The Unemployable and the Unemploying

By Eric Crampton 24/10/2012

Well, which is it then? Are large hikes to minimum wages desirable because they transfer money to low wage workers with no real disemployment effects, or because they get rid of those jobs that shouldn’t be there anyway?

Early American advocates of the minimum wage sought its disemployment effects, to make “unemployable” those whose employment was undesirable: immigrants who would “under-live” upstanding American workers, and women whose proper place was in the kitchen rather than in employment binders.

Most advocates of higher minimum wages in New Zealand point to recent American studies showing little disemployment effect of minimum wages. And they’re right: the most recent American work does show little measurable effect. Minimum wages are far lower there; non-binding constraints largely fail to bind. The effects on poverty aren’t that simple though: the products of minimum wage workers are disproportionately bought by poorer people; incidence analysis warns that a reasonable proportion of mandated wage hikes will be passed through to customers. And, in places like Canada where the minimum wage is higher and more binding, there’s some evidence that minimum wage hikes increase poverty: the losses to families losing second-earners because of disemployment effects outweighed the gains to those families enjoying a small salary increase.

Here’s Chris Trotter with an alternative take. After reasonably critiquing Labour Leader David Shearer’s immigrant-bashing, Trotter reads the tea leaves:

This means that any Labour government led by Shearer is likely to shy away from direct interventions in the labour market. It will not pass legislation designed to reverse the flow of wealth from wage and salary earners to owners and shareholders. It will not, by substantially lifting the minimum wage, engineer a wholesale winnowing-out of New Zealand’s most inefficient businesses. It will not pass legislation restoring universal union membership or the national award system. It will not use the government’s ability to set wages and salaries in the public sector to provide both a guide and a goad for private sector employers. In short, it will not do any of the things required to raise the incomes of New Zealand’s wage and salary earners. [emphasis added]

Is Trotter there really saying that part of the point of a minimum wage is to clear out firms employing low-cost labour? Where the old-school Americans wanted to make undesirables ‘unemployable’, Trotter seems to want to make lower productivity firms ‘unemployingable’.

You can maybe build a model where this works. Specify that workers are really really sticky with a current employer: actual wage differences from shifting jobs have to be really high before they’ll engage in any search or entertain new job offers. Other, more efficient, employers would love to hire them, but they can’t. You’ll also have to specify either that markets for corporate control are just broken, preventing the takeover of less efficient firms by more efficient management, or that the firms are in sectors that are simply inherently less productive. Killing those firms allows the workers to shift over to alternative, more productive, employment. It sure doesn’t seem a plausible model though.

Further, it can often be the case that lower skilled workers are complements to higher skilled workers. Here at Canterbury, a few years before the earthquakes, the University got rid of some of the cleaners and started making staff empty their own waste baskets into central bins on each floor of each Department.* It saved on some low cost workers’ salaries, but at a higher and unmeasured opportunity cost. For every low productivity firm that’s killed by Trotter’s prescription, how many lower productivity tasks in higher productivity firms are also ended? What do we do with those whose endowment of human capital means that their marginal revenue product will never be higher than the current minimum wage?

* The veneer: sustainability, we should be throwing less stuff out, etc.