Thursday, 17 May 2018

Minimum wages and the margin

Michael Reddell makes a lot of sensible points about the government's intended hikes in the minimum wage. He reminds us that:

  • Improving measured average productivity by disemploying the least productive is a false economy;
  • Improving capital investment by forcing a substitution towards capital by making lower skilled labour too expensive is not the kind of productivity boost that improves overall economic performance.  
I'd add another bit. 

If a minimum wage becomes binding, firms have a few ways of responding. They can disemploy workers, change hours and rosters, and substitute towards labour-saving capital. But they can also chisel on other margins of the employment deal so that their effective labour costs go down. Every job is a bundle of tasks of varying desirability and a bundle of rewards of varying value to the worker and cost to the employer. 

Suppose that the total compensation bundle provided to an employee costs $20/hour, including money wages and on-the-job amenities like whether the air-conditioning and heating is set to comfortable temperatures, the comfort of the chairs or workstations, the ease of slotting shifts into your preferred schedule rather than the employer's preferred schedule, the degree of monitoring of on-the-job activities and breaks, and a host of other things that are part of the deal. 

If the minimum wage goes up, one of the margins on which employers can and will respond is in reducing costs on those other margins. Most of those margins are invisible to employment law, but do make work less pleasant. Among those workers who continue to be employed after a minimum wage hike, we should expect that at least some of the benefit of the higher wages is chiseled away in worse conditions. And we should expect that many workers will not prefer the resulting overall bundle - otherwise they could have contracted for fewer on-the-job amenities and higher wages in the first place. 

One margin that is visible to employment law is off-the-books hours: morning meetings before the official clock starts; clean-up after the clock stops; working lunches and the like. There's been a fair bit of press around that part lately. Off-the-clock hours make minimum wages less binding. 

As minimum wages ramp up toward 72% or 73% of the median wage under Labour's schedule, expect more of this kind of thing. If it comes with greater policing around easily monitored stuff, like unpaid hours, expect more chiseling on unmonitored things, or greater disemployment. 

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