Right in the Short Run

I do not know a lot about labor economics, but I have been playing around with this idea for quite sometime now. Can we raise the minimum wage (or institute a minimum wage) and still see an uptake (or a non-decrease) in labor? Well, the standard response seems to be “yes” via a monopsony model, which is great, but not the viewpoint I was going for.

The vantage point I wanted to consider was a little more general. What if the industry is not monopsonistic? My idea stemmed from a discussion in which Steven Levitt was explaining his research about how most firms may not be profit maximizing though this seems to be a common assumption in economics.

The reason we say that increases in wage correspond to a decline in labor uptake and a substitution towards capital is because we assume profit maximization on the part of firms. Essentially, if data (such as Card’s research) points to the fact that labor does not decrease despite these increases in wages, then the change in slope of the hyperplane did not affect its tangency point! This means that capital and labor are perfect complements since the the only way a hyperplane can still be tangent to an isoquant manifold after changing slope is if it has met the manifold at a cusp/kink. Of course, perfect complementarity between capital and labor is probably not the case. What else can be the explanation?

Well, if firms weren’t profit maximizing in the first place, then certainly this could be explained. Differential changes in wage rates would not correspond to substitution away from labor since the firm would not even be at the tangency condition in the first place! Consider a situation in which firms only seek to profit “satisfice” as opposed to maximize. Threshold satisficing could mean that firms don’t respond to increases in wages by firing en masse. (This isn’t to say that one can make large increases in wage rate and still have the firms employing everybody.)

Ultimately, my discussion here is a general comment that when we institute policies based on assumptions such as profit maximization, some of the results may be contingent on that fact. These are not general results, but are rather specific implications of our particular assumptions. Remove those assumptions (perhaps they do not actually happen in real life) and many policy implications may change. Of course, the framework I have discussed makes no claim to understanding how firms decide to target profits … we can discuss further theories about that

To most economists, the answer to the question posed in this post’s title is simple: no.

That’s because economists view jobs as a quantity that is set in the labor market. For a given job, the number of people doing that job will be determined by the supply of labor and the demand of labor. Labor supply is how much labor everyone in the economy is willing to do at all the different wages imaginable, and labor demand is how much work employers in the economy want done for them at all the different wages imaginable.

At some wage rate, the number of people willing to work equals the amount of work employers want to supply. That’s called equilibrium, and the number of people willing to work at this wage will determine the number of jobs in the market.

When someone says that immigrants are doing jobs that Americans just won’t do, they are claiming that American labor supply for a given job is always zero. No matter the wage, no American is willing to get off his behind and do the work. I find it hard to believe that this could be the case for any kind of work, even if the task is extremely dangerous.

A slightly more interesting question is “Are there jobs Americans won’t do at certain wages?” Well the answer to this question is probably yes! Not too many Americans would mine coal for $4 an hour. On the other hand, some immigrants may well be willing to do the job at wages lower than any American’s. At low wages, there are plenty of jobs that immigrants will do that Americans won’t.

Just something to keep in mind when someone trots out the argument that immigration allows us to get jobs done that no domestic resident would be willing to do. Certainly there may be other benefits to immigration, but this is not one of them.

(See also Andrew Samwick)