Back to the minimum-wage wars

Some socialist vestiges linger in Central Asia, perhaps because they are also popular in the West.  Exhibit A is the minimum wage.  Rough estimates vary sharply, from $15 per month in Kyrgyzstan to $188 per month in Turkmenistan (Table 1).

Conservatives here and abroad oppose raising these wages, arguing that employers would fire workers who would be expensive at the new levels of moolah. In the United States, a prominent and well-regarded newspaper columnist contends:

“In West Virginia, the median hourly wage is just $14.79; in Arkansas, it’s $14.48; and in Mississippi, it’s a depressingly low $14.22. A $15 minimum wage could be binding on more than half of jobs in these states.”

The column seems to assume that every worker is paid exactly her hourly value. Aliya receives a $12 wage because she bakes pizzas worth $12 each hour. If her employer is told to raise her wage to $15, he will fire her instead, since otherwise he would lose $3 per work hour.  By this reasoning, raising the US minimum wage to $15 would cause bosses in these states to fire at least half of their workers because they don’t produce enough to justify their new wage. (The median wage is the one that separates the upper half of all the wages from the lower half.)   

Economic theory says otherwise. The wage set in a market equals the value of the last (that is, marginal) worker hired; all other workers are worth more, and some of them are worth more than $15 an hour. The value of each additional worker diminishes because in the short run the growing workforce must share a fixed amount of physical capital – computers, office towers, pizza ovens – and the latest employee must wait his turn to use it. The firm won't pay any worker a wage that exceeds his value, so every worker but the last must deliver net value. 


If you prefer, you can think about the market this way: When the wage is $13, the employer will hire every worker who delivers at least that much in value. He will stop hiring when every remaining applicant is worth less than $13.  This implies that his least productive worker is worth $13; the others are worth more. 

For example, suppose that the first worker is worth $20 per hour, the second $18, the third $17, the fourth $16, the fifth $14, and the sixth $13.  The current wage is $13, which determines the value of the marginal (the sixth) worker.   Since all six workers earn $13, that is also the median wage. If the government raises the wage to $15, the first four workers will still have net value ($5 for the first worker, $3 for the second, etc.) and so won’t be fired. 

In sum, a $15 minimum wage will probably not destroy half the jobs in poor states. But it will destroy.  In our example, the fifth and sixth workers get the boot. – Leon Taylor tayloralmaty@gmail.com

Country	Monthly minimum wage
Kazakhstan	$61.91
Kyrgyzstan	$14.72
Tajikistan	$45.40
Turkmenistan	$188.41
Uzbekistan	$50.10

Table 1: Minimum wages in Central Asia

Notes

Kazakhstan:  The minimum wage estimate for 2016 is from the US government (https://www.export.gov/article?id=Kazakhstan-Labor). Corrected for consumer inflation from July 2016 through July 2017 (7.1%); data from the central bank of Kazakhstan.

Kyrgyzstan: The minimum wage estimate for 2016 is from the US government (https://www.state.gov/documents/organization/265752.pdf).  To convert from soms to dollars, I used the annual average of the daily exchange rate reported by the central bank for 2016  (http://www.nbkr.kg/index1.jsp?item=1562&lang=ENG&valuta_id=15&beg_day=12&beg_month=01&beg_year=2016&end_day=12&end_month=12&end_year=2016).  Corrected for consumer inflation from July 2016 through July 2017 (3.6%); data from the central bank.

Tajikistan: The minimum wage estimate for 2017 is from the World Bank (http://www.doingbusiness.org/data/exploretopics/labor-market-regulation).

Turkmenistan: The minimum wage took effect January 1; the estimate is from the government (http://www.turkmenistan.gov.tm/_eng/?id=6146).  I used the current official exchange rate to convert from manats to dollars (http://www.cbt.tm/kurs/kurs_today_en.html)

Uzbekistan: The estimate of the minimum wage that took effect October 1 is from The Economist Intelligence Unit (http://country.eiu.com/article.aspx?articleid=114589195&Country=Uzbekistan&topic=Economy&subtopic=Forecast&subsubtopic=Policy+trends&u=1&pid=555595239&oid=555595239&uid=1).

Reference

Catherine Rampell. When labor protections backfire. The Washington Post. August 8, 2017.