarily pay above market.
Posted by: ogmb at Jul 25, 2009 5:28:16 AM
I support the minimum wage, but for dynamic reasons -- firstly, because I think it's an affront to dignity to pay below a certain amount for a human being's time in a country as rich as ours, and I feel the minimum wage is below that amount.
The second reason is more complex; in a world in which we can develop technologies which rely on cheap labor or technologies which rely on high-productivity skilled labor, I'd rather incentivize the latter. I want to create a situation where the power differentials inherent to employer-employee interactions are ameliorated by the increasingly skilled nature of employees.
At the end of the day, very few employers don't pay their mortgages if they don't fill one of their slots at their company. And very few employees do, if they don't find a job. Desperation is a hard driver, and those of us who have been gifted with talents great enough that we actually do stand out from the crowd should remember that the masses of ordinary people have little incentive to accede to a society in which it is very hard for the masses of ordinary people to get by.
Posted by: Punditus Maximus at Jul 25, 2009 5:52:35 AM
thank you
Posted by: muhabbet at Jul 25, 2009 8:04:07 AM
Granting that an increase in the minimum wage would reduce the number of jobs for unskilled workers, but would this not be an incentive for workers to become more skilled. If employers had to pay higher wages, might they not respond by hiring people with more skills so they would be worth the wage they receive. We do not assume that all else remains fixed when we look at the effect of taxes, we also consider the effect they have on peoples incentives, but we ignore incentives when we look at the effect of the minimum wage.
Posted by: joan at Jul 25, 2009 9:38:03 AM
Joan
I think your post is plausibly true but not likely. Ive worked in restaurants with crack addicts for dish washers making the minimum wage or very slightly above. I cant see their response to a min wage hike that prices them out of their job going to a vocational school. The thing that isnt being discussed is that min wage jobs are forms of employment for people in dire need. These are people who are in and out of addiction, generally dont have a stable living situation, and many cases that Ive observed barely have a access to a phone.
I take min wage hikes seriously because there can be nothing sadder than pricing these very low skilled people out of the market for no good reason than politicians and voters wanting to show that they care. Markets can provide labor for people of even the most inept capabilities and I think voters and politicians would do better by trying to improve these people's lot in life through the EITC and not the minimum wage.
Posted by: john pertz at Jul 25, 2009 11:24:41 AM
What if there were no min wage?
I live in a large city in Texas in which nearly all the kitchen staff at every restaurant is illegal labor and everyone knows it and hardly anyone who lives in the city has a problem with that. If there were no min wage, these illegal workers would likely get paid much less, there would be more restaurants able to exist since costs would be lower, and there would be a much greater influx illegal workers. In fact, wages overall would be pushed down for all non-skilled labor.
Then all these jerks who think that illegal workers are costing Americans there jobs or lowering their incomes would start to be right.
Posted by: Rob at Jul 25, 2009 1:10:45 PM
While it is easy for employers to measure employee cost, it is difficult for most to really know what they are worth. As Henry Ford demonstrated, naive calculations are just that. One also has to consider the cost of turnover, retraining, care, quality, dedication. Employers want to hire at the lowest cost and then sort out the best, but this is often at odds with optimal results.
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