Home Economics News Just In - Consumers Pay The Higher Minimum Wage

News Just In – Consumers Pay The Higher Minimum Wage

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The argument in favour of a higher minimum wage is that it’s the bastard capitalists that end up paying it. If this turns out not to be true – the capitalist bastards don’t pay it – then the case for the higher minimum collapses.

The same statement is that there’s a monopsony in low wage employment. The capitalists control so much of the market that they’re able to detail and enforce lower than market clearing wages. This means that when we force them to raise their wages then this doesn’t lead to employment losses. It comes out of the profits they were making from the enforced too low wages and now, after that righteous and just government action they just make normal profits.

That monopsony argument is very popular on the left because it is the only – well, the only one with a shred of intellectual rigour to it at least – one that supports the idea of raising the minimum wage. As that raise is popular on the left then so is the argument supporting it.

The problem here is that the contention is testable. If it’s not the capitalist bastards that end up paying the higher wage then it’s not a monopsony and therefore we should expect to see job losses as a result. The logic does indeed work both ways.

So, Maccy D, is it the capitalists who pay the higher minimum wage?

Finally, and perhaps most thought provokingly, the economists look at the effects of minimum wage hikes on the price of Big Macs. They found that when the minimum wage goes up, the price of a Big Mac goes up, too. Ashenfelter says the evidence on increased food prices suggests that basically all of the “increase of labor costs gets passed right on to the customers.”

It’s not a monopsony, the minimum wage rise isn’t justified therefore. As Jeff Clemens and even Chris Dillow have pointed out before it gets worse than this:

But because low-wage workers are also usually customers at low-wage establishments, this suggests that any pay raise resulting from a minimum wage increase might not be as great in reality as it looks on paper. In econospeak, the increase in their “real wage” — that is their wage after accounting for the price of the stuff they buy — is not as high, because the cost of some of the stuff they buy — like fast food — goes up too.

Low income people do tend to be the consumers of the output of low income labour. It ain’t the lawyers shopping at Walmart after all.

Just to run through the logic again. There will not be job losses from a rise in hte minimum wage only if minimum wage employers are a monopsony – or at least enough of one that they can pay below market clearing wages. That’s why, if we force wages higher then there’s no unemployment effect because we just get to market clearing wages.

But this does mean that if we force wages higher then it needs to be the monopsonists carrying the costs of the wages. Because if they’re not then our minimum wage rise isn’t the just and righteous correction of their monopsonistic powers, is it?

And what do we find out? It’s consumers, not capitalists, who pay the higher minimum wage. Thus it’s not a monopsony, the argument in favour of the minimum wage fails.

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