the minimum wage is more effective when we don’t fight over it

Sen. Elizabeth Warren recently made headlines by pointing out that if the minimum wage had kept up with productivity in the U.S., it would be almost $22/hour. The linked article quotes Erika Johnsen of Hot Air pooh-poohing the idea that wages should have risen with productivity:

Should the increase in crop yield from a farmer using a donkey and plow versus a farmer using a tractor be directly proportional to an increase in those crops’ market worth because of some sort of imagined moral law about productivity and wages? No, because the market value of those crops has diminished as the ease of production has increased, and if that was the way the world worked, we’d all be paying a heck of a lot more for food right now.

But of course, demand is not static. There are more people every year. Also, if more corn is available at a cheaper price, people will find new uses for corn, which increases demand and causes the price to rise again. In other words, demand increases even as technology advances and stuff gets cheaper, because we all consume a lot more stuff per person than we used to.

So even if market prices for some kinds of goods have fallen, the overall value of our labor has outstripped those price changes — if it didn’t, we wouldn’t have economic growth. We have had economic growth, quite a lot of it, and Warren’s point is simply that the workers who have made that growth possible by and large have not shared in the gains. Johnsen’s argument seems to posit that there haven’t been gains, or at least that we shouldn’t expect the gains to rise in proportion to rises in productivity. In fact, however, wages did track with wages until the 1970’s, as Dave Johnson notes here. Johnson’s theory is that the fall happened because of competition with lowly-paid overseas workers. I don’t pretend to know if that’s the right answer, but it does seem obvious that something changed in the early Seventies. As he also points out, 40% of Americans now make less than the 1968 minimum wage in adjusted dollars.

In any event, despite some overheated headlines, Warren was not suggesting that we raise the minimum wage to $22. But the implication of her remarks is that the minimum wage might be indexed to some other number — perhaps, at a minimum, inflation? Pegging to inflation would have given us a much more modest minimum wage of $10.52.

Many people on the conservative/libertarian end of the spectrum (including Erika Johnsen, in her full column) think the minimum wage is simply a bad idea. (Well, Johnsen calls it “timelessly terrible” and a “regressive and economy-damaging populist throwback that just refuses to die.” “Bad idea” was sort of a summary.) Even Christina Romer, who used to work for President Obama, says that it “tends to be more popular with the general public than with economists,” and there’s an excellent, if highly Reddit-y, summary of the arguments on the Libertarian subreddit.

The basic argument is that some employers — generally the ones employing low-wage workers — are already operating on a tight margin, so that if you raise the minimum wage, they’ll be forced to hire fewer workers, and unemployment will go up, especially among the poor. This is often presented as an immutable Law Of Science. As the redditor who starts the linked discussion says, “Dear Mr. President: price floors create surpluses…. I know you don’t think laws apply to you, but–like gravity–the laws of economics are true whether you believe in them or not.”

But is this, in fact, an inviolable law of nature? Christina Romer gives a somewhat more nanced view: “There’s been a tremendous amount of research on this topic, and the bulk of the empirical analysis finds that the overall adverse employment effects are small.”

The Economist puts it even more strongly here:

The most striking impact of Britain’s minimum wage has been on the spread of wages. Not only has it pushed up pay for the bottom 5% of workers, but it also seems to have boosted earnings further up the income scale—and thus reduced wage inequality. Wage gaps in the bottom half of Britain’s pay scale have shrunk sharply since the late 1990s. A new study by a trio of British labour-market economists (including one at the Low Pay Commission) attributes much of that contraction to the minimum wage.

So what’s going on here? How has Britain escaped the minimum wages -> higher unemployment trap? The Economist article suggests that the answer is in the way the increases are enacted:

What exactly is going on in labour markets if minimum wages do not hurt employment but reduce wage gaps? Are firms cutting costs by squeezing wages elsewhere? Are they improving the productivity of the lowest-wage workers? Some of the newest studies suggest firms employ a variety of strategies to deal with a higher minimum wage, from modestly raising prices to saving money from lower turnover….

The success of the Low Pay Commission points to the importance of technocrats rather than politicians setting wage floors. Britain’s small, regular changes may be easier for firms to absorb than America’s infrequent but hefty minimum-wage increases.

In other words, to the degree that a minimum wage is ineffective in the U.S. (compared to Britain), it’s because our minimum wage is set by politicians in an aperiodic, highly-contentious political process. When the populist political winds are strong, there are sudden spikes in the minimum wage, and businesses have a hard time adjusting to the abrupt change. But where the minimum wage increases are done regularly, in small increments, with plenty of notice to the business community, it simply becomes part of the environment in which companies operate, and they correct for it as a matter of course. Under such circumstances, it looks like the minimum wage can do some good in reducing inequality and poverty without harming the poor.

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One Response to the minimum wage is more effective when we don’t fight over it

  1. Pingback: Seattle’s minimum wage experiment and the long-term health of labor | The Handsome Camel

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