February 17, 2021
The old consensus on the minimum wage has broken down.
More recent evidence here—though I'd still characterize those responses as being skewed toward "minimum wage skepticism."
Almost entirely missing from the empirical minimum wage debates are the other "margins of adjustment" that are available to market participants. And when it comes to labor markets, that means adjustments to the contractual terms of employment.
Unfortunately, focus on these "margins" has ben a casualty of the "MIT approach" to economics, with its laser-like focus on "p's" and "q's" to the exclusion of all else.
Then there's the fact that these margins aren't easily measured. After all, the possibilities for adjustment are limited only by entrepreneurial imagination. Gordon Tullock, for instance, pointed out that employers might respond to the minimum wage by turning off the air conditioner on a sultry day.
A recent paper by my student Jack Everett reminds us of the myriad margins of adjustment available to employers. If the empirical analysis doesn't show disemploying effects of the minimum wage, that just means it's time to roll up our sleeves and dive into the rich, multi-faceted nature of economic life.
And a recent Jeffrey Clemens' paper does just that. In the context of the minimum wage, the Clemens paper invites us to re-capture the "old learning" when process and property rights thinking formed the core of economists' approach to understanding markets.
He writes:
“In response to a minimum wage increase, a firm might adjust its noncash compensation offerings. Academics and their employers, for example, contract over the generosity of benefits including health insurance, pensions, research budgets, and travel budgets. Across all US workers, the US Bureau of Labor Statistics (2020b) documents that wages and salaries account for roughly 70 percent of total compensation costs. Benefits including health insurance, paid leave, and pensions account for much of the rest.
In addition to changing noncash compensation, employers may adjust job attributes like effort requirements, schedule flexibility, and training opportunities in response to changes in minimum wages. Positive aspects of jobs are often referred to as “non-compensation amenities,” while negatives are known as disamenities. Conceptually, a firm facing minimum wage increases might seek to offset some of the increase in costs by raising productive disamenities (like effort requirements) and reducing unproductive amenities (like the quality of office furniture).”
As a very wise professor of mine once observed, “the margins of adjustment are where economics comes to life.”