Increasing the Minimum Wage Can Actually Create Jobs—If It’s Enforced

by Polly Cleveland | February 13, 2014

Back when I first studied economics, we “proved” in class that a minimum wage causes unemployment. You just draw supply and demand curves for labor, add a horizontal line for a wage above the “market clearing” competitive equilibrium wage, and—bingo!—a gap appears between labor supply and labor demand. Q.E.D.

I took this orthodoxy on faith until 1992.That’s when David Card and Alan Krueger’s famous paper “Minimum Wages and Employment” appeared, comparing unemployment among fast food workers in New Jersey and Pennsylvania before and after New Jersey raised the minimum wage. Card and Krueger found no effect. None. Zip. At first I shared the economics profession’s incredulity. The research was sloppy. The sample was too small. The researchers’ liberal bias skewed the results. Why even waste time testing something obvious? But then more studies came out, some also showing no effect, and some showing a small positive effect.

An explanation also began to emerge, in terms of the “efficiency wage hypothesis”, developed among others by our new Federal Reserve chair, Janet Yellen. Instead of there being a single “market” wage for unskilled labor, there is a market wage range. The higher the wage an establishment pays relative to other firms, the more diligent and loyal its employees, and the less likely they are to quit. So up to a point, the establishment saves on supervision and training costs what it loses in higher wages. Thus there’s nothing remarkable about the fact that Costco remains profitable while paying substantially higher wages than low-wage super-stores like Wal-Mart. The efficiency wage hypothesis supports a cautious case that setting a minimum wage towards the top of the wage range will benefit workers without harming employers. (Needless to say, conservatives do not buy this argument.)

But there’s still a piece of the story missing. The original supply and demand model I learned in my Econ 101 textbook assumed a perfectly competitive market—as do all introductory textbooks. There may be a chapter on monopoly towards the end, but the instructor rarely gets to it. That’s perverse, as most businesses have some degree of monopoly power—including your local grocery store, just because it’s closer to you than competitors. Some businesses, like Wal-Mart or Amazon, have substantial monopoly power.

What do we learn in the monopoly chapter if we get to it? We learn that monopolists—sole sellers–reduce production in order to drive up prices. Monopsonists—sole buyers– hold back purchases of inputs to squeeze their suppliers. Inputs like labor. Hmm. Where have we heard this story? Ah, company towns, like coal towns in Appalachia.

It follows that big low-wage employers like Wal-Mart may rationally follow a strategy of paying as little as they can, holding down employment in order to push down the market wage range. Such a low-wage strategy offers them an additional advantage: the resulting high turnover of employees makes unionization more difficult. Do big employers collaborate in this strategy? The U.S. Justice Department just caught the CEO’s of Apple, Intel, Google, Adobe, Intuit, and Pixar conspiring to hold down wages for programmers. Wal-Mart and other big low-wage employers don’t need a conspiracy; a tacit understanding will do.

But if the big low-wage employers drive down the whole wage range, then surely the answer is to set a minimum wage even higher than the top of that range, higher than that suggested by the efficiency wage hypothesis. Maybe much higher. Moreover, such a wage increase should actually create jobs, by countering the low-wage strategy. How would that work? Big low-wage employers squeeze employees by deliberately staying understaffed, relying on mandatory overtime as needed. A forced wage increase creates jobs by taking away the gain from understaffing. Holy cow! Talk about turning Econ 101 on its head!

So what’s the fly in the ointment? Enforcement. Employers routinely violate current minimum wages, federal and state. They pay for fewer hours than employees work, or dip into restaurant workers’ tips. My son is a restaurant worker; I clench my teeth thinking of how his bosses have taken advantage of him, for example sending him to make deliveries and pick up supplies in his own car, without reimbursing his expenses.

Enforcement. A big increase in minimum wages makes a hollow victory without enforcement. Enforcement is what unions do through grievance procedures, when there are unions. We’re unlikely to get effective unions without a parallel effort to enforce anti-trust laws and undo tax and regulatory policies rigged in favor of the big boys. But at least we can toss out the old textbook argument that raising the minimum wage causes unemployment!

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New Issue!

by Chris Sturr | January 30, 2014


Our January/February issue is (finally) out.  We had already been posting articles (it’s the layout that takes so long); but today I was able to post the cover article, Sustainability Squared, by Polly Cleveland, and the table of contents.  Here is the editorial note from p. 2:

Keep Making Sense

With this issue, Dollars & Sense begins its 40th-anniversary year.
The link between 2014 and 1974, however, is no mere arbitrary anniversary—the intervening years have brought us from one structural crisis of U.S. and world capitalism to another.

The 1970s were a time of oil price shocks, “stagflation” (the surprising advent of simultaneous high unemployment and high inflation), and a still-uncertain face-off between employers and a wounded (but not decisively defeated) labor movement. Reaganomics was still years away, as was Thatcherism in the UK. Likewise the Latin American debt crisis, structural adjustment, and the neoliberal reshaping of the region.

There was, however, cause for hope as well as trepidation. The 1960s and early 1970s had seen the emergence of new revolutionary movements across the world (and, alas, untimely defeats of some). The energy of the antiwar, black liberation, women’s liberation, and fledgling environmental movements reverberated through U.S. politics. Grassroots rebellions shook the AFL-CIO’s narrow business unionism and conservative official politics. Contending forces pointed to divergent paths out of the economic crisis—including both “free market” and government-interventionist approaches. Radical economists wondered whether proposals for new forms of state intervention in capitalist economies could be headed off in favor of more radical solutions.

Today, we’re living through another interregnum, this one arising from a structural crisis of neoliberal capitalism. The prostration of the labor movement, gaping economic inequality, the increasing “financialization” of capitalist economies—not surprisingly, to critical economists—have led to a rickety economic-growth model. Booms are fueled by debt, wild financial risk-taking, and speculative bubbles. Crashes lead to protracted periods of stagnation and high unemployment. Where policymakers have “doubled down” on neoliberal policies, it has become increasingly clear that this is a recipe for prolonging the crisis. (See Philip Arestis and Malcolm Sawyer, “The Eurozone Balanced-Budget Disaster,” p. 17.) No clear way out of the impasse has yet emerged. In the United States, capital and, especially, finance, are still riding high. There is little inkling of significant radical opposition, not even of the magnitude of the 1970s, to say nothing of the 1930s. But the battle is not yet done.

So, to begin this 40th-anniversary year, Dollars & Sense continues to intervene in the way we have all along—we keep making sense.

We show the class offensives unleashed from on high for what they are. In this issue, Katherine Schiacchitano and Rob Baiman expose the thinly veiled theft of public-sector pensions. In “Up Against the Wall Street Journal,” Marty Wolfson shows the deceptions behind debt scare-mongering, and how they’re used to attack Social Security.

We look critically at existing reforms and reform proposals, recognizing both their accomplishments and limitations. In “Economy in Numbers,” Gerald Friedman looks at our patchwork health-care reform, and points out the differences a single-payer system would make. Steven Pressman’s “In Review” considers the case for public banks and finds them, if not the end-all solution, then at least part of the solution to our current problems.

Finally, we cover the resistance movements and visions of more fundamental change that stoke hope for the future. In “Active Culture,” Seth Grande describes how an indigenous-led coalition has, so far, faced down both a multinational oil-and-gas corporation and a Canadian government hell-bent on becoming a global energy superpower. Polly Cleveland’s cover story, meanwhile, looks at the ways that existing technology can be deployed to achieve both environmental sustainability and rising employment and wages.

One way the current interregnum differs from the one into which Dollars & Sense was born is that the stakes, if anything, have grown higher. It is abundantly clear now, given the menace of climate change, that what hangs in the balance is the very habitability of the earth. That makes it all the more urgent to link today’s frontline social struggles with grand visions for the kind of future—egalitarian, cooperative, and sustainable—that we need.


–Chris Sturr

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