## How many would work for less than the minimum wage?

Somebody may well haveÂ written on this already. If so, I apologise. But I haven’t read anything on the topic,Â so perhaps it’s new to you too.

Flipping through the HILDA dataset on the weekend (as you do), I stumbled upon an interesting variable. In 2004, the survey asked respondents who were unemployed or not in the labour force what was the lowest hourly wage they would work for. Below, I’ve just drawn a kernel density plot of those wages (omitting those aged under 21, who might earn youth wages).

The red line denotes the federal minimum wage prevailing at the time of the interview (\$12.30 per hour). Pooling unemployed and not in the labour force (948 people),Â 24% of respondents said they would take \$12 per hour or less – in other words, they effectively said that they would work for less than the minimum wage.

But for those not in the labour force, perhaps this was cheap talk? They weren’t actively looking for a job, and therefore the question might not have meant much. So the graph below restrictsÂ the sample to just the unemployed (237 respondents). Among this group, 23% of respondents effectively said they they would work for less than the minimum wage.

Of course, there’s a few problems with taking this kind of analysis to mean that abolishing the minimum wage would cut the unemployment rate by a quarter. Among them:

1. Responses are coded in whole dollars, and quite a lot of those who cited a reservation wage below the minimum wage gave a number that was just below the minimum. For example, only 11% of the unemployed (13% including those not in the labour force) said that they would work for \$10/hour or less.
2. Economists prefer to trust revealed preference (what people do) than stated preference (what people say). Perhaps those who said that they would work for less than the minimum wage were saying what they thought the interviewer wanted to hear. Or they may just have made up a random number (this is what the unemployed guy who told the interviewer he wouldn’t work for less than \$200/hour seems to have done). Or maybe it’s a spur of the moment thing, and if the putative subminimum wage workersÂ had done their sums, they would have realised that they couldn’t make ends meet on that kind of wage, and would not really have accepted a job that paid \$10 per hour.
3. It’s easy to flip things around. For example: “You mean to tell me that three-quarters of the unemployed wouldn’t take a job below the minimum wage?Â So who in their right mind would reduce it?”Â
4. Employment isn’t all we care about. If employers have hiring power (what economists call monopsony power), then lowering the real minimum wage will reduce the wages of low-wage workers. This needs to be traded off against any potential employment gains.
5. Even if a lower minimum wage would boost employment (which in my viewÂ must be right), we may regard very low wage work as unconscionable. In the same way that we set occupational health and safety standards, we may not want to live in a country that allows people to work for very low wages. For example,Â 1% of respondents said they would accept \$5 per hour, which many might regard as exploitative inÂ modern-dayÂ Australia.

Anyhow, just thought I’d throw this out there. I’d be interested in your reactions.

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### 18 Responses to How many would work for less than the minimum wage?

1. Sinclair Davidson says:

we may regard very low wage work as unconscionable.

Kind of says it all. As I always say, Australian unemployment is voluntary. People with jobs and high incomes choose policies that ensure that somebody (else) will be unemployed.

2. derrida derider says:

Andrew, an interesting piece of data. Obvioulsy there’s lots more you could do here – looking at the correlates of high and low reservation wages, etc. Food for a quick, simple but quite useful paper I’d have thought.

Taken at face value, I read these results more as a case _against_ reducing the minimum wage – following reasoning similar to your point 3.

That is, employers would like to offer jobs to unemployed people but the wage they are prepared to offer is below either the person’s reservation wage or below the minimum wage. Hence these people don’t get jobs.

But removing the minimum wage would remove only one of the constraints on the employment of the 23% with reservation wages lower than the minimum. For many (most?) of them, employers might still not be prepared to offer them a job at their reservation wage level (eg \$10/hr). It is plausible that those with the lowest reservation wages do so because they know they have the lowest skill levels.

4. Paul Frijters says:

since its the hilda, you can follow these people over time. Hence you could augment these graphs by telling us
a) how many actually get a job less than their stated reservation wage (in Germany this percentage is substantial)
b) how many have a reservation wage below their last recorded wage, i.e. how many seem prepared to drop down.

The first piece of evidence addresses the ‘cheap talk’ complaint. The second addresses the ‘accepting that your value has gone down’ issue.

5. Leopold says:

It would be interesting to know the reverse: how many of the people from high-income households currently working for the minimum wage or thereabouts would leave the workforce if we cut it – say, to \$8/hour.

6. Fred Argy says:

Thanks Andrew for drawing this to our attention.

I agree with Bruce. You have focused only on the willingness of the unemployed to work for less than the minimum wage. Fair enough but if these people have a very low productivity, employers might not employ them even at \$10. As Bruce says, you have dealt with only the supply constraint – not the demand constraint.

7. crocodile says:

Thanks for an interesting slant on minimum wage – employment tradeoff.

Surely there must be more factors to consider when setting minimum wage levels other than the unemployment numbers. I would be quite interested to find some information regarding the effect of lowering minimum wages on long run productivity growth. I’ve mentioned this in passing before but have been unable to find any research on this specifically. The reason I would be interested is that many of our economic boffins claim that a significant factor on our ongoing prosperity is due to many years of sustained productivity growth. If we concur that this growth is mostly because of technical innovation and the increased investment in this technology then I would have to ask the following. If minimum wages were to fall low enough where it became cheaper to employ human effort rather than invest in productivity improving technology, over time would this cause productivity growth to fall.

8. laughoutloud says:

That is the conundrum isn’t it crocodile? In fact lower wages sufficiently and we can employ people to pick up paper on footpaths, and bring in our rubbish instead of using mechanised street sweepers and bringing in our own rubbish. Lowers unemployment (assuming you can force people to do the work) but lowers productivity. The low wage brigade in fact are nothing more than shills who prefer the rest of us subsidising their lifestyles via increased social service payments to workers who can’t keep themselves from their own eforts while they reap the benefits of being able to pay wages which are less than required to keep people from their own efforts in the labour market. Of course they also rail against the taxes required to keep on paying the social security to the poeple who can’t earn enough to keep themselves, but with a bit of care, no one will notice the contradictions. Well nobody that matters of course.

It’s an old scam, but one that the rich and their paid shills never tire of. And why should they? It has worked a treat for the last 20 years in the US and the UK and it will work here too for a while. Once poeple wake up, we can all join the business lobbies and agitiate for guest workers, who have the real advantage not applicable to the natives, of being unable to cast a ballot in an election. Great. Work for nothing and refused the franchise. It’s great to be back in the early 19th century. And think how grateful these guest workers will be to earn more in our fair land, than they could earn at home. You know \$5 an hour is better than \$1 an hour now isn’t it? And only an elite hypocritical idiot would argue otherwise.

9. Scotsman says:

How many Aussies currently receive the minimum wage. What would be the impact on demand in the whole economy if they all had their wages cut by \$2 per hour?

10. Brendan Halfweeg says:

A decrease in the wages component of production would lead to decrease in the cost of living for everybody, and would have a greater impact on the lowest paid workers than on middle and higher earners in terms of disposable income.

Another aspect to consider is wage mobility – how many workers begin and stay on minimum wage as their experience and skill increasees? People with even less skill are denied the opportunity to learn on the job if tariff barriers protecting existing workers prevent them from working.

Talk of condemning workers to a lifetime of drudgery in low skilled low paid work is nonsensical for most except perhaps for those with learning difficulties or some other impediment that prevents them from progressing up the labour chain. For these people, low skilled work may be challenging and may provide other social benefits that not working cannot provide. I don’t want to over-emphasise this of course, because this instances of this are small (but meaningful to the individuals involved).

crocodile said:

If we concur that this growth is mostly because of technical innovation and the increased investment in this technology then I would have to ask the following. If minimum wages were to fall low enough where it became cheaper to employ human effort rather than invest in productivity improving technology, over time would this cause productivity growth to fall.

This is a productivity gain as well – less resources (in terms of cost) used to produce the same output. However the output is not always the same. Garbage men collecting rubbish as opposed to mechanized trucks may provide a better service – such as in built up areas where there is no room for mechanized trucks to operate without displacing cars. Or a hand car wash doing a better job than an automated one.

Alternatively, it could be a lesser quality product than what a machine could produce, which would often be the case for low skilled workers doing precision and repetitive work.

Mechanisation is not an end in itself.

laughoutloud said:

Lowers unemployment (assuming you can force people to do the work) but lowers productivity.

Reducing unemployment is not an end in itself either, it is all about the efficient use of resources, including human labour. If minimum wage makes labour so expensive that machines are cost competitive in comparison, this is a waste of resources. On the other hand, if labour demand is so high that it raises wages to make machines cost competitive, this is efficient.

There is nothing economic or efficient about paying someone unemployemnt benefits AND paying for machines to sweep the streets. Even to break even (in terms of the total economy, not an individual firm), the cost of mechanisation must be equal to the difference between welfare benefits and minimum wage. This is not the case though since the firm buying the machines is not entirely responsible for paying the welfare benefit, all the firm has to do is be cheaper than hiring someone on minimum wage to justify it. The firm makes money because it has lowered its costs, but the entire economy is paying for both the machine and the welfare benefits. The economy is made up of you and I, we have to pay tax in welfare, we have to pay more for street sweeping (than if there was no minimum wage).

Itâ€™s great to be back in the early 19th century.

This is a ridiculous comparison, no one is proposing a return to 19th century living and working conditions. The fact is that someone on less than minimum wage today (think welfare recipients) are massively better off materially than people on the lowest wages of 200 years ago. Even if you look at it another way, the percentage of people with access to adequate nutrition, clean water and shelter has grown enormously over that time period. Many have grown so accustomed to these things that they now consider them as rights, when in an earlier, poorer time, these things were considered luxuries. It isn’t that people don’t need these things, but rather that our ability to produce and pay for them has improved.

11. Tony Hughes says:

Yeah but the unemployed and poor are forced to stay in Australia. They need to be compensated for this. If they could swap their citizenship with a rich Indian person (or whoever) and get a few hundred grand they could live there in relative comfort. The market for citizenship isn’t free but you could make efficiency arguments to say it should be.

That poor people can’t sell their biggest asset means they require compensation. We call this the dole or the minimum wage.

12. Patrick says:

compensation – that’s the wierdest way I have ever heard this phrased – who, pray tell, incurs the liability (who inflicts it it) to compensate for the harm of not being able to sell their biggest asset?

And what country are you from anyway? I don’t know of any poor people in any of the rich countries I have lived in (Aus, US and France mainly) who would consider living in a poorer country for anything short of enormous compensation. And citizenship just doesn’t cost anywhere near that much.

Not to mention that the relative comfort of a rich person in a poor country is often very different to what you seem to imagine. Sometimes stuff simply is not there – not short of going elsewhere to buy it and bringing it back. Nothing replaces smoothly paved roads and orderly shops. Crime is a different problem and often an order of magnitude greater. Private security buys comfort but at a price beyond anything contemplated by the transactions you propose.

NB I am not against buying citizenship, in fact I think we should charge a HECS-style fee for citizenship and associated services such as English language. But your proposal is, to me, preposterous.

13. Tony Hughes says:

It’s more a theoretical straw man than a policy prescription. It does show, however, that you can argue for the dole using free market principles if you try hard enough.

Your last point is curious, though. You say that the state, in effect, owns your birthright and can therefore charge a fee for you using it? In my original post, citizenship is an endowment gained at birth (like good genes) that generates a return over one’s lifetime. It’s clearly therefore an asset that you’re stuck with and cannot trade if the returns don’t live up to expectations. You can’t trade genes (yet?) but citizenship is not inherently untradeable.

14. Crocodile says:

“A decrease in the wages component of production would lead to decrease in the cost of living for everybody, and would have a greater impact on the lowest paid workers than on middle and higher earners in terms of disposable income.”

Brendan, not so sure that lowering the minimum wage would lead to such a situation. Any employee earning above the minimum already has a value placed on their relevant skills as determined by the market. Lowering the minimum surely would not affect the demand for that particular skill set.

It may not be economic or efficient paying someone the dole and paying for machines to sweep streets but I find this view too narrow as only unemployment levels are being considered. Using a machine may well throw a lot of street sweepers out of a job but it also creates a job for the engineer that has to design one, the factory workers that need to build it, the oil refineries to provide the fuel and the mechanics that maintain it. The list goes on. Each on of these roles requires more skil than the guy with the broom leading to the obvious conclusion that education and training policy are seriously important.

This is why I ask whether lowering minimum wages for the sake of creating low skill jobs is a worthwhile goal. If it turns out that long term productivity growth and education policy suffer as a result then perhaps the minimum wage should stay where it is. The last time I looked at the budget papers the dole was worth about six billion dollars. This is only double the amount given to the private health funds for your 30% subsidy. Add to this all the other handouts and middle class welfare and the dole looks like peanuts.

15. Brendan Halfweeg says:

Any employee earning above the minimum already has a value placed on their relevant skills as determined by the market.

No, they are not. If 5 men on 79% of minimum wage can do the work of 4 men, minimum wages have over-priced the work of the 4 men, since the employer cannot employ 5 men to do the work.

Lowering the minimum surely would not affect the demand for that particular skill set.

It would increase the demand, since the unemployed “skilled” workers would need to lower their price (wage) to compete with less skilled workers. Supply of skilled workers brings it’s own demand, at the right price, of course, necessarily higher than lower skilled work.

It may not be economic or efficient paying someone the dole and paying for machines to sweep streets but I find this view too narrow as only unemployment levels are being considered. Using a machine may well throw a lot of street sweepers out of a job but it also creates a job for the engineer that has to design one, the factory workers that need to build it, the oil refineries to provide the fuel and the mechanics that maintain it.

Just becaue mechanisation creates “better” jobs does not justify it economically. We could equally decry that all work is done by robots (which would requrie a highly trained workforce to build, operate and maintain) but if the robots are more expensive than human labour absolutely, we have all been ripped off, despite employed peoples jobs being more rewarding. This is not about unemployment, it is about economically efficiemt use of resources.

Our forefathers during the industrial revolution didn’t introduce mechanisation because they liked machines, they did it to make money. Better jobs were the result, not the objective.

This is why I ask whether lowering minimum wages for the sake of creating low skill jobs is a worthwhile goal.

Abandoning minimum wage wouldn’t create jobs, all it would do is create demand for work that could be supplied at that wage. Instead of investing in a mechanised street sweeper, a company employs people to do the same job at an economically advantageous wage. Instead of producing street sweepers, the men unemployed by a reduction in demand for street sweeping trucks, lower their wage expectations and turn to producing high speed maglev trains or some such. The maglev train builders lower their wage expectations and build supersonic passenger aircraft ot whatever their skills are usefull for. At the end of the day, we all benefit, including the displaced workers.

Add to this all the other handouts and middle class welfare and the dole looks like peanuts.

Middle class welfare should be eliminated as well, all it does is tie the electorate to the incumbent political party and prevent private initiative through government confiscation through taxation.

16. Crocodile says:

Brendan, I can see where you are coming from but I have a few problems with your assertions.

“No, they are not. If 5 men on 79% of minimum wage can do the work of 4 men, minimum wages have over-priced the work of the 4 men, since the employer cannot employ 5 men to do the work.”

This relies on the assumption that 5 cheaper workers can do the same work as 4 skilled men. But is this the majority case. I couldn’t imagine someone like George Killfockingbird Plumbing Services sacking 4 plumbers and hiring 5 street sweepers nor could I see the local car dealer firing his sales team for cheaper and more numerous labour.

“It would increase the demand, since the unemployed â€œskilledâ€ workers would need to lower their price (wage) to compete with less skilled workers. Supply of skilled workers brings itâ€™s own demand, at the right price, of course, necessarily higher than lower skilled work.”

Perhaps, but only if the tasks performed by the skilled worker can effectively be covered by the use of lower skilled people.

“We could equally decry that all work is done by robots (which would requrie a highly trained workforce to build, operate and maintain)”

I think that ever since the first caveman connected a wheel to an axle this has been the direction we have been heading anyway. Not quite there yet but on the never the less.

“Our forefathers during the industrial revolution didnâ€™t introduce mechanisation because they liked machines, they did it to make money. Better jobs were the result, not the objective.”

Regardless of mechanisation the objective of business is to make money. If better jobs were created in a serendipitous manner then the industrial revolution can only mean that we are all the better for it.

“Abandoning minimum wage wouldnâ€™t create jobs, all it would do is create demand for work that could be supplied at that wage. ”

I’m not meaning to sound flippant but isn’t this creating jobs.

“Middle class welfare should be eliminated as well, all it does is tie the electorate to the incumbent political party and prevent private initiative through government confiscation through taxation.”

Absolutely agree wholeheartedly. Perhaps Andrew could consider starting a thread just for this very important topic.

17. Brendan Halfweeg says:

Plumbing Services sacking 4 plumbers and hiring 5 street sweepers nor could I see the local car dealer firing his sales team for cheaper and more numerous labour.

You’re cont completely correct about plumbing, in Britain where there are a lot less restrictions on trade qualifications, many people resort to “jack of all trades” handymen that will do plumbing, electrical, painting, basic home maintenance and even renovation because more qualified (skilled) are both expensive and scarce. They may not exactly be street sweepers, but their skills are generally no greater than the average home handyman or DIY’er.

If the price or demand is right, people will accept lower skilled individuals doing the work traditionally associated with higher skilled people.

Iâ€™m not meaning to sound flippant but isnâ€™t this creating jobs.

When you talk of job creation, I think of it in terms of “make work” jobs, such as demarcation and other artificial job creation methods. Lowering wages and creating demand for the labout that can be supplied at that wage is not an artificial process, but a market process. It is no different than a shopkeeper lowering his prices to shift tomatoes. the tomatoes existed before he lowered his price, but no one wanted to buy them at the higher price.