Ask the grumpies: minimum wage

Mutant Supermodel asks:

what do economists think about raising the minimum wage? Is there a general consensus either way or is it as mixed up as it is on my Facebook feed?

#1 is not the economist but I’ll say that I support it right now, within reason.  What does #2 say?

Ok, the short of it is:  Economists are still divided on the topic of whether or not, and at what point, raising minimum wages decreases jobs or job growth.

Basic econ 101 theory says that if you raise the minimum wage, creating a wage floor, in a perfectly competitive market, then employment will go down because all the people who would have gotten jobs at lower wages will no longer get jobs.  (This is usually taught in the same chapter as why rent control is bad.)

That’s basic economic theory in a perfectly competitive market.  Market intervention hurts jobs.

HOWEVER, we don’t live in a textbook world.  So this is an empirical question.  And there are literally hundreds of papers exploring the effect of minimum wage increases in a non-experimental framework.  They find mixed results based on functional form.

The first major natural experiment on this topic is one by David Card and Alan Kruger.  They look at the effect of a minimum wage increase on employment of fast food workers at border counties in Pennsylvania and New Jersey.  They find that employment doesn’t change or actually *increases* in the state where the minimum wage goes up.  It doesn’t seem to be decreasing employment at all.

There are a number of potential explanations.  One that I’ve always liked (for its simplicity), but many prominent economists don’t share my like of is the thought that these fast food markets have monopsony power– which is like monopoly power, but what you have when you’re the only employer (or one of the only employers).  When employers have this kind of labor market power, they can keep wages artificially low because they can say either you work for us or you get nothing, because there’s no competitor to say you can work for me and I’ll give you a penny more (thus bidding up wages).  (You don’t need just one employer for there to be some monopsony power– just a small number of employers if they’re willing to collude, or for there to be other frictions in the labor market.)  When this happens, increasing the minimum wage would just reduce profits but wouldn’t negatively affect employment.

David Neumark is the big anti-Card and Kruger guy.  His work with coauthors argues that Card and Kruger’s survey data are inaccurate and that employment goes down based on administrative data.  Card and Kruger disagree.  There was some back and forth.  Cambridge-school economists tend to believe Card and Kruger.  Chicago-school economists tend to believe Neumark and Wascher.

More recently there’s been some work that reconciles all of the findings, suggesting that minimum wage increases don’t actually have a lot of effect in the short run.  People don’t get fired because the minimum wage increases, because firing people is bad for company morale (among other things).  HOWEVER, this newer work suggests that the minimum wage does depress job growth in the long-run.  As people leave (as they often do in minimum wage jobs), they’re not replaced  one-for-one.  There may also be an effect on overall growth by industry (with firms that can only afford minimum wage workers shrinking or going out of business), which would further disguise any negative effect on employment.

What’s the bottom-line?  Economists don’t know.  Most, if not all, economists will agree that there’s some point at which the minimum wage really does decrease employment rates.  (If minimum wage were $100/hr, most of us would stop sending our kids to daycare and fast food workers would be replaced entirely by machines.)  Many economists will also point out that, historically, real minimum wages have been much higher, particularly at times of economic growth (correlation not being causation, but slyly winking and nudging that direction), and some will even note that we’re subsidizing companies that don’t offer a minimum wage with foodstamps and other benefits.  Without those government subsidies, companies might be forced to offer living wages.

Personally, I think the minimum wage should be raised right now.  However, I’m not sure that it should be raised as much as some people are suggesting, particularly in some parts of the country where living costs tend to be lower.  (Just as a sniff test, I’m willing to hire people at $10/hr for standard minimum wage jobs that I’m not willing to hire at $12.50/hr– I’ll just do it myself at that price unless I already know the person is exceptionally competent.)  And then there’s all those exceptions to think about… should teenage wages be lower (and what does that do to adult unemployment?)?  Waitstaff positions?  And so on.  It’s a very complicated question full of many moving parts, and if economists can’t even agree on the direction, it’s hard to know what the magnitude is!


21 Responses to “Ask the grumpies: minimum wage”

  1. First Gen American Says:

    Of all the things I’ve read, the one that stuck with me most is your food stamp comment. To be working full time and qualifying for food stamps (that you then go turnaround and spend back at the place of your employment) seems almost like going back to the days of serfdom…and I don’t like that my tax dollars are subsidizing the profits of these employers. I know the average wages aren’t always at the state minimum at these places but they aren’t where they need to be.

    Also, automation engineers make a whole lot more money than a shelf stocker. Yes a shelf stocker usually can’t easily become an automation engineer but I guess I’d rather have fewer shelf stockers getting paid more and the side benefit being creating automation engineer jobs to improve efficiencies as a result. One company I worked with had 75 automation engineers on staff and they were in NY, a notoriously high cost state for doing business in. This is a company that could compete with Asia prices and win not because they paid people minimum wage but because the staff they did add were high skilled labor and worked on mfg efficiency. This is still a family owned business and is huge now. Yes, the jobs didn’t grow linearly with revenues but the jobs that were added were good ones.

    So yes, increase within reason but not so much that you discourage spending of the people who use/buy the products and services. There is a limit to what I’ll spend on house cleaners and handymen before I just do it on my own. In fact the reason we do so much house improvements on our own is the price fixing of the contractors in the area. There just isn’t enough competition.

    • Leah Says:

      I could see charging employers if their employees work more than a set # of hours and still require public benefits (with some exceptions for really large families, etc). Kind of a sticky thing tho . . . easy to see in textbooks but hard to implement in life.

      • Debbie M Says:

        Companies get charged for unemployment compensation insurance. And that other insurance for when workers are hurt on the job [ed: worker’s comp]. So it’s possible. But that kind of thing also has extra administrative costs, plus companies that never lay off their workers and never injure their workers on the job still have to pay something. Whereas raising minimum wage so that fewer food stamps are needed sounds like a way to reduce administrative costs instead, thus increasing the size of the pie.

      • chacha1 Says:

        That’s an excellent point Debbie. Given all the screaming about our bloated government, somebody should pick that up and run with it – “less government needed when people don’t need so much public assistance! who knew??” :-)

      • nicoleandmaggie Says:

        There’s actually some discussion about that… I think it’s called, “guaranteed minimum income”– rather than having all these expensive programs that spend so much time worrying about reducing moral hazard through monitoring etc, you just set up the tax code in a way that looks like an expanded EITC, only without the earned income part.

      • Holly@ClubThrifty Says:

        A “guaranteed minimum income” is the ultimate moral hazard. Why work at all if you are guaranteed to receive a minimum standard of living that is paid for by someone else?

      • nicoleandmaggie Says:

        The idea that the minimum would be low enough that most people would still find value in working (it’s not like nobody in Alaska works even though they get free oil money just for living there) and it would save administrative costs. Yes, there would be moral hazard, but those people wouldn’t be living it up either.

        And some people believe that moral hazard isn’t as important a problem as kids not getting fed. It’s hard to grasp that concept in a world so focused on the guy using his food stamps to get lobster and not caring about the people who fall through the cracks. As we’ve said before, there’s always going to be type 1 and type 2 error, but different people put different weights on the two.

        Personally, I make enough money that I could handle higher taxes and just not care that low productivity people who suck at working live on a pittance and stay home all day watching tv. The amount of higher taxes would be important for the trade-off, of course. That’s why economists put dollar values on things.

      • Holly@ClubThrifty Says:

        I’ve never been one to sit and stew about the money that goes into food stamps, but I certainly don’t want to grow the ranks of people who use them. I do think a minimum income would make it easier for people to just throw in the towel and settle for a lower standard of living.

        Perhaps it would save on administrative costs though. I can only imagine that the costs of a handful of social programs could be reduced if they were all consolidated down to one program without all of the red tape. If it ultimately saved money due to lower administrative costs, then it would be hard to argue against it.

      • nicoleandmaggie Says:

        Yep, there’s been some discussion in terms of the economics community about this because various other countries have made different trade-offs and depending on what you’re trying to maximize, those trade-offs seem to be working (think Finland’s package when a baby is born). Although no matter how much money it saves administratively, it’s unlikely to be politically palatable in the US. Because people should be punished even if it costs us to punish them.

        Still, it would be nice to know those numbers. It could go either way. And I have lots of friends who work on estimating moral hazard costs of various programs.

      • Rosa Says:

        The moral hazard we have right now is that employers are free to run their businesses based on super cheap labor that we all subsidize, and get the added benefit that most of the programs are designed with work incentives. So there’s this whole system for driving down wages that hurts everyone who works for wages, plus it’s expensive and complicated, PLUS it doesn’t even meet the goal of providing for the poorest, because generally the very poorest are those who can’t work because they are children, elderly, or disabled.

        One of the benefits of a guaranteed minimum income, or a comprehensive non-work-based safety net (so not cash income but public health, housing, and food services) is that instead of subsidizing time spent at low-waged and presumably low-skill low-opportunity jobs, you end up mostly subsidizing time spent doing things like childcare and eldercare.

  2. Holly@ClubThrifty Says:

    Minimum wage was $4.25 then $5.15 when I was a teenager…and now it’s what? $7.25? I think it’s obvious that minimum wage should be raised at this point based solely on the fact that it has barely budged in 12-15 years.
    With that being said, $15 an hour would be a lot where I live. My friend just finished her bachelor’s degree and got her first job offer at 28K. Teachers start at around 28K here. $15/hour doesn’t make sense in Central Indiana, and I suspect it wouldn’t make sense in a lot of rural areas too. Meanwhile, in big cities, $15 is probably necessary.

  3. Calee Says:

    In Southern California, minimum wage is $8 per hour so the employer cost to hire someone is just over 10. As a small business owner, I would like to hire more people, but for what I need done, and the learning curve required for most of the people I like to hire (college students or recent grads) it makes much more sense to hire through a service like Fiverr where I can get perfectly good, long-term data entry help for around 2.50 per hour. Instead of growing my employees with my business and starting them with a cost to me at around $7.50, I’m outsourcing. I think the story of of San Francisco about the Salvation Army childcare center is a great illustration of how the cost of goods and services used by minimum wage (and those working at a pay scale just above) rise with the rise of minimum wage.

    I’m also curious–what do economists say happens to the employes making ~ 10% over minimum wage when an increase happens? Do they get raises or do they become minimum wage employees?

    • nicoleandmaggie Says:

      That also varies. There’s evidence of both step increases and limits to step increases. I’m not sure what conventional wisdom says right now.

      • Debbie M Says:

        At the one place I’ve worked when a minimum wage raise surpassed my previous actual raises, I became a minimum wage worker. This is not great for morale, but on the other hand, it means you can switch to an entry-level job at another company without losing your raise.

      • Rented life Says:

        That the concern in our household. If our state minimum keeps rising then my husband’s employees will make almost as much/more than him but he’s a general manager. His job requires more work, training, degree, etc. but companies in his field aren’t raising manager wages consistent with minimum wage increases and benefits are being reduced on top of that. I understand the desire to raise minimum wage but get frustrated at people thinking its a simple solution. It’s not. I keep hearing it’ll all work out for people just above minimum wage but when?

      • Rosa Says:

        Yeah that freedom to switch for non-financial reasons, like work conditions or hours, is one of the few benefits of working at or near the legal minimum.

  4. Mrs PoP Says:

    FL’s minimum wage was targeted to inflation about 10 years ago, I believe. So it gets increased every January 1.
    To me this seems like a pretty easy compromise point to get to so I wonder why it was never implemented on a national level instead of huge debates that end in large step increases and stagnation for years after. Why not agree on a certain amount and index it to inflation after that?

    • nicoleandmaggie Says:

      Yes, one would think that. Except that there’s a big part of the US (the part with $$) that wants to see the real wage erode. If you have to vote in an increase, it’s more likely to erode than if you have to vote to stop an increase.

  5. MutantSupermodel Says:

    Thank you for answering this. You bring up a lot of really interesting points i don’t think get discussed much. I hadn’t heard about the minimum income thing before. That’s fascinating.

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