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The theory of the minimum wage is just the theory of a price floor. The effect on employment is dependent on the market composition and the cross-price elastici

by iciac 8y ago

The theory of the minimum wage is just the theory of a price floor. The effect on employment is dependent on the market composition and the cross-price elasticity of labour. Comparing a price floor of $15/h (highly substitutable unskilled labour) with $1000/h (unsubstitutable specialist labour) isn't really tenable. For most minimum wage positions you'll find the bulk is employment by large firms (potentially under a franchise arrangement), labour is substitutable, and wage-bargaining power is weak. Total production is more likely to be driven by demand, and a (relatively) small unit cost increase is likely to be absorbed (if anything, we'd expect it to affect firm profit more than purchased labour). You're correct that less competitive SMEs may be affected more here, operating as a price taker for both their product and labour. These firms however will be disproportionately affected by any external market movement - there's nothing particularly magical about a minimum wage increase.

AnthonyMouse 8y ago
> The effect on employment is dependent on the market composition and the cross-price elasticity of labour. Comparing a price floor of $15/h (highly substitutable unskilled labour) with $1000/h (unsubstitutable specialist labour) isn't really tenable. The proportional composition of the markets wouldn't be exactly the same, but they're both highly diverse markets. It's not just unskilled labor, it's anything with an oversupply of qualified labor, e.g. internships or childcare. Even unskilled labor has a wide variety of potential substitutes depending on context. > For most minimum wage positions you'll find the bulk is employment by large firms (potentially under a franchise arrangement), labour is substitutable, and wage-bargaining power is weak. Total production is more likely to be driven by demand, and a (relatively) small unit cost increase is likely to be absorbed (if anything, we'd expect it to affect firm profit more than purchased labour). Perhaps, but that doesn't mean there is low elasticity of demand. There is a price at which a large company will automate the job or move the entire facility to a location with lower labor costs. And a large firm may have a profit margin equivalent to $4/hour rather than $1/hour for a smaller firm, but raise the wage from $10 to $15 and they're both making layoffs (or forced to raise prices). > You're correct that less competitive SMEs may be affected more here, operating as a price taker for both their product and labour. These firms however will be disproportionately affected by any external market movement - there's nothing particularly magical about a minimum wage increase. Which is why we prefer to avoid those other things as well.
- iciac 8y ago
  Automation usually requires a high fixed cost to enable long-term low-operating costs. If you suppose a decreasing unit installation cost or scale construction over time you'll eventually hit a point at which companies will automate, especially if there's added efficiency (two examples: McDonald's certainly didn't shift to kiosk solely due to minimum wage, nor could we set an hourly wage low-enough that a typist pool could compete with a common word processor). Ditto for location shifting: it's dependent on a) the transferability of the activity, b) the cost of shifting, and c) the price differential between the two locations. Minimum wage may be a component in this decision - but it will not be the only one. For context: I work as a policy economist in Australia, principally in regional employment. The minimum wage rate here is (AU) $18.93/h, unemployment sits at trend around 5.5%. In my experience the primary driver for regional employment (often less complete markets) is labour demand rather than the cost of supply.
  - sokoloff 8y ago
    Isn’t labor demand a curve with a slope, rather than a point? Does not the cost of supply curve interact with demand?
  - AnthonyMouse 8y ago
    > Automation usually requires a high fixed cost to enable long-term low-operating costs. Sure, but it still has a relationship to wages. You take the fixed cost and amortize it over the expected lifetime of the equipment, add the operating and maintenance costs and compare to wages. If the automation costs $25,000/year per employee replaced then you use it as soon as employees cost more than $25,000/year. It's clear what happens when the cost of an employee rises from $20,000 to $30,000. > nor could we set an hourly wage low-enough that a typist pool could compete with a common word processor Sure you could. No one would willingly take the job for so little money, but that doesn't mean the dollar value doesn't exist. But nobody needs to "save" those jobs because there are many other jobs that pay more. A $0.05/hour job is useless when there are unfilled $10/hour jobs. But a $10/hour job can be better than unemployment when there aren't unfilled $15/hour jobs and the employer's automation threshold is $12/hour. > Ditto for location shifting: it's dependent on a) the transferability of the activity, b) the cost of shifting, and c) the price differential between the two locations. Minimum wage may be a component in this decision - but it will not be the only one. It's not a matter of it being the only factor, it's a matter of whether it pushes the number over the threshold. Which is what happens at the margin.

by iciac 8y ago

AnthonyMouse 8y ago

> The effect on employment is dependent on the market composition and the cross-price elasticity of labour. Comparing a price floor of $15/h (highly substitutable unskilled labour) with $1000/h (unsubstitutable specialist labour) isn't really tenable. The proportional composition of the markets wouldn't be exactly the same, but they're both highly diverse markets. It's not just unskilled labor, it's anything with an oversupply of qualified labor, e.g. internships or childcare. Even unskilled labor has a wide variety of potential substitutes depending on context. > For most minimum wage positions you'll find the bulk is employment by large firms (potentially under a franchise arrangement), labour is substitutable, and wage-bargaining power is weak. Total production is more likely to be driven by demand, and a (relatively) small unit cost increase is likely to be absorbed (if anything, we'd expect it to affect firm profit more than purchased labour). Perhaps, but that doesn't mean there is low elasticity of demand. There is a price at which a large company will automate the job or move the entire facility to a location with lower labor costs. And a large firm may have a profit margin equivalent to $4/hour rather than $1/hour for a smaller firm, but raise the wage from $10 to $15 and they're both making layoffs (or forced to raise prices). > You're correct that less competitive SMEs may be affected more here, operating as a price taker for both their product and labour. These firms however will be disproportionately affected by any external market movement - there's nothing particularly magical about a minimum wage increase. Which is why we prefer to avoid those other things as well.

iciac 8y ago
Automation usually requires a high fixed cost to enable long-term low-operating costs. If you suppose a decreasing unit installation cost or scale construction over time you'll eventually hit a point at which companies will automate, especially if there's added efficiency (two examples: McDonald's certainly didn't shift to kiosk solely due to minimum wage, nor could we set an hourly wage low-enough that a typist pool could compete with a common word processor). Ditto for location shifting: it's dependent on a) the transferability of the activity, b) the cost of shifting, and c) the price differential between the two locations. Minimum wage may be a component in this decision - but it will not be the only one. For context: I work as a policy economist in Australia, principally in regional employment. The minimum wage rate here is (AU) $18.93/h, unemployment sits at trend around 5.5%. In my experience the primary driver for regional employment (often less complete markets) is labour demand rather than the cost of supply.
- sokoloff 8y ago
  Isn’t labor demand a curve with a slope, rather than a point? Does not the cost of supply curve interact with demand?
- AnthonyMouse 8y ago
  > Automation usually requires a high fixed cost to enable long-term low-operating costs. Sure, but it still has a relationship to wages. You take the fixed cost and amortize it over the expected lifetime of the equipment, add the operating and maintenance costs and compare to wages. If the automation costs $25,000/year per employee replaced then you use it as soon as employees cost more than $25,000/year. It's clear what happens when the cost of an employee rises from $20,000 to $30,000. > nor could we set an hourly wage low-enough that a typist pool could compete with a common word processor Sure you could. No one would willingly take the job for so little money, but that doesn't mean the dollar value doesn't exist. But nobody needs to "save" those jobs because there are many other jobs that pay more. A $0.05/hour job is useless when there are unfilled $10/hour jobs. But a $10/hour job can be better than unemployment when there aren't unfilled $15/hour jobs and the employer's automation threshold is $12/hour. > Ditto for location shifting: it's dependent on a) the transferability of the activity, b) the cost of shifting, and c) the price differential between the two locations. Minimum wage may be a component in this decision - but it will not be the only one. It's not a matter of it being the only factor, it's a matter of whether it pushes the number over the threshold. Which is what happens at the margin.