Funemployment

When a great thinker like Scott Alexander designates the strongest argument for a policy you oppose, you should certainly pay attention:

This strikes me as the strongest argument for the minimum wage and other job-killing labor regulations: that they are turning otherwise-miserably-employed people into unemployed welfare recipients.

It’s rare, and refreshing, to read arguments for the minimum wage that acknowledge even the potential for disemployment effects, let alone acknowledge them as a feature rather than a bug.  The problem with Alexander’s analysis is that, ceterus parabus, we would expect the minimum wage to disemploy workers in less miserable jobs.

Imagine an economy with two jobs for low skilled workers: elevator attendant and fry cook.  Let’s assume for simplicity that demand for fry cooks and elevator attendants is roughly equal.  However, since fry cooks have to slave over a hot grill rather than in an air-conditioned elevator, the supply of fry cooks is much lower than the supply of elevator attendants.  If employers are to induce a worker to become a fry cook, they’ll have to pay her a higher wage, or a compensating differential.  Graphically, both markets clear, with some low skilled workers choosing to have a fun job at lower wages and other choosing to have a more difficult job at higher wages:

 

Now, let’s say that the government institutes a minimum wage somewhere between the wages of both jobs, which creates a surplus of workers in the market for elevator attendants but not in the market for fry cooks:

 

Using Alexander’s terminology, the only jobs that weren’t destroyed were the miserable ones!  It’s then possible that some unemployed elevator attendants, rather than waiting for a fun job to free up, will decide to enter the fry cook market…

 

…which lowers the premium for being a fry cook in the first place!

This is obviously a very simple world we’ve built, but, even in this model, it’s possible for a wage subsidy or even just a cash transfer to boost low skilled workers’ earnings without creating involuntary unemployment or forcing workers to consume a different bundle of wages and job enjoyability.

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