Thursday, December 5, 2013

Take a good look backwards as well as forwards in the economics of the minimum wage

Don Boudreaux links to Bryan Caplan, who has an interesting post up pointing out that we need to consider the dynamic response to a minimum wage announcement. I only call it "interesting" because I'm not entirely sure what I think of it yet, but I think it's worth thinking about.

The point is that if a minimum wage hike is passed in advance firms can gradually adjust through reduced hiring and attrition (if indeed that's the direction they would respond - of course if the monopsony model is correct there may be increased hiring gradually). The point is, by the time of the actual discontinuity in the law everything might have happened already.


The trouble I'm having with this is that I'm not sure what would cause the gradual response. If you were making major transitions to capital-intensive production I could see doing that gradually, but presumably that's not what we're talking about in many of these cases (although I suppose that's an empirical question). If you're not doing the same thing, more capital intensively, why not just pay the same amount of people low wages until the minimum wage goes into effect and then pull up stakes? In the high turnover world of fast food franchises (as in, for example, the Card and Krueger study) that seems very reasonable. What glide path are we really thinking of in the Card and Krueger case??

But as I say - it's interesting. I don't quite know the answer.

This reminds me of a post I had a couple weeks back on the minimum wage noting that we have to follow things forward in time before we pass judgment. Why? Because different monopsony models imply different long run effects. If it's a straightforward market power model then the minimum wage (as long as it's modest) should be good in the long and short run. If it's a fixed labor cost version of the monopsony model it will have good short run and bad long run effects. So you need to look a while out to really get a sense of what you're dealing with.

It's an ex-post dynamic response explanation. Here, Bryan and Don are talking about an ex-ante dynamic response. But it's still the same sort of idea.


  1. I'm not sure about Bryans conspiritorial attitude. Nor am I sure that there would be no lay-offs when the wage change occurs. But, I think he's right that many firms will deal with the situation by not replacing staff who leave. Some low wage employers have high turnover, but not all, even in fast-food the employee turnover rate is only 61% at present. The other way they will deal with the situation is to reduce non-percuinary benefits and demand more flexible working hours.

  2. The hiring vs. separation thing seems like a non-issue to me. Do we care? It certainly doesn't matter for the empirical analyses to date.

    The bigger issue is the timing of the adjustment.

    1. I think it does matter. Employers will try to minimize lay offs for reasons of morale and public appearances. That means if they have very high turnover they will leave it until the change occurs to hire fewer people, while if they have lower turnover they'll act sooner.

  3. Look, you can follow this logic forever. On the day the minimum wage is hiked, E(MWH) = 1. But on the day before, E(MWH) = 0.99, right? It can't come as a huge surprise? The night of the 2006 midterm elections, E(MWH) had to increase substantially. But even before that night it was clear that E(Democratic Takeover of Congress) was pretty high and E(MWH|DToC) was also pretty high. In fact, you start to see Democratic polling numbers leap up from a narrow lead to a double-digit lead as early as late '05:

    So why wouldn't rational businesses start adjusting to a prospective minimum wage hike as soon as E(MWH|DToC, etc) exceed 0.5?

    My answer, of course, is some combination of "bounded rationality" and "milking current wage/profit structures for as long as possible."

    Also, Bryan's theory that the only reason minimum wage hikes could be phased in is for reasons that support his priors is a little silly when you consider that almost every law, about anything, ever, has some sort of phase-in, even those that don't have a lot of regulatory promulgation or administrative stand-up. It's just basic fairness to give people a period of certainty between "will this be the law?" and "the law applies today."

  4. From John Csekitz-
    I asked Don what he thought would happen in the short and long term regarding the SeaTac MW increase to $15.00

    While I am sure the there will be cherry picking to confirm strongly held biases; I think there could be some great insights learned from that experiment.

  5. Two comments. Here's the first one.

    One of the things that always strikes me as... weird, about the minimum wage debate is that most of the time we set up our economic models and think through them under the assumptions that goods or commodities are perfectly divisible. Of course when we take our models to the data, that assumption usually doesn't hold so we, sigh, invoke the 'approximation justification' and deal with real world indivisible quantities. Yet when we have a real world situation where an obvious divisibility clearly exists we refuse to bring our analysis closer to the theory and insist on treating a very much divisible commodity as if it was somehow indivisible.

    "Standard theory" (no monopsony, no weird stuff) does not predict that an increase in the minimum wage will necessarily cause employers to hire fewer laborers. It predicts that it will cause employers to hire less *labor input*. If you're an employer and you want to reduce labor input as a result of minimum wage you can either cut the number of workers, and keep the hours per each worker still hired the same, or you can keep the same number of workers but cut each one's hours - as a first order approximation, you're indifferent. Afaict, no minimum wage laws simultaneously mandate minimum hiring hours. And these are jobs paid by the hour, not salaried (is that why commentators and economists forget about this? Because that's not *their* own occupational experience?)

    Minimum wage goes up. You don't want to fire any workers because in the future - say, when demand goes up - you might want to hire more workers and keeping the ones you got economizes on fixed hiring costs. But you want to cut hours hired. Instead of being open till 1AM you now close at midnight. And instead of keeping the full restaurant open till midnight you make the 10pm-midnight shift "drive through only". You cut back on the number of items on your menu, economizing on the need for prep work. Etc. Along, you cut your existing workers hours.

    These kinds of adjustments do take time. Fitting your workers demanded schedules into a workable lattice is tricky. Readjusting your store's operation to different hours involves some changes. Maybe workers need to be retrained in how they prepare/produce the goods. If you know the min wage hike is coming, by the time it comes, you're more or less fully adjusted. Nothing of note is observed by the researcher, *not even* the reduction in hours (never mind employment effects). If the hike is unanticipated you will also have adjust and since that will be spread out over time, sloppy and myopic studies won't detect it. But at least there will be something there to detect. But it won't be employment, it will be hours.

  6. Second comment, specifically on this: "If you were making major transitions to capital-intensive production I could see doing that gradually"

    You're thinking too theoretical here. Or maybe not theoretical enough. The substitution is not just between capital and labor input but also between different types of labor. Contrary to popular belief (and this is noted in some studies though for different reasons, and never fully pursued) different workers *within* industries affected by min wage are not perfect substitutes for each other. Older workers may be more reliable (in terms of punctuality etc) but perhaps are harder to train in terms of ... I don't know, customer friendliness (some stereotyping here on my part, sorry). College and high school kids may have scheduling demands which are more flexible than single parents. Etc.

    This is generally reflected in some wage differentials and in different proportions of different kinds of workers want to hire. A change in min wages - particularly if it binds on a particular kind of worker but not on another - will alter these proportion and induce substitution from one to another. Maybe you now want more waiters - better service - but fewer cooks - food takes slightly longer to come out!

    But again, the margin you're operating on is mostly hours. And perhaps the rate and *kind* of new hires. And again, this runs into the reasons I listed above for 'gradual adjustment'.


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