Do-It-Yourself vs. the Minimum Wage

After my Intelligence Squared debate, I had a long chat with my opponent Ron Unz about his latest cause: a huge increase in the minimum wage.  For Unz, the disemployment effect of a high minimum wage is a feature, not a bug: It’s his round-about way to discourage illegal immigration and encourage self-deportation.  At the same time, however, Unz denied that his high minimum wage would disemploy many low-skilled Americans.  Why?  Because most of them work in the service sector, not manufacturing.

The logic, as best as I can tell, is that manufacturers sell to a global market.  So when manufacturing labor costs go up, factories readily move abroad, implying relatively elastic labor demand (unless, of course, the minimum wage rises all over the world).  The service sector, in contrast, sells to a local market.  So when service labor costs go up, local customers suck it up and pay more, implying relatively inelastic labor demand.

A nice argument.  There is indeed one reason to expect labor demand to be more elastic for manufacturing than services.  However, there is another equally compelling reason to expect the opposite: do-it-yourself.  In a modern economy, higher manufacturing costs rarely lead consumers to make their own electronics, clothes, or furniture.  The fall in quality would be too steep.  But higher service costs frequently lead consumers to cook their own meals, mow their own grass, or clean their own homes.  The quality’s lower, but still quite tolerable.

So what happens when the minimum wage goes up?  In manufacturing, there’s little substitution into do-it-yourself, so labor demand is relatively inelastic.  In services, in contrast, there’s a lot of substitution into do-it-yourself, so labor demand is relatively elastic.  Precisely the opposite of the Unz view.

If you want to know the actual effect of the minimum wage, of course, you have to combine these two effects.  Which effect – global market or do-it-yourself – predominates in the real world?  I honestly don’t know.  Unlike Unz, though, I don’t say this because I’ve never opened an economics textbook.  I say this because I’ve searched for research on the topic, yet failed to find any.  If you know of any relevant evidence, I’m all ears.

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