Thanks Gil. One way to contextualize your result is to think of it in response to the
argument that increases in the minimum wage only hurt the people they are intended to
help. As I understand it, the debate takes this form:
Supporter of living wage: Perhaps there will be some decline in the demand for labor,
but since this demand is highly inelastic (no empirical debate there), the income
collectively received by low-income people, employed and unemployed, will go up.
Opponent: Yes, but the ill-effects are concentrated on a specific, vulnerable group.
If 5% lose their jobs, they will probably be new entrants who will suffer permanent
damage. So you are making other low-wage workers a little better off so that these
will be devastated.
Supporter: Not so fast. You are assuming that those whose wages go up are not the
same as those who lose their jobs. On the contrary, these jobs have very high
turnover, and therefore the job losses, such as they might be, will be temporary and
spread out over the whole population. Thus most low-wage workers, with a living wage
law, will find themselves working (perhaps) a little less (slightly longer spells of
unemployment between jobs) but making considerably more per hour, thereby coming out
ahead. It is a false assumption that unemployment will be demographically
concentrated.
Gil: Yes, and not only that, but the decline in labor demand (such as it is) will
express itself in the form of fewer hours, which many or all experience, and not
reduced jobs that could potentially affect a few people intensively. Since no one
denies that the demand for labor is highly inelastic, my result, combined with the
turnover argument, shows that a living wage law is unambiguously a good thing for
virtually the entirely low-income population.
----
To me, this is now the minimum position that living wage supporters can take,
buttressed by theory and evidence. I would like to take a maximal position, however,
that through a macro process, the redistribution of income entailed in a living wage
law can stimulate the economy as a whole and thereby potentially offset the
substitution effects of wage change. We have a modest argument from differences in
the marginal propensity to consume, but I have to admit I'm not happy with this for a
variety of reasons, among which is its apparent inappropriateness in the drastically
low-savings U.S. economy at present. A better theory would be one that showed that
system-wide change in the income stream could have stimulative effects apart from the
aggregate savings rate. I would imagine some sort of dynamic out-of-equilibrium
adjustment story employing incomplete information, etc. This is not my area, but I
have a hunch that a process of this sort really does take place sometimes, if not
always, and that formalizing it would be an enormous contribution to progressive
economics. If I ran a foundation I would eagerly throw money at anyone interested in
taking this up.
Peter Dorman
Gil Skillman wrote:
> At 01:33 PM 11/11/98 -0500, you wrote:
> > 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?
>
> Bob, I will send you the paper, but for the sake of present discussion, let
> me also respond to your comments below, after which I'll talk about the
> intuition behind my result.
>
> You write:
>
> > 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.
>
> Possibly true but beside the point, since if the neoclassicals are right
> about the _ceteris paribus_ effects of minimum wage, they could
> legitimately argue that employment would be *even higher* if the minimum
> wage weren't raised. Conversely, are you suggesting that a living wage
> policy should only be implemented in times of strong upswings, to ensure
> that any specific disemployment effect would be "swamped" by macro effects?
> Doubtful.
>
> > 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.
>
> Doesn't help this argument. First,if profit-seeking employers cared about
> these effects, minimum wages would be beside the point, since they would
> willingly raise the wage above existing minimums now. But apparently they
> don't, so increased minimums will still increase effective labor costs at
> the margin and reduce employment.
>
> Second, turnover rates have no direct effect on employment flows, only on
> the identities of those employed by the firm at any one time. Quite
> possibly the indirect effects could work in the *opposite* direction that
> you suggest, if employers "hoard" labor in order to cover absentees and
> departures. If you're right about the efficiency wage effect,
> hoarding--and thus net employment--might go down as a result.
>
> > 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.
>
> Yes, that's my point; see below. But making it requires invoking
> quasi-fixed labor costs, as explained below. In a perfectly competitive
> world without quasi-fixed costs, given that individual labor supply is
> upward-sloping, an increase in the minimum wage leads to an *increase* in
> hours per worker and thus a *decrease* in number of workers employed.
>
> To put it another way, if you want to advance this argument seriously, my
> paper gives you the theoretical ammunition.
>
> > 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.
>
> That doesn't work either. Labor demand curves are still downward sloping
> (though less elastic) even if firms have product market price-setting
> power, as this point suggests. Other things equal, an increase in the wage
> rate would still reduce employment.
>
> This brings us to the point of my paper. Suppose we're otherwise in a
> neoclassical world (for the sake of argument), but there are quasi-fixed
> labor costs, i.e. those which vary with the number of workers hired rather
> than with the number of hours worked. Compared to a world without such
> costs, the effect of quasi-fixed labor costs is to induce employers to
> conserve on number of workers hired and use more hours per worker.
>
> However, *at the margin*, the imposition or increase of a minimum wage
> increases the cost of hours relative to the cost of people (that's not
> obvious, I know, which is why the paper makes a contribution), leading to a
> substitution of people for hours, increasing employment.
>
> Of course, against this "labor substitution" effect is the standard,
> negative "quantity demanded" effect from increasing the total cost of
> labor, but nothing guarantees that this effect on *workers employed*
> offsets the labor substitution effect. Consequently, there is no *a
> priori* basis for concluding that increasing the minimum wage must reduce
> worker employment (although hours per worker must go down), **even in this
> neoclassical environment.**
>
> Gil
>
