Perhaps one aspect of minimum wage that you are missing is that this is different from price control of fungible goods is several important aspects, that everything else being equal:
Higher minimum wage means higher demand for goods consumed by minimum wage employees.
Higher minimum wage incentivises employers to invest more in their employee productivity (training, better work conditions, etc)
Same employees may be more productive if you pay them higher wages, and you may be able to get better employees.
In some cases 2+3 might means that there may be several equilibrium points that are roughly equally good for the employers—either hire high-turnover low-productivity people with lower wages, or hire lower-turnover higher-productivity people for higher wages, and effect #1 is enough for the higher minimum wage to just be a win-win (which is perhaps why some employers actually support minimum wage laws).
I think all these sort of fail on the basis of partial equilibrium rather then general equilibrium but here are a few thought that may or may not fit somewhere.
1. Is a bit of a Say’s Law take. One thing that might be considered is just how quickly the realized new demand from increased wages (and how quickly some might react in terms of quantity of labor employed is reduced) transmits thought the local economy. If demand propagates quickly, 1 might hold.
2. That’s an interesting approach. Could increased wages result in increased investment in human capital? Maybe, maybe not. An interesting historical debate might come back here. The old Cambridge Capital Controversy, as it was explained to be once, basically supports a multi equilibrium outcome. One is a high wage equilibrium with a low return to capital (the w and r in the model). While the debate was supposed to be been resolved and so the two outcomes not possible I never got the sense that all agreed so perhaps there might be something there.
3. Was a theory called Efficiency Wages.
All that said, I think the biggest problem with wage theory for economics is that “wages” are not really set as much in the market as in the corporate HR office. This is not to say that there is not linkage to external markets, but borrowing from old monetary policy terms, is only loosely linked. Within a medium to large (and probably even what would be called small these days) corporation the effort is very much a complex joint production activity and margins are poorly understood (and probably not even known in a lot of cases). The standard micro economic analysis only goes so far. The margin really should be some unit output from the corporate effort. Wages then become more a political economy setting where the issue is more distribution and less about allocation. (Include all the thinking about need for “slack” for productivity...)
I agree that the case where there are several equilibrium points that are almost as good for the employer is the case where the minimum wage looks best.
Re point 1, note that the minimum wage decreases total consumption, because it reduces efficiency.
Is there actual evidence that a minimum wage decreases total consumption? I’ve never heard that, or seen any study on it, and I’d like to learn more.
(Intuitively, it doesn’t seem highly plausible to me, since my assumption would be that it transfers wealth from rich people to poor people, which should increase total consumption, because there’s more room for consumption growth for poorer people, but I’m also not sure if that is true.)
(Edit: after a cursory search of current research on the topic, it seems that the consensus is rather that a minimum wage has a small positive effect on consumption, which is what I would have naively expected.)
First, poor have lower savings rate, and consume faster, so money velocity is higher. Second, minimal wages are local, and I would imagine that poor people on average spend a bigger fraction of their consumption locally (but I am not as certain about this one).
A minimum wage decreases total consumption in some situations but not in all situations. In a world consisting of ten poor people and a single rich person, where buying the bare minimum food costs $1/day and buying comfort costs $10/day, the only way for the poor people to get money is to work for the rich person, and he is willing to hire them for any wage up to $100/day, the equilibrium wage would be $1/day. The result is that the rich person would only be spending $20/day (his own food, the wages of the nine poor people, and his own comfort) and each poor person would be spending $1/day, their entire wage. If a minimum wage of $11/day were instituted, all the poor people would be hired for $11/day, with all ten of the people having food to survive and having comfort. Consumption would go up significantly and everyone would be better off.
This hypothetical is more an analysis on the constraints (monopoly employer, closed system, static labor supply / demand, static prices) than on the effect of the minimum wage on consumption. It ignores that the minimum wage harms both employers and employees that would be hired absent a minimum wage.
A minimum wage will be inefficient in all situations relative to a taxing more inelastic economic activity and redistributing the proceeds.
Given a monopsony employer, setting a minimum wage equal to the competitive equilibrium wage is efficient because it removes the monopsony dead weight loss.
The monopsony approach to the labor market says they’re the rule. A company doesn’t actually formally have to be the only buyer of labor power in its region to hold monopsony power.
Perhaps one aspect of minimum wage that you are missing is that this is different from price control of fungible goods is several important aspects, that everything else being equal:
Higher minimum wage means higher demand for goods consumed by minimum wage employees.
Higher minimum wage incentivises employers to invest more in their employee productivity (training, better work conditions, etc)
Same employees may be more productive if you pay them higher wages, and you may be able to get better employees.
In some cases 2+3 might means that there may be several equilibrium points that are roughly equally good for the employers—either hire high-turnover low-productivity people with lower wages, or hire lower-turnover higher-productivity people for higher wages, and effect #1 is enough for the higher minimum wage to just be a win-win (which is perhaps why some employers actually support minimum wage laws).
I think all these sort of fail on the basis of partial equilibrium rather then general equilibrium but here are a few thought that may or may not fit somewhere.
1. Is a bit of a Say’s Law take. One thing that might be considered is just how quickly the realized new demand from increased wages (and how quickly some might react in terms of quantity of labor employed is reduced) transmits thought the local economy. If demand propagates quickly, 1 might hold.
2. That’s an interesting approach. Could increased wages result in increased investment in human capital? Maybe, maybe not. An interesting historical debate might come back here. The old Cambridge Capital Controversy, as it was explained to be once, basically supports a multi equilibrium outcome. One is a high wage equilibrium with a low return to capital (the w and r in the model). While the debate was supposed to be been resolved and so the two outcomes not possible I never got the sense that all agreed so perhaps there might be something there.
3. Was a theory called Efficiency Wages.
All that said, I think the biggest problem with wage theory for economics is that “wages” are not really set as much in the market as in the corporate HR office. This is not to say that there is not linkage to external markets, but borrowing from old monetary policy terms, is only loosely linked. Within a medium to large (and probably even what would be called small these days) corporation the effort is very much a complex joint production activity and margins are poorly understood (and probably not even known in a lot of cases). The standard micro economic analysis only goes so far. The margin really should be some unit output from the corporate effort. Wages then become more a political economy setting where the issue is more distribution and less about allocation. (Include all the thinking about need for “slack” for productivity...)
I agree that the case where there are several equilibrium points that are almost as good for the employer is the case where the minimum wage looks best.
Re point 1, note that the minimum wage decreases total consumption, because it reduces efficiency.
Is there actual evidence that a minimum wage decreases total consumption? I’ve never heard that, or seen any study on it, and I’d like to learn more.
(Intuitively, it doesn’t seem highly plausible to me, since my assumption would be that it transfers wealth from rich people to poor people, which should increase total consumption, because there’s more room for consumption growth for poorer people, but I’m also not sure if that is true.)
(Edit: after a cursory search of current research on the topic, it seems that the consensus is rather that a minimum wage has a small positive effect on consumption, which is what I would have naively expected.)
Remember that I’m not interested in evidence here, this post is just about what the theoretical analysis says :)
In an economy where the relative wealth of rich and poor people is constant, poor people and rich people both have consumption equal to their income.
First, poor have lower savings rate, and consume faster, so money velocity is higher. Second, minimal wages are local, and I would imagine that poor people on average spend a bigger fraction of their consumption locally (but I am not as certain about this one).
Don’t rich people tend to die with a significant portion of their lifetime income unspent, while poor people don’t?
A minimum wage decreases total consumption in some situations but not in all situations. In a world consisting of ten poor people and a single rich person, where buying the bare minimum food costs $1/day and buying comfort costs $10/day, the only way for the poor people to get money is to work for the rich person, and he is willing to hire them for any wage up to $100/day, the equilibrium wage would be $1/day. The result is that the rich person would only be spending $20/day (his own food, the wages of the nine poor people, and his own comfort) and each poor person would be spending $1/day, their entire wage. If a minimum wage of $11/day were instituted, all the poor people would be hired for $11/day, with all ten of the people having food to survive and having comfort. Consumption would go up significantly and everyone would be better off.
This hypothetical is more an analysis on the constraints (monopoly employer, closed system, static labor supply / demand, static prices) than on the effect of the minimum wage on consumption. It ignores that the minimum wage harms both employers and employees that would be hired absent a minimum wage.
A minimum wage will be inefficient in all situations relative to a taxing more inelastic economic activity and redistributing the proceeds.
Given a monopsony employer, setting a minimum wage equal to the competitive equilibrium wage is efficient because it removes the monopsony dead weight loss.
Agreed! Thanks, that is certainly the caveat I would add. In real world, monopsonies are however rare to nonexistent
The monopsony approach to the labor market says they’re the rule. A company doesn’t actually formally have to be the only buyer of labor power in its region to hold monopsony power.