Yet another case in which minimum wage increases can raise employment

In a very simple supply and demand model the minimum wage increases unemployment. Yet there are many plausible models under which the minimum wage can actually increase employment, or have no effect on unemployment. This is fortunate because much of the empirical literature tends to suggest that the minimum wage as no effect, or only a very slight effect, on employment.

I wanted to introduce one such reason. Although I’ve never encountered it myself in anything I’ve read, It’s a simple enough idea that I’m certain that many other people must have invented it before me- so I claim no originality here. However, it is kind of cute.

Suppose, as is often claimed, that labour supply curves are backward bending. As peoples hourly wages rise at first they will be enticed to work more hours, until eventually they decide that their earnings are good enough that they would prefer additional leisure, and thus cut back the hours they supply:

Image result for Backward bending supply curve

Now suppose that a minimum wage increase takes us into a further region of the backward bending portion of the curve. Minimum wage workers will therefore seek fewer hours. Ceteris Paribus their employers will therefore have to hire more workers to fill the shifts they are turning down. The total number of hours won’t increase, but the shifts will be spread across more workers.

In practice, maybe it looks something like this. Jenny works two jobs to make ends meet. As the minimum wage increases to 15 dollars an hour, she finds that she no longer needs a second job. Her employer therefore fills that job with someone else- Bob. Jenny escapes overwork and Bob escapes unemployment.

Postscript: Have we committed the lump of labour fallacy? 

A friend worries that I may have committed the lump of labour fallacy here by assuming that the total number of hours on offer will remain constant, despite these large changes. I should be clear therefore that the consideration we discuss above- a fall in unemployment due to a fall in the inequality of hours worked- is merely a countervailing consideration to the normal arguments for increased unemployment due to minimum wage increases.

No position is being taken on whether the total hours demanded by business under an increased minimum wage will rise, fall, or stay the same. I’m merely pointing out that, in any of these scenarios, if individual supply curves of labour are backward bending over the relevant range, that will likely mean that some employed workers will seek fewer shifts, which will, all things being equal, reduce inequality in time worked and unemployment somewhat. That reduction may not be enough to cancel out the minimum wage disemployment effects caused by a reduction in the number of hours of work businesses demand (if such effects exist). Further, the equalisation we point to could be cancelled by other factors- e.g. the administrative costs of having more employers (this is an empirical question). Nonetheless, what we’ve described here is one potential factor shaping the effects of the minimum wage on the unemployment rate.

Postscript II: Another case

Suppose the following to be true:

1.  There are many small firms that don’t want to expand. Maybe they are family businesses, and expanding will mean greater labour for the owner-operator. Maybe they think expansion is risky.

2. Small firms which expand experience positive economies of scale.

3. Firms (especially the small firms somewhat averse to expansion) are averse to reducing their staffing levels. This could be result of sentimentality, ethics, contracts, or simple pride. Or maybe diseconomies of (small) scale mean that it is hard for many of these small businesses to have a viable strategy with any reduction in staffing.

4. In order to pay the cost of an increased minimum wage, an increase in profits is required.

Under these conditions, the combination of 2, 3 & 4 and an increase in the minimum wage might force these firms to overcome their natural opposition to expansion so they can pay their expanded wage bill. So a minimum wage increase might trigger economic expansion, and thus a reduction in unemployment (not to mention an increase in investment), under these conditions.


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