Supply and demand sounds simple. It rarely is, however, and some cases are quite complex. Consider the minimum wage.
Raising the minimum wage makes low-skilled labor more expensive. Basic supply and demand suggests that businesses are likely to adjust by employing fewer low-skilled workers or reducing their hours.
Economists call that straightforward adjustment the “employment effect” of the minimum wage. Estimates of the actual employment effect – and there are file drawers full of them – are not so straightforward, however. Most are indeed negative, meaning that an increase in the minimum wage reduces the employment of low-skilled workers.
But many of the negative estimates are small, some estimates are close to zero and some are even positive, suggesting that raising the minimum wage might actually increase the employment of low-skilled workers.
The conflicting estimates have economists themselves conflicted. To many, the large percentage of negative estimates supports the traditional view that the minimum wage costs many low-skilled workers either their jobs or work hours. To other economists, the variability in the estimates means we still can’t say with confidence what the actual employment effect is.
To still others, the preponderance of small negatives, close to zeroes, and positives among the estimates indicates that raising the minimum wage has little if any harmful effect on the employment of low-skilled workers. These economists tend to favor raising the minimum wage.
There’s another interpretation.
Professional grade supply and demand is ever mindful that people can be quite creative in adjusting to change. For instance, businesses can adjust to an increase in the minimum wage in all sorts of ways.
One is to raise prices. Economists have investigated this option closely and have found that businesses largely reject it. For most businesses, wages paid to low-skilled workers is a small fraction of their costs. A higher minimum wage thus increases costs only marginally. Raising prices to cover the costs of a higher minimum wage risks alienating customers.
Plus, there are easier options. Cut health benefits to low-skilled workers. Cut their breaks. Cut their food or merchandise discounts. Cut their training or work amenities. In short, offset the higher wage by cutting other forms of compensation.
It’s thus possible for a minimum wage increase to have no effect on the total compensation or employment of low-skilled workers. What workers gain in a higher wage they lose in other compensation, which enables businesses to avoid cutting hours or jobs.
Another option: raise performance standards and be quick to dismiss workers who fail to meet the higher standards.
Workers adjust in creative ways, too.
Pay workers more and they are less likely to quit. They are also less likely to behave in ways that might get them fired. Happier workers are also more productive.
That’s not “feel good” fluff. Ample evidence supports the claims. Treating people with common decency is good business.
Which means raising the minimum wage might pay for itself, or better. If the lower turnover and greater productivity reduce costs by more than the higher minimum wage raises costs, the happy possibility becomes reality.
Skeptical? I am. Most business owners and managers already understand all that about turnover, productivity and treating workers decently, don’t they?
At any rate, the upshot is that the employment effect of the minimum wage is likely to vary considerably across businesses, industries, towns, cities and workers. That’s why the estimates of the employment effect vary so much. There is no single employment effect; there are many of them.
So, should we raise the minimum wage or not? We’ll take that up in my next column.
Reg Murphy Center