A Word from the BPE

Today the federal minimum wage increases from $6.55 and hour to $7.25 an hour. This is a far cry from the $4.25 I used to make at Baskin Robbins, but I digress.

The timing of the enactment of this legislation is incredibly poorly timed, and is likely to hurt the very people it purports to help.

Let us take a step back and ask a very simple question. Why are there minmum wage laws in the first place? Introducing price floors into otherwise competitive markets violates the principles of efficiency and fairness outlined in any Econ 101 course. If you mandate wages above the market-clearing wage, then firms are going to cut back hiring and people are going to want to work more, leading to a reduction in employment and an increase in unemployment (the unemployed being those who want to work at the given wage but can't find work). The total consumer and producer surplus goes down, leaving the economy unequivocally worse off than before.

Of course, imposing a price floor that is below the market-clearing price is going to have no effect whatsoever. Given that very few working Americans earn at or near the federal minimum, it's likely that the only result from minimum wage legislation is the cost of promoting it in Congress. Indeed, in the state of Indiana, for example, only 64,000 of the 1.8 million employed persons earn the minimum (that's 3.5% if you're keeping score at home).

If we depart from the assumption of perfect competition (the economist's pipe-dream), there are market structures in which higher minimum wages will not depress employment, however. In particular, if firms have monopsony power (the firms are buyers and individuals are sellers in the labor market, a monopsony is the reverse situation of a monopoly, in which the buyer, not the seller, has market power). In a monopsony, workers are paid wages less than their marginal products, and imposing higher minimum wages can move the market closer to the competitive case, thereby increasing employment.

Nevertheless, what kinds of job typically pay at or near the minimum? Fast-food, low-end retail, and the like. There are lots of these jobs around (well, not as many today as a few years ago), and lots of product market competition in these industries, so it seems unlikely that firms would have monopsony power, the only market structure in which it might possibly make sense to legislate higher minimums.

So this all leads us to an empirical question: what are the employment effects of higher minimum wages? The evidence is mixed. Most of it suggests that the employment effects are mildly negative or zero, suggesting that there is little gain (but also little cost) from imposing higher minimums. This suggests that there is little efficiency loss from imposing higher minimums.

So why do I care? It's not all about efficiency. It's about fairness. Minimum wage laws are racist and discriminate against the poor, the young, and the uneducated. The only people who earn the minimum wage are teenagers, people with less than a high school education, or part time workers who are supplementing a family's primary source of income. Higher minimums are likely to hurt these people, as they are the ones whose jobs will first be cut when mandated minimums increase. These are precisely the people who cannot afford to lose jobs (and the on the work experience that comes with it).

In short, higher minimum wages likely benefit few and hurt some, and the hurt on the some (the minorities, the poor, and the uneducated) is likely far greater than the benefit for the few (those who might see small increases in their wages). It's just bad policy.