why do people think that increasing the minimum wage would increase employment?

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Leviathan replied on Mon, Jan 25 2010 2:17 PM

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I have myself said that the concept of the minimum wage necessarily reducing employment is an assumption that holds true only in the crude textbook model of the labor market, and is not suited to actual reality. As noted, monopsony power (and more broadly, oligopsonistic conditions in labor markets) complicates matters. Firms are confronted with an upward sloping labor supply curve rather than an infinitely elastic labor supply curve. So what are effectively the imperfections of labor markets make matters far more complicated than is immediately evident, and claiming that minimum wages increase unemployment is not so cut and dry, considering that the absence of infinite elasticity (few would argue that cutting wages by a cent would result in worker resignation, for example) is an element in the general deficiencies of labor markets. This is why we've encountered empirical research into the effects of the minimum wage on employment that is in sharp contrast with textbook theories.

So we have, for example, the aforementioned Card and Krueger's Minimum wages and employment: a case study of the fast-food industry in New Jersey and Pennsylvania:

"On April 1, 1992 New Jersey's minimum wage increased from $4.25 to $5.05 per hour. To evaluate the impact of the law we surveyed 410 fast food restaurants in New Jersey and Pennsylvania before and after the rise in the minimum. Comparisons of the changes in wages, employment, and prices at stores in New Jersey relative to stores in Pennsylvania (where the minimum wage remained fixed at $4.25 per hour) yield simple estimates of the effect of the higher minimum wage. Our empirical findings challenge the prediction that a rise in the minimum reduces employment. Relative to stores in Pennsylvania, fast food restaurants in New Jersey increased employment by 13 percent. We also compare employment growth at stores in New Jersey that were initially paying high wages (and were unaffected by the new law) to employment changes at lower-wage stores. Stores that were unaffected by the minimum wage had the same employment growth as stores in Pennsylvania, while stores that had to increase their wages increased their employment."

This is actually consistent with basic labor economics. We can consult Dickens et al.'s The Effects of Minimum Wages on Employment: Theory and Evidence from Britain. Consider the abstract:

"Recent work on the economic effects of minimum wages has stressed that the standard economic model, where increases in minimum wages depress employment, is not supported by empirical work in some labor markets. We present a general theoretical model whereby employers have some degree of monopsony power, which allows minimum wages to have the conventional negative impact on employment but which also allows for a neutral or positive impact. Studying the industry‐based British Wages Councils between 1975 and 1992, we find that minimum wages significantly compress the distribution of earnings but do not have a negative impact on employment."

So we've noted that the heterogenous nature of labor markets allows for negative employment effects in a monopsony model, while the orthodox model does not allow for any broad positive employment effects. More importantly, it's likely that there are additional heterogeneities in employment trends that render textbook analysis deficient, as evidenced by an empirical source such as Dube, Lester, and Reich's Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties:

"Local case studies of minimum wages typically find no significant employment effects, while studies using national data find some negative effects for teenagers. We argue that heterogeneity in spatial employment trends generates biased estimates in national analyses and causes overstatement of precision in local and national studies. We propose two new local estimators that compare all contiguous counties or metro areas in the U.S. that straddle a state-based minimum wage gradient. We find that the negative elasticities in national fixed-effects models are generated by unobserved heterogeneities in employment trends. Our local estimators are more robust and show no employment effects."

What's usually asserted is not a well-informed claim, as there is a substantial amount of empirical research that demonstrates the precise opposite to be true. For direct relevance here, consider Addison et al.'s Do minimum wages raise employment? Evidence from the U.S. retail-trade sector:

"This paper examines the impact of minimum wages on earnings and employment in selected branches of the retail-trade sector, 1990–2005, using county-level data on employment and a panel regression framework that allows for county-specific trends in sectoral outcomes. We focus on specific subsectors within retail trade that are identified as particularly low-wage. We find little evidence of disemployment effects once we allow for geographic-specific trends. Indeed, in many sectors the evidence points to modest (but robust) positive employment effects."

We can also consider the effects of increased human capital acquisition induced by minimum wage legislation, as observed in Cahuc and Michel's Minimum wage unemployment and growth:

"This paper shows that, in an overlapping generations, model with endogenous growth, minimum wage legislation does not necessarily has negative consequences on economic performance. Such legislation can have positive effects on growth by inducing more human capital accumulation. More precisely, a low demand for unskilled labor, induced by a minimum wage, may create an incentive for workers to accumulate human capital. Moreover, it is possible that a decrease in the minimum wage lowers the welfare of each agent in the economy."

Even aside from formal legislation, we can refer to the effects of union activity promoting incentives for human capital acquisition in apprenticeship training and the like through the establishment of minimum wages, which is supported by Dustmann and Schönberg's Training and Union Wages:

"This paper investigates whether unions, through imposing wage floors that lead to wage compression, increase on-the-job training. Our analysis focuses on Germany. Based on a model of unions and firm-financed training, we derive empirical implications regarding apprenticeship training intensity, layoffs, wage cuts, and wage compression in unionized and nonunionized firms. We test these implications using firm panel data matched with administrative employee data. We find support for the hypothesis that union recognition, via imposing minimum wages and wage compression, increases training in apprenticeship programs."

For a more direct and straightforward analysis of the minimum wage's ability to provide efficiency benefits (as some do not conceptualize increased employment as increased static efficiency), we could consult Kass and Madden's Holdup in oligopsonistic labour markets - a new role for the minimum wage:

"We consider a labour market model of oligopsonistic wage competition and show that there is a holdup problem although workers do not have any bargaining power. When a firm invests more, it pays a higher wage in order to attract workers from competitors. Because workers participate in the returns on investment while only firms bear the costs, investment is inefficiently low. A binding minimum wage can achieve the first-best level of investment, both in the short run for a given number of firms and in the long run when the number of firms is endogenous."

To confirm the aforementioned claim that minimum wages may shift activity to high-wage labor and away from unskilled, low-wage labor (which would also build on our earlier points about human capital acquisition), consider Acemoglu's Good Jobs versus Bad Jobs:

"This article develops a model of noncompetitive labor markets in which high‐wage (good) and low‐wage (bad) jobs coexist. Minimum wages and unemployment benefits shift the composition of employment toward high‐wage jobs. Because the composition of jobs in the laissez‐faire equilibrium is inefficiently biased toward low‐wage jobs, these labor market regulations increase average labor productivity and may improve welfare."

Finally, consider Todorovic and Ma's A Review of Minimum Wage Regulation Effect—The Resource-Based View Perspective, which employs meta-analytic techniques to expand beyond the potential deficiencies of single or isolated studies:

"The debate around minimum wage regulations, in the aftermath of recent regulatory changes in the United States, continues to grow. This article contributes to present literature by engaging the minimum wage controversy from the resource-based view theoretical perspective. Based on literature review, we find that minimum wage regulations appear to exhibit different impacts in different countries. Using meta-analysis of the related literature, we propose a conceptual framework that highlights the relationship between national resource base and minimum wage regulatory impact. Specifically, we posit that minimum wage impact on a country, such as the United States, is moderated by the national resource base. Further, we identify opportunity cost associated with inadequate minimum wage regulations, as consisting of education, entrepreneurial propensity, and cost divergence. Our conclusions point to the positive effects of the minimum wage controls, including increased education, more productive operating practices, and the emphasis on skill development and high value activities."

So all in all, we actually have rather substantial empirical evidence of the minimum wage's benefits for employment, human capital acquisition, productivity, which constitute efficiency improvements or aids to such. The static orthodox model honestly appears rather naive and incomplete in comparison.

There have been attempts at Austrian criticism of the monopsony model of the labor market, such as Walter Block's An Austrian Critique of Neo-Classical Monopsony Theory. As with so much of his work, there seems to be little but an attempt to attack a strawman, with this one being a case of a criticism of more dated static monopsony models rather than the more contemporary concept of "dynamic monopsony" explored by Card and Krueger, Burdett and Mortensen, or by Alan Manning in his Monopsony in Motion. The same is true of Don Bellante's The Non-Sequitur in the Revival of Monopsony Theory, which contains little more than his disgruntlement at the usage of the term "monopsony" to describe conditions of upward sloping labor supply curves as opposed to traditional single-buyer conditions, is a repetition of previous criticism he's offered of the "old" model, with copy-and-paste of commentary from more insightful criticism of Peter Kuhn (which itself claims that the model is "not sufficiently precisely defined for empirical testing" and therefore does not address the studies among the numerous ones mentioned above).

To be fair, recently Krugman made a point which I considered a very good one.  He argued that removing the minimum wage would not have as dramatic of an effect as many free-market economist seem to suggest (for example, Murphy suggested that if minimum wage was repealed unemployment would be solved within six months).  Most jobs are above the minimum wage.

It seems standard ignorance of the difference between textbook theory and reality. It's parallel to the fact that many are happy to chant that price floors cause surpluses and price ceilings cause shortages without considering the fact that the existence of numerous equilibrium prices above and below the respective floors and ceilings set will mean that there is no disruption.

Card and Krueger wrote an error-filled paper and subsequent book (Myth and Measurement: The New Economics of the Minimum Wage) stating that the negative effects of minimum wage laws are nonexistent.  Even though their work has been disproved by several sources, minimum wage advocates continue to use their paper as "proof" of the goodness of a minimum wage increase.

There have certainly been attempts to offer "rebuttals" of Card and Krueger's work (alongside mere declarations of its falsity, such as that offered by James Buchanan), but has that "disproved" the model as a whole? Much of that speculation seems to be related to the misconception that Card and Krueger simply vanished under a bombardment of economic consensus. For example, Block, Westley, and Padilla's Internal vs. external explanations: a new perspective on the history of economic thought states that "the most recent article to make this claim [the minimum wage does not increase unemployment] (Card and Krueger, 1994), was overwhelmed with a plethora of publications to the contrary, and since CK have not since replied to any of them they are wrong." That is openly and demonstrably false. In response to Neumark and Wascher's comment on their original article, for example, they issued a very prompt reply. What did you refer to?

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Leviathan replied on Mon, Jan 25 2010 2:18 PM

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Hmmm, can't post again.

EDIT: Ah, there it is.

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Andrew Cain replied on Mon, Jan 25 2010 2:20 PM

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Takes some time for the long articles with multiple links

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laminustacitus replied on Mon, Jan 25 2010 2:22 PM

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fakename:

laminustacitus:

Honestly, I do not see how this proves the demand and supply analysis I gave wrong. In  addition, I am discussing maximum wages, not minimum wages, which your analysis seems to forget when it discusses firms offering higher wages.

A request: could you provide me the source that you had read.

 

 

So you're saying that a maximum wage prevents workers from preferring more leisure?

http://books.google.com/books?id=S6KZVx8rcXAC&pg=PA443&lpg=PA443&dq=positive+real+wicksell+effect&source=bl&ots=dEjCpiBG1H&sig=38SApnfWXFkVQPT4sTQqdjwySXE&hl=en&ei=-M5dS8_fM47IsQOg6rWcAw&sa=X&oi=book_result&ct=result&resnum=8&ved=0CCoQ6AEwBw#v=onepage&q=positive%20real%20wicksell%20effect&f=false This link shows what I'm thinking about from page 443-444.

Thank-you.  I don't have much time to read it now, but I'll post what I think about it once I do.

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Leviathan replied on Mon, Jan 25 2010 2:31 PM

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Laughing Man:

Takes some time for the long articles with multiple links

Well, I didn't bother waiting for approval; I just posted a short note and then edited the post. What I actually had trouble with was an error caused by quote code mismatches, though there weren't any. I got around it by eliminating the usernames of the people I was quoting.

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filc replied on Mon, Feb 1 2010 3:32 PM

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Leviathan:

As noted, monopsony power (and more broadly, oligopsonistic conditions in labor markets) complicates matters

The Monopsony theory concept is entirely impossible to be realized on any type of market. Even a coerced market will very unlikely ever experience such a condition. 

Leviathan:

and claiming that minimum wages increase unemployment is not so cut and dry

It is indeed very cut and dry. If we raise the minimum wage to $1000 an hour, who would be able to employ people at the rate?

It's important to note that labor is nothing more than a market good like anything else. If we price fix banana's at $1000 per pound, banana's would also go un-employed. The folly is when people try to pretend that labor mythically behaves differently on a market. Though the fundamentals are the same and can be proven a priori. 

Leviathan:

This is actually consistent with basic labor economics

There is only economics. There is no such thing as labor economics. This fallacy assumes we can arbitrarily define different behaviors amongst various market goods. Changing key terms, definitions, and looking for instances of empirical data to support the arguments that were fabricated. The whole thing is folly though and changing key terms and definitions is something you have demonstrably been subscribed to. 

Leviathan:

So all in all, we actually have rather substantial empirical evidence of the minimum wage's benefits for employment, human capital acquisition, productivity, which constitute efficiency improvements or aids to such.

I have substantial empirical evidence which shows that flipping a coin will land heads 68% of the time.

Again, why don't we raise minimum wage to $50 an hour? $1000 an hour?

Leviathan:

negative employment effects in a monopsony model,

A monopoly in providing employment for labor is necessary for such a model. It's nearly an impossibility without some form of coercive entity. Even with a coercive entity such a condition is extremely difficult to create and maintain. 

Leviathan:

What's usually asserted is not a well-informed claim, as there is a substantial amount of empirical research that demonstrates the precise opposite to be true. For direct relevance here, consider Addison et al.'s Do minimum wages raise employment? Evidence from the U.S. retail-trade sector:

And as I said, we do things here A priori. Not A posteriori. 

There are those who also have proven that selling ice-cream in NYC during the summer time is linked to an increase in homicide rates. 

Measuring complex social phenomena is always arbitrary. I could pull the same amount of statistics which would counter yours. Emperical evidence is inherently flawed. Thats why we do it A prior.

You have to prove, a priori, that minimum wage benefits workers. To that I ask you, why not raise minimum wage to $1000?

Leviathan:

There have been attempts at Austrian criticism of the monopsony model of the labor market, such as Walter Block's An Austrian Critique of Neo-Classical Monopsony Theory. As with so much of his work, there seems to be little but an attempt to attack a strawman, with this one being a case of a criticism of more dated static monopsony models rather than the more contemporary concept of "dynamic monopsony" explored by Card and Krueger, Burdett and Mortensen, or by Alan Manning in his Monopsony in Motion. The same is true of Don Bellante's The Non-Sequitur in the Revival of Monopsony Theory, which contains little more than his disgruntlement at the usage of the term "monopsony" to describe conditions of upward sloping labor supply curves as opposed to traditional single-buyer conditions, is a repetition of previous criticism he's offered of the "old" model, with copy-and-paste of commentary from more insightful criticism of Peter Kuhn (which itself claims that the model is "not sufficiently precisely defined for empirical testing" and therefore does not address the studies among the numerous ones mentioned above).

No, the whole model is mythic. I doubt Dr. Block desires to waste much of his energy and time into nonsensical ideological arguments. He'd prefer to stay in the realm of reality and economics.

Leviathan:

It seems standard ignorance of the difference between textbook theory and reality. It's parallel to the fact that many are happy to chant that price floors cause surpluses and price ceilings cause shortages without considering the fact that the existence of numerous equilibrium prices above and below the respective floors and ceilings set will mean that there is no disruption.

Yes your first statement is very true. many economics believe that equilibrium is a thing of reality in the market. It is not, Mises explains this simply in HA. Also, any attempt at identifying an equilibrium price is pretty outrageous. Likewise the establishment of the "Correct" minimum wage is also always arbitrary.

It's entirely true and can be proven a priori that price fixing a good always results in shortages and surplus's. Raising a rate too high results in a surplus, a rate too low results in shortage. The same applies to labor. 

Leviathan:

There have certainly been attempts to offer "rebuttals" of Card and Krueger's work (alongside mere declarations of its falsity, such as that offered by James Buchanan), but has that "disproved" the model as a whole?

Yes. Primarily because the monopsony concept is flawed just like the monopoly concept is flawed. The boundaries which identifies a monopsony is arbitrary, just as monopolies boundaries are arbitrary. What usually happens is a specific industry begins to loose consumer interest. The industry however previously may have been very popular and lucrative. The labor economist only sees one thing, he see's the wages of horse and buggy repairmen steadily falling. There is a bunch of left over capital for horse and buggy salesmen. Few people have horse and buggies left. All these firms attempt to please this small pool of people. As a result prices need to drop as competition is stiff. The less profitably industry likewise has to pay their laborers less.

Instead of taking this as a signal for laborers that they need to leave the industry they argue that it is monopsony and create a union to force wages higher. A free market economist by contrast however see's that Horse and Buggy is loosing capital investment and interest. However they also notice that the automobile industry is starting to grow, by contrast the wages are rising in that industry where as they fall in horse and buggy. 

SO the labor economist isolates his periferal view and focus's only on the men loosing their wages in the horse in buggy industry. Instead of being a pal and telling his buddies to find new employment in a more desirable industry he uses violence, or threat of violence, to keep the wages high and punish the existing capitalists in that industry. 

So it comes back to Hazlitt's lesson. Observing what is unseen. In all cases monopsony  models are assigned arbitrarily and ignore factors that go on in other parts of the economy. If wages are dwindling in an industry it's more than likely a signal that laborers need to leave a dieing industry and participate in an industry where consumers have high demand and have needs that need to be addressed. 

This is in effect the entire fallacy of the Organized labor model.

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filc replied on Mon, Feb 1 2010 3:33 PM

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http://search.mises.org/search?q=monopsony&site=Literature

For your referencing apatite.