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minimum wage
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06-01-2009 1:41pm#1
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Well, the question of a minimum wage is constantly in debate--and has been so, in the broader argument of general wage increases, for centuries. The Classical argument is that a given proportional increase in the (minimum) wage must be offset by a proportional reduction in the number of workers employed. A major assumption behind that is a fixed “wage pool,” or put another way: employers have a fixed amount they will spend on labour, and that’s it. That’s true for industries where economic profit is razor thin; or, the ubiquitous perfectly competitive market. Your entrepreneur is making just enough (their opportunity cost) to keep them in that task. Perfect markets are, effectively, non-existent to that extent--although one could argue that certain small businesses, such as your local shop, fit the framework of tight profit to opportunity cost margins (for employers) with labour costs being high in proportion to total costs.silverharp wrote: »without turning into a left/right or fair/unfair type of discussion, what are effects of having a minimum wage v not. simply put does it cost jobs? or does it effect the number of hours worked in the economy? do the regulations create administrative or other costs either to business or the gov?
its came up in a few of the other threads so it probably worth teasing out as a specific issue.
To go old-school, and to put it in a more formal manner, J.S. Mill said that where capital is fixed, the demand for labour is based upon pre-accumulated capital. Therefore, we can say, the elasticity of demand for labour is unitary; or there will be exactly off-setting actions and counteractions, vis-a-vis wages and numbers employed. Mill was, as far as I understand, the first to reject this classical idea, otherwise known as the “wage fund doctrine,” in response to William Thornton; he did so late into his life, after holding the theory to be true for many years.
Continuing to,In this doctrine it is by implication affirmed that the demand for labour not only increases with the cheapness, but increases in exact proportion to it, the same aggregate sum being paid for labour whatever its price may be [...] There is supposed to be, at any given instant, a sum of wealth, which is unconditionally devoted to the wages of labour. This sum is not regarded as unalterable, for it is augmented by saving, and increases with the progress of wealth; but it is reasoned upon as, at any given moment, a predetermined amount. More than that amount it is assumed that the wage-receiving class cannot possibly divide among them
(Thornton on Labour and its Claims, 1869) Or, in summation, the employer can contribute more of their own private income (profit) to workers, and simply do without a new private plane for awhile. The argument goes back further than this, and was more in relation to hours worked and increases in wage.There is no law of nature making it inherently impossible for wages to rise to the point of absorbing not only the funds which the capitalist had intended to devote to carrying on of his business but the whole of what he allows for his private expenses beyond the necessaries of life
You could also apply the idea that minimum wages are necessary for people not to compete to their own detriment, and to society’s, in the same manner that we have a maximum working-hour week. It’s in society’s interest, one could argue, to have a minimum bar to avoid subsistent living conditions. However, in personal actions, it is in each person’s actions to break this; say an informal agreement to work for €5 an hour, it only takes one person to start off a positional arms race by lowering that to, say, €4.90 (read as a loose example). Therefore, it could be argued that we need binding legislation to prevent this inherent market failure.
I guess an abstract way to analyse the issue is through efficiency wages, or the market setting “non-shirking condition,” without the need for intervention that would, to some extent at least, give the same outcome. Would an industry set a minimum bar themselves, not out of social interest for workers, but, in view of their own profits? For anyone unfamiliar with “shirking,” if you were reading boards.ie at work today then you were shirking :P. The idea comes from a need to have a carrot and stick approach to workers--we cannot monitor workers at every moment, but at least some of the time we can. We then need to create a situation whereby getting sacked is a painful possibility, enough to offset the effort required to work and not shirk. It’s in a worker’s interest to shirk, do little to nothing productive, and simply read boards all day as you’ll still receive a wage; the alternative is to exert effort and receive a wage (I’m purposefully ignoring performance related end-of-year bonuses because minimum wage jobs tend not to have these).
The stick, in this approach, is the difference between unemployment benefit and your wage. The higher the wage, the less you’ll shirk, as you’ll be in fear of losing your job and simply receiving unemployment benefit--and so the increased wage will actually increase the profit of the firm. So, one way of looking at this is for you to get everyone in your office to procrastinate on boards all day and you’ll be paid more to stop
. Essentially, employers would keep an effective floor on wages even if you were to remove the minimum wage; a more free-market paradigm approach. You could then put forward the behavioural economics argument of whether economic agents do, in fact, attempt to maximise their own benefit without recognition to social consequences/benefits; whether firms, as agents, recognise the benefits of higher wages for their workers, and society as a whole, and therefore accept a reduced profit level to achieve this.
An example of some work that illustrates inconsistencies in the rigidity of classical unitary theory is that of Card and Kreuger. What they presented went against the classical doctrine and found an insignificant reduction in employment, relative to the wage increase; there are problems with this work, of course, but it’s still hung around in the face a lot of effort to discard it. Two quite recognised figures that support the findings, at least the broad ideas that it presents, are Stiglitz and Krugman (in Conscience of a Liberal), so there’s no consensus that Card-Kreuger are absolutely wrong, as such.
Work like this goes against what seems logical, and what has been held up to be true for a very long time, so some people find it difficult to accept, even to the narrow test bracket that was used. (People recall their Economics 101 class and the supply and demand graph illustrating an excess supply of labour when you raise the price.) You can argue, effectively, both ways. Minimum wages aren’t one size fits all for every country/region, and its effects aren’t equal in proportion for every industry, so analysing one will give you different results than another. I find it difficult to accept their findings, to be honest; interesting, none the less, however. Others reject Card-Kreuger findings outright.
My own opinion is that it’s a complicated issue--a trite assertion, I know. It depends on how imperfect markets are; what proportion of firms costs are on labour (and, of those total labour costs, what proportion is on person earning the minimum wage); disparities between different wage brackets and income inequality before a minimum wage is implemented; the substitutability of capital and labour in the firm/industry, what the focus of your economy is (how many people are in the minimum wage bracket, i.e. China vis-a-vis manufacturing, as opposed to the more developed nations and service industries); will the increase in wages be reflected by a complete transfer of the increased cost, incurred by firms, to prices (the extent to which this will/can occur goes back to the question about how imperfect markets are) and so reduce the real wage for everyone else, while those on the minimum wage are back to the original real wage; and so on.
I don’t see a unitary elasticity between employment and a minimum wage for employees, at least not at all levels. That said, I wouldn’t advocate increasing the minimum wage as a passing action as though it were to have zero, to few, consequences, however--and some kind of argument that minimum wage increases also cause an increase in total employment seems odd, to frame it kindly. Possibly if you have a labour shortage, and you wish to increase the labour force participation rate, then the increase in total employment, after an increase in the minimum wage, argument could work; other holes open up here, too.
I’m unaware what administrative costs you’re referring to with a minimum wage; the other side of the card could be, assuming that the numbers employed does fall due to the increase in wages, your administrative costs fall as you have to fill in less tax returns...
In short, it’s probably worth having a floor for wages--large numbers of the unskilled competing on the basis of how low they will go isn’t good for society, even if you’re solely looking from the economics perspective--and I doubt the number of hours worked would fall at the minimum wage level--in relation to a backwards-bending labour supply curve type situation--but, for each worker individually then it's a possibility. I'd hazard a guess that the number of hours worked, in total, by workers in that bracket would increase because the increased wage would increase the participation rate, and therefore more workers and more hours.
Whether Ireland has an optimal minimum wage, I don’t know. You could also have an, essentially pointless, argument from an ideological perspective; one side arguing, in a much broader manner, about market intervention, and the other side citing the benefits of the welfare state. That's what generally occurs in the mainstream media.0 -
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