Tuesday, March 08, 2005

A different look at raising the minimum wage

Today's Foundation for Economics Education alert links to this FEE Timely Classic, which I hadn't read before. While my emphasis is on the rippling effect of price increases, especially that raising the minimum wage to $x will penalize those already making $x, Professor David Laband looked primarily at the labor-substitutive effects of a minimum wage increase. His good insight is that because a minimum wage hike makes the lowest-wage workers more expensive, employers will want to hire "highly-educated and skilled workers over less well-educated, less-skilled workers." This, he notes, is
to the detriment of the uneducated, unskilled component of the labor market (i.e., the very component liberal politicians and theorists profess so much compassion for, so much so that they claim this compassion defines the difference between them and their conservative counterparts).
It's not a bad thing if society has an overall shift to higher-wage, more productive labor. Raising the minimum wage, though, doesn't do that. It's not a shift in labor, only substitution, as Professor Laband points out. A shift in labor means that 50% of the population is low-skilled, the other 50% is high-skilled, and over time it changes to 40%/60%. Substitution means that society stays at 50%/50%, and instead of employers wanting to hire 95% of each, they'll want to hire only 90%/100%.

In theory, the increased demand for higher-skilled workers means that substitution gives people an incentive to improve themselves. But that's the case already in the real world, and some people just don't have a comparative advantage. Competition isn't about absolute skill, but relative skill.

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