Friday, March 10, 2006

Devil's Policy Advocate

It’s Opposite Day, and Tyler’s alter ego Tyrone is defending the minimum wage. But he doesn’t defend it as I expected. If I were to defend the minimum wage, it would go something like this:
The evidence indicates that the minimum wage’s disemployment effect is relatively small. That means the demand for unskilled labor is inelastic. And that means the total amount paid in wages will increase after a wage hike despite the reduction in working hours. This is perfectly consistent with the standard neoclassical model of the labor market; the claim was never that demand for labor is elastic, only that it slopes downward.

So the question is, how is the higher total compensation distributed? The standard argument is that workers who keep their jobs are the winners, while workers who get fired (or not hired to begin with) are the losers. But it’s actually possible that all workers will share in the gains. How? Two ways: (1) The high rate of turnover in unskilled jobs means that most workers alternate between employment and unemployment. The higher wages in the employed periods outweigh the zero wages in the unemployed periods. But more likely: (2) The disemployment manifests as a reduction in hours per worker rather than a reduction in workers. Everyone keeps working, and though they work fewer hours, the higher pay during the hours worked more than compensates. (This possibility would rationalize the Card-Krueger study – which showed an increase in “Full Time Employment” (FTE) in New Jersey fast food restaurants after a minimum wage hike – and the subsequent Neumark-Wascher study that showed a reduction in payroll hours after the same hike. FTE measures workers, not hours worked.)
Following Tyler’s lead, I’ll resist the impulse to make the counterargument.

1 comment:

Ben said...

Marginal revolution is down so I don't know what they wrote but I'll tell you how I defend minimum wage. I'd like to know if people think it makes sense:

IMO Minimum wage should exist but should be set slightly under a time average of the natural economic equilibrium for wages. Although you might think this is useless, it is not because it smoothes out temporary fluctuations in the markets which can incur costly transaction/adaptation costs to everyone. Volatility in markets can appear in all sorts of conditions especially when there are few competitors in a sector and one closes down or leaves a relatively small or isolated market. Individuals don’t have big buffers for these kinds of fluctuations and being swept by these waves is costly. Employers can exploit high transaction costs (costs of moving away and finding a new job for example) that keep them from leaving and impose big pay cuts. Employees can be forced until the market stabilizes to keep a job at a rate of pay they would never have accepted if they were not already established in their locality. Minimum wages are useful to smooth out the effects on people who are already most vulnerable because they are at the bottom of the wage scale and are too isolated for markets to function rapidly enough to provide a constant fair wage.