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A Minor Point About Minimum Wage | I like koalas.
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A Minor Point About Minimum Wage

Posted by on May 6, 2010

[This post was originally written for my employer’s blog, Show-Me Daily.]

The first job I ever got paid for was probably mowing lawns in the ’90s when I was a teen. Earning $10 per lawn sometimes didn’t seem worth it while pushing the mower in the sweltering heat — but I had a friend named Jonathon who, with a ton of initiative and some help from his dad, started a small operation where he mowed several lawns every weekend all summer long to begin saving for college.

The first job for which I ever received a paycheck was developing photos at Walgreens, right around the time I turned 18. I made $6 per hour, and developed lots of photos and stocked lots of sodas and milk during my time there. I never felt entitled to any more money than the people I worked for back then felt inclined to pay me, and I now understand the economic rationale for my relatively low pay back then: I wasn’t very productive.

Compared to Jonathon, or even to the photo clerks who had been there longer than me, it was obvious that I couldn’t do what they did in the same period of time. Jonathon mowed several lawns every week because he made it a point to develop relationships with customers that would last all summer, and touched base with them to make sure they were getting the service they wanted. More senior Walgreens clerks were better at juggling many tasks and completing all the little tasks that needed doing, often because they had both experience and initiative.

By and large, people earn in proportion to what they produce. The Post-Dispatch ran a very well-written op-ed today by 17-year-old Miles Larson, which seems to lack this insight (link via John Combest). Larson argues from an assumption that, given the opportunity, businesses will pay their employees as little as possible. This is true in a sense, but ignores the fact that businesses employ people at all because they produce something valuable. If the value of their production is much higher than the wage they are paid, it creates an incentive for competing businesses to offer to pay them more, and steal them away as an employee. Usually employers are smart enough not to let that happen — not least of which is because they don’t want to have to train a replacement. Most of the time, they just pay employees what they are worth.

There’s a reason that so many teenagers earn minimum wage: They are simply less productive than older, more experienced workers. As one study from the Show-Me Institute pointed out, most workers who earn minimum wage are young and still in school, while older workers — even poor ones — tend to earn well above minimum wage.

Younger workers earn less because they are less productive, not because employers are predatory. Minimum wage is not a refuge for the poor and underprivileged, it is a barrier preventing people whose labor is worth less than $7.25 per hour from selling their time to employers, leading to greater unemployment among the very demographic that minimum wage laws are ostensibly designed to protect.

13 Responses to A Minor Point About Minimum Wage

  1. Andrew Hanson

    What do you make of the massive gains in productivity over the last 30 years tied with fairly stagnant wages? Or so-called “efficiency wages?”

  2. Josh Smith

    I’m not sure what you mean, but I suppose I might point to drastically lower prices and higher quality for virtually every good as an explanation for why wages inflation adjusted wages haven’t changed much. Productivity gains are hard to estimate, but almost certainly present. If you think those gains are because the workers themselves are better, then they should be commanding more in the terms of trade: either cheaper goods or higher wages. If they are more productive because of access to better technology or management techniques, then the owners of the technology or the managers deserve more of the gain.

    My understanding of efficiency wages are that they were above-market wages paid to reduce employee turnover, dating back to Henry Ford. This falls well within the rationale of my post– you get paid based on your value to the employer, if it is worth it to them to pay more to encourage you to stick around and keep them from needing to retrain, more’s the better for you (and them). Is that what you meant by efficiency wages?

  3. David C. Miller

    “If the value of their production is much higher than the wage they are paid, it creates an incentive for competing businesses to offer to pay them more, and steal them away as an employee.”

    I don’t understand. After they leave, won’t the first company just select another grunt from this country’s inexhaustible supply of 17-year-olds, use the extra profits they get from paying lower wages to invest in a Death Ray, and then use this Death Ray to gain market share and world dominion? Textbook economics would say yes.

  4. Andrew Hanson

    You answered my first question. I just wanted to challenge your claim that “people earn in proportion to what they produce.” There are many factors that affect the productivity of a worker, not all of which she is responsible for. So you can see huge gains in what people are able to produce without seeing a relative increase in wages. I think the question of what people deserve is separate and interesting, but I will say that it’s difficult to assert exactly how much productivity is based on capital and how much is based on human capital.

    On my second question, I think the claim of efficiency wages is a bit stronger, namely that a worker’s productivity will increase if she is paid an above market wage. I didn’t bring this up to challenge your analysis. I was just interested to see how efficiency wages fit into your framework for thinking about wages and productivity.

  5. Eapen Thampy

    There are several flaws in this analysis.
    First, the number of young people looking for work is larger than the number of jobs available. This means employers have more leverage in negotiating compensation and working conditions than workers. Second, young workers are by and large ignorant of the laws governing the conditions of their employment, and they have difficulty making evaluations of whether or not they are receiving fair compensation (partially because they don’t know the extent of the foregone opportunities to engage in other work). While this doesn’t mean that every employer exploits their young workers, it does mean that young workers are on the wrong side of several important asymmetries.

    Second, there are a lot of employers who are willing to exploit their workers, whether out of cynicism (my workers exploit me, so I’ll return the favor) or out of greed. This particularly happens when employers can get younger, cheaper labor to substitute for older, more skilled and expensive labor, without compensating the younger workers accordingly.

    I hesitate to make the conclusion that is instrinsically exploitation, because it’s impossible to homogenize an infinity of worker-employer interactions into the conclusion that all of them represent exploitation. Some of them surely do, particularly where substitution of cheaper labor represents an implicit re-negotiation of this contractual relationship that isn’t explicitly presented as such by the employer.

  6. Josh Smith

    Andy- I said “people earn in proportion to what they produce” but that statement was ambiguous. I should have said “people earn in proportion to the value they provide.” It’s a little more vague, but also more accurate (no surprise). So, if pulling a lever causes a machine to output a car, and then they upgrade the machine so that pulling the lever causes it to output two cars, the girl who pulls the lever won’t necessarily get a raise, but the price of cars might go down a little.

    Eapen- I suppose my analysis was unclear, because all of your points are things I thought I had already answered in my post.
    Hypothetical
    If HappyBurger undertakes to pay their burger-flipping teens less than the value said teens provide, because there are so many teens clamoring for jobs flipping burgers, it would pay for MelancholyBurger’s management to maintain, rather than lower, their base salary for burger flippers. Now MB can hire the best that the under 18 set has to offer when it comes to flipping burgers. HB is forced to employ teens who value their time less (including their free time) and they can’t hire the most effective workers (within the unskilled worker set).
    /Hypothetical
    Competition keeps employers from lowering wages, even when they have superior bargaining power, because all employers can’t bargain as a group. This is a coordination problem, the solution to which would put employers into more of a cartel/monopsony situation, where your assertion that they can pay less because of a glut of teen labor on offer has merit.
    With regard to your second point, I would reiterate my initial contention that teens are cheaper to employ because they are less productive than the alternative: older, more-skilled workers. Yes, there are cases where businesses would enjoy paying a teen $5/hour rather than an experienced worker $10 or $12, but they are getting what they pay for. In most cases, they would rather pay more and get a worker more suited for the job than a warm body who will work for as little as possible.

  7. Eapen Thampy

    I don’t know man, there’s a reason why we have child labor laws.

  8. Josh Smith

    Laws don’t have to make sense, they just have to pass certain (admittedly rigorous) criteria to come into being. Lawmakers are not perfect and neither are voters. Let us not assume that something is reasonable just because it is the law. We may have to follow the law, but that doesn’t mean we can’t think it should be changed.

    Also, not all child labor laws are about wage rates. Some pertain to number of hours minors can work or what kind of work they can do — others dictate safe conditions, etc. Initially your comment seemed like a non-sequitor to me because so much of child labor laws, at their inception and now, pertain to working conditions and not wage rates.

  9. Eric D. Dixon

    “people earn in proportion to what they produce”

    I probably should have edited this to “people earn in proportion to the wealth they produce” (and don’t forget the enormously important “By and large” qualifier that preceded it), but I assumed everybody would read that phrase as meaning wealth produced, not goods or services produced. Clearly not the case.

  10. Eapen Thampy

    I don’t think you get to make the assumption that children are less productive or efficient than older, more skilled workers. Here are two counterexamples: carpetweavers and chimney sweeps.

  11. Eric D. Dixon

    I don’t think you get to pretend that you’ve disproved a largely true generalization by pointing out rare exceptions.

  12. Josh Smith

    To elaborate on Eric’s comment:

    It is clear that I need to break down my concepts a little more. I have no problem with this, I just hope that my reasoning is sufficiently clear that a questionably relevant counterexample will not qualify as a cogent reply.

    I was responding in my initial post to an op-ed that contended minimum wage for teens should not be lowered. I contended that lowering it is a good thing, because this makes it legal to employ people whose labor is worth less than minimum wage. My argument was predicated on a larger point about what determines wage rates. Wage rates are not determined by flighty or penny-pinching employers any more than they are determined by workers — no matter their skills or bargaining power. Wages are established by supply and demand for labor, a highly heterogeneous commodity in both supply and demand. People are willing to do all sorts of different work, and people need workers to do all sorts of different things. For certain rare tasks, smaller people are better suited, smaller hands for carpetweaving, smaller bodies for chimneysweeping. It is a fact that human beings grow in size with age. So, younger people are uniquely suited to do certain kinds of work. It is also the case that as people age, they mature, and gain wisdom, experience, and initiative. Different people have all of those things in different amounts, but younger people tend to have them less than older people, and those things are quite valuable to employers and customers (the two chief purchasers of labor).

    These facts give rise to the following principle: Young people produce less wealth per person on average than older people. There are exceptions to this, namely, any activity for which a younger person has a particular attribute that an older person would not have.

    Short version: The fact that there are certain professions for which younger people are preferred employees in no way invalidates the larger principle that people earn according to the wealth they produce, or that reducing or eliminating minimum wage for some or all groups is a good idea.

  13. DaveG

    When the state of Missouri passed the The Missouri Minimum Wage Law in 2007, it was obvious that it would negatively impact the minimum wage worker in the long run: Less jobs available and a cost of living increase. Say the local burger joint used to be able to hire four people for a shift. Due to the Law drastically increasing minimum wage, that employer would soon only be able to higher three people for the exact same shift. So now there are less minimum wage jobs out there and the ones that exist require people to work harder to make up for the lost co-worker. The only other option for an employer would be to raise prices to compensate for the increased wages. So we are right back to where we were before the Law passed.

    I really think job compensation comes down to supply and demand. Most people are qualified enough to work as a “Sandwich Artist” at the local Subway. Not many people are qualified to be the CEO of a Fortune 50 company. There doesn’t appear to be a shortage of Sandwich Artists and companies pay accordingly…

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