On the Minimum Wage

This past semester, I took a class in microeconomics. The information I learned in this class has proved tremendously useful in finding ways to criticize the rightwards-leaning conclusions people often draw from economics. So, just for fun, in this post I'm going to be critiquing the notion that minimum wages are a bad idea, an idea which I've critiqued before for various reasons but have figured out a new way to critique, using fancy microeconomical diagrams.
The standard argument against minimum wages works like this. You have the labor market, and in that labor market you have supply of labor and demand for labor. Supply of labor is how much people in the aggregate are willing to work for a given wage level (which always strikes me as "demand for jobs"), and demand for labor is how much employers in the aggregate are willing to employ at a given wage level (which always strikes me as "supply of jobs"). Anyway, if you put these two market forces on a graph together, supply slopes up as the wage increases and demand slopes down, like supply and demand do. In a "free market," supply and demand balance each other out, and you end up with the wage level at which everyone making a rational decision who wanted to work would be able to do so, and everyone seeking workers would be able to find them. If you force the wage to be higher than that equilibrium wage, you end up with more people wanting to supply their labor than you have people willing to demand their labor. Hell, it's the simplest diagram in all of economics. So sure, the people with jobs get paid more, but you also end up with a big ol' labor surplus, also known as a lack of jobs.

Now, there are a whole bunch of problems with this theory. One problem is that empirical studies appear to very soundly not back up its conclusions. Another is that raising people's wages ends up boosting aggregate demand which, at the very least in a demand-shock recession like we're recovering from now, raises demand for labor and creates jobs. But the critique I'm making in this post does not have anything to do with those kinds of arguments. Instead, I think the entire set-up of the fundamental anti-minimum wage argument is flawed.

One of the first things we looked at in microeconomics was the process of deciding between two different goods while subject to a budget constraint. So, for instance, you like apples and you like oranges, but you only have so much money, so how many apples and how many oranges do you order? But there was another example that our professor brought up a couple of times: consumption vs. labor. The idea is, people like to consume things and they also like to spend time not working for money, but in order to consume things you need to spend some time working for money. Ultimately you need to choose how to balance between these two goods. I find it more intuitive to relabel the "consumption" axis as the "money" axis, because what you get by not enjoying leisure time is money, and what you do with it is your choice.

Here's a diagram I've made of the money-vs.-leisure situation:

The horizontal axis is leisure, the vertical axis is money. The blue curved lines are indifference curves, each a set of points along which the decision-maker's utility is the same (so that he or she wouldn't care at what point on, say, the third blue curve from the bottom they were on). Indifference curves further from the axes are preferred. The two diagonal lines (which, by the way, look curved in a really trippy fashion) represent two possible budget constraints. In this case, the budget constraint is the wage: the rate at which you can trade free time for money. The red line is a lower wage, and the green line is a higher wage. You can see that the highest utility that this person can get to on the red line is somewhere between the two points where the red line crosses the second-lowest indifference curve that I've drawn. It's probably somewhere very nearly in the middle of that segment, and near where Indifference Curve #3 comes closest to the red line. But on the green line, they can reach a point slightly better than Indifference Curve #4. Their utility is much higher at this point, and they have more money. But they also have more leisure! Because they get more money for the time they don't spend on leisure, it makes sense for them to reinvest some of the gains from their higher wage in more leisure time.

The standard assumption in economics is that if you give someone an incentive to do something, they'll do it, and if you give them a bigger incentive, they'll do more of it. And that's true, in a vacuum. But people have lots of different things they want, and at some point, as you give them more and more stuff in exchange for doing what you want them to do, they'll have enough of that stuff, and figure that at this point they can afford to go do other, more inherently enjoyable things. It's a kind of hidden cost: in this scenario, as you make someone richer and richer, you make their leisure time that much more potentially enjoyable, and therefore make the decision to work that much more costly. You can also imagine this with physical stuff: there are plenty of things I would need to be paid a non-negligible amount to take possession of, not just things that are inherently disgusting and repellent but also things I just don't have any use for. Standard economics says I should be willing to take anything for free as long as I don't positively dislike it, right? Well, but anything I own is something I have to find space for, and space in my house is a scarce resource. It's a hidden cost.

So I don't think it's at all clear that the supply of labor is upward-sloping. It's not a normal market: the less money you have, the less choice you have to do anything other than try to get more money. (This is also one of the reasons why we shouldn't worry that progressive taxes will discourage the rich from working, for what it's worth.) There isn't any particular reason to think that raising wages will make more people want to work (in the aggregate; it'll probably make more people want to work at all and other people want to work fewer hours). Will it make businesses more reluctant to hire? Perhaps, or perhaps not; that's where the empirical studies and the demand-boosting effects come into play. But it strikes me that at least half of the argument against minimum wages is just plain wrong.