Minimum Wage - Price Floor

Recent events in Washington have once again raised the question of if and by how much minimum wage should be raised. The question of minimum wage is primarily one debated by economists, who really benefits by raising the minimum wage? Minimum wage is an example of a government intervention in order to redistribute wealth through the use of a price floor. A price floor is the legal limit on how low a price may be set for a good. In the case of minimum wage, employees are the suppliers of labor (the good) while businesses become the consumers.

The only way for a price floor to binding is for it to be set above the equilibrium price the market would naturally balance its self at, and in here lies the problem. To begin consumers (businesses) are now forced to pay a higher price for the same good (labor) and therefore reduce the amount they’re willing to purchase (hire fewer workers). At the same time, suppliers (workers) are now guaranteed a new and higher price than they were before so they increase production (more potential workers enter the job market). Both of these effects together create what is known as a surplus.

In the case of minimum wage it means that there are more workers seeking jobs than there are jobs to be had or an increase in unemployment. Aside from an increase in unemployment there are other potential negative effects of minimum wage to include an increased income disparity for those in occupations exempt from minimum wage such as farmers. Some economists believe that there are three times as many workers earning less than minimum wage as there are those earning minimum wage. While related to unemployment another impact is for businesses to increase their production through automation as opposed to laborers.

Think of the number of workers employed by Amazon. com who currently earn minimum wage and the potential loss of those jobs if Amazon decide to automate their distribution center operations. There are a number of professions who have been effectively electronically outsourced to include grocery store checkout and bagging personnel, bathroom attendants, elevator attendants, etc… Seems relatively straight forward, however, as a number of studies are realizing not all of a minimum wages effects are negative as demonstrated by the case in Britain.

The country introduced a national minimum wage in the 1990s that was slightly higher than the United States. It was set at 46% of the median wage, a second lower floor was set for young people and both are adjusted annually. The result, there seems to be little to no harm from the law. In fact, the minimum wage seems to be spreading the wages so that it not only increased the wages for the bottom 5% but it also increased earnings for those further up the pay ladder effectively shrinking the wage gap at the bottom half.

Apparently the minimum wage in Britain encouraged employees to work harder and caused businesses to invest in the training among other things to boost productivity. So perhaps this raises a different question of not really who benefits from minimum wage but rather how do legislators ensure that the minimum wage they set is managed in a fashion where both employees and employers can benefit. But isn’t that ultimately always the question of balance between social perceptions, business economics and legislation. What sort of floor? Dec 3rd 2013, 11:23 by R. A. | LONDON The Economist.

http://www. economist. com/blogs/freeexchange/2013/12/minimum-wages AROUND the world, momentum is building for increases in minimum wage rates. SeaTac, Washington, a Seattle suburb that is home to a large metropolitan airport, backed a $15 per hour minimum wage law last week. On Thursday of this week fast-food workers around America will strike for one day, demanding a $15 per hour base rate for the industry. A majority of Americans favour increases (even a majority of Republicans), and President Obama has signalled his support for a bill raising the national minimum wage to $10.

Germany's new coalition has backed a national minimum wage of €8. 50 ($11. 50). What might higher minimum wage rates mean for workers? In the most basic economic story, marginal workers are paid their marginal productivity, and an increase in the minimum wage will therefore reduce overall employment. Economists began rethinking that most simple of models in the 1990s, when new research revealed that higher minimum wages didn't necessarily have the expected employment effects.

Some reckoned that frictions in the labour markets, like the cost to workers of searching for obtaining new jobs, gave firms bargaining power that allowed them to take an outsized share of the gains from the hire. A cleverly designed minimum wage could, in that case, raise worker pay without reducing employment. Last year, a Free exchange column took a look at the current state of the debate within economics: “America’s academics still do not agree on the employment effects. But both sides have honed their methods and, in some ways, the gap between them has shrunk.

Messrs Card and Krueger moved on to other work, but Arindrajit Dube at the University of Massachusetts-Amherst and Michael Reich of the University of California at Berkeley have generalised the case-study approach, comparing restaurant employment across all contiguous counties with different minimum-wage levels between 1990 and 2006. They found no adverse effects on employment from a higher minimum wage. They also argue that if research showed such effects, these mostly reflected other differences between American states and had nothing to do with the minimum wage.

Messrs Neumark and Wascher still demur. They have published stacks of studies (and a book) purporting to show that minimum wages hit jobs. In a forthcoming paper they defend their methods and argue that the evidence still favours their view. But even they are no longer blanket opponents. In a 2011 paper they pointed out that a higher minimum wage along with the Earned Income Tax Credit (which tops up income for poor workers in America) boosted both employment and earnings for single women with children (though it cost less-skilled, minority men jobs). Britain’s experience offers another set of insights.

The country’s national minimum wage was introduced at 46% of the median wage, slightly higher than America’s. A lower floor applied to young people. Both are adjusted annually on the advice of the Low Pay Commission. Before the law took effect, worries about potential damage to employment were widespread. Yet today the consensus is that Britain’s minimum wage has done little or no harm. The most striking impact of Britain’s minimum wage has been on the spread of wages. Not only has it pushed up pay for the bottom 5% of workers, but it also seems to have boosted earnings further up the income scale—and thus reduced wage inequality.

Wage gaps in the bottom half of Britain’s pay scale have shrunk sharply since the late 1990s. A new study by a trio of British labour-market economists (including one at the Low Pay Commission) attributes much of that contraction to the minimum wage. Wage inequality fell more for women (a higher proportion of whom are on the minimum wage) than for men and the effect was most pronounced in low-wage parts of Britain. The finding that an increase in the minimum wage boosts pay up the wage scale, and not just for those earning the minimum wage, is fascinating but also somewhat worrying.

It suggests that the minimum wage does not primarily boost pay by reallocating the surplus generated by a hire. Instead, employees seem to respond by working harder while employers invest in training and other workplace productivity boosters. That's a lovely thing to have happen, but also reason for caution. Technological progress seems to be boosting opportunities for automation all the time, and at some point firms will cross the threshold beyond which it makes sense to replace labour with capital rather than invest in more productive labour. Amazon's fulfillment centres generate tens of thousands of jobs, many at or near minimum wage.

Maybe a higher minimum wage will lead to better pay without much of an employment effect. Or maybe Amazon will accelerate the deployment of warehouse robots. Maybe a higher minimum wage will boost pay at fast-food restaurants. Or maybe it will lead the restaurants to get serious about automation. I think ideally we would see a push instead for greater wage subsidies to low-income workers, perhaps combined with the careful minimum wage system used in Britain to ensure that firms don't simply shift the burden of giving market pay rises onto the state.

But straightforward minimum wage hikes may be the only politically feasible way forward for low-income workers. And in some sense a rise in the minimum wage is a can't lose proposition. If there are no employment effects then all is well. And if there are large employment effects then perhaps society will be unable to ignore the impact of automation: there may no longer be a market-clearing "living wage" for the lowest skilled workers in rich economies. And then perhaps a serious discussion, about a universal basic income, for example, or efforts to expand ownership of capital, can occur.