EFFORTS TO MODIFY INCOME DISTRIBUTION MINIMUM WAGE LEGISLATION: AN ECONOMIC ANALYSIS by George J. Stigler The minimum wage provisions of the Fair Labor Standards Act of 1938 have been repealed by inflation. Many voices are now taking up the cry for a higher minimum, say, of 60 to 75 cents per hour.
Economists have not been very outspoken on this type of legislation.
It is my fundamental thesis that they can and should be outspoken, and singularly agreed. The popular objective of minimum wage legislation— the elimination of extreme poverty—is not seriously debatable. The important questions are rather (1) Does such legislation diminish poverty? (2) Are there efficient alternatives? The answers are, if I am not mistaken, unusually definite for questions of economic policy. If this is so, these answers should be given.
Some readers will probably know my answers already ("no" and "yes," respectively); it is distressing how often one can guess the answer given to an economic question merely by knowing who asks it. But my personal answers are unimportant; the arguments on which they rest, which are important, will be presented under four heads: 1. Effects of a legal minimum wage on the allocation of resources.
2. Effects on aggregate employment.
3. Effects on family income.
4. Alternative policies to combat poverty.
The Allocation Of Resources The effects of minimum wages may in principle differ between industries in which employers do and do not have control over the wage rates they pay for labor of given skill and application. The two possibilities will be discussed in turn.
The former result, discharge of less efficient workers, will be larger the more the value of their services falls short of the legal minimum, the more elastic the demand for the product, and the greater the possibility of substituting other productive services (including efficient labor) for the inefficient workers' services. The discharged workers will, at best,
move to unregulated jobs where they will secure lower returns. Unless inefficient workers' productivity rises, therefore, the minimum wage reduces aggregate output, perhaps raises the earnings of those previously a trifle below the minimum, and reduces the earnings of those substantially below the minimum. These are undoubtedly the main allocational effects of a minimum wage in a competitive industry.
The second and offsetting result, the increase of labor productivity, might come about in one of two ways: the laborers may work harder; or the entrepreneurs may use different production techniques. The threat of unemployment may force the inefficient laborers to work harder (the inducement of higher earnings had previously been available, and failed), but this is not very probable. These workers were already driven by the sharp spurs of poverty, and for many the intensity of effort must be increased beyond hope (up to 50 or more per cent) to avoid discharge.
The introduction of new techniques by the entrepreneurs is the more common source of increased labor productivity. Here again there are two possibilities.
First, techniques which were previously unprofitable are now rendered profitable by the increased cost of labor. Costs of production rise because of the minimum wage, but they rise by less than they would if other resources could not be substituted for the labor. Employment will fall for two reasons: output falls; and a given output is secured with less labor. Commonly the new techniques require different (and hence superior) labor, so many inefficient workers are discharged. This process is only a spelling-out of the main competitive effect.