RSS Feed

Letter To The Editor

Posted on

Dear Editor,

It was very good to see The Dominican Star consider the question “Should the minimum wage be raised?” (The Dominican Star, September 21, 2011).  By presenting both pro and con viewpoints, the Opinion page (page 5) took a good first step.

I am responding to encourage the advocates to take the next step.  Whether the pro or the con advocate won the debate or whether either was more persuasive in addressing the question is not the reason for this response.

Because the real world is complex, both advocates could and need to sharpen their arguments by taking more time to sort through the complexity.  Because the issue is highly charged and important, clear and rigorous thinking by both advocates needs to replace assertions.

For the pro side there are several unsupported assertions.
1. Pro Assertion #1: “Opponents of increasing the minimum wage believe that raising it would lead to higher unemployment, forcing companies to cut jobs.  This is a bad argument, especially in the weak labor market we have today.”    The second quoted statement is an assertion.  The second statement fails to explain why the first sentence is a bad argument.  The Pro Advocate fails to say that buyers of labor could have market power.  In the extreme case, this is the power wielded by a single buyer (a monopsonist to economists).  In a monopsony market, economists have shown two important points: [1] the current wage rate can be below the competitive equilibrium wage and [2] consequently in a monopsony market environment setting a minimum wage set above the prevailing wage can actually raise both the wage rate and the level of employment.   It would be for the Pro Advocate to produce evidence that the labor market in question is closer to being a monopsony market place than a competitive market place.

2. Pro Assertion #2:  “We know that raising the wage is not detrimental to the economy.  Over the last decade, states and cities passed higher minimum wages.”  The second sentence of this quote is a statement but does not produce a reason supporting the first statement that raising the wage is not detrimental to the economy.  As in most economic issues there are two sides.   So on the one hand a higher minimum wage helps one group (those workers with a job at the higher wage rate) but on the other hand a higher minimum wage hurts another group (which includes but is not limited to those paying the higher wages).  The real work is determining whether the benefits outweigh the hurts.  This is heavy lifting that needs to be done not asserted.

3. Pro Assertion #3:  “Even if Congress cannot agree to raise the minimum wage nationwide, it would still be beneficial for certain states to do so, including Illinois.“  As it is presented in the article, this statement is an unsubstantiated assertion.  Asserting that something is beneficial does not make it so.

For the con side there are assertions too.
1. Con Assertion #1: “As giant companies like Wal-Mart, Target, Jewel-Osco and other retailers are forced to pay higher wages, they would inevitably cut back on the number of workers in order to save on payroll and compensate for the higher wage. “  As in Pro Assertion #1, it depends on the market for labor.  Is that market competitive (in which case the Con Advocate would be on the right track) or is it monopsonistic (in which case the Con Advocate would be on the wrong track)?  Implicitly the Con Advocate is assuming competitive markets.  But an assumption is just that, an assumption.  Does the data warrant this assumption in the case being considered?   At least the assumption should be stated explicitly.

2.  Con Assertion #2: “The market would realize that Americans would be making more money as a whole because of the rise in minimum wage (and would raise prices accordingly).”  Parenthesis added.   There are two parts to this assertion.  I will address the part before the parenthesis.   If the minimum wage is increased and if the level of employment and production remain unchanged, then those workers earning the higher minimum wage would have a higher income.  But this increased wage bill would, other things equal, lead to a reduction in someone else’s income as there is less left for the others.   What the workers gained in income, someone else—managers or owners for example—would lose.  So it is not at all clear that Americans as a whole would be making more income  due to an increase in the minimum wage.  What the Con Advocate stated is an assertion unsupported by data.

Fortunately basic economic analysis would strengthen each advocate’s case.   Rather than rely on assertions, the advocates can draw on research done by economists on the minimum wage issue.  A key insight from the research is that market structure–competitive vs. monopsony—matters.  As a starting point they could consult a Principles of Economics textbook and review the articles it cites.  For example they could review pages 336-340 in Microeconomics 13th edition by Lipsey, Ragan, and Storer published by Pearson Addison Wesley and page 369 in Principles of Microeconomics 10th edition by Case, Fair, and Oster published by Prentice Hall.

I extend my thanks to the two advocates for taking the first step and encourage them to take the next step.

Loreto Peter Alonzi, Ph.D.
Professor of Economics and Finance
Dominican University

Advertisements

One response »

  1. This post is very usefull thx!

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: