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Ask Better Questions

03 Mar 2021

This was founded out of an angry rant on a forum about competitive debating, where someone tried to dismiss the minimum wage discourse as being “redundant” due to it being easy to discuss the “limits of where the wage ought to be”. I think that reflects a lack of nuance - and the best way to counter that is by figuring out which questions we need to ask.

In order to evaluate whether or not to implement a minimum wage, we’d need to begin by evaluating the disemployment effects, which involves characterising the market structures of labour markets where the minimum wage would be binding. To what extent are labour markets monopsonistic (due to firm concentration, labour immobility, geographical immobility etc.)? To what extent are there job search-and-match frictions? What are the implications of labour markets being characterised by perfect competition as opposed to monopsony as opposed to search-and-match behaviour on the disemployment effects of a minimum wage? So even just evaluating the effects of employment is already difficult.

Of course, we care about the welfare implications. That means we’d need to untangle the heterogeneity in disemployment effects - is there some sort of rural versus urban divide and are the disemployment effects concentrated on smaller mom-and-pop shops versus large national chains? How does this heterogeneity affect the costs and benefits of a minimum wage?

Next, we’d want to look at the actual jobs for which a MW would be binding. Are they mostly staffed by teenagers who are working part time or is it for working class families? Perhaps we care a lot more if it’s the latter. Do they involve short turnarounds and large flows in and out of employment, such that those who get unemployed quickly get a new job, or are those who lose their jobs without income for a year or longer? Presumably the harms are a lot smaller if it’s the former, since the small periods of unemployment are mitigated by the higher wage when employed. After all, we don’t just care about time in employment - we care about people’s overall earnings. Furthermore, what happens when the minimum wage is binding - will the wages of workers who used to be paid just above that get raised due to compensating wage differentials? If this is the case, perhaps the welfare benefits are larger than what we would see just by considering minimum wage workers.

Finally, how do the higher labour costs get absorbed - does it cut into profits or raise prices? And do we know what the effects of either is? Perhaps the lower profits affect the process of endogenous firm entry and exit among small corner shops - how much do we value having a variety of firms? Perhaps the goods and serivces for which there are higher prices are those consumed by the wealth, making this a progressive transfer.

I’m not saying that a discussion about the minimum wage needs to answer all of these questions. But if we want our disagreements to be grounded in reality and reflect the messiness of reality, we should at least try and attempt to look at all of these questions.

[ economics  takes  ]