Minimum Wage Laws

A poster asked over at my xanga regarding my thoughts on the minimum wage. Having a list of mostly-expired topics doesn't exactly give me a viable alternative, so here we go.

The discussion around the minimum wage is amusing to watch. Supporters and opponents continue tossing the same facts and figures at each other, as if repeating their arguments one more time will convince the other side just how supremely wrong they were in their foolish assumptions.

Seriously, though, it's an interesting issue. A related subject is mandatory overtime pay rules, which I want to discuss before going on into the minimum wage. Mandatory Overtime Pay, which I'll dub as MOP for the rest of the post, are relatively self-explanatory: after a certain amount of hours worked, a firm must pay a worker such-and-such a higher wage (generally time and a half). The obvious critique of MOP is that it unduly tells the firm how they can go about paying their employees while punishing them even more for obeying the law (in the form of a much higher wage). For a firm to avoid paying the extra MOP wage, a firm has three options:

1) Hire another worker, which has the obvious drawback of now costing the firm twice as much as before MOP;

2) Make the current worker more productive in order to allow the worker to complete their job in enough time for MOP not to activate (in the U.S., that's under forty hours a week). The drawback to this is that it generally requires some form of extra capital to make the worker more productive, e.g. extra training and/or machinery to help them become more productive;

3) Reduce the amount of work the employee has to work so they don't exceed the MOP-activation threshold, which means that there is a job that needs to get done that isn't.

All of these options have problems, each of which has more problems than the simple ones I've outlined above. To hire another worker, for instance, a firm has the additional costs of finding another worker willing to take the job. On the other hand, look at the pluses to each:

1) The firm now has double the production as before in that niche.

2) You have a more productive worker, which could be particularly worthwhile if the cost was training (a once-and-you're-done cost).

3) The worker gets more leisure time.

Now that I'm through bringing up the pros and cons of MOP (for reasons that are beyond my understanding), I can finish up my digression and move back on track to the original subject at hand: minimum wage laws.

Minimum wages aren't actually the demons (or angels) that people make them out to be. There's an entirely other dimension to them which is unaddressed...probably because the actual effect is difficult to measure. The effect I refer to is the typical firm's desire to do more with what they have when faced with a necessary rise in costs. If you're faced with higher costs for something you can't substitute, you try your best to get some higher output out of it; for a good example of this, look at Toyota, which is frequently lauded for getting all of its employees included in cost-saving measures by innovation on their own levels of employ; instead of going out and finding the cheapest-cost workers, Toyota encourages their workers to become more productive.

In introductory economics, typical models will explain something akin to the following line of reasoning: minimum wage laws establish wage floors above that of the equilibrium wage, which creates a surplus of workers willing to work at the higher wage and a reduced employer demand to pay for jobs at such a high pay rate. The discrepency between supply and demand is a labor surplus, also known as unemployment.

Sounds simple enough, right? It has its own kind of simple logic, too. From the business majors I've met, introductory macroeconomics and microeconomics are the only courses of that sort required, so doubtless many see the situation as simple as the preceding paragraph.

Of course, it isn't. One issue is that most people don't work for minimum wage, so it's not as though a spike in the current minimum wage ($5.15 an hour) will cause another Great Depression. Besides, 18 states have minimum wages higher than the federal standard and those states total some one-half the population of the United States.

My old stomping grounds of Washington State, just in case anyone was curious, has the highest minimum wage, currently standing at $7.63 an hour and tied to inflation.

The main point is that a hike in the minimum wage wouldn't crush our economy. In fact, it might raise the productivity of our workforce (a hypothesis I examined above), which could be healthier for the economy in the long run. Now, I'm not going out on a limb and insisting that the U.S. Congress go out and make the minimum wage $10.50 an hour or somesuch nonsense. Minimum wage laws do impose costs on firms that may not be prepared for it and whose labor markets may be distorted by such tampering. Furthermore, many minimum-wage jobs are in industries where it's certainly difficult to raise a worker's productivity - janitors, cashiers, food service jobs, bus drivers, college interns in Washington, D.C...these aren't exactly jobs where you can train someone for a day or two and expect their output to rise dramatically.

Such is life where services take up 80% of your economy. Training is a two-tiered payoff; for some service jobs (like the ones I mentioned above), it can have next to no payoff. For upper-echelon jobs (lawyers, doctors, accountants, political operatives, etc.), payoffs can be enormous, but those occupations aren't exactly minimum wage, so that's beside the point. There's only one type of training that can significantly help minimum-wage workers, and it has absolutely nothing to do with their improving the productivity jobs: significant education in more highly-skilled, often technologically-intensive jobs.

And here we are back at education, my big issue...pure coincidence, of course.