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A surprisingly large number of smart people support raising the minimum wage. In two separate conversations this week with very intelligent people, it was argued to me:

  1. That there is some research (I once wrote a book review of this) suggesting that labor markets are monopsonistic. And I can draw you a picture of how mandating wage floors in these situations would be employment enhancing over a small range of wage changes. The point here is that due to “frictions” in the labor market, there isn’t much flexibility for workers to change jobs, and so are sort of “locked in” to their jobs.
  2. If we allow for an increase in the minimum wage, there will be a reduction in employee turnover since the higher wages will make workers happier and also attract better workers.

Now, we can write books and books about each of these claims. But we don’t have to, because both can’t provably be true. Why? Argument 1 says employees have no flexibility in the labor market and that they are so attached to firms and frictions are so high that they can’t or won’t quit. Argument 2 says a major problem for employers of low-wage workers is that their workers are flighty and not committed to the job.

Which is it, if any? In the comments please do not attack either of the claims, there is plenty to say about them, I’m only interested in the consistency.

3 Responses to “More Minimum Wage Jujitsu”

  1. Ally says:

    I appreciate the point you’re making is that both of these claims can’t be true simultaneously. There is, at least, a very strong tension between them.

    You mention that these points were argued to you in two separate conversations. If each of the points was made by a different person there’s not necessarily any intellectual inconsistency here. It just means that at least one of them is mistaken. One can find weaknesses in both of these positions.

    Or did both of your interlocutors put both of these arguments to you? If so, did you point out the apparent tension in their beliefs? Did they attempt to reconcile them somehow?

    I’m not sure how one would reconcile both of these beliefs, but that’s probably because I don’t hold them. And I wouldn’t wish to strawman the positions of these people.

    Just thinking out loud.

  2. wintercow20 says:

    Good points. Indeed these were two separate conversations, and what I try to do is help students ask “probing” questions. When I learn of an idea, I ask of them, “what model of the world” does this story seem to be suggesting. And as we explore that, we then ask, “if that model of the world is proximately correct, what other behaviors would we expect to see?”

    What is interesting is that if you dig deep enough, you can surely find an Op-Ed or a paper demonstrating the correctness of both of those claims, but again as a matter of pure logic both can’t be correct, so this is a chance to then discuss the difficulty in doing social science research.

  3. Doug M says:

    “Argument 1 says employees have no flexibility in the labor market and that they are so attached to firms and frictions are so high that they can’t or won’t quit. Argument 2 says a major problem for employers of low-wage workers is that their workers are flighty and not committed to the job.”

    I don’t have a problem with both being true simultaneously.

    The problem with argument 2 above, is that if high turnover has a cost, then the employer has the option to pay more. Minimum wage isn’t necessary. Furthermore, it is that gap between the wage the employer is currently paying, and the prevailing wage that will keep a worker on the job.

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