Wednesday, February 08, 2006

Not sure I get this 

David Tufte writes about an example from Thomas Sowell on the minimum wage's ability to create more discrimination.
He points out that a minimum wage actually makes it cheaper to discriminate. I've used the argument for a long time that price floors generally cause discrimination, but I've never heard it made this way.

Suppose you have two workers who can do $3 and $4 worth of work each hour, and you must employ at least one of them. With voluntary exchange and arbitrage they will end up getting paid $3 and $4, and the employer will by happy to hire one or both of them. However, if we institute a $5 minimum wage, the employer will discriminate and hire only the worker with the higher productivity. The employer is out a dollar, but they now have $2 to spend on capital to make their single employee more productive.
I checked this with some of my colleagues, and I want to specifically thank Eric Hampton for confirming what I thought. If you HAVE to employ at least one, you hire the first worker voluntarily only if you can pay him $4. If both will work for $3 or less, you hire both. You would never hire one at $4 and the second at $3 unless you could discriminate between them.

Sowell's passage that I think David is quoting is this (from the first edition, p. 158 -- my copy of the second is out on loan):
...surplus labor resulting from minimum wage laws makes it cheaper to discriminate against minority workers than it would be in a free market, where there is no chronic excess supply of labor. Passing up qualified minority workers in a free market means having to hire other workers to take the jobs they were denied, and that in turn usually means either having to raise the pay to attract additional workers or lower the job qualifications at the existing pay level...
What that means is that minimum wage laws give us some excess supply of white labor, which we can then use to fill the gap of employees left by discriminating against non-whites. That's a far different explanation than what David offers.