A frustrating problem in modern economics is their vocabulary. In particular, the word “efficiency” has an inherently positive connotation, and thus normative implications – everyone wants to be efficient. Efficiency however, is meant to be a value-neutral measure of resource allocation, not a prescriptive claim. Rather, our normative arguments must come from ethical considerations. This is why even the most conservative accept some level of economic inefficiency, such as child labor laws (under neoclassical theory, all government intervention leads to inefficiency). This is relevant to the minimum wage debate, because it means we shouldn’t reject increasing it just because it creates economic inefficiency and a labor surplus, as is often argued in political rhetoric. Instead, we must treat these effects as consequences that are weighted against the benefits.
In dealing with the minimum wage in the US, the first question we must ask is whether a minimum wage is necessary. To the most extreme free-marketers, the market will adjust, through supply and demand, to the optimal wage price. This is because they assume that if a wage is too low, the firm will not get enough valuable labor to fulfill its production, and will thus raise the wage. And if a worker demands a wage that is too high, no one will employ him. As these two forces balance against each other, an optimal price will be reached at equilibrium. The problem with this argument is that it neglects the role of power in the supply-demand bargaining relationship. Workers are not fluid resources that can travel to wherever a job is required, but they are psychological human beings who have attachments to geographical and resource constraints. For example, a worker may be too poor to travel across the country to get a job or may not have the informational resources needed to find a suitable job. Therefore, he may be restricted to a small labor market. Multiplying this scenario nationally, it problematizes the anti-minimum wage position by creating “local monopolies,” either by structural restraints or business norms, with greater bargaining power than non-unionized laborers. Of course, producers won’t pay so little that their workers die, but they may not pay enough to raise workers out of poverty (I am assuming poverty is morally reprehensible). And in many situations, laborers are so restricted in their “free choice” that it is essentially negligible as a market power. As such, a minimum wage is necessary, at least in some form.
The next position that must be established is where to set the minimum wage. This is the debate taking place in American politics today. Broadly, we can divide the sides into two philosophies: living wage vs. non-living wage. The living wage side believes that the minimum wage should raise people above the perceived poverty line so that they can live a non-degrading, reasonable life (deriving that line is not within the scope of this post) – it is a question of human rights. However, opponents fear the incentives it creates. That is, hinting at some form of social Darwinism, they think if the minimum wage is too low, it will reduce the incentive to pursue career advancements. As such, the optimal policy would be the one that motives poor people to propel themselves up to economic success in a hyper-stressful environment of competition and envy.
I am sympathetic to the living wage proponents. I see no reason why people who prefer it can’t be satisfied with a minimum wage job. They are contributing to society, and they are fulfilled. It seems somewhat absurd that we force everyone to climb higher and higher, even if they are completely happy where they are. Sure, you can argue that it helps innovation, but the person who would be satisfied at a minimum wage job would only want to climb up to a non-innovative, living wage job (small managerial positions, for example).
Now we come to the economics. Mainstream theory proposes that raising the minimum wage would create a surplus in labor by creating a price floor. That is, employers will not be willing to pay that extra cost in wages, and will therefore downsize, which will increase unemployment. There are many research papers that contradict this, but frankly, I don’t see refuting this claim as necessary. Even if the classical theory is right, the minimum wage should still be raised. To explain this, we must return to the necessity of a minimum wage itself. If raising wage prices leads to unemployment, why should we have it at all? The answer evokes the descriptive/normative distinction in economics. That is, although we assume that descriptively the minimum wage increases unemployment, we must ask ourselves if it is ethically worth it. In this case, is it better to have everyone who wouldn’t have been employed in a minimum wage system employed, but under the poverty line? To me, that seems like an absurd endeavor. It is wrong for the same reason child labor is wrong: human rights. And even though child labor laws create some economic inefficiency, and may even hurt a family (the child could contribute a needed income), we have accepted those costs for what is perceived as a morally-relevant benefit. Minimum wage functions similarly, in that even though it creates unemployment, it is better to have those employed be out of poverty than have everyone employed at the minimum wage in poverty.
Some people are hesitant however, because they are reminded of those who will become unemployed right after we raise the wage. I concede that there will be some short-term suffering, but in the long-run, it will benefit the whole. This is because it will set a new “reference point” on which to calibrate policy. When making efficiency claims, the equilibrium is not necessarily the ultimate equilibrium since there are many constraints and confounding variables in the real world. For example, to use an absurd example, theoretically nature could produce oil at twice the rate it does. Yet, since it “chooses” not to, it creates inefficiency by establishing a quota. Economists however, have internalized this restraint, so the greater allocative efficiency that could have been had without this restraint is assumed not to exist. The same thing applies to child labor, and the same thing could apply to the minimum wage. As such, rather than blaming a labor surplus on the minimum wage, we can assume a new “natural equilibrium” that has internalized the costs of the surplus.
The greatest thing about this claim, if it is true, is that it completely justifies increasing the minimum wage as a historical principle. Let’s use the 80s as a set point, which conservatives consider a prosperous era. In 1980, the nominal minimum wage was $3.10. Yet, if we adjust for inflation, the 1980 minimum wage is $8.76 in real prices. That’s higher than the wage we have now. Therefore, the rhetoric that a higher minimum wage would lead to economic problems doesn’t hold if we account for the various other metrics that accompany economic prosperity – after all, Reagan is considered by conservatives to have done a good job even with a higher minimum wage.
The point of all of this is that the minimum wage should not be assumed to be a defining economic element, as people tend to do when they see economic models that isolate variables. It is entirely possible to incur the costs (and benefits!) of a minimum wage, but also achieve high economic prosperity and innovation. Economic policy should not be a frantic pursuit of efficiency, but should take moral dimensions that question if it is worth living in a fully-efficient world.