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We are not in favor of a minimum-wage hike. Most arguments for an increase lack a sound theoretical foundation or valid empirical evidence.
However, one that theoretically holds water is the case of the single employer in a local market. In econ speak, a single buyer of a service is a monopsony. If there is a local labor-market monopsony, an increase in the minimum wage can potentially raise wages and increase employment. Below is an example.
Ebenezer Scrooge owns the No. 1 coal mine in Gully Gulch. He is the only employer in town. Aside from subsistence farming, Gully Gulch residents have no real alternative to working in the mine. At a $20-a-day wage, Scrooge can get 100 workers to mine $3,500 of coal a day. His wage bill is $2,000 a day, so the wretched miser makes a daily profit of $1,500.
As nasty as Scrooge is, he cannot compel additional workers to the mine. But he’d like to double his output by increasing his work force to 200. In order to attract the 100 additional workers, he’ll have to raise wages to $30 a day–not just for the 100 new workers but also for the initial 100. The additional (aka marginal) labor cost of this expansion is $4,000, but his additional (marginal) revenue is only $3,500. So he doesn’t expand his output or hire more workers.
Now, impose a $30-a-day minimum wage. Scrooge moans and groans. The wage bill for his 100 workers rises to $3,000, and his profits fall to $500 a day. But something else happens. At the $30 minimum wage, he can hire the additional 100 employees without having to raise the wages of the initial 100. His marginal labor costs end up being $3,000, his additional revenue is $3,500, so he expands his output and hires more workers.
So how many local U.S. labor markets are characterized by a single employer of low-paid workers? The answer seems to be near zilch. Back in Gully Gulch, annual employee turnover is close to zero—after all, the No. 1 mine is the only game in town. In contrast, pre-COVID fast-food employee turnover in the United States was 150% per year. Unskilled U.S. workers can and do shop around for better jobs, which is strong evidence of the absence of monopsony. Theoretically interesting but empirically irrelevant.•
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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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This country’s income and wealth inequality has gotten obscenely out of control. A few are benefiting while tens of millions suffer. The current minimum wage has not been raised in years and is paltry by historical standards. More importantly, it is not a living wage. One can’t support a family on anything near the current minimum so we, the public, have to (very inconsistently) step in help the low-income families that result from pathetic wages with food and medical care assistance. That is, we are indirectly subsidizing the employers who are creating unacceptable levels of poverty.
There is good evidence that raising the minimum wage to a more livable level, would not materially reduce employment. And, because many of the affected people work in food service or sales, which require a local presence, such a move would not compromise our international competitive position.
If our economic goals include the welfare of all citizens, increasing the minimum wage is step in the right direction.
Sorry, David; you just don’t “get it,” do you? A person deserves to be paid commensurate with the contribution he makes to any employer. Employers do not “create unacceptable levels of poverty,” people who do not apply themselves to their job, no matter how menial or basic, do.
Example: I eat at McAlisters frequently because I like their food and it is reasonably priced. But the McAlisters in Carmel on East 146th street is always looking for employees; there are Help Wanted signs throughout the store every time I go in there, and the service is generally slower than other McAlisters locations, much as you can tell the employees they do have are hustling their butts off.
Why do you think that is? Here’s an answer: Because Carmel parents attend to over-indulge their little darlings to such an extent that they don’t need to find entry-level jobs to learn the basics of employment like showing up on time, being pleasant and well-groomed while at work, and the like. If those parents are willing to provide their little darlings with a car, a phone, and a credit card, why work? Why learn what it takes to make a meaningful contribution to your place of employment and get paid for it, while learning skills that elevate your work ethic (or develop one in the first place), such that life brings you future successes? In short, why bother to learn how the wheels turn in The Real World?
Not every job can provide enough income to raise a family of four right out of the box; some people’s contribution to their employer’s enterprise -hold onto your hat, here- just aren’t worth that much money! I know that’s a bitter pill to swallow, but facts can be nasty for terminally-liberal minds who think the Entrepreneurship of the Golden Goose cannot be killed by intentions that deny human nature, such as yours.
A friend and I were discussing the enormous debt load so many recent college graduates complain about…and expect the likes of Bernie Sanders to pay for them by further raising the national debt to even more obscene levels than it already is…and in the bargain, reducing the value of a college education because the recipient didn’t work to pay for it.
Said friend and I remarked how we had graduated from Purdue with no debt because we had forgone spring vacations to Ft. Lauderdale and they like and, in turn, worked our butts off in full-service gas stations in Indianapolis summers and vacations, pumping gas and mounting snow tires late at night in the cold for the respective station’s customers.
I direct your attention the the excellent 2017 Purdue University Commencement Speech given by Purdue President Mitch Daniels, following. It sounds like 12 minutes of education you missed somewhere along the line. I can’t imagine a more meaningful commencement speech having been tendered by anyone, anywhere, in all of academia:
https://www.youtube.com/watch?v=9G1s7wfZiIM
I respectfully disagee with your conclusions advance in your opinion piece:
1. If you are a business owner and you can’t afford to pay your employees a semi-living wage at $15/hr, you need to reconsider your business plans and/or business acumen. There are many ways to curb budgets that don’t involve paying living breath human beings a substandard wage. Plus, invest in your employees, and they will invest in you.
2. Large corporations (the Wal-Marts of the world) are paying sub-standard living wages on the backs of taxpayers, i.e., their own employees are food stamp eligible and using their food stamps to buy products at Wal-Mart. We need to give less corporate welfare and more help to individual Americans.
3. Eight states aleady have a $15/minimum wage, and those businesses in those states have adapted just fine with it.
4. Your conclusion that the free market will take care of our most vulnerable, least skilled workers and still provide a living wage is belied by the ever increasing income inequality in this country.
Michael B: Kindly read my response to David K. I do, however, agree with your Point #2 to the extent that it addresses corporate welfare. Other than that, you are free to “help individual Americans” to the extent that you ultimately live in squalor; there’s no one stopping your generosity if that’s what you feel you should be doing with your money.
Beyond that, your treatise suggests that of Hillary Clinton during the 2016 Presidential campaign…blathering from a disingenuous woman who has never signed the front of a paycheck for an employee…but is more than willing to tell an entrepreneur what they should be doing with their enterprise, their investment, and the sweat of their brow.
Bob, I recognize your counterpoints, and I have no doubt about your personal conviction for those points. But believe it or not your ad hominem arguments equating me to someone else falls flat, given that for the last 20 years, I’ve been an owner of a business with about 140 employees. Our revenues are about 8 times what they were 20 years ago. So, I might actually know a thing or two about running a business.
As to your comments to David about college and graduate school debt, I suspect you might be like me – in your 50’s. I worked to pay my way through college and graduate school, back in the 80s and early 90s, but I was able to do so because tuition was $6,000 to 7,000/yr. Between all your comments, it seems that you want today’s young people to work for something less than $15/hr, while also absorbing all of current college tuition costs, and nevermind the extra economic challenges thrust upon by them by the pandemic.
Over beers, I’m sure we would have a spirited but coridal and interesting give and take conversation, and please know that my comments here are intended in that same vein.
I’m sometimes amazed that we haven’t had a more forceful revolt by the non-college workforce before 2016. Think of all of that has happened to this group since the 1980s to lower wages and increase insecurity. Here’s very short list (ok, rant):
• The requirement to provide overtime pay and time-and-a-half for each hour an employee worked over 40 per week. In 1975 the threshold for this requirement was $56,000 per year in today’s dollars so this applied to a large majority of workers. Since the threshold was not raised it is now under $24,000 and applies to less than 7 % of the workforce.
• The same thing happened to the minimum wage. At present, a full-time minimum wage would not even cover a family health insurance policy let alone provide for the additional deductibles and coinsurance (forget food, clothing etc.).
• Non-compete contracts now apply to 1 in 8 workers making less than $40,000 per year. A fast food worker can be prohibited from going to another close-by restaurant to make more money. And many fast-food franchise chains prohibit franchisees from hiring workers away from other franchisees. Result: lower wages and benefits and worse working conditions.
• Outsourcing may now account for up to a third of the increase in income inequality. Many, maybe most, large organizations (for-profit and not) outsource many low-level functions. The result of this demeaning “innovation” is low pay and fewer benefits because these employees are not now tied to the outsourcing firm. But, it also means that the aspirational path from mail room to board room is no longer available.
• Anti-trust enforcement (if this is not now an oxymoron) has come to be focused almost entirely on the effects of an aggregation on consumer prices. But the resulting monopsony also has an effect upon wages especially when the larger resulting entity becomes the dominant employer in an area.
• Our Trade agreements have put our manufacturing workers, but not professionals, in competition with those of lower wage countries. The result has been sharply lower wages in many industries, fewer jobs and the decimation of “rust-belt” cities. Trade can be a win-win but, in order to be so, the winners would have to help the losers adjust in order for the win to be genuine.
• Right-to-work laws have been one of many techniques to kill labor unions so that now, with fewer than 6% of private workers protected by unions, they are powerless with respect to increasingly concentrated employers.
• I won’t go into the change in pensions, the rise of business PACs, the explosion in CEO pay or the change wrought by the GIG economy. But most of these have worked to the detriment of blue-collar workers.
The result has been lower pay and much higher insecurity compared to the previous generation. No wonder there is anger. Do we still have a functioning social contract? And the idea that people are paid “commensurate with their contribution” is simply laughable. Capitalism operates within a set of rules enforced by the government. Those rules help determine who wins and who loses. Right now a significant proportion of our society are losing. It doesn’t have to be that way.
Quote: “Our Trade agreements have put our manufacturing workers, but not professionals, in competition with those of lower wage countries. The result has been sharply lower wages in many industries, fewer jobs and the decimation of “rust-belt” cities. Trade can be a win-win but, in order to be so, the winners would have to help the losers adjust in order for the win to be genuine.”
May I assume, David, that you are/were a supporter of President Trump’s “America First” policies as to manufacturing and trade agreements?
Quote: Capitalism operates within a set of rules enforced by the government. Those rules help determine who wins and who loses. Right now a significant proportion of our society are losing. It doesn’t have to be that way.
So, again, may I assume you subscribe to the theory that more government control will solve our problems? Why not all-out socialism and, finally, communism, where “the government” owns and controls the means of manufacture? Wouldn’t that be so much better than those mean old capitalist entrepreneurial types who are taking advantage of people? (Yeah, I really want “the government” to be in charge of who wins and who loses…that’s worked so well for centuries in just about every country on the planet, hasn’t it?)
Why do you suppose labor unions have fallen so out of favor? Do you suppose their original function has been accomplished, that employers are more aware of their employee’s value and treat them better? Why do you suppose the UAW can’t make inroads in the “foreign” car manufacturers who establish production facilities in The United States, David? Could it be that enough union workers are tired of seeing their dues used to support leftist political candidates who no longer represent the values of rank and file union members?
Bob, Since I was trained in economics I have had a prejudice for free trade. But I’ve come to also see its downside as well. These can be addressed either with some reasonable increase in tariffs (taxes which consumers would pay) or by helping the communities/businesses/employees that face competition from low wage countries. Despite the rhetoric, I can’t see that we’ve done much of anything in either area over the last four years (or for the 40 or so years before that).
On the second point, I have great respect for markets, when they can be made to work. But I don’t equate government oversight or provision with socialism. Otherwise, we’d have a socialist military, socialist police and fire departments, socialist teachers and trash collectors. And the most popular health insurance organization in the country is the “socialist” Medicare program.
So, I’d suggest that government programs and intervention be reserved for areas where markets are not working well or are inappropriate. Reasonable people can disagree as to the when and what. But trying to scare people by using the word “socialism” both inhibits discussion and causes some people (especially the young) to be more open to socialism because it’s applied to areas (like Medicare) that obviously works.
Messrs. Bohanon & Curott – Kindly note that there are two errors in your analysis.
#1: “The additional (aka marginal) labor cost of this expansion is $4,000, but his additional (marginal) revenue is only $3,500. So he doesn’t expand his output or hire more workers.” This analysis does not take into account that if he’s paying 50% more, he is likely to attract better talent that will produce more output per person.
#2: “Now, impose a $30-a-day minimum wage. Scrooge moans and groans. The wage bill for his 100 workers rises to $3,000, and his profits fall to $500 a day. But something else happens. At the $30 minimum wage, he can hire the additional 100 employees without having to raise the wages of the initial 100. His marginal labor costs end up being $3,000, his additional revenue is $3,500, so he expands his output and hires more workers.” This makes no sense – it is in fact, the identical model as before. You say “he can hire the additional 100 employees without having to raise the wages of the initial 100” but he has already raised the pay of the original 100.
In fact, recent research suggests that employers, especially large ones, have the power to reduce wages. See:
https://www.project-syndicate.org/commentary/case-for-higher-minimum-wage-in-the-us-by-daron-acemoglu-2021-02?utm_source=Project+Syndicate+Newsletter&utm_campaign=3babda6500-covid_newsletter_03_04_2021&utm_medium=email&utm_term=0_73bad5b7d8-3babda6500-93511341&mc_cid=3babda6500&mc_eid=ecc1c1a8c3