Tuesday, November 27, 2012

Problematicity of minimum wages, part 2

Some time ago, I wrote about why I consider minimum wages unempowering and harmful to the least privileged members of society.  I contended that minimum wages shut out from the labor market - a fundamental social institution - those people whose labor is least valuable.  It prevents them from exercising what little power they have and perpetuates their disenfranchisement by preventing them from accumulating social and human capital through employment.

I'd like to revisit that topic briefly to better explain why a minimum wage effectively bars the least valuable, least privileged, and least powerful members of society from employment.

The process of establishing wages is effectively a negotiation between employer and employee.  In some cases - when the employee's power is checked by the presence of many other potential employees - the employer can set the wage.  In other cases - when the employer's power is checked by the presence of many other potential employers - the employee can set the wage.  The freer the market, the less power both employee and employer have.  All the rest of the time, employee and employer negotiate and arrive at a compromise.

Negotiations end when either the parties reach an agreement, or when one party walks away from the negotiation.  The threat of walking away without a deal is a bargaining tactic.

This illuminates the brutal consequences of a minimum wage.  In the presence of a minimum wage, the employer cannot offer a wage low enough to make the potential employee a contributing laborer.  So the employer walks away from negotiation, leaving the employee out in the cold.  The minimum wage effectively bars the least valued members of society from participating in the labor market not by outright exercise of force, but by the conjunction of freedom to walk away from negotiation and conditions on the price of labor.

In a modern, wealthy welfare state, the people most affected by the minimum wage and shut out from labor force participation move from job to job, work for cash, consume very little, and rely on friends, family, charity, and welfare.  They're not starving to death, but they are shut out of permanent participation in the labor force.  Thus they have difficulty accumulating social and human capital - they're stuck in an effective poverty trap.

So here are two general classes of solutions to this disenfranchisement.  One type of solution is to remove the ability of employers to step away from the negotiating table.  Mandate that employers take any job applicant and pay them a set wage.

The other type of solution - the type I favor: do away with the minimum wage and replace it with an anti-poverty measure that genuinely empowers the underprivileged, instead of one that merely looks nice to us upper-middle-class folks while silently disenfranchising the poorest, least valuable members of our society.


  1. I think your model of how this would work isn't quite right. Getting rid of minimum wage wouldn't only result in having more people work, it would also mean people who are ALREADY working for minimum wage will be paid less. That's going to mean a lot of those people can't afford basic things anymore. Given that there's no where in the U.S. that you can work fewer than 63 hours a week for minimum wage and still afford a pretty basic apartment (http://takingnote.blogs.nytimes.com/2012/05/30/paying-rent-on-minimum-wage/), those people are going to either have to work more hours at the lower rate (taking the place of someone else who could be working), or they'll go on these other measures we currently have for the poor, e.g., unemployment, food stamps, etc.

    Also, think about WHO works minimum wage jobs. A lot of times those are the people who can "afford" to do so in a different sense than we mean of adults, supporting a family. Teenagers! Take a man or woman supporting a family with a minimum wage job. Suppose minimum wage is abolished, and that pay rate is dramatically lowered. The person with the family can no longer support their family on the new low rate, but guess who can take that job? A teenager of middle-class parents. They are already living with their parents, fed by their parents, clothed by their parents, taken to the doctor by their parents. They can "afford" in a time-for-money exchange to work for less than minimum wage because their money goes towards discretionary purchases. They take the job. any new jobs that can be created at this new low rate (let's say they even get double the hires) are also likely to be filled by teenagers, not the breadwinners. Is this good for the economy, or a moral good for society to make this exchange? I would argue definitely not. If we were to abolish minimum wage (which I think would be a huge mistake) we have to think about the fact that the exchanges we make to increase the number of employed do not necessarily increase the number of people we WANT to be employed.

  2. "do away with the minimum wage and replace it with an anti-poverty measure that genuinely empowers the underprivileged"

    What are these measures of which you speak?

    1. Blog post coming soon detailing these measures.