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A large segment of the employer class will have workers believe either that the existence of a minimum wage or increases to the existing mandated wage have a direct negative relationship to employment and the economy—they are almost completely wrong.
The Fraser Institute is one of Canada’s most well known right-wing think tanks. In a policy report they undertook on the minimum wage, they say the following:
“Most economists would likely agree that high minimum wages reduce employment opportunities for young and unskilled workers. Most would probably also agree that high minimum wages do not necessarily raise the incomes of the poorest members of society. Yet, in spite of this consensus about the economics of minimum wages, the minimum wage continues to be touted by politicians and policy-makers as an effective way to help the poor.”
The trick being pulled here is the idea that high minimum wages won’t necessarily increase incomes doesn’t assume all things stay equal in a firm’s actions. In other words, employers will use adjustment channels to offset the increased wages. This is often true and it’ll be important to circle back to to show how this being the case actually defeats the Fraser Institute’s larger point on minimum wages.
First, let’s see what the overarching data suggests. In one of the most studied empirical overviews on minimum wage effects on employment in the last decade, the Center for Economic and Policy Research (CEPR) found that the “minimum wage has little or no discernible effect on the employment prospects of low-wage workers.”
The most well known metastudies in the field for the last several decades all show that minimum wage increases have statistically negligible effects on employment.
That’s not to say that the minimum wage doesn’t have effects on the behaviour of firms and workers. It certainly does. In fact, it is a net positive for workers and the economy writ large.
For one, increases in the minimum wage can act as a wage stimulus for the economy. Increasing the purchase power of consumers per capita means more market activity which would benefit employers as well. While on the topic of employers, the CEPR’s overview suggests that a minimum wage increase can be helpful for employers because of the costliness of worker turnover. If the current staff at an organization is making less than the competitive rate on the labour market, employers will be more likely to leave the spot vacant and incur the output costs of that, rather than hire someone at the competitive pay rate and have to increase their current staff’s pay as well.
Increases in the minimum wage means that the new minimum closes the margin between the competitive rate and what current staff are being paid, making turnover less costly and dealing with understaffing to boot. This is an example of an adjustment channel that helps both employers and low skilled, low-paid workers.
Vulgar economists assume that employers can replace a worker who is just as efficient whenever they want. They fail to take in the dynamism of a labour monopsony such as the costs of finding the right worker based on location, transportation, skill, the competitive rate of pay, etc.
It’s this kind of cherry picking when the “laws” of supply and demand should be treated as somehow independent of a historical constellation that we find demagoguery at its finest. Speaking of which, let’s return to the Fraser Institute’s argument against the minimum wage which conveniently uses adjustment channels as a reason why increases in a minimum wage doesn’t necessarily increase the income of the poorest in our society.
The Institute treats the idea that increases in a mandated wage is a posteriori not necessarily true but then, only a few pages later, uses an a priori argument to say that the laws of supply and demand hold for increases in the price of labour necessarily leading to less demand for it — which is statistically negligent apropos all the major metastudies, mind you — on the part of employers:
“It is a well-established fact that the quantity of a good or service demanded declines as its price rises relative to the prices of other goods and services. When the relative price of bananas rises, utility-maximizing consumers will buy fewer bananas and more oranges. Similarly, when the price of labour (i.e. the wage rate) rises, profit maximizing firms will tend to substitute other inputs (e.g. machinery) for labour and reduce their demand for workers.”
The laws of supply and demand are argued as necessarily true for why the price of labour would reduce demand for workers based on a static a priori argument. That the minimum wage, and raises to it, would necessarily mean more income for the poor is said to be not true even though a priori a minimum wage does mean more income for the poor. In developed countries like Canada and the United States, 70 to 80 per cent of household income comes from wages. Based on this, it is not a stretch to say that from a purely theoretical deduction, that is a priori—a minimum wage and raises to it necessarily means more income for the working poor.
What the Fraser Institute has to have poor workers believe is that when it comes to them getting more money in their pockets from mandated increases in the price of their labour, it’s in fact more complicated than an A = A situation. On the other hand, employers reacting to the laws of supply and demand when it comes to the price of labour is in fact A = A; the worker turned to an easily replaceable, homogenous battery for equally efficient labour expenditure. In short, a cog.
This is the misinformed and strategically employed idea of capitalist supply and demand having mathematical laws that assume perfect rational agents, as if they are platonic laws like in physics. What has to be disavowed is that the general pattern of behaviour described by supply and demand curves are always in contention with and subject to a historico-material constellation.
A glimpse at our constellation?
At the beginning of this new decade 2,153 billionaires had more wealth combined than 60 per cent of the planet’s population.
If the majority of economists, who are often the harbingers of this system’s vast inequality, say that poor workers having the right to decent minimum wages means that according to the laws of supply and demand the employer won’t buy their labour, remember not to buy this convenient use of “natural laws” which don’t hold true in reality on a society-wide scale.