See
Poor Labor Economics From a Former Secretary of Labor by Don Boudreaux of Cafe Hayek.
"One of the few correct statements in one of Robert Reich’s recent minimum-wage videos
(in which he argues in favor of raising the national minimum wage by
107%!) occurs at around the 1:50 mark. Here, Reich says “Studies have
also shown that when the minimum is raised, more people are brought into
the pool of potential employees, so employers have more choice of whom
to hire.”
Indeed – but Reich misses the real meaning and full
importance of this point. He (1) draws from it only a mistaken
conclusion and (2) fails to draw from it an important correct
conclusion. In this post I’ll limit myself to discussing only (1); I’ll
discuss (2) in a later post.
The mistaken conclusion that Reich draws is that the hike in wages
“cuts down on turnover and helps employers save money.” Higher wages do
indeed, undoubtedly, cut down on employee turnover (although the
important economic point made in the eighth paragraph here,
in 1998, about this general matter by Paul Krugman ought to be kept in
mind). But cutting down on turnover, while a benefit, is not
necessarily worth its costs to employers. That is, the reduction in
turnover caused by higher wages doesn’t necessarily help employers save
money – given that the lower turnover is paid for by employers in the
form of higher wages. The benefit (lower turnover) must be weighed
against its costs (a higher wage bill for employers). The net result
might well be that employers lose money.
Reich, however, illegitimately assumes that any reduction in employee
turnover that results from raising the current U.S. minimum wage from
$7.25 per hour to $15.00 per hour is worthwhile to employers. (Reich
here does what David Henderson might call “benefit analysis”
– in contrast to cost-benefit analysis. If you ignore costs, no
benefit will ever appear to be too costly!) But, again, it might well
be that the benefit to employers of some additional reduction in
employee turnover isn’t worth the additional cost, in the form of a
higher wage bill, that is necessary to purchase that benefit.
If you doubt this last claim, consider that each employer right now
could reduce its employee turnover by doubling the wages it pays. That
reduced turnover would be a benefit enjoyed by each firm that doubles
its workers’ wages, but this benefit is also highly unlikely to be worth
its cost to each firm. The fact that we do not see employers daily and
indiscriminately purchasing with higher wages a less-turnover-prone
workforce implies that there comes a point for each employer at which
the benefits of lowered employee turnover are not worth the costs of
securing this lowered employee turnover. (The point at which the
benefits of additional lowered employee turnover are made equal the
costs of securing this additional lowered turnover differs across
industries and firms, and changes through time for all industries and
firms – yet another reality that Reich can fairly be interpreted as
missing.)
We can also infer from the fact that we do not see firms daily and
indiscriminately purchasing, with wage-rate hikes, ever-more reductions
in employee turnover that the existing rate of employee turnover for
each firm is likely ‘optimal.’
The reason we can confidently draw this conclusion is that if this
rate weren’t optimal – if the rate of employee turnover for each firm
were (as Reich assumes) too high or (a possibility that Reich ignores)
too low – then firms themselves have strong incentives to adjust the
rates to their optimal levels. If Wal-Mart learns that its employee
turnover can be reduced at a cost to it (in the form of a higher wage
bill) that is more than compensated by the benefits to it of this
reduction in employee turnover, Wal-Mart – profit-seeking firm that it
is – will, of course, take this step without having to be compelled by
government to do so. Ditto for every other private, profit-seeking firm
in the economy.
It is plainly illegitimate to assume that the economy is so widely
infected with failures of private firms to take profit-enhancing steps –
steps that are easily within the capacity of each private firm to take –
that government dictates are required to force firms to take such
profit-enhancing steps."
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