Sure we don’t know about the elasticity, and the impact, unless we do the policy and can measure the other covariates. But, I’m not sure if that’s the direction the burden of proof should lie.

Caplan did a good post on this here:

http://econlog.econlib.org/archives/2013/03/the_vice_of_sel.html

Note that they are talking about much lower levels of the minimum wage relative to average income (so less of a distortion if you think of a distribution of employment opportunities), and he is a little more generous about the result than I would be (as there needs to be a distinction between long-run and short-run impact).

I just caught this reply.

And thanks Matt, I appreciate the time you put into this.

My only question is, how do we know if the minimum wage is binding until we hike it to a level where any deleterious effect is obvious in the statistics?

Anyway, we have now commenced a natural experiment with youth rates: deja vu again! It will be interesting times…

Hey Luc,

Sorry about the delay replying – been super duper busy 😛

“You opened your reply to me with the thought that a minimum wage may
be justified in some circumstances, although you then qualified that
statement so stringently that I struggle to see much relevance to the
modern world – at least, as regards advanced economies. Be that as it
may, you then baldly stated that a minimum wage of $18-20 would cost
jobs. I struggle with that statement, especially given my real world
experience.

In my view, and I could be wrong, the main concern of a small, open economy should be to be a competitive exporter.”

There were so many conditions because it is such an indirect measure it requires a large number of assumptions to get the required result 😉

The minimum wage at $18-20 an hour, for a full 40 hour week, would be a lot closer to the average wage than what we currently have. This implies that there are a number of jobs that either won’t be created, will be destroyed, or will merely have lower hours simply because the relative price of increasing output through labour (rather than capital) is so high.

This has nothing to do with exporters in of itself, this simply has to do with the inherent margin for this type of work. A lot of this work is service work, the type of working that appears to be becoming more substitutable by capital.

The fact is, we are increasing the relative price of one of the inputs to production if the minimum wage is binding – this will lead to lower output, and at a high level such as has been mentioned it is inconceivable that it will not also reduce employment and hours. Now there may be reasons why we want to do this – but if our goal is to ensure a certain “minimum income” a minimum wage is not a particularly good tool.

“Then you mention that our tax system already incorporates provision for a
minimum income, but it doesn’t because so many are excluded by
especially, but not exclusively, right wing governments.”

Think of it this way. In NZ and Aussie we have an unemployment benefit with no minimum time. Overseas they have unemployment insurance – with a minimum time and tied to your prior wage.

The NZ-Aussie way of doing things sounds like a minimum income. The question needs to be whether it is set at the right level!

“Fair enough but I was talking about the last term or so of the government immediately preceding out current bunch!”

I was saying that the minimum wage seemed to make some sense in a social contract sense back in the 1950s here – any criticism I have of the concept will hold just as strongly for any one of our recent governments 😉

I had given up on commenting on your reply to my previous post on your $19 Living Wage WTF thread, just the time lag thing through busyness, but since you have linked to that post here I thought I might run a couple of thoughts past you on the topic on the minimum/living wage issue, with reference to your reply to me over there.

You opened your reply to me with the thought that a minimum wage may be justified in some circumstances, although you then qualified that statement so stringently that I struggle to see much relevance to the modern world – at least, as regards advanced economies. Be that as it may, you then baldly stated that a minimum wage of $18-20 would cost jobs. I struggle with that statement, especially given my real world experience.

In my view, and I could be wrong, the main concern of a small, open economy should be to be a competitive exporter. The internal price level matters little if those exporters are not dependent on low wages – China, Bangladesh, etc currently exist for those industries.

But I don’t believe we, NZ, have any exporters of note who rely on low wages. And I would suggest that the exchange rate effect overwhelms the local wage level in any significant NZ export industry, anyway. Wages are surely a pretty minor component of export prices in an economy like ours, and we should aim to keep it that way, ie highly skilled.

So a lift in the minimum wage, properly introduced as a positive contribution to societal welfare, and not to be used as an increase in pay through the relativity process – although I shudder to think of what major luminaries like Duncan Garner and Rodney Hide would make of it – would result in a minor, once only lift in the price level, much as an increase in GST does. And similar to an increase in our holiday entitlements from three weeks to four.

Then you mention that our tax system already incorporates provision for a minimum income, but it doesn’t because so many are excluded by especially, but not exclusively, right wing governments. WFF is a prime example of what you discuss about the deserving and undeserving poor, and like you, I think, I’m aghast at the narrow view of the nature of humanity that allows that concept to remain in our societal consciousness – but it does a have long ancestral antecedent!

And as Gareth Morgan points out, our income based progressive tax system would struggle to handle a minimum income system.

Then in reply to my comment that minimum wages have happily coexisted with near-full employment, in economists terms, at least, you said only with “large monopsony employers and homogenous labour – but the world has been changing :)”. Fair enough but I was talking about the last term or so of the government immediately preceding out current bunch!

Has the world changed that much already? 😉