Minimum Wages: Short rejoinder to Geloso

A few days ago I posted here at NOL a short comment on some reaction I’ve seen with regards to Seattle’s minimum wage study. Vincent Geloso offers an insightful criticism of my argument. Even if his point is quite specific (or so it seems to me), it offers an opportunity for some clarification.

But first, what was my argument? My comment was aimed at a specific point raised by advocates of increasing minimum wages. Namely, that even if Seattle’s study shows an increase in unemployment, a study with a larger sample may say otherwise. My point is that the way I’ve seen this criticism raised is missing the economic insight of minimum wage analysis, namely that jobs will be lost in less efficient employers and employees first. So far so good. The problem Geloso points out is with my example. I refer to McDonald’s as the efficient employers fast food chain (think of economics of scale) and as less efficient employers the neighborhood family-run little food place (neighborhood’s diner).

Geloso correctly argues that different employers react in different ways. It is expected, for instance, that a larger employer such as a fast-food chain would have more options to make a marginal adjustment when there is an increase in minimum wages. Of course, I agree, but the point I’m rising is about where jobs will be lost first (not the specific mechanism in each employer). Geloso flips my example and argues that a small diner has more (in relative terms) to lose by letting go one out of two employees than a fast food joint that has to let one employee go among maybe ten thousand. By letting one employee go, the small employer loses a larger share of its output. Therefore a small employer would be more inclined to keep all of his labor force and cut costs on another front (less hours work in average doesn’t cut it, that’s like a shared unemployment that would also cut output down).

A large employer like a fast food chain, however, can let one out of ten thousand employees go because the loss in output is not that significant. I have two issues with this example. The first one is that a fast food chain is facing the increase in minimum wage ten thousand times, not two. To cut even the rise in cost, the firm fast food chain has to cut down its labor force 15% (1,500 employees.) But I think the problem with this example does not end here. If it were the case that small diners don’t cut employment but fast food chains do, then we should see more unemployment in larger employers than in small neighborhood diners.

A second point I want to make is with Geloso’s argument that the study is about focusing “like a laser” on one out of multiple channels in the group most likely to respond in that manner (unemployment?). That the study, as long as the focus is on unemployment, should focus on the less efficient employers (and employees) first, and not just look at the unaffected employers because that’s where we just happen to have better statistics for is my point. There are two options. The first option is that what matters is focusing on the channel the increase in cost will be managed by employers. But this is neither a focus on unemployment nor on the criticism I’m replying to. Option number two, that the study should focus on the employers “most likely” to reduce unemployment, which is actually my point regardless of how many “channels” are included in the sample.

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