How does that work, again?
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Economist.com | NEW YORK
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Labour Markets
Mark Thoma at Economist’s View cited the article we blogged about the other day in the New York Times in support of the proposition that for employers, the minimum wage pays for itself. This is an example of efficiency wage theory, which predicts that when a worker gets paid more, he increases the level of effort he exerts in order to keep his job. More productive workers are more valuable, so the minimum wage exerts some sort of Laffer-curvish effect on the economy.
But this seems to miss a crucial aspect of efficiency wage theory. The theory predicts that when a firm increases its wages, the employee works harder, not because he is suddenly lit up from within by the dignity of a higher wage, but because the job becomes more valuable to him. He does not want to get sacked, because he has no alternative with equal pay. This does not work if you raise the minimum wage, because wages increase across the entire market; workers have no increased incentive to stay at a particular job.
There is another way in which the higher minimum wage could produce higher productivity. The efficiency wage theory predicts that if unemployment increases, workers will try harder because it would be difficult to find another job. But this seems a rather mean way for policymakers to increase hourly labour output.
economist.com
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All this talk about the minimum wage generally misses a key point. The proponents of a higher minimum wage must argue either (a) that the market is undervaluing (through some inefficiency) low wage labor, or (b) that the labor is correctly valued, but that the minimum wage is an effective method of artificially redistributing income to lower paid workers.
If (a), then it must be argued not only that low-wage labor is undervalued but also that the United States federal government - in its infinite wisdom - is better at valuing it than the market. I find this hard to swallow.
If (b), it must be argued there is not some better way of distributing income. Why not the Earned Income Tax Credit? The cost of this program will rest on the federal government, where it is much more transparent, rather than businesses, where it can influence the economy in drastic but obscure ways. More importantly, the EITC is better able to direct aid to the small minority of minimum wage earners who actually need it (poor adults with dependents), rather than those who don't (teenagers). The labor department's demographic breakdown of the minimum wage work force is required reading for debating this topic: bls.gov
Posted by njerseyguy at January 17, 2007 2:07 PM
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