Friday, May 15, 2015

Robert Reich Gets Only One Thing Right About the Minimum Wage

By Donald Boudreaux

In one of his recent videos pushing a $15 per hour national minimum wage, former U.S. Secretary of Labor Robert Reich got one thing (and only one thing) right: he noted – starting around the 1:50 mark – that “[s]tudies have also shown that when the minimum is raised, more people are brought into the pool of potential employees, so employers have more choice of whom to hire.”
As I discussed in this earlier post, Reich is confused by this reality (although he’s unaware of his confusion).  One confusion of Reich’s that I’ve not yet discussed until now is his failure to draw from this reality the most obvious correct conclusion.  That correct conclusion is this one: the higher the minimum wage, the greater is the scope and incentive for employers, when they are choosing which low-skilled workers to hire and to retain, (1) to use economically irrelevant criteria (such as workers’ race, sex, or sexual preferences), and (2) to give excessive weight to certain potentially economically relevant criteria (such as a job-applicant’s work experience and whether or not that applicant is a single parent).

To Reich’s credit, he does not in this video base his case for the minimum wage on the allegation that employers of low-skilled workers have monopsony power.  (Perhaps even Robert Reich understands the absurdity of claiming that the typical employer of low-skilled workers in America has monopsony power in the labor market.  Perhaps even Reich has drawn the sensible conclusion that one draws when one routinely sees McDonald’s franchises located literally across the street from Burger King, KFC, and Pizza Hut franchises, and often a short walk from Wal-Mart stores, local bakeries, bagel shops, and pet stores – walks on which pedestrians will frequently encounter advertisements for moving companies and lawn-care services.)
Because Reich’s case for raising the minimum wage does not rest on a claim of employer monopsony power, he correctly understands that raising the minimum wage creates a surplus of workers at the minimum wage.  Reich doesn’t use the term “surplus.  Again, he says that raising the minimum wage gives employers “more choice of whom to hire.”  But this increased choice for employers amounts to the same thing as a surplus of workers, even though Reich is deeply confused by what his realization of this truth implies about the employment effects of minimum-wage legislation.
Because minimum-wage legislation robs low-skilled workers of their ability to offer to work at hourly wages below the government-dictated minimum, the manner in which these workers effectively compete for jobs that are available at the minimum wage necessarily consists of their offering to employers something other than a discount on their hourly wage.  That ‘something’ can be any number of things that are within each worker’s control, such as offering to work harder or agreeing to a reduction in the value of their fringe benefits.  But that ‘something’ can also be any number of things that are beyond each worker’s control – such as being a member of an ethnic group for which an employer has a preference or being the son or niece of the business-owner’s next-door neighbor.
When the ability to compete for jobs along an important and economically relevant dimension such as hourly pay is blocked, the forces of competition do not disappear.  These forces of competition instead are channeled into other dimensions, many of which are economically irrelevant (such as a job-applicant’s race or sexual preferences).  The make-up of workers employed at minimum-wage jobs is thus not only different from what the make-up of workers would be at whatever wage would prevail in the absence of a minimum wage, the difference in these two ‘make-ups’ in the pools of workers is not random.
In the U.S. today, the make-up of the pool of actually employed minimum-wage workers, compared to that of the pool of workers who would be employed at whatever wage would prevail without a minimum wage, will contain relatively (and absolutely) fewer teenagers, minorities, women, openly homosexual, bisexual, and transgendered people, and people with unusual mental, emotional, or physical challenges.
Some of this resulting bias in the pool of people working at the minimum wage will be the consequence of conscious or subconscious prejudice or even bigotry on the part of employers or, in some cases, employers’ customers (or other employees).  The racist restauranteur who has two whites and three blacks – all equally qualified – applying for the two entry-level jobs he has available is much less likely to hire any of the black applicants if they are prevented by government from offering to work at hourly wages lower than the wages demanded by the white applicants.  Ditto the hair-salon operator who, although herself non-bigoted, has a clientele that is largely anti-immigrant.  This salon operator has for her one minimum-wage job two equally qualified applicants: one an attractive white teenage girl with a darling Alabama accent, the other a plain-looking swarthy Guatemalan who speaks broken English.
Some other part, however, of the resulting bias in the pool of people working at the minimum wage will not be the consequence of any offensive or illegitimate attitudes on the part of employers (or of employers’ customers or other employees).  With more applicants than there are minimum-wage jobs available, all employers of low-wage workers will (as Reich himself correctly suggests) have greater opportunity than otherwise to screen more carefully – in excess of the amount of such screening that would occur absent a minimum wage – for the best of the best among this pool of workers.  Applicants who speak and write the best English; applicants from leafy suburbs with good schools; applicants with their own cars; applicants who present practically zero risks of being undocumented immigrants; applicants with the most job experience; applicants who dress more stylishly; applicants who are not single parents of young children; applicants who have no criminal records; – applicants such as these, for perfectly understandable and economically rational reasons, are less risky hires than are applicants who don’t possess these traits.  Over time, the pool of minimum-wage workers will contain relatively more of these ‘good’ employees and relatively fewer of the economically more risky ones.
So unless you or your children fit squarely the profile of these ‘good’ applicants, the artificially created greater employer choice that Reich celebrates is, in fact, a detriment rather than a benefit of minimum-wage legislation.
The above originally appeared at Cafe Hayek.

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