The Minimum Wage:
Introducing a new series
24 Nov 2006 in Regulatory Economics, Regulatory Policy, Legislation
The Democratic leadership of the new 110th Congress promises to increase the federal minimum wage. Today we begin a series that sorts out the economics of this labor market regulation.
The federal minimum wage is a policy and set of regulatory standards established directly by Congress. It is found in the Fair Labor Standards Act of 1938 (FLSA), which has been amended dozens of times since. The law delegates to the Department of Labor the responsibility for publishing rules and enforcing the regulations, but it does not confer on DOL significant legislative discretion. Like the tax code, this is an important counter-example to the conventional wisdom that Congress delegates regulatory details because they are too technical or complex for busy Solons to understand. When Congress wants to be explicit about regulation, it writes the rules itself. When it doesn't want to be explicit, or it wants to evade responsibility for the details, it delegates.
Economics teaches that companies pay wages equal to the incremental value of what workers produce -- what economists call the "value of marginal product." For unskilled workers, this value is not very large. The purpose of the federal minimum wage is to overcome this market outcome for covered workers who work for covered employers. (Not all employers and workers are covered. For example, congressional interns are not paid at all, much less at the federal minimum wage.)
By its very definition, the federal minimum age affects only the very lowest segment of the labor market -- workers who lack the skills or aptitude to produce greater value through labor. But generally they do not stay at the bottom for long. As they develop skills and aptitude, the value of what they produce grows and their employers must either increase their wages or risk losing them to another employer willing to pay a higher wage. Thus, the minimum wage is a self-limiting, transitory phenomenon rather than a permanent condition, except for workers belonging to one of the following three categories:
- Workers who are unable to develop skills or display the aptitude to perform valuable work.
- Workers who choose not to develop skills or display the aptitude to perform valuable work.
- Workers who are restricted in some manner by external forces or circumstances from selling their labor to the highest bidder.
Workers in the first category elicit great sympathy and there is broad willingness to find ways to assist them as a matter of social policy. The minimum wage is a peculiar instrument for accomplishing this, however, because it evades public responsibility for achieving it and converts public duty into private burden. It is thus arguably unfair from the perspective of employers, and simultaneously inefficient because it does not accomplish its objective at lowest cost. But it is also ineffective: employers faced with the burden of paying more than the value of what these workers produce can be expected to choose not to hire them (or certainly not as many of them). The result is counterproductive: the minimum wage leads to fewer "deserving" unskilled workers having jobs and benefiting from the moral value of work.
Workers in the second category elicit scorn rather than sympathy, and the minimum wage rewards them for their indolence. Worse, it encourages more indolence. For a hypothetical but concrete example, consider a federal minimum age of $50 per hour. Vast numbers of unskilled workers would be pleased. But they would not have an incentive to obtain the skills and aptitudes necessary to produce $50 worth of value for each hour they work. Investments in skills and aptitude, which are costly, would yield no return on investment until they produced more than $50 of value per hour worked. For a long list of jobs, this is simply infeasible. The result would be two very different and distinct labor markets -- one market for jobs that entail producing more than $50 per hour of work, and another market for all other jobs. But no workers would be attracted to this second market because of their skills and aptitude, and these jobs simply would not be done, or just done badly.
For workers in the third category, the predominant public reaction is outrage at whatever restriction impedes their free movement. Historic restrictions on the labor mobility of Jews, freed blacks, and finally women, have all met this fate. (University of Illinois professor Richard Jensen says it anti-Irish bigotry is similarly remembered but that the few such restrictions on Irish labor actually occurred.)
In any case, the minimum wage is a peculiar policy tool to address restrictions on labor mobility. It could be said to compensate workers whose labor mobility is artificially restricted, but it is a far more artificial way to accomplish this objective than to simply let labor markets work without impediment. For another thing, the minimum wage actually exacerbates labor immobility. A worker employed by Company A is less motivated to quit and work for Company B if company A is compelled by regulation to pay the same wage that Company B is willing to pay. Rescinding regulatory constraints on labor mobility would seem to be a more effective approach if increasing labor mobility is the policy objective.
Which leads to an alternative understanding. For at least some of its advocates, the minimum wage may be intended to accomplish exactly what happens: reduced labor mobility, particularly between unionized and nonunionized employers.
