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On the Self-Testability of the Minimum Wage

On the Self-Testability of the Minimum Wage Economy Near Us (XXVII)

As I have shown, in a previous intervention, in which I explained the conceptual difference between the minimum salary (the actual minimum wage, with the particularity that is generated by the market, rigorously called “minimum nominal salary”) and the minimal wage (administrative wage, with the particularity that it is administratively established, rigorously called “minimal nominal salary”) in the present intervention I will argue about the self-testability of the minimal wage. I have also shown, in the same intervention, that the establishment of the minimal wage without using a method by which it is methodologically anchored by a macroeconomic indicator, relevant for ensuring sustainable economic growth, entails the possibility of it functioning as an instrument of social protection only.

Returning to the problem of the minimal wage, it must be said that, by introducing the minimal wage in a discretionary way, two predicates of sufficiency are involved, namely:

1) it does not allow any wage to have a value lower than the minimal wage or, if this happens, there are principles that restore the “rebel” wage to a value at least equal to the minimal wage;

2) the minimal wage stabilizes itself or, in the worst case, varies not too significantly, but, symmetrically, exhibiting a tendency of approaching to its expected level. We will make, further, some considerations on the concepts of economic testability but also on the testability of the minimal wage. 

The concept of self-testability in the economy 

Economic testability is a property of an economic variable to be verified from several perspectives, namely:

  1. a) from the perspective of truth – when it is the subject of a factual prediction;
  2. b) from the perspective of appropriateness – when it is the subject of a qualitative justification (for example, a question of social justice);
  3. c) from the perspective of functioning – when it is the object of an operational analysis.

The concept of the minimal wage can be examined, under the aspect of testing, only under the third perspective, because it is an economic variable introduced administratively, so neither the truth perspective nor the justification perspective is relevant for its testing.

Economic self-testability refers to the case where we have an automatic testability, i.e. the adjustment feedback (either negative or positive, as the case may be) which does not appear as a discretionary impulse, but as an impulse generated by the functioning of the variable in cause (for example, the price of a product is self-testable in the free-market mechanism).

There is also a hybrid kind of self-testability: in case the testability mechanism is introduced in a discretionary manner, but its effective functioning is triggered (or stopped) automatically - here we have the well-known case of the automatic stabilizer.

In the following, our intervention focuses on the “pure” self-testability of the minimal wage (i.e. neither on the discretionary nor on the discretionary-automatic hybrid). 

A logical analysis on the minimal wage self-testability 

We have mentioned previously that the minimal wage is an economic variable established administratively (I provided mentions, in other papers, about the economic, social or moral justification, and about how this determination is made). This means that the minimal wage cannot be tested under any of the three types of testability mentioned. The question arises, however: what should testability and self-testability of minimal wage refer to? Here are some considerations that can be made in this regard:

  • testability (respectively self-testability) will have to refer to the possibility that the economic system, in its functioning anchored to the accepted economic theory, may generate an economic variable of the nature of the wage, that is, the nature of the monetary remuneration of the work[1] so that variable will be stabilized, or will contain stabilization “principles”;
  1. therefore, the testability will not refer to an existing variable, but to one that is generated by the economic system itself but which, once generated, verifies the predicate of sufficiency of a minimal wage.

Let us examine, in an abstract and simplified way, the standard model of the functioning of the labour market. The examination will be carried out in the well-known context of the imperfect character of the labour market, especially regarding the atomicity of the economic actors – either employers or employees.

First, about the first predicate of sufficiency. Suppose an employer sets a minimal wage for its own employees (it does not matter if it is below or above the marginal labour productivity, because the decision is not economic, but administrative). Given the free market conditions, other employers will take advantage of this and set their own slightly higher minimal wages (either from the marginal labour productivity reserve or betting on the efficient wage), by trying to increase their competitiveness in the labour market. There is no economic reason, of a competitive nature, to stop this phenomenon. But this means the violation of the first predicate of sufficiency of the minimal wage (obviously, the establishment of a lower minimal wage, in response to the first determination, has no economic reasons for the competitiveness of the labour market so it will not be applied).

Now, about the second predicate of sufficiency. Perhaps the competitive establishment, through the various employers and the different values ​​for their own minimal wages, could lead, through the economic mechanism itself, to the stabilization of a minimal wage value which is acceptable (and, of course, profitable) for all generic employers. By limiting our functional analysis to only two employers who, as we have already shown, will be pushed by the market “reasons” to set their own minimal wages different, there will be an economic context in which the two values ​​converge with each other (possibly, and with the identification of the sense of convergence - from small to large or vice versa)? We will discuss this eventuality in the following hypotheses (concerning the standard economic behaviour):

  1. a) the labour force follows the higher wage – behaviour justified by minimizing the opportunity cost of choosing the job;
  2. b) the increasing cost with wages diminishes the competitiveness of the products and services on the market and also diminishes the profit of the employers.

In these hypotheses, we consider that the phenomenology of interest will have the following evolution:

  • up to the bearable limit (taking into account the market demand for products and services and profitability indicators), the follower employer will keep his own minimal wage above the one of the competitor (more theoretically, his marginal minimal wage will be slightly equal to the marginal minimal wage of the competitor). It follows that, in principle, there will be no convergence between the two minimal wages in question;
  • under no circumstances will there be a reversal trend in the two minimal wages, as this would mean a decrease in the competitiveness on the labour market (remembering that the competitiveness in the labour market is inversely proportional to the competitiveness on the market of goods and services). 

Brief conclusion 

The “market” minimal wage does not exist, it cannot be established by the market because it is not market testable. As a result, the intervention of the state is legitimate here (which criteria the state uses to determine the level of the minimal wage is, of course, a separate discussion). What bears further scrutiny is whether there is not a free-market tendency to reduce the gap between the marginal minimal wages and by what size or with what speed.

 

[1] N.B. We do not consider here the concept of wage package, because the analysis is not influenced in a significant way by this omission.

 
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OEconomica No. 1, 2016