Robert's Stochastic thoughts

Tuesday, May 15, 2007

Robin Hood and The Minimum Wage

What is the effect of the minimum wage on economic efficiency ? First when people say "economic efficiency" they tend to mean money metric welfare. The change in "economic efficiency" due to a reform is equal to the sum of the cash transfers which people would find equally pleasant or unpleasant as the reform. This rules out any role for egalitarianism.

The economics 101 answer is that the minimum wage reduces economic efficiency creating a decline in money metric welfare (or dead weight loss) equal to the roughly triangular area between a labor supply curve, a labor demand curve and the minimum wage line (this is called a Harberger triangle). Egalitarian economists like to argue that such triangles tend, in practice, to be small and dwarfed by the welfare benefits of redistribution. I want to argue that the minimum wage can increase money metric welfare.

The economics 102 answer is that this is possible if there is imperfect competition, in particular monopsony in the labor market (firms don't take market wages as given).
In this case, a minimum wage can caused increased employment. I will assume that this is not the case.

It is also possible in efficiency wage models with endogenous monitoring effort by employers (that would be economics 103). I will ignore this too.

The point, if any, of this post, is that it is possible if there are people choosing between seeking a minimum wage job or criminal activity. There are such people and they say so when asked. If there is a large transfer to disadvantaged workers and a small dead weight loss from the minimum wage, it makes looking for a minimum wage job more attractive (a slightly smaller chance of finding such a job times higher pay if one finds one makes it more attractive to search). It certainly makes quitting a minimum wage job less appealing.

This has efficiency benefits if the alternative to work includes crime not just leisure.

How does economics 101 miss this argument ? In economics 101 it is assumed there is no crime.

In fact it is rare in economic research. The work of Hershel Grossman is an exception.

5 comments:

Anonymous said...: http://www.nytimes.com/2006/11/21/us/21janitor.html?ex=1321765200&en=f139e42d0ca84d0a&ei=5090&partner=rssuserland&emc=rss

November 21, 2006

Cleaning Companies in Accord With Striking Houston Janitors
By STEVEN GREENHOUSE

Houston's major cleaning companies and the union representing 5,300 janitors there announced a tentative contract yesterday that ends a monthlong strike, raises the workers' hourly wages by nearly 50 percent over two years and provides them health coverage.

Under the three-year deal, the first for the janitors since they unionized last year, their pay, which now averages $5.25 an hour, will increase to $6.25 on Jan. 1, 2007; to $7.25 on Jan. 1, 2008; and to $7.75 on Jan. 1, 2009.

Further, the employers agreed to increase a janitor's typical shift to six hours a day, from four. Many of the janitors had said they were being given too few hours of work to support their families.

As a result of the rise in both hourly pay and the hours in the workweek, the employees expect to see their paychecks double over the next couple of years.

"It's a moment of great victory," said Mercedes Herrera, a janitor for five years who earns $5.15 an hour. "We all came together, and the union gave us strength. Many of us have never received a raise. I've earned the same ever since I started, so the raise is great." ...

anne; 3:42 PM
Anonymous said...: http://www.nytimes.com/2006/11/03/us/03labor.html?ex=1320210000&en=7e1de42c381db409&ei=5090&partner=rssuserland&emc=rss

November 3, 2006

Janitors' Union, Recently Organized, Strikes in Houston
By STEVEN GREENHOUSE

Last year, more than 5,000 janitors in Houston decided to form a union, giving organized labor one of its biggest victories ever in the South.

But now the janitors are locked in a new struggle. They have gone on strike because five Houston cleaning companies have rejected their proposal for a salary increase to $8.50 an hour, up from the current average of $5.25 an hour.

The companies say the proposal for a 62 percent increase, along with health insurance, is unrealistic.

The janitors, who generally work four hours a day, say they are merely asking for enough to support their families....

[Remember, the number of hours of work allowed is critical for determining whether there are to be any benefits.]

anne; 3:45 PM
Anonymous said...: http://maxspeak.org/mt/archives/003046.html

May 9, 2007

The Labor-Economics Thought of Professor N. Gregory Mankiw
By Max Sawicky

Gawd what piffle:

"It is a timeless economic lesson that when the price of something goes up, buyers usually buy less of it. If Harvard has to pay its unskilled workers a higher wage, it will hire fewer of them. Some workers earn more, but others end up unemployed."

Yes it is so timeless, the good professor responds to the current labor agitation at Harvard with a recycled column. The novelist and crazy person William S. Burroughs once described future social life as individuals having conversations by endlessly replaying snippets of tape from their personal library.

To get to cases, Harvard has a ginormous endowment. It faces no competitive constraint on how big this endowment must be. There is no reason it must displace some low-wage workers to pay others more. If their endowment yields a modest annual return of five percent, that leaves them $1.4 billion with a B, aside from new annual revenues, to throw a few extra dollars an hour to 250 workers.

"A higher wage would also change the composition of Harvard's work force, for wages play a role in supply as well as demand. If the University posts a job opening at $10 an hour, it gets a larger and better mix of applicants than if it posts the same opening at $8 an hour. The person who would have gotten the job at the lower wage is now displaced by a more skilled worker. In the short run, a living wage might benefit those at the bottom of the economic ladder. In the long run, they would be replaced by those who are already a rung or two higher."

The implication here is inflexibility in the number of jobs, and of workers' and employers' ability to move across pay scales that differ by $2/hr. Of course, when it suits them, economists model amazing flexibility, a veritable world without friction....

anne; 3:49 PM
Anonymous said...: http://select.nytimes.com/2007/05/15/opinion/15herbert.html

May 15, 2007

The Right to Paid Sick Days
By BOB HERBERT

It sounds reasonable: seven paid sick days a year. Why should you have to lose a couple of days pay, or maybe even your job, because you had the misfortune to catch the flu?

And it certainly seems unreasonable to penalize an employee in good standing who misses a day or two of work to care for a child who is ill or has met with a serious accident.

After all, this is the 21st century.

The reality, for a surprising percentage of the U.S. population, is more like the 19th century. Nearly half of all full-time private sector workers in the U.S. get no paid sick days. None. If one of those workers woke up with excruciating pains in his or her chest and had to be rushed to a hospital — well, no pay for that day. For many of these workers, the cost of an illness could be the loss of their job.

The situation is ridiculous for those in the lowest quarter of U.S. wage earners. Nearly 80 percent of those workers — the very ones who can least afford to lose a day's pay — get no paid sick days at all....

[Benefits, we wonder;got to be French to have benefits.]

anne; 7:13 PM
Anonymous said...: Oh dear....

http://www.nytimes.com/2007/05/15/washington/15cnd-attorneys.html

May 15, 2007

Gonzales Pressed Ailing Ashcroft on Spy Plan, Aide Says
By DAVID STOUT

WASHINGTON — On the night of March 10, 2004, a high-ranking Justice Department official rushed to a Washington hospital to prevent two White House aides from taking advantage of the critically ill Attorney General, John Ashcroft, the official testified today.

One of those aides was Alberto R. Gonzales, who succeeded Mr. Ashcroft as Attorney General.

“I was very upset,” said James B. Comey, who was deputy Attorney General at the time, in his testimony today before the Senate Judiciary Committee. “I was angry. I thought I had just witnessed an effort to take advantage of a very sick man, who did not have the powers of the attorney general because they had been transferred to me.”

Mr. Comey’s account offered a rare and titillating glimpse of a Washington power struggle, complete with a late-night showdown in the White House after a dramatic encounter in a darkened hospital room — in short, elements of a potboiler paperback novel.

Mr. Comey related his story to the committee, which is investigating various aspects of Mr. Gonzales’s tenure as Attorney General, including the recent dimissals of eight United States attorneys and allegations that applicants for traditionally nonpartisan career prosecutor jobs were screened for political loyalties.

Although Mr. Comey declined to say specifically what the business was that sent Mr. Gonzales, who was White House counsel at the time, to the bedside of Mr. Ashcroft in George Washington Hospital, where he lay critically ill with pancreatitis, it was clear that the subject was the National Security Agency’s secret domestic surveillance program. The signature of Mr. Ashcroft or his surrogate was needed by the next day, March 11, in order to renew the program, which was still secret at that time.

Since the existence of the program was disclosed in late 2005, it has been reported that it was the subject of a tense debate at the highest levels of the Bush administration, with some officials concerned about the very legality of the program.

Mr. Comey told the committee today that when Mr. Ashcroft was ill and he was in charge at the Justice Department, he told the White House he would not certify the program again “as to its legality.”

On the night of March 10, as he was being driven home by his security detail, he got a telephone call from Mr. Ashcroft’s chief of staff, who had just been contacted by Mr. Ashcroft’s wife, Janet.

Although Mrs. Ashcroft had banned visitors and telephone calls to her husband’s hospital room, she had just gotten a call from the White House telling her that Mr. Card and Mr. Gonzales were on their way to see her husband, Mr. Comey testified. “I have some recollection that the call was from the president himself, but I don’t know that for sure,” Mr. Comey said....

anne; 9:05 PM