Bryan Caplan is Wrong: The Minimum Wage is Good for Business
I have recently acquired and read Bryan Caplan’s essay collection “Labor Econ Versus the World.” Full of passionate pleas for deregulation, open borders, and minimizing education’s role in society, much of his clever analysis warrants appraisal. Keyword being much. He embarrassingly fails on a few topics; one of which is the minimum wage.
To summarize his argument: Labor regulations make hiring workers expensive. Employers must then refrain from finding job seekers. The more they refrain, unemployment levels surge; and therefore aggregate demand falls as people have less money to spend on consumer goods. As someone who denies supply- and demand-side economics are mutually exclusive, I find it amazingly difficult to oppose many of his prescriptions. Overhauling labor market regulations like Gerhard Schröder, Tony Blair, and Emmanuel Macron (“good Keynesians” in my eyes) did is desirable. Cutting taxes on employers and undermining trade unions make complete sense.
It’s his most radical proposal that deserves criticism: Gutting the minimum wage. I find this the most incompatible with full employment, an objective Mr. Caplan agrees with. If you accept the terrifyingly ruthless nature of involuntary unemployment, public policy should favor firms which can actually manage this. And unfortunately for neo-Brandeisian types, small businesses don’t fit the bill (no pun intended).
Small businesses and startups would benefit the most from minimum wage abolition. Why might this be harmful if the goal is full employment?
- They survive by paying the lowest wages possible.
- Most of them fail within ten years. The ones which survive remain stagnant.
- Their net employment growth is hilariously zero; destroying most of the jobs they create.
- They are more likely to layoff workers in the event of an economic bust. (See: Canada.)
Minimum wage abolition, then, would mean lower aggregate demand. For low wages, no job security, and net reduction in work means less cash in laborer hands. And we know how that goes. Driving wages down, as Mr. Caplan believes Keynesians should embrace, would therefore have comparable ramifications to the labor market supervision he appropriately condemns. This is because his policy ideal would benefit job destroyers. It would do little for job creators: Big businesses. Those guys, despite how much libertarians and progressives unite in opposing them, create more safer, high-paying jobs with benefits. They also benefit poorer communities through philanthropy and creating jobs with more promotional opportunities. (Which, contrary to popular sentiment, illustrates gentrification is anti-poverty.)
A high minimum wage benefits these job creators. This is why Amazon quite literally lobbies for it. It squashes smaller, inferior firms in favor of efficient businesses which can afford it. Raising the minimum wage would thus do three things:
- It would mean a greater share of the workforce must labor for big corporations. This would reduce inequality, strengthening social cohesion and mobility. The most equal country in the world, Denmark, has a third of its population working for big firms. In the United States, inequality rose as big companies saw their workforce share decline.
- By creating living-wage, high-security jobs, aggregate demand increases. Workers will have more money to spend on consumer goods. If we reduce labor costs in other areas—effectively a subsidy for big corporations—a greater number of these jobs manifest.
- It would boost productivity levels by nudging corporations to increase automation. (This is known as the “Webb effect.”)
A superior alternative to minimum wage abolition is increasing public-private partnerships (like what President Biden did recently). By using contracts the government, working with big corporations, will create jobs of high social value. (Ideally in manufacturing and infrastructure.) By subsidizing labor costs, you get society closer to full employment. To reiterate, deregulating labor markets in other areas, like ending protections for trade unions, is also a good idea. But until Mr. Caplan can show minimum wage abolition is within the interest of big business, I support raising it.
