A hidden cost of the living wage
While forcing UVa to pay a minimum wage of $10.72/hour might or might not be welfare improving, I feel few are taking the following into account:
When people are paid more for each hour that they work, they are likely to spend more hours working. Unfortunately this does not necessarily imply that more tasks are going to be completed, but instead that more time is going to be required to complete a same task.
Because a higher wage per hour makes spending more time at work relatively more attractive than at the next-best alternative, people will naturally choose to stay at work for longer hours. Exerting effort is costly for everyone and is not verifiable (pretty much anything can be used as an excuse to justify why one task is taking so long to be completed), therefore a higher hourly wage does not provide incentives to work harder. Any rational agent would be expected not to exert more effort as a result of the salary increase.
The net effect is workers exerting the same effort in a longer span of time, or equivalently, lower effort per unit of time. Holding everything constant UVa would not only face greater costs due to the proposed salary increase, but also because it would need to pay for the additional hours that each required task will consume after the salary increase. It is true that this effect can be mitigated by supervising employees and/or monitoring them, but this also implies an additional cost.
Despite this post, I don't have a formed opinion on the living wage issue. I reserve the right to make additional posts on it as I become more acquainted with the arguments used by either by its proponents and opponents.
posted by bcj @ 3:11 PM
4 comments
4 Comments:
You mention the substitution effect associated with a wage increase, but let us not forget the accompanying income effect. The theoretical change in hours worked due to a wage increase is ambiguous.
To Adam... you empiricist, you always need to see the indifference curves, don't you?
Juan Carlos may have a good reason to feel the substitution effect dominates the income effect for low wage workers. If the wage is really a "living wage," presummably the workers need the increase just to survive and won't be spending the increase on leisure. Instead, they would use it to buy necessities such as adequate housing, food and clothing.
Not until they reach a wage above subsistence do they start spending more time on leisure due to a wage increase.
But then again, we'll need to consult the data ;)
Very true. Empirically, I doubt very seriously that the income effect dominates the substituion effect until maybe the upper middle class. But I expected a more complete theoretical treatment from the theory guy.
I agree that empirical analysis is required to verify which effect dominates which.
Suppose we asked the question to an empirist, and also suppose that we have already waited for the two years it would take him to find data, come up with a model, debug his fortran code and finally come up with an estimate for the net effect.
If it turns out to be the case that workers are willing to work less, then it would be really hard to argue that the current wage rate is not a living level, and thus increasing the wage would be pointless.
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