June 13, 2017

Minimum Wage hikes don't cost jobs (?)

As the article below says, this is a contentious subject with evidence either way. The law of supply and demand is very much an 'iron' law, one incapable of repeal.  So increasing the price of labour must reduce the demand for it. And labour costs are a major part of costs for most businesses so the effect should be pretty obvious.

That is however in a "ceteris paribus" situation and other things are not always equal. A very old observation on the matter -- going back to Henry Ford and persuasively argued in modern times by Ron Unz -- is that workers are also buyers so giving them more money means that they will spend more and thus increase demand -- which will in turn increase the income of businesses, thus enabling them to pay their workers the mandated rise. That is something of a perpetual motion argument but is probably partly true.

A less adventurous argument is that large pay rises tend to be granted in periods of prosperity so the employer can afford them and all that happens is that the balance of returns to labour and capital is restored.

The least persuasive argument is that higher wages tend to incentivize higher productivity, thus enabling the boss to pay more.  That may happen but only in isolated instances, one would think.

Australia is in a very different situation to the United States.  Minimum wages are almost always set nationally in Australia, whereas American minima can be set Federally, Statewide or even on a municipal basis.  And high municipal minima do tend to spark evasion in the USA.  Businesses simply move out of town to where the set wages are lower.  Seattle appears to be an example of that. So the law of supply and demand is as reliably present as ever in the matter of minimum wages.

So, from that example, my conclusion is that offsetting effects are probably large in Australia but unregulated wages would probably still generate higher levels of employment


What was it thinking? On Tuesday, the normally hard-hearted Fair Work Commission drove up the cost of labour 3.3 per cent. From July 1 the full-time minimum wage jumps from $34,975 to $36,135 – that's an extra $22 a week, the biggest increase in ages.

It will spread far beyond the lowest-paid. The Commission believes that 23 per cent of Australian workers, almost 1 in 4, will benefit from the flow-on increase to awards. And it'll spread further, to enterprise agreements that need to compete with awards.

It'll cost jobs. There are "experts" who say so. "It's just got to be reducing employment, it's just got to be," said one, quoted in the Financial Review. Business will be forced to "reduce costs through cutting jobs or other investments," said another, in The Australian.

You'd think so. If a business' costs go up and its income doesn't, it'll have to cut back. It makes sense.

Just as it makes sense to think that lower class sizes improve educational outcomes.  They ought to. But while that's obviously true in extreme cases (if class sizes or wages were increased tenfold, it would hurt), normal-size adjustments, of the kind that are usually made, seem to have no effect whatsoever. And these are some of the most intensively studied questions in economics.

I'll leave class sizes for another day. On wages, the commissioners said those studies had "fortified" its view that modest and regular wage increases "do not result in disemployment effects".

The latest, and most damning, is a seven decade-study released in May by the United States National Employment Law Project entitled Raise Wages, Kill Jobs?

"If the claims of minimum wage opponents are akin to saying 'the sky is falling', this report is an effort to check whether the sky did indeed fall," the authors say.

They examined each of the 22 increases in the US federal minimum wage between 1938 and 2009 to determine whether either employment or hours worked had dropped in the year that followed.

"The results were clear: these basic economic indicators show no correlation between federal minimum wage increases and lower employment levels, even in the industries that are most impacted by higher minimum wages," they reported.

We find it hard to believe that modest wage increases don't cost jobs, because they ought to.

"To the contrary, in the substantial majority of instances (68 per cent) overall employment increased after a federal minimum-wage increase. In the most substantially affected industries, the rates were even higher: in the leisure and hospitality sector employment rose 82 per cent of the time following a federal wage increase, and in the retail sector it was 73 per cent of the time."

"Moreover, the small minority of instances in which employment declined, all occurred during periods of recession or near recession. That pattern strongly suggests that the few instances of such declines are better explained by the business cycle than by the minimum wage."

They go on to observe that their findings aren't really surprising. Study after study has found the same thing.

We find it hard to believe that modest wage increases don't cost jobs, because they ought to. Where's the employer going to find the money? But cutting jobs can cost money, and the money can come from higher prices and from getting more out of each worker, so-called productivity growth. Of late productivity has been growing faster than wages, so the commission's decision puts things back into balance.

And partly because when workers are paid more, they stay more and become better workers, and even become better ambassadors for the businesses that employ them. And because, occasionally, wage increases are really big. When they are big enough, low wage workers become higher wage workers and spend more, especially in shops and food outlets, the kind of industries that are likely to employ them.

There's just a chance the commission knows what it's doing.

SOURCE





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