"Micro"-economics of minimum wage laws

    I have written a post on minimum wage law and unemployment, stating that unemployment was not obviously increased whenever the minimum wage was raised in Hong Kong. The post intends to explain one idea: other things being equal. If other things are not equal when you assess the impact of a policy, you have to find a way (such as statistical method) to control these other things first, or your assessments are simply invalid. 
   In this post, I want to discuss another blind spot involved in these analyses, minimum wage law or the like, frequently adopted in high-school economics education. The unemployment implication is drawn by referring to a demand-supply diagram. There is, perhaps, nothing wrong. The danger is that the demand and supply curves are drawn for one labour market as if there is only one type of labour service involved in the market. Of course, we know that in the real world labour services are of various types. The services offered by a barber are greatly different from that offered by a chef. Hence, one demand-supply diagram of aggregate labour service obviously over-simplifies the issue at hand. 

   How will the employment analysis be affected if labour services are broken down into different types when one single minimum wage law is introduced? 

   First, of course, we should consider different markets for different types of labour services. In each market, a different demand-supply diagram should be drawn. 

   Second, when this is done, it is obvious that we will find only some types of labour services are affected while some will not. Unskilled workers with low wages are affected. Skilled workers with high wages will not. Unemployment, if any, should be generated only in the affected sectors. In the situation of Hong Kong, before the introduction of minimum wage law (in 2011), the government had identified two industries, cleaning and security guards, as potentially the sectors that require wage protection and would be affected. 

   Third, this is not the end of the story, however. And this is exactly where multi-sector analysis can offer extra insights. Sectors are inter-related. If one sector is directly affected by the minimum wage, another sector will be indirectly affected, not because the wage of this sector is below the legal requirement, but because this sector will be affected by the affected sector. For example, a worker may work as a salesperson or a security guard. Salesperson's salary is above the minimum wage, and so this sector is not directly affected. However, a salesperson may change job, becoming a security guard as the salary of the latter is improved by the law while other working conditions, such as job stability, work intensities etc, are perhaps better. These inter-sector effects are probably the more pronounced impact of the minimum wage law. 

   In fact, casual observation confirms this. In Hong Kong, security guard for residential properties is one of the most affected sector by the law. Before the law, wages were too low for this sector and most workers were old male retirees. Now, much more different types of people are willing to work in this sector. A very clear change is that female security guards are no longer an exception. Younger guards are also occasionally found. 

   Is there (more) unemployment in this sector due to the law? If we use a simple and single demand-supply diagram for analysis, the answer should be positive. But don't forget that we have many demand-supply diagrams for many sectors. A salesperson is still an employed salesperson before he or she can change job to become a security guard. They don't first quit the jobs and then wait for the security guard industry to employ them, and so in the meantime they are unemployed. What happens may only be the potential supply of security guards is higher than demand, but these excess supply is reflected in many people waiting for job offers from this sector (security guard) while they are currently employed in a less ideal sector (salesperson). Another new source of worker supply may be the household wives. They may not consider working in the past as jobs that they can work may not offer a wage high enough. But they may now consider working. Nonetheless, they may not be counted in the labour force before they find a job (they will not register themselves as job seekers when they are household wives) and they are not counted as unemployed (they work as household wives). Hence, overall increase in unemployment rate may not be observed. But there could be misallocation of labour resource: workers and jobs may not be best matched. 

   Meanwhile, the indirectly affected sector, say salesperson, may have a pressure to raise the wage (though the original wage is already above the minimum wage level). They may not immediately find a job as security guards because the job offers are not sufficient. But their bosses may notice that the outside opportunities for their salespersons are wider. The employors may feel a pressure to increase salary or they may lose workers in an unwanted way. 

   Finally, another industry supposedly significantly affected by the law is cleaning. I am not so sure what have been happening to cleaning workers' situation after the law. I can easily observe employment situation for security guards at residential properties but not also clearly about cleaning workers' situation. My casual observation is that there is not much change in cleaning workers' situation (but if I am wrong, let me know). The sector is still dominated by older female workers. If this is true, why? I think this is due to the sectorial characteristics. Perhaps cleaning is a low-skill job but it is also a very unpleasant job. In a sense, unpleasant job is similar to skilled job. A hurdle has to be overcome before you can work in these industries, and not every one can overcome the hurdle. True, money matters. When salary is increased to a sufficiently high level, more people will try and overcome the hurdle. But does minimum wage law increase wage to the required level as to change people's perception for cleaning job? I think you must have your own answer in mind.  

   As mentioned above, simple analysis of demand and supply in high-school economics has a blind spot. The point is not that demand-supply model is insufficient for analyzing things that happen in the real world. The point is that only one demand-supply diagram is drawn, ignoring inter-sector effects, or different demand-supply diagrams should be drawn to show how one diagram is affecting another. In economics, this is about partial equilibrium versus general equilibrium analysis. Simple economics concentrates almost exclusively on partial equilibrium analysis. But, as shown in this post, general equilibrium perspective is often important.