Why minimum wage has no discernible effect on employment

5 May, 2015 at 17:11 | Posted in Economics | 3 Comments

Economists have conducted hundreds of studies of the employment impact of the minimum wage. Summarizing those studies is a daunting task, but two recent meta-studies analyzing the research conducted since the early 1990s concludes that the minimum wage has little or no discernible effect on the employment prospects of low-wage workers.

01The most likely reason for this outcome is that the cost shock of the minimum wage is small relative to most firms’ overall costs and only modest relative to the wages paid to low-wage workers. In the traditional discussion of the minimum wage, economists have focused on how these costs affect employment outcomes, but employers have many other channels of adjustment. Employers can reduce hours, non-wage benefits, or training. Employers can also shift the composition towardhigher skilled workers, cut pay to more highly paid workers, take action to increase worker productivity (from reorganizing production to increasing training), increase prices to consumers, or simply accept a smaller profit margin. Workers may also respond to the higher wage by working harder on the job. But, probably the most important channel of adjustment is through reductions in labor turnover, which yield significant cost savings to employers.

John Schmitt/CEPR

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  1. And interestingly even with all that there is no mention of the obvious benefit. Workers receiving a higher minimum wage tend to spend it increasing the aggregate turn in the economy.

  2. In this post, and the companion post citing the egregious op-ed by James M. Buchanan, we see the consequences of failing to think realistically about the economy. I’d like to draw attention to just how thorough and far-reaching this failure is.
    .
    In textbook reasoning, of the kind Buchanan adapts for ideological purposes, the economist is thinking in terms of a metaphorical market and allocational efficiency: the wage is like the setting on a valve, metering out labor services. There is literally a quantity of labor allocated, and a strong presumption that a higher price per unit of labor will result in substitution, that is, a change in allocation. The governing theoretical model is one in which it is simply ASSUMED that technical or managerial efficiency is achieved, so that the only problem is allocational efficiency. In short, uncertainty is assumed away.
    .
    In actual firms, allocational efficiency is generally subordinate to technical or managerial efficiency, which is a partially unsolved problem, the problem of coping with uncertainty as a continuous fact of life. This is uncertainty manifest on the microeconomic level of the firm: the assumption that technical or managerial efficiency is achieved is wholly unrealistic. And, actual firms — and employment relations along with them — are organized not around the economist’s theoretical construct of allocational efficiency, but around achieving technical efficiency in the control of production processes.
    .
    In actual firms, managers and their employees are struggling not with problems of allocation, but problems of . . . well, management: of coping with mistakes, controlling the production process and its inevitable waste. The wage is not about a quantity of labor service; the wage is a fixed pledge contingent on following managerial direction. Show up for a certain amount of time, do what you are told, follow procedure, control the production process, be prepared to pitch in when things go wrong. In a restaurant, say, it is pitch in when there’s an unexpected surge of customers, or someone spills some food, or some food is not cooked to the customer’s satisfaction and so on. People are employed to clean up, to follow recipes, to cope with customer’s demands and complaints, meeting standards of service or food quality or hygiene, and so on. When employees are required to wash their hands, that’s a procedure adopted to cope with an uncertain world, in which there’s some chance of contamination; it does not map onto allocation of finely metered labor services.
    .
    In theoretical terms, under assumed certainty, the wage is equal to the marginal product of labor and this is a technologically determined quantity, because under certainty, technical efficiency is assumed to have been achieved, leaving only the problem of allocational efficiency. Under uncertainty, it will still be theoretically true that the marginal product of labor equals the wage (Stiglitz proved this, for what it is worth), but this result is managerially determined. If the wage is higher, management will make better use of labor.
    .
    Under certainty, too high a wage has more serious welfare consequences than too low a wage, because the actual marginal product is technologically determined, independent of the wage rate. Under uncertainty, too low a wage is more wasteful than too high a wage; the asymmetry of welfare results is reversed.
    .
    Moreover, under uncertainty, wages are “sticky” by design. Indeed, most prices are “sticky”: fixed in nominal terms with significant contingencies (such as warranties and guarantees and conditions, and threats in the form of “this behavior will get you fired” or “this product failure will get you arrested or sued”), in order to facilitate technical management.
    .
    None of this, strictly speaking, is missing from orthodox economics. It is there, but it is conveniently forgotten or dismissed as a matter of ingrained habit, as the logic of certainty festered in the textbooks and the op-eds of ideologically motivated pissants.

  3. Some time ago I wondered why Congress, which has been mostly held by Democrats for decades, has failed to index the minimum wage to inflation, like they have indexed other things. In trying to find out I ran across a few studies about minimum wage increases back in the 1980s. In those studies there seemed to be no clear effects upon unemployment or prices. {shrug}


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