@arindube Vernon Smith on the cruelty of the minimum wage

@arindube Paul Krugman on the minimum/living wage in 1998

Utopia, you are standing in it!

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Low pay across the OECD

Should it be illegal for workers to accept a sub-minimum wage job?

New Zealand has one of the highest minimum wages

via CONVERSABLE ECONOMIST: Some International Minimum Wage Comparisons

Who has the highest minimum wage in purchasing power parity terms?

Paul Samuelson on the minimum wage

Paul Samuelson on the minimum wage

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Australia’s minimum wage is one of the highest in world

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Offsetting behaviour alert: only fools and politicians would believe that a minimum wage increase increases net pay and conditions

John Schmitt  lists 11 margins along which a minimum wage might cause changes in net pay and conditions:

  1. Reduction in hours worked (because firms faced with a higher minimum wage trim back on the hours they want),
  2. Reduction in non-wage benefits (to offset the higher costs of the minimum wage),
  3. Reduction in money spent on training (again, to offset the higher costs of the minimum wage),
  4. Change in composition of the workforce (that is, hiring additional workers with middle or higher skill levels, and fewer of those minimum wage workers with lower skill levels),
  5. Higher prices (passing the cost of the higher minimum wage on to consumers),
  6. Improvements in efficient use of labour (in a model where employers are not always at the peak level of efficiency, a higher cost of labour might give them a push to be more efficient),
  7. “Efficiency wage” responses from workers (when workers are paid more, they have a greater incentive to keep their jobs, and thus may work harder and shirk less),
  8. Wage compression (minimum wage workers get more, but those above them on the wage scale may not get as much as they otherwise would),
  9. Reduction in profits (higher costs of minimum wage workers reduces profits),
  10. Increase in demand (a higher minimum wage boosts buying power in overall economy), and
  11. Reduced turnover (a higher minimum wage makes a stronger bond between employer and workers, and gives employers more reason to train and hold on to worker.

Richard McKenzie argues that the biggest impact  of a minimum wage increase is reductions to paid and unpaid benefits for minimum wage workers, including  health insurance, store discounts, free food, flexible scheduling, and job security resulting from higher-skilled workers drawn to the higher minimum wage jobs:

  • Masanori Hashimoto found that under the 1967 minimum-wage hike, workers gained 32 cents in money income but lost 41 cents per hour in training—a net loss of 9 cents an hour in full-income compensation.
  • Other researchers in independently completed studies found more evidence that a hike in the minimum wage undercuts on-the-job training and undermines covered workers’ long-term income growth.
  • Wessels found that the minimum wage caused retail establishments in New York to increase work demands by cutting back on the number of workers and giving workers fewer hours to do the same work.
  • Fleisher, Dunn, and Alpert found that minimum-wage increases lead to large reductions in fringe benefits and to worsening working conditions.
  • Marks found that workers covered by the federal minimum-wage law were also more likely to work part time, given that part-time workers can be excluded from employer-provided health insurance plans.

McKenzie also argued that if the minimum wage does not cause employers to make substantial reductions in fringe benefits and increases in work demands, then an increased minimum should cause

(1) An increase in the labour-force-participation rates of covered workers (because workers would be moving up their supply of labour curves),

(2) A reduction in the rate at which covered workers quit their jobs (because their jobs would then be more attractive), and

(3) A significant increase in prices of production processes heavily dependent on covered minimum-wage workers.

Wessels found that minimum-wage increases had exactly the opposite effect as intended: labour force participation rates went down; job quit rates went up, and prices did not rise appreciably.

These are findings by Wessels are consistent only with the view that minimum-wage increases make workers worse off, rather than better off in terms of net pay and conditions. After the minimum wage increase, the net advantages and disadvantages of menial jobs are less than before. Fewer workers enter the workforce and more quit their jobs.

McKenzie was the first economist to argue that a minimum wage increase may actually reduce the labour supply of menial workers. Employment in menial jobs may go down slightly in the face of minimum-wage increases not so much because the employers don’t want to offer the jobs, but because fewer workers want these menial jobs that are offered.

The repackaging of monetary and non-monetary benefits, greater work intensities and fewer training opportunities make these jobs less attractive relative to their other options. This reduction in labour supply by low skilled workers is why the voluntary quit rate among low-wage workers goes up, not down, after a minimum wage increase. As McKenzie explains

Economists almost uniformly argue that minimum wage laws benefit some workers at the expense of other workers.

This argument is implicitly founded on the assumption that money wages are the only form of labour compensation. Based on the more realistic assumption that labour is paid in many different ways, the analysis of this paper demonstrates that all labourers within a perfectly competitive labour market are adversely affected by minimum wages.

Although employment opportunities are reduced by such laws, affected labour markets clear. Conventional analysis of the effect of minimum wages on monopsony markets is also upset by the model developed.

McKenzie argues that not accounting for offsetting behaviour led to a fundamental misinterpretation in the empirical literature on the minimum wage. That literature shows that small increases in the minimum wages does not seem to affect employment and unemployment by that much.

…. wage income is not the only form of compensation with which employers pay their workers. Also in the mix are fringe benefits, relaxed work demands, workplace ambiance, respect, schedule flexibility, job security and hours of work.

Employers compete with one another to reduce their labour costs for unskilled workers, while unskilled workers compete for the available unskilled jobs — with an eye on the total value of the compensation package.

With a minimum-wage increase, employers will move to cut labour costs by reducing fringe benefits and increasing work demands

Proponents and opponents of minimum-wage hikes do not seem to realize that the tiny employment effects consistently found across numerous studies provide the strongest evidence available that increases in the minimum wage have been largely neutralized by cost savings on fringe benefits and increased work demands and the cost savings from the more obscure and hard-to-measure cuts in nonmoney compensation.

McKenzie is correct in arguing that the empirical literature on the minimum wage is dewy-eyed. The first assumption about any regulation is the market will offset it significantly.

In the course of undoing the direct effects of the regulation, there will be unintended consequences such as the remixing of wage and nonwage components of remuneration packages of low skilled workers covered by the minimum wage. Greg Mankiw concludes that:

The minimum wage has its greatest impact on the market for teenage labour. The equilibrium wages of teenagers are low because teenagers are among the least skilled and least experienced members of the labour force.

In addition, teenagers are often willing to accept a lower wage in exchange for on-the-job training. . . . As a result, the minimum wage is more often binding for teenagers than for other members of the labour force.

Some Ground Rules for the Minimum Wage debate

This is the best single paper I’ve seen written on the methodology of the minimum wage debate.

From a great blog I have just discovered, the author gives a good kicking to both sides for empiricial sloppiness, advocacy bias and plain bad economics. He also explains how to lift your game no matter where you are on the political spectrum.

Naturally, the author, , is an economics undergraduate.

Gains from Trade

My latest article for Turning Point USA. I suggest some aspects of the debate that just need to go away. Your thoughts?

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