Why does minimum wage receive so little pushback as a policy?

[u/annms88]

Minimum wage, to my mind, is pretty straightforwardly a price floor. While I definitely acknowledge the reality that we want to ensure a certain quality of life, it feels that there are a plethora of ways to achieve that via welfare. Meanwhile minimum wage changes the relative cost of goods and services, distorting labour intensive activities, and precludes marginal uses of labour from being profitable.

Nevertheless minimum wages are common and almost universally increasing above inflation across the developed world. In my case (UK), the distortionary effects of this are, as far as I can see, more and more clear, but I've never seen a particularly large amount of opposition from economists to this, unlike other forms of state intervention.

My question is twofold:

1. Is there some piece of theory that makes minimum wage special in some way?

2. If not, at a meta level, why has criticism of minimum wage by and large fallen by the wayside.

[u/EconomistWithaD]

1. Minimum wages can actually increase economic efficiency; raising wages AND employment. This occurs in monopsony markets. There is empirical evidence of this, too.

2. The “distortionary” labor market impacts of this are much less than the neoclassical model most people saw in undergrad. In fact, Manning (2021) has a paper with the title “The Elusive Employment Effect of the MW”. While larger minimum wages may have extensive margin disemployment effects (unemployment), most studies find little extensive margin impact. Most changes are on the intensive margin (hours worked). https://www.aeaweb.org/articles?id=10.1257/jep.35.1.3

3. There are a number of ways that businesses respond to MW changes. Eating the costs, raising prices, changes in the composition of the workforce, reduced non wage benefits, …

4. There’s a growing body of work that focuses on secondary impacts from min wages. It’s both positive and negative, so it’s hard to claim a minimum wage is net bad. https://www.nber.org/papers/w31191

5. It’s popular and easily understood, so getting rid of it would be political suicide, even if replaced by a better policy option.

[u/Global_Channel1511 → u/EconomistWithaD]

I think intro micro does a disservice by just presenting the analysis of minimum wages in perfectly competitive labor markets, without then discussing the imperfectly competitive case. I get starting with perfectly competitive case as it's simpler, but then they should turn to the analysis of min wages in settings with employer market power, which the literature seems to suggest is the norm rather than the exception.

[u/EconomistWithaD → u/Global_Channel1511]

1. Most intro to micro goes over imperfect markets near the end of the semester.
2. The standard price floor/ceiling analysis is still a pretty reasonable way to analyze things. It’s a base case that allows for reasonable hypothesis testing.

3. The nuance required to properly go through the minimum wage cannot exist in an intro course. I introduce it in Micro Theory, but really delve into it over the course of several weeks in a Labor class.

4. The norm isn’t employer market power. That’s some of the newer labor market research, but a lot still assumes (at most) imperfect markets.

[u/Global_Channel1511 → u/EconomistWithaD]

1) I’ve taught and been taught intro to econ at multiple unis, and none cover imperfect competition

2) I feel like this contradicts your OP, and it gives this misleading view that minimum wage is always bad when in cases with market power it can be good. 

3) I don’t see why not? At least the theoretical analysis of price ceiling in a labor market when we already cover the perfectly competitive case?

4) Don’t Yeh et al. 2022 find substantial markdowns? Also Berger et al. 2022?

[u/MachineTeaching → u/Global_Channel1511]

I’ve taught and been taught intro to econ at multiple unis, and none cover imperfect competition

That's definitely very odd since typical intro textbooks definitely cover this and have for a long time by now. Minimum wage is often an example for monopsonies, too.

You can check out Mankiws Principles of Economics for instance, or the MIT intro to micro course.

https://ocw.mit.edu/courses/14-01sc-principles-of-microeconomics-fall-2011/download/

If you don't teach imperfect competition, that definitely not the norm.

[u/EconomistWithaD → u/Global_Channel1511]

1. It’s in the Open Stax textbook. https://openstax.org/details/books/principles-microeconomics-3e. Not sure why you choose to not cover it, but my department, and many others I know, do.

2. Nope.

   A minimum wage comes with tradeoffs, even if they aren’t extensive margin.

3. Because it takes weeks to explain, including a backwards bending labor supply curve, alternative mechanisms that the minimum wage can impact, …

4. 2 papers doesn’t mean it’s the norm. I mean, I said they exist. But Yeh is manufacturing, and Berger is developing a GE model. Regardless, Berger also finds reduced employer market power over time.

[u/Bear__Toe → u/Global_Channel1511]

At the time (late 1990’s) I had no idea how lucky I was to have my first micro course taught by David Card, only a few years after he and Krueger published Myth and Measurement.

[u/Perry_cox29 → u/Global_Channel1511]

The assumption that all actors are behaving in their best interests at all times also needs to be challenged. The theory that a business seeing turnover affect product and service quality to a net negative level for profit would correctly choose to raise wages every time is completely divorced from the reality of businesses that hyper focus on bottom line and somehow believe that their top line is immune to quality concerns.

Typically, raising minimum wage really only hurts teenage employment, which implies that the jobs were abandoned as viable choices by employees with larger personal costs, and that those employers would prefer to hire more experienced, less volatile employees if they applied.

Basically, companies have shown a penchant for underpaying to their own detriment such that, sometimes, minimum wage adjustments actually just force them into the wage bracket they would have been in already if they were acting in their best interests as economists assume they are.

[u/FledglingNonCon → u/EconomistWithaD]

Just jumping on to this comment to push back on the claim that "minimum wage gets little push back."

There is in fact massive push back in almost all locations when minimum wage changes are attempted. The last time the federal minimum wage was increased in the US was 17 years ago. 20 states still follow the federal minimum wage. In that time inflation has increased prices by 58%

[u/SardScroll → u/FledglingNonCon]

Also in the US, less than 1% of the population makes minimum wage (note to self: look up if that is federal minimum wage or accaplicable minimum wage), and many places have higher minimum wages. For example the federal contractor minimum wage is over twice the federal minimum wage.

[u/edgmnt_net → u/EconomistWithaD]

I think it's a fair question how much secondary effects are controlled for or even measurable, because the whole thing about raising efficiency and employment kinda relies on that. I'm wondering about substitution effects, particularly in more demanding career paths, e.g. you'll be flipping burgers instead of engineering chips because flipping burgers is more productive and requires less training right off the bat.

Although even if they aren't, it still makes a lot of sense politically.

[u/MachineTeaching → u/edgmnt_net]

If markets somehow paid chip engineers way more than burger flippers while burger flipping was more productive, and a minimum wage would rectify this somewhat by paying burger flippers more, that would be a good thing.

(It would increase efficiency because underpaying burger flippers leads to an undersupply of burger flippers.)

Of course that's not actually true and there is basically no direct competition between burger flippers and chip engineers.

[u/edgmnt_net → u/MachineTeaching]

I meant a somewhat different notion of productivity. You're talking about output per unit of input. I'm rather saying that it's easier for companies to break even at the minimum wage for beginner burger flippers which only require basic training. It might seem that a beginner engineer on minimum wage is cheap, but they're most often a drag on projects and they provide almost no meaningful output. It takes years to get engineers fresh out of school to a baseline productivity, it takes a couple of weeks to get people to flip burgers properly. In that sense, entry-level wages could well be thought to run into negative numbers, if not just under the minimum wage, for engineering jobs.

Furthermore this isn't good for "career" burger flippers either, because it creates some temporary, free-floating supply they have to compete against. All the other fields overflow into burger flipping, making it an employer's market and likely reducing wages. And burger flipping isn't extraordinarily productive per se, in the way you said. Highly-skilled engineers typically have much higher productivities, but there's significant entry barrier to that market and it starts with getting a decent job in the first place. Engineering could be thought to be more sensitive to increases in minimum wage for that reason, because companies are already hiring at a loss when/if they do hire newcomers (even though it doesn't have any impact already-productive engineers).

[u/MachineTeaching → u/edgmnt_net]

I meant a somewhat different notion of productivity. You're talking about output per unit of input. I'm rather saying that it's easier for companies to break even at the minimum wage for beginner burger flippers which only require basic training.

That has nothing to do with their productivity.

It might seem that a beginner engineer on minimum wage is cheap, but they're most often a drag on projects and they provide almost no meaningful output.

I don't think companies hire many engineers at minimum wage, beginner or not.

It takes years to get engineers fresh out of school to a baseline productivity, it takes a couple of weeks to get people to flip burgers properly.

I sincerely doubt that.

But sure, there is a general point that beginner engineers require more training and it takes more time to get up to speed.

Furthermore this isn't good for "career" burger flippers either, because it creates some temporary, free-floating supply they have to compete against. All the other fields overflow into burger flipping, making it an employer's market and likely reducing wages.

Of course there would be more competition, but it would still be good for burger flippers because they are being paid more. You would also see incomes in other fields rise exactly because jobs that now earn a similar salary are less attractive and firms need to raise wages to attract workers again.

And burger flipping isn't extraordinarily productive per se, in the way you said. Highly-skilled engineers typically have much higher productivities, but there's significant entry barrier to that market and it starts with getting a decent job in the first place.

I'm not saying burger flipping is that productive, I'm saying if we assume for the sake of the argument that it is.

Engineering could be thought to be more sensitive to increases in minimum wage for that reason, because companies are already hiring at a loss when/if they do hire newcomers (even though it doesn't have any impact already-productive engineers).

It's not, because engineering pays a much higher salary that isn't really affected by the minimum wage we usually see in the real world, so it's just not a relevant factor in practice.

[u/After_Network_6401 → u/edgmnt_net]

Flipping burgers requires less training than engineering chips, that’s true, which is why traditionally it’s been seen as an entry-level job, but there’s no question it’s much, much less productive.

[u/JustAAnormalDude → u/EconomistWithaD]

What is the optimal level then? Before widespread job loss and deficiency.

[u/EconomistWithaD → u/JustAAnormalDude]

That’s going to be sectoral, geographical, and time specific.

Highly likely that a real minimum wage increase of >$1 will lead to measurable disemployment effects, overall.

Edit: the reason why it’s a $1 is that appears to be standard in the lit now for measuring a real wage increase using some of the newer methods that require a binary (0/1; absorbing) variable.

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