notes-econ-minimumWage

How could changing minimum wage not change employment?

http://mobile.businessweek.com/articles/2014-02-13/making-the-economic-case-for-more-than-the-minimum-wage claim that research seems to be showing that raising the minimum wage a little doesn't affect employment too much:

" The argument that a wage floor kills jobs has been weakened by careful research over the past 20 years, beginning with a seminal 1994 study by David Card of the University of California at Berkeley and Alan Krueger of Princeton. The duo compared employment in fast-food restaurants in New Jersey, which had just enacted a minimum wage hike, with fast-food restaurants across the border in Pennsylvania, which had kept its rate the same. The result: no reduction in New Jersey’s employment rolls.

The Card-Krueger study touched off an econometric arms race as labor economists on opposite sides of the argument topped one another with increasingly sophisticated analyses. The net result has been to soften the economics profession’s traditional skepticism about minimum wages. If there are negative effects on total employment, the most recent studies show, they appear to be small. Higher wages reduce turnover by increasing job satisfaction, so at any given moment there are fewer unfilled openings. Within reasonable ranges of a minimum wage, the churn-reducing effect seems to offset whatever staff reductions occur because of higher labor costs. Also, some businesses manage to pass along the costs to customers without harming sales.

So where to set the wage floor? Whether he arrived there by logic, intuition, or dumb luck, there’s a defensible case that the sweet spot is in the neighborhood of Obama’s suggested $10.10 an hour. The Initiative on Global Markets at the University of Chicago Booth School of Business found in a survey last year of leading economists that 47 percent felt the good effects of a $9 minimum wage—the figure on the table at the time—would outweigh any bad ones. Only 11 percent disagreed. Last month seven Nobel prize-winning economists and four former presidents of the American Economic Association, along with more than 600 other economists, signed a letter to Congress urging passage of the $10.10 floor. “At a time when persistent high unemployment is putting enormous downward pressure on wages,” the letter said, “such a minimum-wage increase would provide a much-needed boost to the earnings of low-wage workers.” "

A theory

IF this is true, what sorts of theories could explain it?

One idea is that market wages are being set mostly by the amount that the marginal low-end worker needs to support themself, and are relatively inelastic to the number of jobs and the amount of value (for the employer) created by the worker (the marginal product of labor).

One theory would be that, in a situation in which there are many, many more workers than companies, and in which workers are desperate for a job, the companies have disproportionate bargaining power. Assume that the number of workers, and their situations, are fixed. Assume also that marginal desperate worker is willing to take almost any job over no job. If there are many more desparate workers than available jobs, then the wage rate will be bid down arbitrarily low, almost to zero.

Now, alter an assumption: now assume that a marginal desperate worker is willing to take almost any job that would allow them to support themselves over no job, but would prefer no job over what it takes to support themselves.

Now the wage rate is bid down only to the amount that the most frugal of the marginal workers can support themselves on.

Since the number of workers is fixed and is assumed to be many more than the number of jobs, the wage rate is inelastic to the number of jobs. Since the criterion for a marginal desperate worker to prefer a job over no job makes no reference to the value created by the worker, the value created by the worker does not affect the negotiation.

The theory explains the facts and jives with other intuitions

With an additional assumption, this theory can explain how increasing minimum wage might not substantially decrease employment.

Assume that the vast majority of the jobs currently available to desparate workers are jobs in which the value created by the worker is much higher than the prevailing wage and the minimum wage. In this case, in a free market, the wage rate will be bid down by marginal desparate workers to the living expenses of the marginal frugal worker. Now if a minimum wage is introduced which is still much lower than the the value created by the worker in the vast majority of low-end jobs, what happens? The wage rate will be bid down by marginal desparate workers to the lesser of (the living expenses of the marginal frugal worker, the minimum wage). By assumption, the minimum wage doesn't make the vast majority of low-end jobs unprofitable for the employer, so most of them will still exist.

This theory also jives with the idea that government aid to the poor 'subsidizes' those who employ them by allowing the employers to pay less than they otherwise would. If the wage rate is being primarily driven by the living expenses of the workers (rather than by the marginal product of labor), then decreasing the living expenses will also decrease the wage rate.