Market Power

Musings by an academic economist on the power of markets and the power over markets.

Friday, April 01, 2005

How Do Employers React to Minimum Wage Increases?

King at SCSU scholars has this post on the minimum wage. Craig Newmark at Newmark's door posted this excellent column by Steve Chapman on the effects of the minimum wage. For the employer's point of view, here is a beautiful piece on Coyote Blog from a fella who runs campgrounds. The theory espoused by economists and the evidence provided by the campground owner line up very well.

Many of the campground owner's employees are over 60 years old and are paid the minimum wage. Some snippets:

To run our campgrounds, we mainly employ retired people. Of my
500 workers, well over half are over 60 years old, more than 150 are over 70,
some 25 or so are over 80 and a few are even over 90! Most are on social
security and medicaire, and many have pensions and retirement health
plans. A good number are disabled and have some sort of disability
support. While they work slower, they make up for their low productivity
in part by their friendliness with customers and their life experience.

I love hiring older workers at $5.15 an hour, and they love the job
and line up for it. But what happens when I have to pay these less
productive workers $6.00 an hour? What about $7.50? What about at
$12.00 an hour?

We run a number of campgrounds in Washington under concession contract from
the US Forest Service. Most of these campgrounds are both small and very
isolated, and are therefore labor intensive. Given local market
conditions, it is increasingly difficult to raise fees fast enough to keep up
with rising labor rates (as well as labor-linked costs such as workers comp and
unemployment) since we are competing against larger private campgrounds that are designed more efficiently and may be closer to local labor. We have
effectively given up trying to make money in this area, and will very likely not
rebid the contract when it expires.

In a number of locations, we have been forced by rising minimum wages
and associated costs (particulalry workers comp.) to switch some of our cleaning
and landscaping duties from our live on-site employees to local

Anyway, on this particular concession we have to pay our
living-on-site workers based on the SCA. This means, for example, that
someone who sits in a parking lot booth collecting parking fees must be paid
something like $12.50 an hour, which translates to a bit over $15.60 when you
factor in FICA, SUI and workers comp. Over 2000 hours a year that is
$31,200 a year.

A fully automated fee collection machine (which actually does more than
the attendent, since it takes credit and debit cards as well as makes change for
cash) costs $23,000. Plus, the machine never will sue over wrongful
termination, never will discriminate against or sexually harass a customer,
never will steal, and never will fail to show up for work.

Last election, Floridians voted themselves a minimum wage increase of
$1.00, and worse, voted that the wage will increase each year by a cost of
living factor. As a result, on the May 2 effective date, our costs will go
up by about 15% in managing the swim areas and campgrounds in that area.
Since this is well over our profit margin, prices will also go up by the same
amount on the same day.

What does that lost comment say about the elasticity of demand faced by this fella in Florida?

To my principles of micro students: we just finished talking about the perfectly competitive firm. What happens to this firm's marginal cost curve when it employs minimum wage workers and the minimum wage is increased? How does the firm's output decision change? What happens to the supply curve in the market? What happens to the product's price? To my principles students and my collective bargaining students: how does the firm substitute between resources when faced with a higher minimum wage?

Oh, and one other thing... what is the average family income of people in Minnesota who would be helped by an increase in the minimum wage? $15,000? $25,000? See here and look halfway down the tabl(thanks to John Palmer for the link).

Hat tip to Russ Roberts at Cafe Hayek for the Coyote Blog piece.