Effects Of Minimum Wage Hikes Are Complex

Jun 28, 2018

Commentary: The Las Cruces minimum wage is in the local news again. It is set to increase to $10.10 an hour starting January 1st and a study is soon to be released as to the potential impact of this change. Opponents of the wage increase argue that the minimum wage destroys jobs, increasing unemployment among the working poor, thereby harming the exact people meant to be helped.

It’s just common sense, the opponents argue. Raise the price of something and people buy less. Raise the minimum wage and fewer minimum wage workers are hired. Right? Right?

Well not so fast. The above argument applies to perfect competition—when there are many buyers and sellers, and homogeneous project—but that isn’t how labor markets work in the real world. And when markets are not perfect competitive, raising wages may not reduce employment.

Consider first a situation when the employer enjoys a monopsony, that is, a monopoly as a buyer. In this case, the employer has an incentive to reduce employment so as to suppress wages. You may well have run across this in actual practice. Every heard someone say, “I could hire that person for $10.10 an hour, but then I would have to give everyone a raise.” The employer isn’t hiring that worker to keep wages down.

Now think what happens when you impose a minimum wage of $10.10 an hour. The incentive to limit employment is taken away. Hiring a new worker for $10.10 an hour has no effect on the wages of existing workers as they are already earning the $10.10 minimum wage. Employment might actually increase.

A second common circumstance in which minimum wage might not reduce employment involves bilateral monopolies. These occur when there is a single buyer and a single seller. This is common in labor markets where specialize training gives make an employee uniquely qualified for a job offered by a particular employer.

Even minimum wage workers often have skills that are unique to there one boss. Take a fast food worker. The worker will acquire skills unique to their employer that makes them more valuable to the employer than a potential new hire.

Let’s suppose the trained worker produces $11 an hour in value to the employer and could earn $7.50 an hour working for someone else. Thus, the max salary the employer will pay is $11 as the employer wouldn’t hire the worker at a loss. The least the worker will take is $7.50 an hour.

Where between those two values the wage will be depends on negotiating skills. Generally, the advantage will be on the side of the employer when dealing with a low-level employee. Often the salary paid will be close to the $7.50 minimum.

Now suppose that a minimum wage of $10.10 per hour is imposed. The employer still hires the worker, after all the worker generates $11 an hour in value, so is still profitable. But the worker is better off, receiving a higher wage. Of course, the employer, who has to pay the higher wage, is worse off.

With both monopsony and bilateral monopoly, minimum wage makes the low-wage worker better off and the employer worse off. So, by imposing a higher minimum wage, the Las Cruces City Council is making a value judgement about winners an losers, coming down on the side of low wage workers.

Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. He is a former opponent of the minimum wage, but recent studies have convinced him he was wrong. The opinions expressed may not be shared by the regents and administration of NMSU.