Who Wins, Who Loses With the Minimum Wage?

Or, what economics is really about. At least from my point of view.

I've posed this question to several friends in the past. It's pertinent. It's politically charged. It engages passion. And it's a great way to show off your econ knowledge, whether it's econ 101 or PhD level. Over time, I like to think my own answer has grown more informed and qualified, but instructive at the same time.

Here's how I answer this question:

It's complicated. Duh. Economics always is.


First off, going to make the assumption that it's an EFFECTIVE minimum wage. If the min wage is set at 15 cents an hour, no one cares, because no one gets paid that. So, let's make the assumption that the minimum wage has been set high enough to actually increase some wages.

Since it is actually increasing wages from the market equilibrium, we can immediately assume the market is not going to be operating IN equilibrium anymore. Which means there is not going to be a price set so supply=demand. One is going to be higher than the other, which means there is either going to be a shortage or a surplus. 

In this case, it's a definite surplus. Price is high, which means demand has decreased and supply has increased, so supply>demand. Surplus. And since we're talking about job markets, that means unemployment. Since we're talking about an increase in unemployment, that means we are PROBABLY going to get some losers right there, namely the people that are now unemployed, who would have otherwise been employed. Not only that, but there are now more people enterting the labor market, because they think there are high wages, so there are even more unemployed.

Ex: Doctors get paid $100,000 a year and there are 100 doctors all employed. Raise the wage to $150,000 and only 80 jobs are availaible. 20 doctors are now unemployed, right off the bat. But 50 more people went to medical school, because they THOUGHT they were going to get $150,000 salaries. They're all unemployed now, too.

It's also important to note that the COMPOSITION is going to change. Because the wages are higher, you are going to be attracting more attractive candidates than what used to be in the pool. So, doctor wage was 100 grand and I was thinking about becoming a banker that makes 200 grand. Now the doctor makes 150 grand? Well, I am okay with taking a slight pay hit, because being a banker sucks. I'll go be a doctor instead.

That actually matters a lot in min wage. If you raise the min wage, it's going to attract a whole lot of people into minimum wage jobs, that are actually going to displace the people who are already working them. Especially since, now that they are paying more for labor, businesses are going to want to make more certain that their employees are good employees. Single mother? Out, too unreliable, in comes the college student who didn't think $8 an hour was worth his time but loves $10 an hour. Ex-cons? Screwed. Possible drug addicts, minorities? Eh...

But it definitely does help those workers who can get those jobs. And it helps ANOTHER group of workers, too, that DON'T make minimum wage.

Go back to the banker example. If the bank knows I might leave, now they will offer me a raise. This happens a lot, too. Increasing the minimum wage doesn't just raise the workers who are on minimum wage, it raises wages of a lot of people across the economy (generally on the lower end of the scale).

But, still, marginal workers might not necessarily benefit. Businesses? Well, that's an interesting issue...

To some extent, businesses can pass on the higher costs to their customers. Less profit, for sure, but not necessarily zero profit. Also, like I have said before, most companies have absolutely no clue how to hire or pay their workers. There are probably cases where increasing the minimum wage has HELPED companies. They are getting better workers, and actually making an effort to train them and retain them now that they have to pay them so much more. The company gets more productive. This is what Henry Ford did with his Model T. His workers all sucked, he had lots of turnover, so he dramatically increased his pay and got the best workforce in all of Detroit. And, no, he didn't pay his workers enough so they could all buy Model Ts, that's just the most ridiculous nonsense I have ever heard in a history class...

There's also a difference between long-term and short-term. In the short-term, yeah, a business might be hurting. In the long-term, the increased cost of labor is going to mean a substitute towards capital, which means a capital deepening in the economy that COULD make everything more productive in the long-run. It definitely means more money for whoever makes capital goods. IE, if you have to hire 4 people at $10 an hour, suddenly an automated computer system looks a lot nicer than if you only had to pay them $6 an hour. And that's good news for whoever makes the computer system.




So, again. Complicated.


You notice here that is there is no absolute answer, no policy conclusion, no recommendation, no statistical analysis, no paper, nothing of note, really.


Except for one thing. Consideration of lots of different variables, specifically unknowns.




What any good education SHOULD teach you is how to ask questions, figure out what you don't know, come up with hypotheses, and protect you from sexy narratives that look good but don't have any explanatory power.


The fun thing about economics education is that it does just that. And it's designed to do just that, because the focus on unintended consequences, and how one market changes another, is always there. It's intrinsic to the subject.