Friday 24 June 2011

Maharey on Minimum Wages

I'd take former Labour Cabinet Minister and current Massey University Vice-Chancellor Steve Maharey's NBR column "Why minimum wages are necessary" as a launching point for ripping on Massey, but I'm reluctant to talk any kind of smack about Canterbury's competitor institutions when Christchurch's future remains less than certain.

Let's take Maharey's claims in turn.
The fact is that no one really knows if the minimum wage is contributing to high levels of unemployment. In general terms, the research suggests that the minimum wage, set at a level that matches the state of the labour market, will not cost jobs.
It would be tough to find effects of the relatively minor increases we get in the overall minimum wage in New Zealand, but that isn't to say that the aggregate effect isn't large. We could similarly say that nobody really knows if carbon emissions are contributing to temperature increases if the only data we had were twenty-five years of quarterly data on changes in CO2 output and changes in temperature. The aggregate effect can be large even if year on year changes don't do much.

If we start from the premise that there are no employment effects from the minimum wage, the case for a minimum wage still isn't as clear-cut as Maharey suspects. For starters, we expect a whole lot of the cost of minimum wage increases will be passed through to consumers via product prices. If minimum wage workers disproportionately produce goods and services consumed by poorer people, or at least disproportionately relative to poor folks' relative tax burden, minimum wage increases are not nearly as progressive as income transfers to poor people funded out of the standard income tax regime.

Here are Maharey's arguments for minimum wages:
The first reason is that it is one of the main ways of dealing with inequality. A minimum wage is an attempt to ensure those at the bottom end of the scale have at least enough money to live on.
A more efficient way of achieving the same goal is income transfers; if you want it targeted to folks in work, do it through something like the EITC (WFF). The incidence of the minimum wage isn't clear, but is almost certainly less progressive than the tax system.
It follows, and this is the second reason, that workers should not be expected to work for very low wages. This is nothing more than exploitation and a society that has any sense of fairness should not allow this to happen.
Wages would not drop massively in the absence of a minimum wage. Firms compete with other firms for workers; there isn't some big secret cartel meeting of all the potential employers where they use secret handshakes and arcane Masonic rituals to ensure that nobody chisels on a low-wage pact. It's a damned shame that Labour's notions of fairness forced a bunch of sheltered workshops for the disabled to close through ridiculous application of minimum wages; we ought to allow employers to hire workers with lower marginal product for a wage that matches their contribution.
Third, wages should be set at a level that does not require the government to provide subsidies.
I think this is a big one. EITC or other in-work income support programmes are an on-the-books expenditure; minimum wages bury the cost. If the public will is that low wage workers get higher wages, then the best way of spreading the burden of that support is through the general tax system.
Fourth, low pay is often a result of undervaluing what a worker can do or the skills they have on offer. Young workers are often paid less simply because they are young even if their contribution is the same as older workers.
Employers take greater risks hiring folks with no track record. If a kid hired on lower salary proves to be a great worker, he'd expect a decent bump up at salary review. Forcing equal pay for unequal track records forces those with no experience out of the market.
Fifth, low pay is not a good economic strategy. When times are good, low pay leads to high turnover and a weak commitment to training. ... success becomes dependent on who can pay the least to their workers not on quality, productivity, design, marketing, value-add, skill and the other elements of a desirable economy.
Efficiency wages are hardly unknown; firms wishing to avoid turnover problems may pay higher wages to get a better pool of job applicants. The other claims Maharey makes require, I think, a pretty uncompetitive market. Otherwise, some firms would start improving on the other margins to get an edge on their competitors. I don't think that Dyson would have been less innovative in vacuum cleaners had the minimum wage for product engineers been $0.02 (nor do I think their engineers' wages have ever been close to minimum).

Meanwhile, there have been burblings in favour of reintroducing a lower minimum wage for youths.

6 comments:

  1. "A more efficient way of achieving the same goal is income transfers; if you want it targeted to folks in work, do it through something like the EITC (WFF)."

    Lots of inefficiencies there too.

    Tax cut best. Leave it in their pockets in the first place.

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  2. "The fact is that no one really knows if the minimum wage is contributing to high levels of unemployment."

    Depends on what that means. The overall level of unemployment isn't much affected by minimum wages but unemployment among low skilled, low productivity workers is another matter.

    "In general terms, the research suggests that the minimum wage, set at a level that matches the state of the labour market, will not cost jobs."

    What does "matches the state of the labour market" mean? Does he mean that the minimum wage should adjust depending on conditions in labour markets?

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  3. "EITC or other in-work income support programmes are an on-the-books expenditure; minimum wages bury the cost. If the public will is that low wage workers get higher wages, then the best way of spreading the burden of that support is through the general tax system."

    We discussed this on Twitter a little, but 140 characters isn't ideal.

    Firstly, I think you need to better support your claim that the "best way" is through the tax system rather than through a minimum wage. I agree that transparency is a good thing, but it's not the only thing. I don't think your assertion is good enough on its own.

    Secondly, and more importantly, doesn't government subsidised employment encourage employers to use workers in low productivity jobs? Doesn't this mean that the NZ taxpayer is therefore subsidising the creation of jobs that can't actually pay their way? Why would this be a good thing for the NZ economy and the NZ taxpayer?

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  4. @ Thomas Beagle My take on your 2nd point is that the govt is already subsidising a whole bunch of people to not work (currently about 9% of the population). If that money could be used to help get some of those currently without a job into work wouldn't that be a good thing? Surely a subsidy to get some productivity out of unemployed folk is better than paying them to do nothign at all.

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  5. @Lindsay: Suppose that for moral reasons you thought it bad that some folks didn't get paid as much as you'd like them to be paid and you wanted government to make up the difference. If you could do that by minimum wages or by income transfers (wage subsidies), the latter is less bad. If you don't think anything needs to be done, the latter is still less bad.

    @Paul: I think he means that min wage increases go up by more in booms than in recessions. And that's one of the reasons why it's hard to detect employment effects.

    @Thomas: It's a simple point, but not an obvious one. If we've decided that the tax system has the right amount of progressivity and properly balances efficiency losses (deadweight costs of taxation) against equity concerns (folks who think richer people ought not only pay more but pay more relative to their incomes), then that's the vehicle through which we ought to fund policies like income support for poor people. If you think that the tax system isn't fair to poor people, then the proper route is to fix the tax system, not to muck about with labour price controls - the efficiency costs of the latter wind up being higher.

    The incidence of minimum wage increases isn't as easy to determine as that of tax increases but seems likely to fall more heavily on poorer folks. First, there are the folks who lose their jobs - the disemployment effects of minimum wages. Second, most of those wage increases are passed through by employers in competitive markets. Then you have to look to see who buys the things produced by minimum wage workers to figure out the incidence. And that will also skew more heavily regressive than does the overall tax system.

    As for your second job, it's true that some lower productivity jobs get done when the minimum wage is lower. But that's a plus. Boosting average measured productivity by ensuring that folks with lower productivity can't get jobs is just a way of juking the stats. Yes, higher average productivity is a good thing, but only when it reflects that the country's become more productive. Similarly, we could raise the country's average IQ by deporting everyone with IQ less than 100. Sure, it's nice to have higher average IQ, and higher average IQ correlates with good stuff. But stat juking, whether by killing low productivity jobs or deporting lower IQ folks, doesn't help.

    @Lats: True. But note that the costs are higher than that as subsidy would also go to folks currently employed who receive no subsidy currently.

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  6. Rather there being a drive to pay less and less, in this podcast (http://www.econtalk.org/archives/2010/02/phelps_on_unemp.html) Edmund Phelps contends that due to turnover costs employers pay too much and so we have some level of persistent unemployment even absent the minimum wage. A minimum wage should only make things worse.

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