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.
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.