Employers decide at the margin, like everyone else

I was discussing the tragedy of the minimum wage over the weekend with a friend, explaining that economists of pretty much all political affiliations agree that a minimum wage set above a competitive market wage hurts the poorest members of society.

Even after viewing this video, he proposed a model:  imagine that an employer makes $1 million in profit, and needs workers to produce the product.  Raising the minimum wage will be simply redistributive, and that firm will simply hire the same workers that they would have hired, but pay them more.

That’s the wrong model.  The mechanism at work here is not just simple redistribution.  Governments might accomplish simple redistribution by cash transfers, but not by just raising the minimum wage.  Employers make hiring decisions at the margin.  This means that they weigh the costs and benefits of hiring that next worker.  If the worker only produces $5.00 of value per hour, it doesn’t make sense for a profit-maximizing firm to pay $6.00 per hour for that labor.  In a competitive market, we would expect that a wage for a worker would be competed up to how much value that worker can actually produce.

People make decisions at the margin.  Imagine you’re selling hot chocolate, and you’re going to donate the proceeds to your favorite charity.  Assume that all customers won’t pay more than $1.00.  If you find that you require $1.50 to make a cup, it doesn’t make sense to even make it.  If you’re selling each unit at a loss, you can’t turn a profit by increasing the volume you sell.

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10 Responses to Employers decide at the margin, like everyone else

  1. Thomas Merrill says:

    If the worker produces $5.00 of value per hour, a minimum wage at least prevents an employer from exploiting a worker for $4.00 per hour.

    • Aaron says:

      Why is that exploitive?

      • Thomas Merrill says:

        Because my east coast liberal economics spider sense tells me so!

        • Aaron says:

          The first step is admitting you have a problem. But seriously, without the job, the worker would make $4 less per hour. Without the worker, the company doesn’t create any value.

          Wages have to be determined by the overlap of interests; workers and firms make a collaborative endeavor, not the cut-throat competition that an Avatar-like, cartoonish version of evil ‘capitalists’ would suggest/demand.

          A saying that springs to mind: “Don’t let the perfect be the enemy of the good.” Categorically and a priori determining the ‘fairness’ of wages is very problematic; it’s pretty demonstrable that minimum wage laws disproportionately hurt the poor, young, and uneducated.

    • Seth Goldin says:

      How would a blanket minimum wage be able to distinguish between the person who you deem isn’t being paid the appropriate value, and the person who is producing at the competitive rate? Also, how would you, a government, or anyone even know what the value of that labor is?

      • Thomas Merrill says:

        Advocates for higher minimum wages are concerned with the earnings that are required to meet living expenses, not the salary that matches the value of the labor. Service sector minimum wage jobs cannot be outsourced, nor can they be downsized (i.e.: it takes [x] people to run a McDonalds at any given time). Higher wages cannot mean fewer employees in this example, and so the prices are passed to the consumers — many of whom are not living at the minimum wage, and thus a redistribution that puts less pressure on the working poor.

        The manufacturing sector is a different story, but there are many more factors related to transporation/logistics (where fuel and infrastructure highly subsidized) and environmental regulation that are arguably more important to a manufacturer than single-digit hourly wage rates.

  2. Thomas says:

    “Higher wages cannot mean fewer employees in this example”. But what about all the McDonald’s that never opened because of minimum wage? In that case, we’re not talking just fewer employees, but no employees at all. There’s hidden costs in everything.

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