Monday, June 13, 2005

The economics of wages

In the 1990's, President Clinton and Secretary of Labor Robert Reich, argued for increasing the minimum wage by suggesting that such action could actually attract new workers into the workplace. They based their theory on research by Princeton University economists David Card and Alan Krueger. But careful analysis of the Princeton study and common economic sense don't bear it out.

Today's San Francisco Examiner cites a study by economist Ken Sims for the Golden Gate Restaurant Association.
Many San Francisco restaurants are closing and others are just hanging on, according to a study that blames last year's 26 percent increase in The City's minimum wage and a slew of other new and increased local fees, taxes and regulations.
San Francisco's minimum wage stands at $8.62 per hour for 2005.

The conventional wisdom for raising the minimum wage, or for having one in the first place, is to help the working poor. It's very appealing to suggest that everyone should have a living wage, however, it's just not that easy.

To understand why such a law is actually harmful to low-wage workers, consider the employers' alternatives. If, for example, an employer is required to pay a worker $9 per hour for work that he values at only $6, he/she has several options. First, the employer could fire the low-wage workers and replace them with more productive employees. Secondly, he/she can outsource to contractors or worse yet, outsource to foreign workers. A third alternative is to automate. An employer can also chose to hire illegal workers who seem to be plentiful and willing to work for lower wages and virtually no benefits. Finally, as San Francisco restauranteurs are doing, they can chose to quit business altogether or relocate to an environment that is more business-friendly.

A living/minimum wage seems a compassionate thing. But can it actually work in the real world?

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