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 > 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) >[EMAIL PROTECTED]; (413) 549-8796 (home) > > >
