The Minimum Wage

Thanks to LF for his final round. It’s been a good debate. I only wish that I could have spent more time on my last round so that readers could be more enlightened. Let’s resume the debate.LF’s CaseAt the core, LF’s case is basically that the minimum wage is like a regular price floor, and hence unemployment will increase. He also maintains that unemployment is bad (I agree, ceteris parabbus) and hence the minimum wage is not beneficial for society. Empirics and theory are used to try and prove this, as we’ll discuss below.I argue that various mitigating factors exist, and that the labour market is different to other markets. Furthermore, the unemployment idea is not ceteris paribus – not everything else is equal for various reasons. If these mitigating factors outweigh the issues associated with a neoclassical price floor, then I win the debate. If not, the vote is for LF.Price Elasticity of Essential Goods and ServicesNo response whatsovever to the conspicuous consumption argument this entire debate – driving down conspicuous consumption is assumed to be good, as a minimum wage does. The good done from this can outweigh employment losses in certain sectors due to the inelasticity of demand combined with monopsonistic issues.Besides, undertaking employment is to forego the opportunity cost, say more education and a more efficient, specialised workforce. This, plus conspicuous consumption reduction is a positive.Big Increases vs. Small DecreasesAgain dismissed as irrelevant by Con. Even granting his statement that the demand for labor may decrease, unemployment is a negative given ceteris paribus, but the situation is not ceteris paribus! The utility gained for the workers is significant, and outweighs lost utility of the unemployed (in the case of layoffs) and exceeds that of customers when costs are passed on; the average customer has earnings above that of a minimum wage worker. Let’s also remember that firing somebody isn’t something that employers readily do – they have regulations to comply with, retraining to do if they ever lower prices and experience increased demand for their products etc. The situation is not always the case that a price rise will result in unemployment.When considering what is beneficial for society it’s important to look at what utility one derives from each new dollar they earn – it’s the entire reason wealth redistribution exists. The minimum wage helps contribute to greater societal utility and happiness, which is beneficial.Marginal ProductivityCon attacks my evidence for my stated psychological effects, despite it being rather self evident. I suppose I have myself to blame for not going to great lengths (while rushing to post R3 due to Internet failure) to source generally accepted fact. Readers, see if my psychological impacts resonate with you – people like you are the people who are making decisions based on these impacts!However, Con’s criticism ties in very nicely with my point from R2 about neoclassical economics and its overemphasis on markets, as demonstrated by my quote of Ross Gittins. Con attacked negative externalities yet dropped the whole overemphasis point. Now he’s saying that a lack of quantitative evidence is problematic, yet he let it slide earlier! Furthermore, a focus on quantitative data tends to result in valuing things too quantitatively. For instance, when you go shopping you tend to focus on price as opposed to say, quality, despite your wishes for quality being a priority, because you can’t easily measure quality as you can with price. Relating back, Con also dropped my the conclusion of all of this that price movements had less impact than speculated, severely weakening his case.Readers can decide on the psychological impact of the minimum wage and whether the general populace sees it as fair and hence works more productively. The key is behavioural economics.MonopsonyThis issue is rather important, so let’s spend some time on it.Con’s main contention to the minimum wage fixing monopsonies is that it doesn’t help in a majority of cases (if varied by area then relocation he says, nevermind that people are unlikely to move on small pay differences) . Again, my technicality argument about determining the very worst monopsonistic payment in existence (or something rather low) and then setting the minimum wage above this by a bit (but below most other jobs pay) is perfectly sound, if a little unfair. It’s a well known fact that a minimum wage increases employment under monopsony [1].However, the big argument is about (less substantial) monopsony powers existing in urban labour markets. The paper under contention [2], states clearly that 2 effects will occur under a minimum wage “minimum wages have two opposing effects: the employment-increasing “oligopsony” effect and the employment-reducing “exit” effect. The overall effect of a minimum wage depends on which effect dominates” . Interestingly though, the ‘exit’ effect is a result of increased ease of entry into a market which causes greater competition. Of course, this causes a degree of unemployment, but this is simply markets at work, and is beneficial in the long run. As to the oligopsony effect, it’s clearly stated : “Thus, even in the case of multiple employers, a minimum wage set moderately above the market wage can increase employment through greater labor market participation. Intuitively, by setting the minimum wage above the market wage,employers ﬁnd it easier to ﬁll their vacancies” , among other statements. Basically, more employment.Just to round off, studies like Bhaksar and To 1999, Walsh 2001 found an overall positive impact; ie. Oligopsony impact greater than exit impact.EmpiricsThis is amusing. Con quotes a meta-study on minimum wage studies, I discredit the study with meta-analysis showing publication bias and Con retorts argues that it is ‘difficult to apply’ meta-analysis to economics. Explaining pages and pages of academic argument and statistical methods is beyond this debate however. I’ll note that Con’s quoted text is published at a time when it would be reacting to Card and Krueger’s statement of publication bias (a few years prior) . However, Doucouliagos and Stanley used a different, more accurate version of meta-analysis, disagreeing with Krueger’s methodology yet reaching the same conclusion that countered Neumark and Wascher’s findings.I won’t delve into the minutae (debates in itself...) but here’s an interesting quote from the conclusion:“Secondly, minimum-wage effects might exist but they may be too difficult to detect and/or are very small. Perhaps researchers are “looking for a needle in a haystack” (Kennan, 1995, p. 1955). In any case, with sixty-four studies containing approximately fifteen hundred estimates, we have reason to believe that if there is some adverse employment effect from minimum wage raises, it must be of a small and policy-irrelevant magnitude.” [3]If employment change is of a ‘policy irrelevant magnitude’ then LF’s case, dependent on unemployment outweighing positive impacts, is essentially weak. There’s the productivity effects, the psychological impacts and the whole utility per dollar arguments based off diminishing returns being put against ‘policy irrelevant’ employment effects.ConclusionI can’t summarise the entire minimum wage debate in a few words – it’s a complex issue based on various mitigating factors meaning that conventional theory regarding a price floor doesn’t apply, or is of less importance than the mitigating factors. Basically ‘policy irrelevant’ unemployment effects (potential positive employment via monopsonistic competition as well in some cases) are outweighed by other effects. Case in point for behavioural economics.Thanks to LF for a fierce debate.Sources[1] - http://pubs.aeaweb.org...[2] – Ibid[3] - http://www.deakin.edu.au...