Five Ways Minimum Wage Studies Fail - Underemployment
The first post on the Mere Economics blog revisited a post I'd written over at the Independent Institute. Here's part 2.
Let’s stick with the margins of adjustment for a while longer. When we show a supply and demand diagram for a labor market in Econ 101, it’s common for students and professors alike to assume that the x-axis depicts the “quantity of workers.” In a sense it does, but workers are more divisible than might appear at first glance. You can actually hire one-fourth of a worker—just hire her for twenty-five percent of the time you employed her before. The downward-sloping demand curve is best thought of as a “demand-for-labor-hours-per-unit-of-time” curve.
In other words, employers may adjust to a minimum wage by slashing employee hours, even without reducing the number of workers on the payroll. It’s common for economists to discuss how kiosks can substitute for low-skilled workers in the fast-food context. But notice how this point is consistent with a.) maintaining the size of a workforce and b.) simply having laborers work fewer hours. When companies install kiosks, they simply don’t need as many (human) hands on deck, at any given moment. Instead of the teenage, fast-food workers coming in every day, they might rotate, and each comes in every other day.
Steven Landsburg, in a comment here, notes something even subtler about underemployment. To get to the punchline, it’s possible that increasing the minimum wage can increase the total number of workers companies hire. This result is consistent with the law of demand because the higher minimum wage still decreases the total number of hours purchased.
Here’s how it works: Let’s suppose before the minimum wage a teenager works the store from 11 am to 7 pm. His busy hours are at noon and six. For the rest of the time, he mostly stares at his phone. With an increase in the minimum wage, the store owner no longer tolerates such shirking (see above). Rather than monitoring this worker (there’s not much for him to do anyway, so the benefits of monitoring are low), the owner simply closes the store during the slow hours. Finally, the owner rearranges his workforce a bit. He hires a worker for the noon hour and the six o’clock dinner hour—and he’s closed in between. More than likely, it’s not the same worker for both hours, so the total number of people he’s hired increases, while the total number of labor hours purchased falls. “Job loss,” of sorts.