Blogs > Liberty and Power > Minimum Wages and Margins of Adjustment

Jul 13, 2004 8:34 am

Minimum Wages and Margins of Adjustment

Interesting discussion about the effects of minimum wage laws shooting around the blogosphere.  The big question seems to be why so few, at least recent, studies show any major effect of increasing the minimum wage.  I think Tyler Cowen has it right in arguing that employers have multiple margins to adjust on when forced to pay higher monetary wages.  To break it down a bit more precisely than Tyler does, imagine that an employee's total compensation consists of monetary wages plus various forms of non-monetary compensation. This is obvious to salaried workers who get health benefits, vacations, etc., but it's true even for minimum wage workers if you, as Tyler credits Gordon Tullock with doing, expand the category of compensation broadly enough.

The example Tyler uses is turning up the air conditioning (i.e., making it not as cool in the workplace).  If you have to pay more in wages, rather than firing workers, you might choose to save in other ways.  Other examples here could range from reducing employee discounts (no more free Big Macs), making employees pay for their own uniforms, increasing the level and intensity of monitoring so as to produce more output at the higher monetary wage, creating stricter rules about using company resources (such as phones, computers, or office supplies) for personal use, etc..  There are numerous ways in which firms can adjust to a mandated monetary wage hike so as to leave either their total compensation costs unchanged, or to squeeze more productivity out of workers without laying them off.  Note that if governments pass mandated non-monetary compensation laws (forcing all firms to provide health insurance for example), we would see the same sorts of marginal adjustments elsewhere, this time including lowering monetary wages perhaps.

The big point here is that for some significant number of workers, the series of changes kicked off by the imposition of a higher minimum wage makes them worse off.  If you imagine compensation as a bundle of goods, mandated benefits (whether monetary or not) adjust that bundle in ways that are very likely not to match the preferences of both employers and employees.  (The old economist's counter-factual is that if people really wanted the new bundle, they could have negotiated for it.  I don't buy that as being correct for everyone.)  The bottom line is who knows better which bundle of compensation is more mutually satisfactory:  decentralized negotiations between employers and firms or government trying to impose a one-size fits all solution?  In that way, the argument is a good application of Hayekian knowledge considerations.

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