Thursday, 14 February 2013

Could Increasing Minimum Wage Reduce Unemployment?*

* Betteridge's Law may not apply here. The TL;DR is that we don't really know. This is just my idea of one reason why it could.

Firstly, I think the law of demand will still hold if we say that employers will purchase less of employee's hours at the higher price. The case we need to look at is where employers make up the shortage in employee hours by offering overtime rates to existing employees.
Why don't employers offer those hours to new employees at the overtime rate? I think a fair assumption is that all employees are paid at the same rate. If you have a thousand hours to fill and can either fill 900 at $7/hour and 100 at $12/hour or you can fill them all at $8/hour. The math works like this:
  • 900*7+ 100*12 = 7500
  • 1000* 8 = 8000
When the minimum wage increases employers will stop offering (as much) overtime when hours are filled.
On the producer side it is obvious that that more employee hours will be offered but I think this increase will be quadratic. A producer will produce when their costs are met. Take, what is probably the worst-case example, a single-parent family or a family where one spouse is already employed. Now the potential costs incurred by choosing to work are: - any welfare payment/benefit - childcare: the rate in Ireland is $6.68/hour http://www.childminding.ie/2012/04/childminders-survey-results-2011/ - travel: my own weekly travel expenses (petrol) would be roughly nine hours at the US minimum wage - food/nutrition: cost of buying lunch and less time to prepare food may lead to swapping home-cooked meals for takeout, which has a money and nutritional cost - opportunity cost of free time and time spent with children
I don't like to point out problems without offering a semblance of a solution. My inclination would be to change the minimum hourly wage to a minimum daily scale. Currently fixed costs like travel are heavier felt by those who work less than full days. Take $1.75 out of the minimum wage and over eight hours this is $14 euro. Call the daily minimum wage $14 + $5.50H (http://www.wolframalpha.com/input/?i=14+%2B+5.5x%2C+7.25x+from+0+to+8 ), where H is the number of hours worked (with a ceiling of 8 before it becomes overtime). This does not affect those who were working eight-hour days but it encourages employees to offer longer days that enable employees to spread out the fixed costs of working.

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