Friday, December 5, 2014

Three Cheers for the Minimum Wage

I’m taking an econ class for my MBA program right now, and we covered minimum wage. The intro econ view is that the labor market is like all efficient markets. There is a labor supply curve, and a labor demand curve, and there is an equilibrium price. 

There is also a wage floor, the minimum wage. I’m pretty left wing, and I know that some of my own peers are too, and they seem to have drunk the Kool Aide on the problem with the wage floor – that being it created structural unemployment.  This has distressed me.

So I was thinking about the problem with intro econ stuff, namely that it is a vast simplification and has a lot of normative biases towards conservative leanings. There’s a saying in econ circles to counter Colbert, that “Facts have a conservative bias.” That is true, but only at the level of simplification.

What econ as taught, at least in the intro econ classes I’ve had, doesn’t talk about enough is the simplifications that have taken place to illustrate the concept. The example here is the labor market.  The labor market supply and demand curve intersection graph assumes four big things that are not true. First is that all workers are the same. Second is that all jobs are the same. Third that there is no such thing as search and the markets clear.  Finally, they assume that there is no government to act as an agent of redistribution. 

That’s just not true.  There are many labor markets, and for most the equilibrium price is above the wage floor, so the wage floor only sets a standard. Those where the wage floor is above the clearing price, the jobs and the pay are horrible. A government should step in, as ours does to a limited extent, to make better the lives of those workers who work and those who are locked out of the labor market through structural unemployment. The problem is that a certain party has demonized those at the bottom of the wage scale, calling them takers are welfare queens. That means people want to work; there is a cultural and monetary advantage to working where there is not to just relying on benefits.

The other option is to look at the labor markets that do clear. Here I’m thinking of migrant farm workers. They are paid less than the minimum and have no guarantee of employment. When Alabama cracked down on undocumented workers, farmers couldn’t get people to harvest their fields because the national market price of farm labor was too low for people used to some labor protection. The jobs are that bad. That’s why I think a minimum wage is good, because it helps pull those shadow wages up, and there is less poverty overall with transfers even with structural employment.

Overall, the question should be about the appropriate level of the minimum wager, and stricter enforcement of wage and labor laws, not less.

Addendum, 12/7/2014

Another problem popped up in Facebook reply to a former student of mine: The other problem. The econ 101 view is also a market with perfect information. The employer has an information asymmetry in that area, in that it knows more about the labor market than the potential employee -- this is helped in some form by sites like Glassdoor, but it is imperfect. There is also the power gradient in that the employer can take someone down to the clearing price, but in some labor markets it is not possible to live at the clearing price for labor. Thus the government-mandated wage floor.