It is of course possible to have both. Set a minimum income guarantee for everyone (so that even those who are not working, don’t starve), allow the minimum income to be retained by those in work (so avoiding a high effective tax rate on low incomes), and add a minimum wage as well (so discouraging low-productivity work, and incentivizing training for higher productivity work).
By the way, the major political value of describing Walmart as a “welfare queen” is that welfare recipients are stigmatised, and this line of rhetoric redirects the stigma (and tends to dilute it). It is unfair to Walmart, but perhaps no less fair than calling anyone a welfare queen.
Why a bad idea, though? I guess you are disputing this point:
(so discouraging low-productivity work, and incentivizing training for higher productivity work).
Here’s a simple model. Assume that full-time employees cannot live on less than $8 an hour (they starve, can’t pay rent etc.) Also assume that an employer can offer untrained staff two sorts of job:
Job 1 has very low productivity, total value of $6 per hour, but a pay-rate of $3 per hour. $3 a hour is too low to live on, but employees will accept it where that supplements a minimum guaranteed income.
Job 2 has higher productivity, total value of $14 per hour, but staff must be trained to do it, and because they now have transferable skills, the employer must offer $10 an hour to retain them. The training costs average at $2 per hour over the typical duration of the employment.
The employer offers staff Job 1 because that gives a higher profit ($3 per hour, rather than $2 per hour). Staff take it because $3 is better than nothing. But there is more economic value created if employers offer Job 2 instead. A minimum wage requires them to do that. You can argue the details, but that’s the general principle.
There is clearly a counter-argument that the minimum wage is a market intervention and can cause inefficiencies (it may result in some folks who just can’t be trained losing their $3 per hour jobs). But the counter to that counter-argument is that the minimum income guarantee is already a market intervention which is encouraging employers to offer Job 1 (as it allows employees to accept it). So a corrective intervention is needed.
There is clearly a counter-argument that the minimum wage is a market intervention and can cause inefficiencies (it may result in some folks who just can’t be trained losing their $3 per hour jobs).
That’s an inefficiency, but it seems to me that a far more central one is embedded in the assumptions of your toy model: how many unskilled jobs ($3) funge against skilled or semi-skilled ones ($10). In practice, it seems to me that the kind of jobs an employer can offer are often narrowly constrained by business requirements.
A factory owner, for example, might be able to retrain unskilled line workers (fitting Subwidget A to Subwidget B) to do semi-skilled work (operating a widget-fitting machine) for higher total productivity; that’s consistent with your model’s assumptions. But if you run, say, a hardware store, someone’s got to stack shelves, mop the floors, and run the registers, all of which take roughly the same level of training, and there’s only so many places you can squeeze out more per-body productivity by investing more. Anyone you have to fire because of minimum-wage laws there represents an economic loss: they aren’t getting paid, and you aren’t running as efficient a business as you could be.
OK, a fair criticism of the “toy” model, which was simplified to make the point. There are always multiple choices of productivity and wage level, and big moves (more than doubling employee productivity, while simultaneously quadrupling the cost of labour) usually can’t happen quickly.
Back in the real world, I did a quick look at the economic evidence, and was surprised. The latest evidence base is that the minimum wage has surprisingly little effect on anything. It seems to have no discernible effect on employment levels—see here—but it has no clear net impact on training levels either—see here.
One problem is that minimum wages tend to be varied only marginally, so it is hard to see a big effect. However, the UK provides a more dramatic experiment, where minimum wages were abolished in the 1990s, then re-introduced a few years later. Some UK assessment here on employment and on training. Again, not a big impact in either case, though training levels apparently did increase among groups affected by the minimum wage. This suggests the toy model is not totally daft.
Interesting reading, although I’m always leery of relying on a single meta-analysis of a politically charged subject. For the sake of argument, though, let’s take it as given that increasing the minimum wage has no or only a small effect on employment rates. Where’s the money coming from, then, and what would we expect that to do to the economy?
First option: It’s a free lunch; the money would otherwise go to line the pockets of (spherical, behatted, cigar-chomping) capitalists. This is implausible to me on priors, but we can put bounds on how far we can stretch it: most businesses run on margins of 15 to 20%. I’m having a slightly harder time finding figures on personnel costs, but Google informs me that 38% is a decent payroll target; factor in benefits and such and let’s call it 50% for all personnel-related expenses. This suggests that minimum wage laws could increase average wages by 10 or 20% without cutting too much into business owners’ cigar budgets, although we should really be thinking on the margins here.
Second option: It’s being passed on to consumers in the form of higher prices. On average people are making more but also paying more; this means inflation. There are institutions trying to control inflation, though, so the costs probably end up being taken out in lower interest rates or in subtler ways. Note that higher costs of consumer goods work a lot like a mildly regressive tax; lower-income people buy more in consumer goods as a share of income.
Third option: The balance of labor changes. Jobs that can’t economically be done at the lower wage points move to places that have less stringent laws, and trainable or higher-skilled jobs move in to fill the employment gaps. I don’t think I’m economist enough to analyze this fully, but it looks like we’d expect wages for those higher-skilled jobs to go down in the affected jurisdiction as a consequence of supply-and-demand issues, probably after a time lag. In any case someone’s still doing crappy jobs for crappy wages; they just don’t show up in the statistics. Frictional costs also arise; outsourcing isn’t cheap.
Fourth option: Something’s masking the effect. Either the changes are slow enough that they don’t show up in the available statistics, or something I haven’t thought of is going on.
Interesting reading, although I’m always leery of relying on a single meta-analysis of a politically charged subject.
My first reference above was more of a “meta-meta-analysis” since it surveys the results of several meta-analyses! At a high level, it is going to be quite difficult to argue that there really is a big impact on employment, but somehow all the analyses and meta-analyses have missed it. As I said, I found it surprising, but this is the full evidence base.
For the sake of argument, though, let’s take it as given that increasing the minimum wage has no or only a small effect on employment rates. Where’s the money coming from, and what would we expect that to do to the economy?
This is the main question addressed by the Schmitt paper. To quote the exec summary.
“The report reviews evidence on eleven possible adjustments to minimum-wage increases that may help to explain why the measured employment effects are so consistently small. The strongest evidence suggests that the most important channels of adjustment are: reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners (“wage compression”); and small price increases.”
One of the other hypotheses considered was a reduction in profits (which is what the toy model would suggest: the low-wage “Job 1” maximizes profits rather than productivity, and moving to “Job 2″ increases productivity but lowers profits). However, Schmitt found not many studies and not much evidence of this, except in the UK following introduction of the minimum wage from nothing. Again, I found that very surprising: if anyone is losing out by paying the minimum wage, you would expect it to be the Walmarts of the world. But not so, apparently.
Personally I would expect large corporations and the very rich to be capable of defending their position against any reasonably predictable shift in the economic environment, since they have resources and motivation to lay out more comprehensive contingency plans than anyone else.
That extra productivity from “Job 2” doesn’t just vanish into the aether. Higher minimum wage means the poorest people have more money, then they turn around and spend that money at Walmart.
The ones who lose out from a higher minimum wage would be the middle managers, who are then less free to treat bottom-tier workers as interchangeable, disposable, safe targets for petty abuse. With higher wages, those workers will have more of the financial security that makes them willing to risk standing up for themselves, and specialized skills that make them more expensive to replace. That’s what wage compression, reductions in turnover, and improvements in organizational efficiency look like from the trenches.
Higher minimum wage means the poorest people have more money, then they turn around and spend that money at Walmart.
The poorest people do not directly benefit from minimum wage, because they don’t have jobs. Many participants in the informal economy are also very poor.
One option I didn’t think of in the ancestor is that people pushed into the informal sector may still be showing up as employed in the sources being referenced: people making a lower-than-minimum-wage living as e.g. junk collectors are sometimes counted as such depending on methodology. We could pick out this effect by asking for personal earnings as well as employment status: if higher minimum wages are coming out of corporate margins somewhere, we’d expect average earnings (at least in the lower segment of the workforce) to go up, but we wouldn’t expect that if it’s pushing people into the informal sector. A survey would probably have to be carefully designed to have the resolution to pick this up, though.
Managers are more likely to abuse minimum wage workers the higher the minimum wage. At a higher minimum wage workers will value their jobs more and so will tolerate more abuse before quitting, and managers will value having the worker less because employing the worker is more costly.
There’s some evidence this is false. Now, when I tried to google it, this is the only study I found (or at least the only one I could read for free), and I don’t trust it all that much. But it is not immediately crazy to think that employers can get more effort out of employees at the lower-paid end by paying them less, eg due to loss aversion.
We have yet to establish that minimum-wage labor meets my intuitive definition of a market, where people can freely make or refuse trades and you get more by paying more.
The relative value of a job matters more than the absolute here. When a worker can walk across the street and get the same $15 an hour at McDonalds they do today at Burger King, then Burger King and McDonalds need to compete for employees based on work conditions. Managers get away with abuse only when the salary exceeds the prevailing wage for the skill set, or jobs are hard to find.
When a worker can walk across the street and get the same $15 an hour at McDonalds they do today at Burger King, then Burger King and McDonalds need to compete for employees based on work conditions.
Nope. When you force a price floor above the market clearing price (the price for labor, aka the minimum wage) you create a persistent glut of supply and a shortage of demand. Managers don’t have to compete for workforce when there is a long line of people raring to get their $15/hour in front of both McDonalds and Burger King. Instead, managers spend a lot of time coming up with clever ways to to automate their business.
If some prospective employees are better than others, then that long line of people will still contain better and worse candidates, and employers may compete to get the better ones.
It presumably means some combination of that, speed, diligence, etc. I wouldn’t expect abuse-tolerance to be a large fraction of what most bosses want, though no doubt some bosses are awful enough to prefer less profitable but more abusable employees.
Depends on the “abuse”. Here it means practices that increase productivity at the expense of employee quality of life. For example, insisting that employees be willing to work odd hours on short notice.
Employers always compete for better employees, but they are, generally speaking, satisficers. The marginal benefit from having a high-IQ, very conscientious, giving-his-100%-to-the-job employee flipping burgers is not very high.
You’re described a mechanism that will make managers more likely to abuse minimum-wage workers when the minimum wage is higher. But you haven’t argued against Strange7′s claimed mechanism that would make managers less likely to abuse minimum-wage workers when the minimum wage is higher.
Do you think it’s obvious that Strange7′s proposed mechanism would be outweighed by yours, or that it’s wrong altogether?
Is there actual empirical research on the relationship (if any) between minimum wage and working conditions?
(There’s one bit of Strange7′s comment that doesn’t make any sense to me: ”… and specialized skills that make them more expensive to replace”. I don’t see how increasing the minimum wage will have that effect. The rest seems reasonably plausible prima facie.)
Strange7′s claimed mechanism that would make managers less likely to abuse minimum-wage workers when the minimum wage is higher.
This one?
With higher wages, those workers will have more of the financial security that makes them willing to risk standing up for themselves, and specialized skills that make them more expensive to replace.
It makes no sense. At first approximation a high minimum wage makes it more beneficial to have a (now high-paying) job, but it also makes it harder to get such a job. Given this, the workers will have more to lose and more difficulties in finding another job if fired. That makes them more willing to endure abuse so as not to lose the high-paying job.
I don’t have links handy, but I believe there were some interesting empirical case studies of the situations where a business paid much more than the prevailing wage (basically, a rich Western company set up shop in a very poor third-world country). As far as I remember, the basic results were that (a) the job becomes a valuable commodity to be bought and sold (essentially, the local power structures exert control over who can apply for the job); and (2) the workers are willing to do anything so as not to lose that job.
Now, guaranteed employment at a “living wage” actually would make employees quite resistant to managers’ abuse. However the obvious problems with that are obvious.
At first approximation a high minimum wage makes it more beneficial to have a (now high-paying) job, but it also makes it harder to get such a job.
Sure. But having had a higher-paying job means (or at least can mean and sometimes will) having more savings (or, more likely: some savings instead of none), which means that losing your job is a nuisance rather than a cataclysm likely to put you on the streets within a month. That seems like it might be quite a big deal in terms of employee attitude.
(Yes, of course guaranteed employment would have a much stronger effect. So, less disastrously I think, would a reasonable-sized basic income.)
Lumifer is right, and I think you are effectively confusing a law that gives you the right to work at the minimum wage with actual minimum wage laws which are instead laws forbidding you from working for less than the minimum wage.
I promise that I am not confusing those things, though of course it is possible that I am confused in other ways.
The question I think is on the table, which hasn’t obviously-to-me been resolved, is this: Suppose we substantially increase the minimum wage and wait a few years. All sorts of things may change as a result. Some people will have more money. Some people will not have jobs any more. Etc. Now, look at those people who do still have minimum-wage jobs. Are those people more or less subject to abuse by their bosses?
Maybe more, because doing the same work for higher pay means they need their jobs more and their bosses are more able to fire them. Maybe less, because they may now have more savings because they’ve been being paid better. Maybe more, because actually they won’t have any more savings but they’ll stand to lose more by getting fired. Maybe less, because being better paid will bolster their confidence and make them more inclined to stand up for themselves. Etc.
I agree (for the avoidance of doubt) with the mechanism Lumifer describes. That will definitely tend to produce more abuse. But it looks to me as if there are others that go the other way. If you have compelling evidence that they aren’t real, or that they are outweighed by the one Lumifer describes, would you care to sketch it or point to it, rather than just saying “Lumifer is right” (with which I already agreed if it means “Lumifer’s mechanism works the way he says”, and which surely needs further support if it means ”… and it outweighs all other factors”) ?
That’s not exactly true. You can volunteer for far less than the minimum wage (Some would say infinitely less) if you want to. What you can’t do is employ someone for some non-zero amount of money that’s lower than the minimum wage.
I don’t know. You’re talking about the propensity to save and—at the minimum-wage levels of income—it’s not obvious to me that it’s correlated with income.
We can throw images back and forth (“Now she has money left after buying food and she’ll put into a savings account!” vs. “Now she’ll just buy a bigger TV and fancier clothes ending with the same credit card debt!”), but I suspect that economics papers with relevant data exist. I also suspect that the results will show high variance and dependence on the prevailing culture (e.g. compare average savings rates in the US and China).
Personally I would expect large corporations and the very rich to be capable of defending their position against any reasonably predictable shift in the economic environment
If you can formulate that claim sufficiently precisely to be falsifiable, it shouldn’t be hard to test it.
Someone downvoted your reply, Nornagest, which I really can’t understand: I upvoted it myself.
The parent is now at −2; one more down and it will disappear from view, and we will get a heavy tax for continuing.
What is happening here? Are we just not allowed to have discussions on this forum about the possible economic gains and costs of minimum wage or minimum income policy?
Someone’s probably downvoting everything in the thread, most likely on grounds of being too political for the forum. My other comments here have taken the same hit.
Obviously I don’t agree with that policy as it’s applied locally, but I can’t really blame them either. This exchange has been relatively sane, but the discussion under other comments has had points of low quality, and I’m not totally convinced that we’re better off with the thread as a whole.
My knee-jerk assumption is that Job 1 would actually not be accepted by almost any employees. This is based on the guess that without the threat of having no money, people generally would not agree to give up their time for low wages, since the worst case of being unemployed and receiving no supplemental income does not involve harsh deterrents like starving or being homeless.
Getting someone to do any job at all under that system will probably require either a pretty significant expected quality of life increase per hour worked (which is to say, way better than $3 per hour) or some intrinsic motivation to do the job other than money (e.g. they enjoy it, think it’s morally good to do, etc.)
It’s more likely that a well-implemented basic income would simply eliminate a lot of the (legal) labor supply for low-wage jobs. I both see this as a feature and see no need for a minimum wage under this system.
It’s an interesting point, though you seem to be assuming that the minimum income would be offered completely unconditionally, with no requirement to seek employment, and no penalty for refusing it. Real world benefit systems tend to come with strings, as this is far more popular than giving permanent handouts to people who could work but just don’t want to.
Some real-world benefit systems have strings. The entire premise of a basic income is that it’s unconditional. Otherwise you call it “unemployment,” and it is an existing (albeit far from ideally implemented) benefit in at least the US. It might be reasonable to discuss the feasibility of convincing e.g. the US to actually enact a basic income, but as long as we’re discussing a hypothetical policy anyway, it’s not really worthwhile to assume that the policy is missing its key feature.
OK, there seems to be a terminology difference between basic income which is unconditional and guaranteed minimum income which usually comes with conditions, such as willingness to work.
Somewhere up the thread we were discussing “guaranteed” income and also “basic minimum income” so I wasn’t clear which was meant.
Honestly, I just can’t see an unconditional minimum income being feasible at all in the English-speaking world: critics will brand it as a “layabouts charter” and no party with a serious desire to be elected will support it. Whereas a minimum income which a) is granted conditional on willingness to work and b) is still paid to those in work (so avoiding a high effective tax rate) looks much more feasible.
Ah, I guess that clears up our confusion. I wasn’t aware of that distinction either and have heard the terms used interchangeably before. I will try to use them more carefully in the future.
At any rate, I definitely agree that an actual basic income would be a hard sell in the current political climate of the US. (I’m less inclined to comment on the political climate of the English-speaking world in general, due to lack of significant enough exposure to significant enough non-US parts of it that I wouldn’t just be making stuff up).
I’d also argue that a guaranteed minimum income in the manner you describe is a far less interesting (and in my opinion desirable) policy, as it just simply doesn’t have the game-changing properties that a basic income would. As far as I’m concerned, the primary purpose of implementing a basic income would be to eliminate the economic imperative that everyone work.
If successful, this would hopefully do a number of useful things, like making the employer/employee relationships of those who still worked more of a balanced negotiation, depoliticizing automation efforts, and generally eliminating the level of human suffering produced by being between jobs, taking time to improve one’s mental health by relaxing, doing volunteer work, doing work no one will pay for, etc., in one fell swoop.
While I obviously can’t claim to know that it would work perfectly or at all, I would contend that these are desirable outcomes and that there is at least a reasonably high likelihood that a successful implementation of a basic income would produce them, and therefore that attempting to implement such a policy is worthwhile. I’d argue that the current model where a job occupies a large chunk of a given human’s time, is required (for the most part, with obvious caveats for the independently wealthy, etc.) to live, and where a given job can only exist if the market will pay for it, is broken, and will only get more broken as more automation exists, the population grows, and several other current trends continue.
Well of course. It would definitely facilitate a lot of people being, by many measures society cares about, completely useless. I definitely don’t contend for example that no one would decide to go to california and surf, or play WoW full-time, or watch TV all day, or whatever. You’d probably see a non-negligible number of people just “retire.” I’m willing to bet that this wouldn’t be a serious problem, though, and see it as a definite improvement over the large number of people who are, similarly, not doing anything fun with their lives, but having to work 8 hours a day at some dead-end job or having crippling poverty to deal with.
Right. But then there are consequences to many people being “useless”, or, in econospeak, dropping out of the labor pool.
For example, the GDP of the country will go down. The labor costs will go up which means the prices will go up which means the basic income will lose some of its purchasing power. The government’s tax revenues will go down as well and that might create a problem with paying for that basic income for everyone.
And that’s just major, obvious, first-order consequences.
I agree that that is a possible consequence, but it’s far from guaranteed that that will happen. Although in sheer numbers many people may quit working, the actual percent of people who do could be rather low. After all, merely subsisting isn’t necessarily attractive to people who already have decent jobs and can do better than one could on the basic income. It does however give them more negotiating power in terms of their payscale, given that quitting one’s job will no longer be effectively a non-option for the vast majority.
This may mean that a lot of low-payscale jobs will be renegotiated, and employers who previously employed many low-paid workers would have to optimize for employing fewer higher-paid workers (possibly doing the same jobs, depending on how necessary they are, or by finding ways to automate). I don’t claim any expertise in this, but I’d find it hard to believe that there isn’t at least some degree to which it’s merely easier to hire more people to accomplish many tasks people are currently hired for, rather than impossible to accomplish them some other way. This also is an innovation-space in which skilled jobs could pop up.
As for high-payscale jobs, I could see good arguments for any number of outcomes being likely to occur. Perhaps employers would be able to successfully argue that they should pay them less due to supplementing a basic income. Perhaps employees would balk at this and, newly empowered to walk more easily, demand that they keep the same pay, or even higher pay. The equilibrium would likely shift in some way as far as where the exact strata of pay are for different professions, and I can’t claim to know how that would turn out, but it seems unlikely people would prefer to not work than to do work that gives them a higher standard of living than the basic income to some significant degree.
Similarly, people who own profitable businesses certainly wouldn’t up and quit, and thus most likely any service that the market still supports would still exist as well, including obvious basic essentials that presumably would exist in any economic system, such as businesses selling food or whatever is considered essential technology in a given era. Some businesses might fail if they’re unable to adapt to the new shape of the labor market, and profitability of larger businesses may go down for similar reasons, but the entry barrier for small businesses would also decrease, since any given person could feasibly devote all of their time and effort into running a business without failure carrying the risk of inability to continue living.
There would probably be a class of people who subsist on basic income, but we already have a fairly large homeless population, as well as a population of people doing jobs that could probably go away and not ruin the economy for anyone but that individual.
My point isn’t that everything will turn out perfectly as expected, or that I have any definitive way of knowing, obviously, but there do exist outcomes that are good enough and probable enough to pass a basic sanity-check. The risk of economic collapse exists with or without instituting such a policy, and I’m not yet convinced that this increases the likelihood of it by a considerable margin.
It is of course possible to have both. Set a minimum income guarantee for everyone (so that even those who are not working, don’t starve), allow the minimum income to be retained by those in work (so avoiding a high effective tax rate on low incomes), and add a minimum wage as well (so discouraging low-productivity work, and incentivizing training for higher productivity work).
By the way, the major political value of describing Walmart as a “welfare queen” is that welfare recipients are stigmatised, and this line of rhetoric redirects the stigma (and tends to dilute it). It is unfair to Walmart, but perhaps no less fair than calling anyone a welfare queen.
You can have both, but minimum wage is still a bad idea. You’re better off just having a higher minimum income guarantee.
Why a bad idea, though? I guess you are disputing this point:
Here’s a simple model. Assume that full-time employees cannot live on less than $8 an hour (they starve, can’t pay rent etc.) Also assume that an employer can offer untrained staff two sorts of job:
Job 1 has very low productivity, total value of $6 per hour, but a pay-rate of $3 per hour. $3 a hour is too low to live on, but employees will accept it where that supplements a minimum guaranteed income.
Job 2 has higher productivity, total value of $14 per hour, but staff must be trained to do it, and because they now have transferable skills, the employer must offer $10 an hour to retain them. The training costs average at $2 per hour over the typical duration of the employment.
The employer offers staff Job 1 because that gives a higher profit ($3 per hour, rather than $2 per hour). Staff take it because $3 is better than nothing. But there is more economic value created if employers offer Job 2 instead. A minimum wage requires them to do that. You can argue the details, but that’s the general principle.
There is clearly a counter-argument that the minimum wage is a market intervention and can cause inefficiencies (it may result in some folks who just can’t be trained losing their $3 per hour jobs). But the counter to that counter-argument is that the minimum income guarantee is already a market intervention which is encouraging employers to offer Job 1 (as it allows employees to accept it). So a corrective intervention is needed.
That’s an inefficiency, but it seems to me that a far more central one is embedded in the assumptions of your toy model: how many unskilled jobs ($3) funge against skilled or semi-skilled ones ($10). In practice, it seems to me that the kind of jobs an employer can offer are often narrowly constrained by business requirements.
A factory owner, for example, might be able to retrain unskilled line workers (fitting Subwidget A to Subwidget B) to do semi-skilled work (operating a widget-fitting machine) for higher total productivity; that’s consistent with your model’s assumptions. But if you run, say, a hardware store, someone’s got to stack shelves, mop the floors, and run the registers, all of which take roughly the same level of training, and there’s only so many places you can squeeze out more per-body productivity by investing more. Anyone you have to fire because of minimum-wage laws there represents an economic loss: they aren’t getting paid, and you aren’t running as efficient a business as you could be.
OK, a fair criticism of the “toy” model, which was simplified to make the point. There are always multiple choices of productivity and wage level, and big moves (more than doubling employee productivity, while simultaneously quadrupling the cost of labour) usually can’t happen quickly.
Back in the real world, I did a quick look at the economic evidence, and was surprised. The latest evidence base is that the minimum wage has surprisingly little effect on anything. It seems to have no discernible effect on employment levels—see here—but it has no clear net impact on training levels either—see here.
One problem is that minimum wages tend to be varied only marginally, so it is hard to see a big effect. However, the UK provides a more dramatic experiment, where minimum wages were abolished in the 1990s, then re-introduced a few years later. Some UK assessment here on employment and on training. Again, not a big impact in either case, though training levels apparently did increase among groups affected by the minimum wage. This suggests the toy model is not totally daft.
Interesting reading, although I’m always leery of relying on a single meta-analysis of a politically charged subject. For the sake of argument, though, let’s take it as given that increasing the minimum wage has no or only a small effect on employment rates. Where’s the money coming from, then, and what would we expect that to do to the economy?
First option: It’s a free lunch; the money would otherwise go to line the pockets of (spherical, behatted, cigar-chomping) capitalists. This is implausible to me on priors, but we can put bounds on how far we can stretch it: most businesses run on margins of 15 to 20%. I’m having a slightly harder time finding figures on personnel costs, but Google informs me that 38% is a decent payroll target; factor in benefits and such and let’s call it 50% for all personnel-related expenses. This suggests that minimum wage laws could increase average wages by 10 or 20% without cutting too much into business owners’ cigar budgets, although we should really be thinking on the margins here.
Second option: It’s being passed on to consumers in the form of higher prices. On average people are making more but also paying more; this means inflation. There are institutions trying to control inflation, though, so the costs probably end up being taken out in lower interest rates or in subtler ways. Note that higher costs of consumer goods work a lot like a mildly regressive tax; lower-income people buy more in consumer goods as a share of income.
Third option: The balance of labor changes. Jobs that can’t economically be done at the lower wage points move to places that have less stringent laws, and trainable or higher-skilled jobs move in to fill the employment gaps. I don’t think I’m economist enough to analyze this fully, but it looks like we’d expect wages for those higher-skilled jobs to go down in the affected jurisdiction as a consequence of supply-and-demand issues, probably after a time lag. In any case someone’s still doing crappy jobs for crappy wages; they just don’t show up in the statistics. Frictional costs also arise; outsourcing isn’t cheap.
Fourth option: Something’s masking the effect. Either the changes are slow enough that they don’t show up in the available statistics, or something I haven’t thought of is going on.
My first reference above was more of a “meta-meta-analysis” since it surveys the results of several meta-analyses! At a high level, it is going to be quite difficult to argue that there really is a big impact on employment, but somehow all the analyses and meta-analyses have missed it. As I said, I found it surprising, but this is the full evidence base.
This is the main question addressed by the Schmitt paper. To quote the exec summary.
“The report reviews evidence on eleven possible adjustments to minimum-wage increases that may help to explain why the measured employment effects are so consistently small. The strongest evidence suggests that the most important channels of adjustment are: reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners (“wage compression”); and small price increases.”
One of the other hypotheses considered was a reduction in profits (which is what the toy model would suggest: the low-wage “Job 1” maximizes profits rather than productivity, and moving to “Job 2″ increases productivity but lowers profits). However, Schmitt found not many studies and not much evidence of this, except in the UK following introduction of the minimum wage from nothing. Again, I found that very surprising: if anyone is losing out by paying the minimum wage, you would expect it to be the Walmarts of the world. But not so, apparently.
Personally I would expect large corporations and the very rich to be capable of defending their position against any reasonably predictable shift in the economic environment, since they have resources and motivation to lay out more comprehensive contingency plans than anyone else. That extra productivity from “Job 2” doesn’t just vanish into the aether. Higher minimum wage means the poorest people have more money, then they turn around and spend that money at Walmart.
The ones who lose out from a higher minimum wage would be the middle managers, who are then less free to treat bottom-tier workers as interchangeable, disposable, safe targets for petty abuse. With higher wages, those workers will have more of the financial security that makes them willing to risk standing up for themselves, and specialized skills that make them more expensive to replace. That’s what wage compression, reductions in turnover, and improvements in organizational efficiency look like from the trenches.
The poorest people do not directly benefit from minimum wage, because they don’t have jobs. Many participants in the informal economy are also very poor.
One option I didn’t think of in the ancestor is that people pushed into the informal sector may still be showing up as employed in the sources being referenced: people making a lower-than-minimum-wage living as e.g. junk collectors are sometimes counted as such depending on methodology. We could pick out this effect by asking for personal earnings as well as employment status: if higher minimum wages are coming out of corporate margins somewhere, we’d expect average earnings (at least in the lower segment of the workforce) to go up, but we wouldn’t expect that if it’s pushing people into the informal sector. A survey would probably have to be carefully designed to have the resolution to pick this up, though.
Managers are more likely to abuse minimum wage workers the higher the minimum wage. At a higher minimum wage workers will value their jobs more and so will tolerate more abuse before quitting, and managers will value having the worker less because employing the worker is more costly.
There’s some evidence this is false. Now, when I tried to google it, this is the only study I found (or at least the only one I could read for free), and I don’t trust it all that much. But it is not immediately crazy to think that employers can get more effort out of employees at the lower-paid end by paying them less, eg due to loss aversion.
We have yet to establish that minimum-wage labor meets my intuitive definition of a market, where people can freely make or refuse trades and you get more by paying more.
The relative value of a job matters more than the absolute here. When a worker can walk across the street and get the same $15 an hour at McDonalds they do today at Burger King, then Burger King and McDonalds need to compete for employees based on work conditions. Managers get away with abuse only when the salary exceeds the prevailing wage for the skill set, or jobs are hard to find.
Nope. When you force a price floor above the market clearing price (the price for labor, aka the minimum wage) you create a persistent glut of supply and a shortage of demand. Managers don’t have to compete for workforce when there is a long line of people raring to get their $15/hour in front of both McDonalds and Burger King. Instead, managers spend a lot of time coming up with clever ways to to automate their business.
If some prospective employees are better than others, then that long line of people will still contain better and worse candidates, and employers may compete to get the better ones.
Yes, and in this context better means “willing to put up with abuse by bosses”.
It presumably means some combination of that, speed, diligence, etc. I wouldn’t expect abuse-tolerance to be a large fraction of what most bosses want, though no doubt some bosses are awful enough to prefer less profitable but more abusable employees.
Depends on the “abuse”. Here it means practices that increase productivity at the expense of employee quality of life. For example, insisting that employees be willing to work odd hours on short notice.
Employers always compete for better employees, but they are, generally speaking, satisficers. The marginal benefit from having a high-IQ, very conscientious, giving-his-100%-to-the-job employee flipping burgers is not very high.
You’re described a mechanism that will make managers more likely to abuse minimum-wage workers when the minimum wage is higher. But you haven’t argued against Strange7′s claimed mechanism that would make managers less likely to abuse minimum-wage workers when the minimum wage is higher.
Do you think it’s obvious that Strange7′s proposed mechanism would be outweighed by yours, or that it’s wrong altogether?
Is there actual empirical research on the relationship (if any) between minimum wage and working conditions?
(There’s one bit of Strange7′s comment that doesn’t make any sense to me: ”… and specialized skills that make them more expensive to replace”. I don’t see how increasing the minimum wage will have that effect. The rest seems reasonably plausible prima facie.)
This one?
It makes no sense. At first approximation a high minimum wage makes it more beneficial to have a (now high-paying) job, but it also makes it harder to get such a job. Given this, the workers will have more to lose and more difficulties in finding another job if fired. That makes them more willing to endure abuse so as not to lose the high-paying job.
I don’t have links handy, but I believe there were some interesting empirical case studies of the situations where a business paid much more than the prevailing wage (basically, a rich Western company set up shop in a very poor third-world country). As far as I remember, the basic results were that (a) the job becomes a valuable commodity to be bought and sold (essentially, the local power structures exert control over who can apply for the job); and (2) the workers are willing to do anything so as not to lose that job.
Now, guaranteed employment at a “living wage” actually would make employees quite resistant to managers’ abuse. However the obvious problems with that are obvious.
Sure. But having had a higher-paying job means (or at least can mean and sometimes will) having more savings (or, more likely: some savings instead of none), which means that losing your job is a nuisance rather than a cataclysm likely to put you on the streets within a month. That seems like it might be quite a big deal in terms of employee attitude.
(Yes, of course guaranteed employment would have a much stronger effect. So, less disastrously I think, would a reasonable-sized basic income.)
Lumifer is right, and I think you are effectively confusing a law that gives you the right to work at the minimum wage with actual minimum wage laws which are instead laws forbidding you from working for less than the minimum wage.
I promise that I am not confusing those things, though of course it is possible that I am confused in other ways.
The question I think is on the table, which hasn’t obviously-to-me been resolved, is this: Suppose we substantially increase the minimum wage and wait a few years. All sorts of things may change as a result. Some people will have more money. Some people will not have jobs any more. Etc. Now, look at those people who do still have minimum-wage jobs. Are those people more or less subject to abuse by their bosses?
Maybe more, because doing the same work for higher pay means they need their jobs more and their bosses are more able to fire them. Maybe less, because they may now have more savings because they’ve been being paid better. Maybe more, because actually they won’t have any more savings but they’ll stand to lose more by getting fired. Maybe less, because being better paid will bolster their confidence and make them more inclined to stand up for themselves. Etc.
I agree (for the avoidance of doubt) with the mechanism Lumifer describes. That will definitely tend to produce more abuse. But it looks to me as if there are others that go the other way. If you have compelling evidence that they aren’t real, or that they are outweighed by the one Lumifer describes, would you care to sketch it or point to it, rather than just saying “Lumifer is right” (with which I already agreed if it means “Lumifer’s mechanism works the way he says”, and which surely needs further support if it means ”… and it outweighs all other factors”) ?
That’s not exactly true. You can volunteer for far less than the minimum wage (Some would say infinitely less) if you want to. What you can’t do is employ someone for some non-zero amount of money that’s lower than the minimum wage.
The Obama administration is making it difficult for businesses to use non-paid interns to do the kind of work that paid employees do.
I don’t know. You’re talking about the propensity to save and—at the minimum-wage levels of income—it’s not obvious to me that it’s correlated with income.
We can throw images back and forth (“Now she has money left after buying food and she’ll put into a savings account!” vs. “Now she’ll just buy a bigger TV and fancier clothes ending with the same credit card debt!”), but I suspect that economics papers with relevant data exist. I also suspect that the results will show high variance and dependence on the prevailing culture (e.g. compare average savings rates in the US and China).
And ability. The higher your income, the more of it is somewhat discretionary and the easier it is to save more.
I agree that there is almost certainly real research on this, but evidently neither of us has read it yet :-).
If you can formulate that claim sufficiently precisely to be falsifiable, it shouldn’t be hard to test it.
Someone downvoted your reply, Nornagest, which I really can’t understand: I upvoted it myself.
The parent is now at −2; one more down and it will disappear from view, and we will get a heavy tax for continuing.
What is happening here? Are we just not allowed to have discussions on this forum about the possible economic gains and costs of minimum wage or minimum income policy?
Someone’s probably downvoting everything in the thread, most likely on grounds of being too political for the forum. My other comments here have taken the same hit.
Obviously I don’t agree with that policy as it’s applied locally, but I can’t really blame them either. This exchange has been relatively sane, but the discussion under other comments has had points of low quality, and I’m not totally convinced that we’re better off with the thread as a whole.
My knee-jerk assumption is that Job 1 would actually not be accepted by almost any employees. This is based on the guess that without the threat of having no money, people generally would not agree to give up their time for low wages, since the worst case of being unemployed and receiving no supplemental income does not involve harsh deterrents like starving or being homeless.
Getting someone to do any job at all under that system will probably require either a pretty significant expected quality of life increase per hour worked (which is to say, way better than $3 per hour) or some intrinsic motivation to do the job other than money (e.g. they enjoy it, think it’s morally good to do, etc.)
It’s more likely that a well-implemented basic income would simply eliminate a lot of the (legal) labor supply for low-wage jobs. I both see this as a feature and see no need for a minimum wage under this system.
It’s an interesting point, though you seem to be assuming that the minimum income would be offered completely unconditionally, with no requirement to seek employment, and no penalty for refusing it. Real world benefit systems tend to come with strings, as this is far more popular than giving permanent handouts to people who could work but just don’t want to.
Some real-world benefit systems have strings. The entire premise of a basic income is that it’s unconditional. Otherwise you call it “unemployment,” and it is an existing (albeit far from ideally implemented) benefit in at least the US. It might be reasonable to discuss the feasibility of convincing e.g. the US to actually enact a basic income, but as long as we’re discussing a hypothetical policy anyway, it’s not really worthwhile to assume that the policy is missing its key feature.
OK, there seems to be a terminology difference between basic income which is unconditional and guaranteed minimum income which usually comes with conditions, such as willingness to work.
Somewhere up the thread we were discussing “guaranteed” income and also “basic minimum income” so I wasn’t clear which was meant.
Honestly, I just can’t see an unconditional minimum income being feasible at all in the English-speaking world: critics will brand it as a “layabouts charter” and no party with a serious desire to be elected will support it. Whereas a minimum income which a) is granted conditional on willingness to work and b) is still paid to those in work (so avoiding a high effective tax rate) looks much more feasible.
Well, a Franco-Italo-German-speaking world will, evidently, hold a referendum on it soon
Ah, I guess that clears up our confusion. I wasn’t aware of that distinction either and have heard the terms used interchangeably before. I will try to use them more carefully in the future.
At any rate, I definitely agree that an actual basic income would be a hard sell in the current political climate of the US. (I’m less inclined to comment on the political climate of the English-speaking world in general, due to lack of significant enough exposure to significant enough non-US parts of it that I wouldn’t just be making stuff up).
I’d also argue that a guaranteed minimum income in the manner you describe is a far less interesting (and in my opinion desirable) policy, as it just simply doesn’t have the game-changing properties that a basic income would. As far as I’m concerned, the primary purpose of implementing a basic income would be to eliminate the economic imperative that everyone work.
If successful, this would hopefully do a number of useful things, like making the employer/employee relationships of those who still worked more of a balanced negotiation, depoliticizing automation efforts, and generally eliminating the level of human suffering produced by being between jobs, taking time to improve one’s mental health by relaxing, doing volunteer work, doing work no one will pay for, etc., in one fell swoop.
While I obviously can’t claim to know that it would work perfectly or at all, I would contend that these are desirable outcomes and that there is at least a reasonably high likelihood that a successful implementation of a basic income would produce them, and therefore that attempting to implement such a policy is worthwhile. I’d argue that the current model where a job occupies a large chunk of a given human’s time, is required (for the most part, with obvious caveats for the independently wealthy, etc.) to live, and where a given job can only exist if the market will pay for it, is broken, and will only get more broken as more automation exists, the population grows, and several other current trends continue.
Do you think there is also a list of not-useful things to go with your list of goodies? You seem to be forgetting the TANSTAAFL principle.
Well of course. It would definitely facilitate a lot of people being, by many measures society cares about, completely useless. I definitely don’t contend for example that no one would decide to go to california and surf, or play WoW full-time, or watch TV all day, or whatever. You’d probably see a non-negligible number of people just “retire.” I’m willing to bet that this wouldn’t be a serious problem, though, and see it as a definite improvement over the large number of people who are, similarly, not doing anything fun with their lives, but having to work 8 hours a day at some dead-end job or having crippling poverty to deal with.
Right. But then there are consequences to many people being “useless”, or, in econospeak, dropping out of the labor pool.
For example, the GDP of the country will go down. The labor costs will go up which means the prices will go up which means the basic income will lose some of its purchasing power. The government’s tax revenues will go down as well and that might create a problem with paying for that basic income for everyone.
And that’s just major, obvious, first-order consequences.
I agree that that is a possible consequence, but it’s far from guaranteed that that will happen. Although in sheer numbers many people may quit working, the actual percent of people who do could be rather low. After all, merely subsisting isn’t necessarily attractive to people who already have decent jobs and can do better than one could on the basic income. It does however give them more negotiating power in terms of their payscale, given that quitting one’s job will no longer be effectively a non-option for the vast majority.
This may mean that a lot of low-payscale jobs will be renegotiated, and employers who previously employed many low-paid workers would have to optimize for employing fewer higher-paid workers (possibly doing the same jobs, depending on how necessary they are, or by finding ways to automate). I don’t claim any expertise in this, but I’d find it hard to believe that there isn’t at least some degree to which it’s merely easier to hire more people to accomplish many tasks people are currently hired for, rather than impossible to accomplish them some other way. This also is an innovation-space in which skilled jobs could pop up.
As for high-payscale jobs, I could see good arguments for any number of outcomes being likely to occur. Perhaps employers would be able to successfully argue that they should pay them less due to supplementing a basic income. Perhaps employees would balk at this and, newly empowered to walk more easily, demand that they keep the same pay, or even higher pay. The equilibrium would likely shift in some way as far as where the exact strata of pay are for different professions, and I can’t claim to know how that would turn out, but it seems unlikely people would prefer to not work than to do work that gives them a higher standard of living than the basic income to some significant degree.
Similarly, people who own profitable businesses certainly wouldn’t up and quit, and thus most likely any service that the market still supports would still exist as well, including obvious basic essentials that presumably would exist in any economic system, such as businesses selling food or whatever is considered essential technology in a given era. Some businesses might fail if they’re unable to adapt to the new shape of the labor market, and profitability of larger businesses may go down for similar reasons, but the entry barrier for small businesses would also decrease, since any given person could feasibly devote all of their time and effort into running a business without failure carrying the risk of inability to continue living.
There would probably be a class of people who subsist on basic income, but we already have a fairly large homeless population, as well as a population of people doing jobs that could probably go away and not ruin the economy for anyone but that individual.
My point isn’t that everything will turn out perfectly as expected, or that I have any definitive way of knowing, obviously, but there do exist outcomes that are good enough and probable enough to pass a basic sanity-check. The risk of economic collapse exists with or without instituting such a policy, and I’m not yet convinced that this increases the likelihood of it by a considerable margin.