Gil's comments are very interesting, though I'm not exactly clear what is
going on in this model. Could you please explain it a bit further Gil
and/or send me a copy of the paper?
Without having done careful research on this particular factor, four
things seem most pertinent for understanding why minimum wages do not
correlate inversely--or at least not in a straightforward way--with changes
in employment. Thinking about a simple labor market with a downward
sloping demand curve and upward sloping supply curve, these things are:
1. Rightward shift in the demand curve, depending on macro factors, which
in my less than rigorous study of this, seems to swamp the minimum wage
effect. Indeed, one could say that the rise in minimum wages almost always
follows business cycle upswings with a lag.
2. Efficiency wage effects, in particular, declines in turnover and
absenteeism, which by raising productivity, allow us to move up the supply
curve without hiring more people.
3. There may be some declines in hours worked, if not number of people
hired; but, as I recall, this doesn't come through so clearly in the work
of Card and Kreugar, for example, since the total hours were not measured
that carefully.
4. Firms absorb the costs, since, in many cases, low-wage labor costs are
a relatively small proportion of total fixed and variable costs (is this
similar to Gil's point?); but then they try to pass on costs by raising
prices, and are partially successful in doing so, especially in the service
sector, which is not competing with imports from low-wage countries.
These are just some thoughts. I wish I could have had time by now to
develop them further.
Regards, Bob Pollin
effectively shift the supply curve to the rightAt 01:06 PM 11/8/98 -0500,
you wrote:
>Concerning this passage from Krugman on Pollin and Luce's book on living
>wages:
>
>>So what are the effects of increasing minimum wages? Any Econ 101 student
>>can tell you the answer: The higher wage reduces the quantity of labor
>>demanded, and hence leads to unemployment. This theoretical prediction
>>has, however, been hard to confirm with actual data. Indeed, much-cited
>>studies by two well-regarded labor economists, David Card and Alan Krueger,
>>find that where there have been more or less controlled experiments, for
>>example when
>>New Jersey raised minimum wages but Pennsylvania did not, the effects of
>>the increase on employment have been negligible or even positive. Exactly
>>what to make of this result is a source of great dispute. Card and Krueger
>>offered some complex theoretical rationales, but most of their colleagues
>>are unconvinced; the centrist view is probably that minimum wages "do," in
>>fact, reduce employment, but that the effects are small and swamped by
>>other forces.
>
>To Bob and others interested--
>
>The impact of imposing or raising a minimum wage is not as clearcut as
>Krugman suggests, even under essentially neoclassical conditions; nor is
>the theoretical rationale for this ambiguity isn't particularly "complex."
>I've written a paper showing that under otherwise competitive exchange
>conditions, the presence of "quasi-fixed labor costs"--labor costs that
>vary with the number of employees rather than the total number of hours
>worked, like health insurance or lockers or office space--creates a setting
>in which raising a minimum wage may increase the number of *workers*
>employed, even as it reduces the total number of *hours* worked by these
>employees. In this light, results such as those by Card and Krueger are
>not so paradoxical.
>
>Gil Skillman
>
>
>
>
********************************************
Robert Pollin
Department of Economics
Univesity of Massachusetts-Amherst
Amherst, MA 01002
(413) 577-0126 (office); (413) 545-2921 (fax)
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