Minimum Wage during High Unemployment Times

Regardless of whether minimum wages “causes” unemployment, is there a case for a minimum wage during a time when unemployment is higher than the target level?

This is prompted by a story from Matthew Yglesias about the high number of applicants for jobs at some new Walmart locations in DC, in which he points out that the jobs aren’t “good,” but if there are bad jobs available, then that increases the bargaining power of all workers.

To unpack that, the concept is:

Suppose that employee Albert is working for corporation Hardco, Inc.  Albert wants a higher wage, or better benefits, or something.  Hardco wants to keep its costs down.  The implicit threat is that if Albert makes himself enough of a pain in the ass, Hardco will fire him.

So the calculation that Albert needs to make is the probability X of getting his additional wages or benefit times the probability 1-X of getting fired.  If his present wages are W, and his desired additional benefit is B, then it’s more or less X(B) – (1 – X)(W) > 0?  That is, is the expected benefit worth the risk?

But suppose that there’s full employment, and Albert strongly believes that he can get another job if he’s fired.  Even if that other job is not a very good job, it limits his risk.  Instead of looking at the downside as (1 – X)(W), ie, the cost of losing his entire wage, he’s looking at (1-X)(W/2), losing half his wage.  Or, more realistically, losing 10-20% of his wage.

From the perspective of Hardco, they can’t fire that many people — especially in a full employment environment, where it’s hard to hire new people.  So they’re more likely to accede to Albert’s demands.

That’s Yglesias’ reasoning, and it seems valid to me.  Full employment is very desirable in terms of preventing exploitation of labor.  So that suggests to me that we should be drastically lowering all barriers to employment, even “bad” employment.  So what about minimum wage?  Is anyone prepared to argue that we wouldn’t see an increase in employment if we totally abolished the minimum wage?

Once we reached full employment, we could re-establish the minimum wage and raise it until it reaches a point where it starts to adversely affect employment.  But even if the main reason for high unemployment is not minimum wage, we could reasonably conclude the right now, a high minimum wage is not a boon to labor, but a barrier to it.


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