New York and California have just raised their minimum wage to fifteen dollars an hour. When you set a ceiling on rents, you get a housing shortage. When you set a floor on wages, you get a job shortage. Whenever you control prices, you get a shortage.
What’s amazing is that since the Great Recession, we have talked almost non-stop about how to create jobs. The imbalance between workers who want to work and employers who want to hire has been acute. Now policymakers in New York and California, the two biggest job markets in the country, want to make the shortage of jobs much worse! Why would anyone want to do that?
The economists who advise those policymakers would say that the supply of jobs at the low end of the wage scale is inelastic. That is, the work needs to be done one way or the other, so firms who hire low-wage workers will hire them, whether the price is $7.50 per hour or $15.00 per hour. We’ll see.
The problem for measuring the effect of a floor on wages is that you cannot compare. Economists can point to the number of people working at $15.00 per hour and say, “See, the floor on wages did just what we wanted it to do. It increased pay without reducing the number of workers or the number of jobs. Once you force employers to pay a certain amount and no less, however, you’ve lost the ability to see what the market looks like when it is unconstrained. You cannot possibly see how many people have no job because you force employers to pay a minimum wage.
Let’s say you raised the minimum wage to $50.00 per hour, or $250.00 per hour. You would still have quite a number of people who bill their time at the minimum rate or above. That would not mean your effort to raise the floor on hourly pay was successful. A lot of people would be at home earning $0.00 per hour.
If economists can confidently assume that demand for workers is inelastic at the low end of the pay scale, why don’t we hear arguments about when demand becomes elastic? At what point does a floor on earnings affect employers’ calculations about the number of people they want to hire? You can’t determine that transition point, any more than you can gauge the number of people who have no job because you set the floor at some arbitrary rate that Tinkerbell said would feel good to you.
To sum up, elasticity and inelasticity of demand at the low end of the wage scale are immeasurable, because you have no way to make comparisons. You can’t set two identical job markets next to each other, then vary the minimum hourly rate in the experimental market in order to measure its effect on employment. Consequently, people who claim they can raise the minimum wage without affecting employment are flying by the seat of their pants. They have no way to know whether what they say is true or not.
The economists would say, you’re right, which also means we cannot tell whether removing the floor would increase employment. For all we know, we would just have a decrease in total earnings, with no measurable effect on the number of jobs. If that’s true, they would argue, we may as well use intuition to set the minimum rate. It would not be a valid point, though, because economists’ own theories say that free markets function more efficiently – and fairly – to allocate resources than controlled markets do. That’s almost the only principle economists agree about. Long experience with highly controlled markets demonstrates the principle’s validity.
You cannot deny the principle in the case of hourly pay rates just because it’s convenient, or because you have persuaded yourself that employers are habitually unfair. Labor economists can claim that workers are at a bargaining disadvantage when they enter into an employment contract, but I don’t see how that is so. Do employers have more information than workers do? Do employers have any means to force people to work for them? Of course not. Workers, like employers, seek the best deal they can find. They will not work for less than they can command.
So whether you’re an economist, a worker or an employer, you have to wish New York and California good luck with their uncontrolled experiment. People and firms in both states already struggle with taxes so high, they try to find other places to work. Now these states want to drive people out more directly: make it impossible for them to earn a livelihood to begin with. The problem is, many low-skilled people can’t afford to move to another state. So the best advice is, don’t go there to begin with. Sadly, states with so much talent within their borders seem willing to slow or even shut down their entry-level job market.