Municipal Government

Professor Debunks Minimum Wage Opponents

January 5, 2015
Oren Levin-Waldman

In my last column I noted Harold Lasswell’s classic definition of politics of who gets what when and how. In the traditional economics debate on the minimum wage, opponents get what they want in the form of higher profits by effectively suppressing wage rates.

How do they get this? By one of two ways: either they use their political clout to defeat bills that would raise the wage, or they mobilize opposition to the minimum wage by couching their opposition in the language of the public interest. That is, they exploit the economic model that best serves their interest.

In some economic circles, economic models constitute an orthodoxy that are no less than the truth. The standard neoclassical model that holds minimum wages to result in lower employment is nothing less than a self evident truth. Moreover, it has assumed the level of religious orthodoxy. One questioning the truthfulness of this model is simply a heretic. And followed to its logical conclusion, any data that in any way contradicts the model must be by definition faulty data.

And yet, if we return to Lasswell’s definition and apply it to economics, then the choice of a model to explain the effects of the minimum wage is ultimately a political choice. Those who want to argue on the harmful effects often choose the standard model because of its simplicity. But the model is much more complex, and this complexity would not serve their interests.

An employer that wants to pay low wages will naturally justify that decision by claiming that his or her employees aren’t worth more than the minimum. Moreover, they are by an large teenagers. Of course, they would be teenagers, because adults with families could not afford to work for such low wages. To then prove the point, this employer points to studies showing adverse employment consequences of minimum wage increases for teenagers. And yet these same studies often show that these adverse employment effects don’t hold for adults. In other words increases in the minimum wage are not likely to lead to lower employment among adults. Again, to dwell on the former and not the latter is a political choice.

No less a neoclassical economist than George Stigler, and also from the same Chicago School of Economics as Milton Friedman, observed in a seminal article on the minimum wage in the 1940s that the minimum wage leads to two possibilities: either it results in lower employment or higher productivity. In other words, the minimum wage is an efficiency wage, but not necessarily for the same reasons that Sidney Webb said it was.

The problem with the standard model in its simplest form is that it assumes workers to be interchangeable commodities, who for all intents and purposes exert the same effort. But they are, after all, human beings who apply themselves differently to different tasks. The reality is that the minimum wage does not cause unemployment, rather it forces low-wage workers to exert more effort, which in turn increases productivity in support of a higher wage. Higher wages, in other words, reward those who show more effort. Or put differently, the quality of workers is sensitive to wage rates.

We are all familiar with the axiom that one gets what one pays for and if one pays one’s workers wages that don’t enable them to rise above poverty, one will have lower quality workers. Some employers have apparently made this discovery; Costco, for instance, pays its workers on average $20 an hour and the result is a loyal and productive workforce. Several months ago the Gap announced that it would raise its minimum wage to at least $9 an hour in the interest of improving the quality of its workforce and delivering better customer service. Increasingly, more employers are following suit.

If a higher wage leads to greater effort, it should also follow that they will reduce some of their costs. What costs? The neoclassical model of the efficiency wage holds a higher wage to be an "anti-shirking" wage. Workers paid higher wages are less likely to shirk for fear that they will lose their jobs and be forced into lower paying jobs. This, then, cuts down on monitoring costs. If it reduces turnover, it should also reduce recruitment and training costs.

To the extent that this is true, we can now debunk a common bromide bandied about by conservatives— that a minimum wage is about creating a more egalitarian society by forcing up the wages of those at the bottom who aren’t worth more. But the goal here isn’t to equalize, but to ultimately push up wages through productivity gains. The goal is to achieve greater productivity through greater worker effort which will occur when workers are paid more. Similarly, if employers, on their own choose to invest in the human capital of their workers, they too are choosing higher effort. Indeed, this was a fundamental premise of scientific management principles, upon which many contemporary management structures rest.It then follows that there really is a role for the minimum wage, and that employers might prefer to pay higher wages if they could be assured that the labor quality would reflect the higher wage level. Now the critic will respond that they typically oppose paying higher wages because they cannot be guaranteed higher quality workers. Again, following this logic, the typical low-wage worker has no incentive to deliver greater effort when wages are low.

In other words, stop putting the onus on the worker when much of it really belongs to employers. Of course, these employers rely on another premise of the neoclassical model that serves their interest, which is in the market place employers who purchase labor services and workers who sell them are merely trading preferences. As such, it makes sense that workers can lower their wage demands until employers are willing to purchase their services. But this attempt at neutrality merely obscures a power imbalance that enables employers to exploit the situation.

If preferences, then employees and employers are equal. Workers, however, and especially those in the low-wage labor market, are trading on the basis of need. The employer can always opt not to hire if the price is too high., but the worker who needs to eat has no choice but to accept whatever wages are available. At the same time, as much as the employee becomes a needs trader, the employer ultimately is one too, because he or she cannot run their enterprise without workers to do the work.

Instead of casting labor management relations in adversarial terms, which also serves political ends, we should approach it in terms of mutuality and common purpose. Now, if we assume that employers are afraid to take the first step and automatically raise wages, then a legislated minimum becomes a must needed push for employers to do what is ultimately in their best interest. In other words, left to their own devices, employers will not pay higher wages to achieve efficiency. A minimum wage, then, provides that necessary push.

At the end of the day, the problem isn’t the minimum wage, but the model which is used to approach it. If we choose the right model, we might find that as a society that we achieve socially optimal results that serve as all.

January 5, 2015

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