Sunday, November 3, 2013

The Liberal Argument for Abolishing the Minimum Wage

I just finished listening to the Intelligence Squared debate on abolishing the minimum wage, which took place back in April 2013.  I felt compelled to share a different perspective on the issue.  Specifically, I focus on the price-fixing effects of a federally-mandated minimum wage and the possibility that the minimum wage acts to depress wages below the market-clearing level.
The Intelligence Squared debate was drawn along predictable lines.  The opponents claimed that the minimum wage artificially raised the cost of workers which prompted employers to cut jobs.  In effect, the minimum wage hurts the people it is intended to help by depriving them of jobs.  Proponents countered that there was no statistical evidence of such effect and argued for the minimum wage on moral as well as economic grounds. 
The entire debate was based on the premise that abolishing the minimum wage would lead to a decline in pay for low-skilled labor.  What if that were false?  What if the minimum wage artificially depressed wages below the market-clearing level?  What if the actual impact of the minimum wage is to confine low-skilled workers to poverty while employers enjoy excess profits protected by law?   

After all, you don’t hear Walmart and McDonald's complain about the minimum wage being too high.  More importantly, inflation continuously eats into the minimum wage subjecting low-skilled workers to an annual pay cut.  The political process around this issue has never been simple making the timely adjustment of the minimum wage all but impossible.

It is important to keep in mind that the opponents of the minimum wage firmly believe in free markets and detest the idea of governments helping one individual over another.  However, even they would agree that the primary role of government is to protect individual freedoms from infringement by force.  It is precisely this ideological point that underpins the justification for anti-trust enforcement against monopolistic practices.  The question here is what barriers and infringements exist that prevent low-skilled workers from bargaining for their own wages.
Do employers have bargaining power to depress wages?  There is such a multitude of employers from restaurants to retail stores to service establishments that it is hard to imagine an employer monopsony in the market for low-skilled labor.  Rather, high opportunity cost associated with job search is what gives employers an advantage.  I would argue that higher short-term unemployment benefits and stronger protections for collective bargaining would be a much more effective strategy to put workers and employers in an equal bargaining position.

I do believe there is something else at play here, though.  Price-fixing is illegal under anti-trust law.  The problem is that employers don’t have to collude to depress wages.  The federal minimum wage is a universal reference point which enables employers to fix wages at the federally-mandated level.  The Diamond Paradox, proposed by Nobel-prize-winning economist Peter Diamond, describes a condition where a market with many sellers can have monopoly-high prices as long as buyers believe that the price is the same across all sellers and accordingly, the extra search costs are not worth it.  The market for low-skilled labor works exactly the same, but in reverse.  Employers are able to charge monopsony-low wages, because job search costs are high and low-skilled workers believe they will always be offered the minimum wage.  Add to this the fact that Congress rarely adjusts the minimum wage on a timely basis to account for inflation and what you end up is minimum wage regime that results in a tremendous boost to profits.  An even scarier thought is that all wages regardless of skill level could be depressed since  the minimum wage is used as a universal wage benchmark across skill-levels.

The minimum wage legislation of the 1930’s was an attempt to do away with the exploitation of child labor and minimize discriminatory labor practices directed toward women and minorities.   Its original goal was not to improve the condition of low-skilled workers, but rather to empower disenfranchised groups to overcome prejudice and discriminatory wages.  Its ultimate goal was to place such groups in an equal bargaining footing with their employers.  Minimum wage was a blunt, but effective tool that put an end to the rampant exploitation prevalent early on in the 20th century.

Today, disenfranchised groups face similar challenges; however, the minimum wage has morphed into a mechanism that confines them to subsistence with little hope for a better life. Rather than a cap on their pay enforced by the minimum wage, what they need are higher short-term unemployment benefits to pay for the high cost of job search, better frameworks for collective bargaining, access to health care and education/re-training opportunities.  Trading the minimum wage for such reforms is a trade-off which I believe is worth exploring.

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