Does the Minimum Wage Increase Productivity?
This Galbraith article – pointing to Ron Unz’s ongoing good thinking on the topic, got me thinking:
If employers are faced with higher wage rates, that gives them more incentive to invest in business capital that 1. makes workers more efficient and productive, and 2. reduces the number of workers they need.
Is this incentive effect figured into the analyses of minimum-wage effects that you’ve seen? I haven’t laid eyes on such a thing, but my knowledge of the literature is far from comprehensive.
Cross-posted at Asymptosis.
I remember Lindert making a generally similar argument in “Growing Public” for why more generous welfare state nations don’t see measurable GDP drop as a result of people dropping out of the labor force. The most marginal, least productive workers drop out at the margins, to be replaced by capital spending, leaving the rest of the labor force more productive. Been more than a year since I read it, so the details of that part of the argument escape me.
Well Steve this may be. If the metric is x number of employees before and y after where x-y is a bad thing if negative.
But in the past I have called this the “Jimmy the Stock Room Boy Fallacy” here at AB and elsewhere. Imagine a firm that has 100 workers at minimum wage including Jimmy the Stock Room Boy whose job when it comes down to it is monitoring the attrition rate of pencils and paper clips leaving the stockroom so as to inform the department clerk to keep the order rate up. Further suppose an increase in minimum wage that induces management to make a long overdue shift to a stock room inventory program directly tied to Corporate Express that makes Jimmy’s job obsolete.
The question is whether under any theory the other 99 employees should care? Even if enough Jimmy’s got eliminated to make payroll costs plus implementation of job reduction revenue neutral to the FIRM. After all they got a raise and so maximized their own and their family’s self-interest. Which under right economic theory is maybe the only virtue. Their only concern would be if such a raise increased structural unemployment OUTSIDE the firm in ways that limited their economic freedoms. But if in fact the net result is just Jimmy losing his job and finding a new one at MacDonalds making the new minimum and getting a nice going away party besides who suffered here? Nobody.
So the question for WORKERS is whether increases in minimum wage induced enough job losses to restrain their own or their family’s economic mobility. Or whether the net increase in share of total productivity offset that.
But the economic right tends to short circuit that by crying “Look at Poor Jimmy! You heartless bastards!” but unless Jimmy and all his fellow Jimmy’s find alternative employment at the new minimum wage actually impossible to secure, the argument loses force, micro losses at the firm level due to increased capital investment, or simple process improvement not ipso facto turning into net income losses for minimum wage workers whether considered individually or as a class. After all it might well be that those increases in minimum wage for Jimmy’s former 99 co-workers created a new market for an extra asst manager at the local burger joint.
Frankly firm owners who could cut employment by process improvement or new capital investment are likely to do so and get rid of Jimmy anyway. With no tears. Asking their employees to suck it up for ‘Poor Jimmy’ is the height of hypocrisy
Check out the comments on that page! One page of conservative talking points by a guy who obviously didn’t know who Galbraith was, another page of talking points by a liberal who didn’t read the article, a one liner by another guy who didn’t know who he was, and one by a guy with the gall to post links to Milton Friedman youtube videos! Oh, my people …
“If employers are faced with higher wage rates, that gives them more incentive to invest in business capital that 1. makes workers more efficient and productive, and 2. reduces the number of workers they need.
Is this incentive effect figured into the analyses of minimum-wage effects that you’ve seen?”
Err, yes. That’s why we all say that raising the minimum wage increases unemployment. Because it changes the relative prices of capital and labour and employers will use more capital and less labour.
Tim has given one standard effect. There’s a second one. Holding land constant, there are diminishing returns (diminishing marginal product) of labour. Profit-maximising firms choose employment where MRxMPL=Wage. An increase in the minimum wages means they move back along the MPL curve. Less output and employment, but higher productivity of the remaining workers.
For “land” read “skilled labour”, or anything else.
(Tim is holding output constant and varying the input mix; I am holding the other input constant and varying labour and output, but it’s all the same, really.)
The relation between productivity and employment and wages, the downward slope of the labour demand curve, the upward slope of the MC curve, are all the same question.
@Nick: “(Tim is holding output constant and varying the input mix; I am holding the other input constant and varying labour and output, but it’s all the same, really.)”
Good explanation, and yes. All equilibriated by producers maximizing profits, tallied in dollars. But.
I guess what I was really (implicitly and clumsily) asking was: does a minimum wage result in an input mix that increases aggregate utility? Or alternately, does an “undistorted” market maximize aggregate utility?
*If* “revealed preferences” are an accurate barometer of utility — if spending in dollars accurately measures the buyers’ receipts in utility (and remember, we only use that as a measure of utility because we have no other way of measuring it) — then I think the answer is yes. Maximum profits is prima facia evidence that aggregate utility (including workers’) is maximized.
But I *think* there’s an underlying assumption to the doctrine of revealed preferences — that every dollar spent yields the same amount of utility for the buyer. (I’ve dug a bit into the deep theory on preference maximization and such, and it leaves me with the distinct impression that most or all of it is hand-waving, smoke and mirrors that serves mainly to obscure that basic assumption.) Which is obviously not true, which seems to mean that revealed preferences are not a useful measure of purchased utility, and that maximized profits therefore is not evidence of maximized aggregate utility.
IOW, the input mix that delivers maximum dollar profits does not (necessarily) deliver maximum aggregate utility. Likewise, it is not at all clear (assuming producers maximize dollar profits in any regime) that a free-market wage regime yields higher aggregate utility than a minimum-wage regime.
I have a sense that I might have some error of composition going on here, but I don’t think so…
Which means that the “equilibrium” input mix and output level that results from producers’ profit maximization in a “undistorted” market also may not maximize aggregate utility. A minimum wage regime may result in an equilibrium input mix and output level that yields higher aggregate utility.
Steve: the first theorem of welfare economics lays out sufficient conditions under which competitive equilibrium will be Pareto Optimal (i.e you can’t make one person happier without making another unhappier). (No externalities and assymmetric information problems in markets being the biggies). If it’s Pareto Optimal that doesn’t mean it maximises total utility in the Utilitarian sense, because you could argue that the marginal utility of income to the poor is greater than for the rich. The second welfare theorem says if you coul make lump sum transfers (you can’t in practice of course) you can hit the Utilitarian maximum.
Meanwhile, in the world I live in, there is actual data. You can start with Card and Krueger, 1990. I think there have been a few more empirical studies since.
It might be worth looking at the distribution of minimum-wage jobs. I suspect many are not easily eliminated by capital substitution: busboys, retail and grocery stockers, and the like.
The whole MPL story leaves me cold. Does the restaurateur calculate the value of getting a table cleaned up and the next party seated three minutes sooner? Does the grocer calculate the probability that a shopper finds a shelf empty of the item she seeks? I think they probably have pretty good heuristics for ‘how things should look’, and that’s about as far as it goes. Satisficed!
The notion that minimum wage labor can be substituted by automation doesn’t pass the laugh and giggle test when you look at the actual jobs that are performed by minimum wage labor. In general, minimum wage labor is clustered in retail and hospitality. Unless you can come up with robots capable of folding t-shirts and placing them upon display racks, or robots capable of substituting for a “sandwich artist” at your favorite sandwich shop, you will not be substituting capital for labor. In the few places where this has happened — e.g., self-checkout counters at retailers — what has happened is substitution of customer labor for retail worker labor, not actual automation of minimum wage jobs.
The most immediate effect if minimum wage is raised is inflation — prices of sandwiches at a sandwich shop will go up to pay the higher wages of the “sandwich artists”, for example. This is because they are already running the minimum number of people needed to satisfy demand, and firing people is an option only if demand decreases due to the higher sandwich prices. The question of whether demand will decrease depends upon the elasticity of the demand curve for sandwiches. If everybody raises sandwich prices at once, the majority of customers will likely just shrug and pay $1 more for a sandwich, and there is unlikely to be a reduction in demand that will allow firing a worker.
Sometimes I think economists have no idea how actual businesses operate. Perhaps a stint as the manager of a pizza shop or clothing store should be a prerequisite for publication in economics journals? Just sayin’.
One thing that is clear is that a higher minimum wage creates higher demand. The classic experiment is along the Washington State – Idaho border where workers flocking to higher paying Washington jobs have even improved the economy in Idaho border towns, because so many workers have more money to spend.
it seems unlikely to me that a raise in the min wage is going to raise the price of a sandwich one dollar.
and rising prices are not always “inflation.”
what will happen is that people may pay a quarter or less more for that sandwich, and so have a quarter less to spend on something else. Maybe over the whole economy that would cause some noticeable effect, but my guess is that the effect is more likely to be “stimulates demand and therefore increases “work'”. that’s a funny thing about how economies work, though you’d never hear it from the bought and paid for economists.
which could work out.. somewhere some worker IS laid off and replaced by a machine (but not one of the sandwich makers who was getting the min wage). that worker may go back to school, creating demand for more teachers… and increasing supply of more educated workers… which employers are always saying they can’t find enough of… or, the whole thing will settle out with a lower number of hours in the work week for everybody… instead of one person getting cut 40 hours a week (laid off), forty people get 39 hour weeks.
of course we all know that such excess leisure will just cause the masses to spend it drinking and lounging in the streets harassing the hard working lawyers and accountants and economists.