Saturday, January 13, 2007

Minimum Wage/For $7.93 an Hour, It’s Worth a Trip Across a State Line

As always there is an ongoing debate about Minimum Wage laws.
From title link:
Idaho teenagers cross the state line to work in fast-food restaurants in Washington, where the minimum wage is 54 percent higher. That has forced businesses in Idaho to raise their wages to compete.

Business owners say they have had to increase prices somewhat to keep up. But both states are among the nation’s leaders in the growth of jobs and personal income, suggesting that an increase in the minimum wage has not hurt the overall economy.

This seems to indicate that the equilibrium price in Washington was above the minimum wage for most markets and as a result there began a shortage of workers in Washington at the prevailing rate. This in turn dried up the market surplus in Idaho and raised the prevailing equilibrium price to closer to the Washington prevailing wages. For me this indicates the importance of a tight labor market more than forcing businesses to maintain a certain wage. Wage prices are already sticky and having a minimum wage makes it even more sticky in the downward direction.
Several studies have concluded that modest changes in the minimum wage have little effect on employment. A study two months ago by an economist at Washington State University seemed to back the experience of Clarkston and other border towns in Washington. The economist, David Holland, said job loss was minimal when higher wages were forced on all businesses. About 97 percent of all minimum-wage workers were better off when wages went up, he wrote.

I did not see the study, but does this mean that 3% of workers lost their jobs? That does not sound so good to me. And of course most studies are short term, does this take the effect of capital substitution that takes a longer period to study?
Here on this border, business owners have found small ways to raise their prices, and customers say they have barely noticed.

“We used to have a coupon, $3 off on any family-size pizza, and we changed that to $2 off,” said Mr. Singleton, of Papa Murphy’s. “I haven’t heard a single complaint.”

Now, this is interesting. So the people most likely to use coupons are the ones that are probably least likely to afford such measures. This also indicates that the demand curve from price minus $2 and price minus $3 is fairly inelastic. So the consumer surplus in this range is fairly small because they don't see a drop in quantity demanded with a rise in the price in the discounted market.

More later...

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