Sunday, February 24, 2013

Great sentences on the minimum wage

From Bill Woolsey. I'm not sure about the end of this one way or the other but its an interesting thought:
"My vision of the real world is that it is rife with monopoly, monopsony, and all sorts of price and wage discrimination. But, this is in the context of lots of compeition. Competition is "imperfect," but the gains and losses in efficiency are small and fleeting in world of creative distruction.

Still, I wouldn't be surprised if the monopsony effect resulted in some firms hiring more workers due to a higher minimum wage. Unfortunately, that same increase in the minimum wage will push the wage above the marginal revenue product of labor for other firms so that they hire fewer workers.

The notion that government operates like an omniscient benevolent despot and could and would set a wage in each and every market so that competitive equilibrium is approximated is completely unrealistic. I think a more plausible starting place would be politicians trading off the loss of employment versus the increase in wage income. That would suggest that minimum wages would be set above the marginal revenue product of the current level of employment. Of course, reduced profits to firms, very significant politically relevant short run, and even higher prices to those purchasing the products might relevant."
Our estimates are pooled across labor markets and firms. A zero effect really just means we've got about as many going one way as the other.

The wage discrimination point in the post is important to consider too, although its relative prevalence is obviously an empirical question (I'm guessing these places for the minimum wage discussion have take-it-or-leave it wage structures).


  1. The other impetuous is a move to increase productivity, whether by making them work harder (more effort) or smarter (more technology). This latter effect may be the most significant, increasing overall productivity.

  2. A zero effect really just means we've got about as many going one way as the other.

    Let's assume that a "modest" increase really has negligible (aggregate) effects. Are we sure that a 24% increase is still "modest"? Everybody agrees that doubling the minimum wage will reduce hiring, right? So why are we taking it for granted that a 24% hike has no effect? Is *that* what the studies showed? The last 2 hikes were around 11% each.

    1. Depends on how it's structured - 5.15 to 7.25 is 40%, but it was spread out as you allude to. If 24% is spread out probably the same as in the past.

      Labor demand for teenage workers is a lot weaker now than it was, though.

  3. An implication of this discrimination idea is that a minimum could improve the lot of workers paid below what the best paid worker is paid. Their pay would go from well below the market clearing wage up to the market clearing wage, with no impact on the quantity employed. It would be a potential benefit of labor unions as well.

  4. I think it happens too. Why else do employer promote the custom of works not knowing what others are paid?


All anonymous comments will be deleted. Consistent pseudonyms are fine.