The Libertarian Case for a Minimum Wage

Is there a reasonable libertarian economic argument for a minimum wage or raising it?

This is something I have wanted to elope on for some time now, and what better time than immediately after a post discussing poverty and employers paying workers less than their marginal productivity should warrant.

Additionally, as a self-identifying libertarian, I feel like this is an issue that much of the rest of the movement is off base. Though to be fair, I think so are most minimum wage supporters.

(It also helps the discussion of the aforementioned post prompted a lengthy diatribe from me where much of what I am about to write was already discussed).

I think along utilitarian grounds the answer is yes. If there exists a world where you can raise wages for some workers and not decrease, or even increase, employment, why should we not pick this low-hanging fruit?

Many libertarians talk about the world we live in as if the labor markets are perfectly competitive. They speak as if employers do not have bargaining power because their workers’ skills are never tailored specifically towards the company or that uprooting from one’s own community to pursue a job on the other side of the country is a costless feat.

I think this is often a useful way of thinking about the world, but is it the most optimal way of thinking about labor markets with regards to the minimum wage? I am extremely skeptical.

Let’s discuss then the world of labor economist Arin Dube, one of the foremost experts on the minimum wage and whom’s low skilled labor market may be a better depiction of our world than the libertarian default of perfect competition.

In this world, workers have a choice between working at McDonald’s and In-N-Out Burger. Why is it that, for essentially the same job, workers at In-N-Out are paid more than McDonald’s? Is it not the same labor pool?

Not really, the same group of individuals work the same jobs and from what I can gather, there is nothing that makes any individual capable of working at McDonald’s more productive working at In-N-Out. Or at least not enough to warrant In-N-Out offering starting wages well above the minimum wage – which they do so at $11.00 an hour.

In perfect competition, this should not happen.

Neither should it occur in a basic search model where working at McDonald’s means you cannot work at In-N-Out. McDonald’s would have to compensate for your opportunity cost’s differential.

However, what if you can search for other jobs while working at McDonald’s, including In-N-Out? Suddenly your opportunity cost becomes much, much lower.

McDonald’s is aware of this. Therefore offers you a smaller wage and could also be understaffed. They do this because their savings from acting as a monopsony are greater than their cost of losses faced from being understaffed.

In other words, monopsonies may offer less than perfectly competitive wages because workers can search for their dream job(s) while temporarily taking a mediocre one as an unskilled worker at McDonald’s.

Additionally, In-N-Out may pay its workers less than exactly competitive wages due to these same costs, as well as from the lack of competition from McDonald’s. However, more consumers want In-N-Out. As such, they face a higher opportunity cost of not employing a worker than McDonald’s – so they will pay and staff more on average, though not necessarily more than enough to overcome monopsonistic problems.

This would explain why modest increases in the minimum wage seem to decrease employment very little or potentially even increase it. Furthermore, the greater competition from workers may explain why there is a significant spillover effect when it comes to raising wages of professions that were marginally above the minimum wage.

In theory, we could move from W2 of less employment and smaller wages to W1 with a minimum wage increase. However, note that in this world, moving beyond the W1-Q1 equilibrium still causes unemployment, which is why a $15 minimum wage is a bad idea!

Now, with all of this being said, I don’t know how much of this story I entirely buy.

However, I find most of my free market allies are either completely dismissive, ignorant or hand wave this argument away.

My personal take (in short)

In terms of my personal concerns, even if I accept Dube’s world on its face, which I kind of do, how can I trust the public and government to set a minimum wage that doesn’t cause significant unemployment effects?

Another major concern of mine is as someone who supports a massive intake of unskilled immigrant labor, wouldn’t they have much lower than average productivity than even unskilled Americans and therefore likely be harmed by a binding minimum wage?

Meanwhile, if there still is unemployment effects (most studies still show there is a slightly negative effect), however marginal they may be, most economists will agree they fall upon those of us already the worst off. Raising the minimum wage will exacerbate their situation.

Furthermore, labor regulations generally tend to be awful and it’s very easy to screw over workers and their productivity from them. Who would dispute that one of the great strengths of the American labor market over the likes of the UK and France is due to its comparative flexibility? A minimum wage is one more hurdle, albeit it one much of the world shares.

Additionally, I think in general there have been too few long-term studies of minimum wage impacts. Most, including Card-Kruger’s and Dube’s seminal works tend to look at the immediate before and after effects of the policy. It may be that effects take awhile before they fully settle or perhaps that even hinting at discussing raising the minimum wage may prompt employers to react as anticipated by classically competitive models.

Another concern I anticipate is that in the future employers and employees will find more inventive ways to measure productivity. In such a world, the minimum wage would even more likely cause unemployment.

Regardless, no nation has become more prosperous by setting higher wages. It may be unwise of economists to advocate for any raising without expressing some of Dube’s nuance, as we don’t want to give others the wrong idea and prompt a $20 minimum wage.

 

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