Of course, most politicians are tied to the views of their party and therefore will work solely toward the platform they've run on (or so we assume). This ultimately is how the politicians will be judged in the future. If they succeed in passing/blocking the laws they promised their voters they would, then they will likely be re-elected. Otherwise, they could get the boot. This fact essentially answers my question about which way the government will act. However, I would like to assume the government were a bi-partial entity with no allegiance to either party. How would such an entity approach this issue?
The proposition itself is a single yes-no question: Raise minimum wage or not? Because of this, once the government (agent) makes their decision, they will have seemingly chosen a side, pleasing some and angering others. Should the agent simply choose whichever side is larger? Ergo choose the answer that received more votes on the ballot on election day? Perhaps. Although, I believe that vote many be misleading as to which decision is truly better considering there are far more employees than employers in the private sector.
There is another way to attack this situation which I think may be best, although it may not yield the popularity of being the best option by the widespread public. The government should look at the situation not on the basis of "who many people will be helped by each ruling?" nor "what ruling makes the most positive impact immediately?" Instead, the governing body needs to analyze the situation from a purely objective and economic standpoint. If minimum wage increases, what will be the short and long-term effects on workers? Businesses? State GDP? State Income Tax revenue? Unemployment? Inflation? There are countless effects of this potential law that need to be analyzed. Eventually, the result should be that the state economy as a whole (key word) will be better off under one ruling or the other. Using Macroeconomics and a bit of Micro as well along with existing policies and economic climate, the government should be able to at least decide which choice would be a better bet for a better tomorrow. Of course, even when determining the (potentially) better choice, the governing body still must make an arbitrary ruling on the proposition, which will anger one side or the other, perhaps because they don't understand the expected outcomes or because they know they personally will likely be hurt (at least in the short-run) even if the state as a whole is better off.
Of course, this isn't quite how the system works. Politicians are not bi-partial but rather completely one-sided. Therefore, whichever party is in power will make the ruling they wish, as decided by their voters hopefully. This throws a bit of a wrench in my quandary, as it seems that each politicians serves a single principal, their voters. Still, I thought it was interesting to explore the idea as a whole considering the clear differences in interest of employees vs. employers, specifically.
Hmmm. It may be convenient for the question you are trying to ask to think of State Government as a single agent, but isn't that throwing the baby out with the bathwater in describing what politics is about.
ReplyDeleteAlso, as far as our class is concerned, we discussed two different efficiency concepts, a partial equilibrium one - social surplus, and a general equilibrium one - Pareto Optimality. By your own discussion there will be winners and losers either way. So on the Pareto criterion, the policies can't be ranked. Given that, do you want to hang your hat on Social Surplus measures (which typically are sensitive to income redistribution) and say whichever one maximizes the social surplus is the one you'll go for?
Also, truthfully, it is very hard to anticipate the full effects of a policy change de nouveau. So, instead, one might look at research on raising the minimum wage done in other contexts. Card and Krueger have quite a famous paper on this, which in that context shows the change of the minimum wage had no consequence on employment. I expect that you'd find their result surprising.
Thank you for that recommendation. I found it quite fascinating and a bit surprising, as you said. I do, however, have a few concerns (or rather just questions) about their findings. And forgive me for moving away from the principal-agent discussion. I just find this minimum wage topic fascinating.
ReplyDeleteFirst, I worry that their measure for employment, the Full-Time Equivalent (FTE), may be misleading. Essentially all part-time workers are worth 1 and full-time workers are worth 1.5. This seems like quite an over-assumption. If full-time workers are considered those who work, say, 35-40 hours/week, to reach equilibrium, a part-time worker would have to work 23-27. Wouldn't this not take into account cut-backs in hours/employee. Theoretically, a firm could choose to cut hours as opposed to laying employees off. Unlikely I know, since, for tax purposes, it is normally less expensive to higher less workers for more hours than more workers for less hours (before such laws as the ACA, of course), but I still think their model should take that possibility into account. Perhaps they could do this by deciding how many hours constitutes a "job" and then dividing the total number of hours worked by all employees by that number, thus determining how many worthwhile jobs the firm is giving.
I also don't quite understand their explanation for inflation in their analysis. They say the raise in prices for firms directly affected firms in New Jersey is no higher than that of non-affected firms, but this could simply be explained by price competition, i.e. why would certain firms leave their prices low when others in the market are raising theirs? This price inflation doesn't take place in Pennsylvania, showing that the inflation may well be caused by the minimum wage increase. If so, then that is a major problem for NJ. If low-wage industries raise prices, products would become more expensive to consumers, effectively repealing some of the benefit of the wage increase. Meanwhile, all other workers would be negatively affected without benefit. Those making above minimum wage would have to deal with the same inflated prices without receiving any benefit from the wage increase. They seemed to have tried to account for this in their analysis, but I didn't understand their explanation.
Another overlooked change may be change in Time to First Raise, which increased by 3.77 weeks in NJ compared to just 1.26 in the control group of PA. Could this change be a way for firms to cope with the wage increase by keeping workers at lower wages for longer? Also, with the amount of turnover in low-wage industries (an assumption, I know), one could argue that firms could have made this change to keep a larger percentage of employees in the minimum wage zone.
Ultimately, these factors and others (e.g. decrease in the low-price meal program percentage etc.) may be able to account for why unemployment didn't decrease. Perhaps businesses chose to handle the increase in expenses in other ways aside from laying people off. They had to deal with it somehow. Either that or the firm takes on the decrease in profit, which, as you said, would simply imply that that increasing minimum wage is simply an attempt at income redistribution. I would find it interesting to see the production numbers and profits for these firms to see if there is any effect. I expect their will be. Only 6 firms closed, but there was also just a short window of under 2 years in which this research took place. Could there have been more collateral from the wage increase beyond 2 years?
I think this research proves that, in a real world market, unemployment is not affected by a minimum wage increase on a large scale. But I wouldn't say this proves that a minimum wage increase has a positive or negative affect on the economy or any individuals within it. As we said earlier, there are so many variables and it is very hard to calculate the full effects of any policy.