Likes and Dislikes: the Minimum Wage

Raising the minimum wage is a chestnut, a perennial. It’s a favorite proposal for some politicians, cropping up over and over again across the years. Let’s think about who likes the idea of raising the minimum wage and who dislikes the idea.

Who Likes Raising the Minimum Wage?

  • People who earn the minimum wage.
  • People who think that the demand for labor in businesses employing minimum wage workers is highly inelastic and not in competitive, low margin industries. That means that whatever the minimum wage is, they’ll pay it and be able to pass the costs on to their customers without losing business. Are there any of these?
  • People who have union contracts that specify minimum wage multiple pay rates.
  • Employers that pay above minimum wage but whose competitors pay minimum wage. Like Costco whose CEO President Obama cited as supporting an increase in the minimum wage.
  • People who work off the books. An increase in the minimum wage may increase their wages as well as make it more likely they’ll get a job since hiring someone who’ll work off the books is incentivized by an increase in the minimum wage.
  • Parents of kids who take part-time or full-time summer jobs at minimum wage. Most of these parents are middle income or above.
  • People who feel better about themselves for supporting a higher minimum wage. They care.
  • People who live in states that have their own minimum wage laws, above the federal minimum wage, e.g. Illinois, California, Florida. Unless the federal minimum wage goes over their own minimum wages.*
  • Politicians whose base of support includes any or all of the above.

Who Doesn’t Like Raising the Minimum Wage?

  • People who think that the demand for labor in businesses employing minimum wage workers is highly elastic.
  • Employers that pay minimum wage in industries with low margins and/or are highly competitive. A good example of this might be fast food franchisees. I recognize that fast food is frequently given as an example of a highly profitable business that pays minimum wage. That’s misdirection. McDonald’s is highly profitable but doesn’t really employ a lot of minimum wage workers. Its franchisees do and aren’t nearly as profitable.
  • People who earn more than the minimum wage and whose sense of self-worth is highly invested in earning more than minimum wage. Are there any of these?
  • People who don’t like the idea of a mandated minimum wage*
  • People who think the EITC is a much more efficient way to prop up living standards of low wage earners *
  • Politicians whose base of support includes any or all of the above.

Fair? Unfair? Have I missed anybody? (I’ll update the post accordingly.)

I really think that an analysis like this casts some light on the politics of the minimum wage. I’ve enjoyed this exercise so much I may even repeat it for immigration reform or some other issue.

Update

I’m coming up with all sorts of questions. Are comparisons between countries of the relationship of minimum wage to median wage important? I’m seeing claims along these lines. I’m skeptical. If employment doesn’t go down following an increase in the minimum wage, does that prove that the demand for labor in sectors employing minimum wage workers is relatively inelastic? That strikes me as a bit too simplistic. Doesn’t that assume no other exogenous factors?

Update 2

Extra credit question: why do top-ranking Republicans oppose the president’s proposal to raise the minimum wage? The first in my “don’t like” list? The third to last? Because he proposed it?

Update 3

For fans of an increase in the minimum wage: why not increase the minimum wage to $20/hour? Why not $50? I can’t think of a single reason that increasing the minmum wage to $20/hour wouldn’t be better unless you think that it will cause jobs to be lost. The implication of that is that there is some level of minimum wage above which jobs will be lost to an unacceptable degree. Why isn’t that level $7.25?

*Added as updates after the original post.

19 comments… add one

  • steve

    Cant say I have strong feelings about it. Certainly wont affect my employees. Very few people work at or below minimum wage, so I am not really sure of its effects. What studies I have been able to find dont give much of an answer.

    Steve

  • PD Shaw

    Supporters would include businesses in states with a high minimum wage who fear competition from states a low minimum wage.

    Opponents would include states with a low minimum wage who use that fact to lure businesses to that state.

  • Just under 4 million people or about 5% of the work force, earn at or below the federal minimum wage.

  • PD Shaw

    Oops, sorry, if you already had the state minimum wage issue and I missed it.

    One question I have is the relationship between the minimum wage and the earned income tax credit. I see the earned income tax credit as a subsidy for industries with a lot of low wages. If the minimum wage increases, doesn’t it essentially reduce the subsidy? And if so, does the federal taxpayer gain? Are there any inefficiencies caused by the earned income tax credit?

  • Drew

    You’ve enjoyed the exercise………I’ve enjoyed reading it.

    I must say I find those who don’t believe in material elasticities for most economic issues to have blinders on. We are told the “rich” will just pay higher taxes and put up with it. And yet projected tax revenues never really materialize. And its almost impossible to really measure all the foregone economic activity. steve’s desire to see hard study evidence is of course proper, but almost impossible to do.

    WRT wages, you again will be hard pressed to find hard and definitive studies. But you might talk to the local pizza parlor owner.

    And just look at what is happening with ObamaCare and reduced work hours per week. Predictable, predicted, and now reality. And yet some are amazed. (Especially juicy are the reactions of stunned academics.) Some are outraged. I just admonish: “be careful what you wish for, you ‘caring’ people.”

  • Sam

    Who Doesn’t Like Raising the Minimum Wage?
    – people who think the EITC is a much more efficient way to prop up living standards of low wage earners

  • Icepick

    Extra credit question: why do top-ranking Republicans oppose the president’s proposal to raise the minimum wage? The first in my “don’t like” list? The second to last? Because he proposed it?

    What difference, at this point in time, does that make?

  • Icepick

    People who earn more than the minimum wage and whose sense of self-worth is highly invested in earning more than minimum wage. Are there any of these?

    There used to be, but I don’t know if such people exist now.

  • PD Shaw

    Thanks Dave;

    Picking at the state comparison issue some more. Two of the four states with the lowest percentage of workers getting paid at or under the federal minimum wage are California and Alaska.

    Alaska:
    $7.75 state minimum wage (set at $0.50 above federal)
    6.5% unemployment rate (historic low 5.9%)

    California:
    $8.00 state minimum wage ($10.55 in San Francisco)
    9.8% unemployment rate (4.7% historic low)

    I’m assuming the state minimum wage is serving different purposes here. In Alaska, the minimum wage is intended to attract and maintain workers in a less desirable climate where the cost of goods is high due to geographic constraints (little local production other than oil and transportation issues). In California, the minimum wage is not intended to attract or maintain workers, but is supposed to alleviate the financial hardship on the working poor in an attractive area to live.

    It would seem to me that it is in Alaska’s interest to oppose the increase, while California would support it.

  • Icepick

    In California, the minimum wage is not intended to attract or maintain workers….

    I disagree. California IS trying to attract workers. It’s just trying to attract workers that will work for less than the minimum wage. Based on demographic studies it appears to be working spectacularly well.

  • PD Shaw

    If I understand the conclusions on the economic research from
    Steven Landsburg:

    Now that we’ve re-evaluated the evidence with all this in mind, here’s what most labor economists believe: The minimum wage kills very few jobs, and the jobs it kills were lousy jobs anyway. It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers.

    In fact, the minimum wage is very good for unskilled workers. It transfers income to them. And therein lies the right argument against the minimum wage.

    then supporters of raising the minimum wage believe that the economy is currently in the midst of a process of creative destruction, where the loss of low wage jobs will lead to opportunities elsewhere. The economy is humming, it can benefit from the destruction of the jobs that weren’t worth maintaining anyway.

    He proceeds to make Sam’s argument about the better efficiency of EITC in that a public benefit, low-skill unemployment, is paid for by the public, not by the employer of unskilled labor. Seems like an argument for fairness, not efficiency to me.

  • PD, my understanding is that labor economists believe that the minimum wage has a very small effect on employment. Significantly, as I’ve suggested, they’re making some assumptions about the price elasticity of the demand for labor. In other words, there’s no way to tell if there’s some level for the minimum wage at which there’s suddenly a large effect.

  • steve

    Mark Perry lists these numbers.

    “1. In 2011, there were 112,564,000 Americans working full-time, and 111,821,000 of those workers, or 99.4%, were earning more than the minimum wage. Only 743,000 of those full-time workers were earning the minimum wage (or less), or 0.66% of the full-time workforce.

    2. There were almost 45 million workers nationwide who were paid hourly wages and working full-time (40 hours or more) in 2011. Of those full-time hourly workers, 98.3% were earning more than the minimum wage, and only 743,000 (and 1.7%) were earning the minimum wage or less.

    3. There were 3,936,000 teenagers (16-19 years) working at an hourly wage in 2011, and more than 3 million (3,037,000), and 77.2%, of those hourly teenage workers were earning an hourly wage higher than the legally-mandated minimum wage.

    4. For the age group 25 years and over, there were 59,490,000 hourly workers, and 57,557,000 (and 96.75%) were earning more than the minimum wage, and only 1,933,000 (and 3.25%) were earning the minimum wage or less.”

    He concludes from this that the minimum wage keeps people unemployed. I think employers pay workers market raters. If they are paying (essentially) all full time workers more than the minimum wage, it must be what they need to do to keep workers. It looks to me like the minimum wage probably does not affect many people or many jobs.

    To take a stab at Dave’s last question, I think this is a bit like the Laffer curve. At some point, higher rates decrease revenue, we just dont know what that level is. We know that we have been seeing increases in productivity w/o increases in wages. We also know that profits have been high for corporations and that management has been taking home a higher share of that money. The return to capital has been high. If just a bit of that goes to labor instead, is it really likely to decrease jobs? Are we arguing that we need to have even higher shares go to management and capital to create new jobs?

    Steve

  • Drew

    A few observations from a multiple, serial, and diverse line of business business owner.

    “To take a stab at Dave’s last question, I think this is a bit like the Laffer curve. At some point, higher rates decrease revenue, we just dont know what that level is.

    That’s correct in a precise sense. In fact, there is no one Laffer curve, or min wage vs layoff law. Its all situational. Different people and businesses will have diffgerent inflection points. But to deny an effect is tantamount to denying the law of gravity just because it bugs you. Dave summed it up with an example I always use: why not make the minimum wage $30/hr if its so easy? $10 bucks is caring and humane, or “living wage,” in the vernacular, but $8 isn’t?? Please. Ever have a debate with a left leaner about the right amount of taxation? The answer is always “a little more.” But you can never pin them down.

    “We know that we have been seeing increases in productivity w/o increases in wages.”

    We also know that total compensation costs have been rising. Not to mention regulatory and other tax costs. Where do you want an employer to spend their money? Wages? Benefits? Regulatory compliance?

    “We also know that profits have been high for corporations and that management has been taking home a higher share of that money.”

    Markets will sort that out. “Kings” should not.

    “The return to capital has been high.”

    Really? If you are not making at least 4% I’d suggest the real return is zero. Banks savings accounts, the entire gamut of treasuries….. Corporates may be one of the few decent fixed income securities. Perhaps the packaged bank loans.

    Junk bond spreads are at historic lows. The stock market is only where it was 6 years ago. And that’s not risk adjusted. Private equity returns are declining as are most alternatives.

    “If just a bit of that goes to labor instead, is it really likely to decrease jobs? Are we arguing that we need to have even higher shares go to management and capital to create new jobs?

    Ah yes, “just a bit.” Again, markets have a magic way of sorting out capital vs labor vs management. You are making a value judgment, which is fine. But the road to hell is paved with good intentions.

  • Icepick

    Where do you want an employer to spend their money? Wages? Benefits? Regulatory compliance?

    If I’m in the government, especially as a law-maker, a law-maker’s aide, or a regulator, I want you to spend it on regulatory compliance – very broadly defined.

    I think this is a bit like the Laffer curve. At some point, higher rates decrease revenue, we just dont know what that level is.

    And at some point it decreases economic activity in a noticeable way. Based on the expiration of the payroll tax “holiday”, that point seems to be at about a 2% increase in taxes.

  • steve

    “Again, markets have a magic way of sorting out capital vs labor vs management.”

    Did we really get to where we are right now via some market mechanism? Is it the market setting very high executive/management salaries? Why isnt the market dong the same in other countries?

    Steve

  • “1. In 2011, there were 112,564,000 Americans working full-time, and 111,821,000 of those workers, or 99.4%, were earning more than the minimum wage. Only 743,000 of those full-time workers were earning the minimum wage (or less), or 0.66% of the full-time workforce.

    Okay, accepting these numbers….

    Who cares about the minimum wage. Its trivial, and raising it will do damn little for 99.4% of workers. Building of the quote PD found, do we really want to subsidize unskilled workers? After all, subsidize something you get more of it. Are the proponents of the minimum wage really saying that having more unskilled workers is a good thing?

    Did we really get to where we are right now via some market mechanism?

    That is amusing, you look at not the CEO’s wage, but his entire compensation package…but for other workers, just the wage. Inconsistency much?

    We know that we have been seeing increases in productivity w/o increases in wages.

    Sorry, I’m not as charitable as Drew on this point. The whine about wages is just so damn dumb and facile. Use total compensation.

    BTW, regarding CEO compensation:

    Using estimated pay, I look at data from 1993 to 2010 for S&P 500 companies (from S&P’s ExecuComp database). What has happened to average estimated CEO pay (adjusted for inflation) since 2000? Most audiences believe it has increased substantially. In fact, Figure 1 shows that while average CEO pay increased markedly from 1993 to 2000, it declined by over 46 percent from 2000 to 2010. Median CEO pay also increased from 1993 to 2000, but has since declined. The convergence between the means and medians suggests that boards have become less likely to award large pay packages since 2000.

    There are still some outliers that receive attention and likely drive the perception that pay has increased. For example, three CEOs received over $50 million in estimated pay in 2010. The means and medians indicate that these are outliers and not the general rule.

    ExecuComp also follows the CEOs of over 1,000 smaller companies not in the S&P 500. Average estimated pay for these CEOs, like S&P 500 CEOs, increased in the 1990s and declined in the 2000s. Today’s average pay roughly equals its 1998 level.

    Ooops. Time to find a new hobby horse.

    So, as Drew noted, the market seemed to have addressed this issue…and without anything from the Obamassiah.

    Link

  • If you aren’t using total compensation when discussing productivity and what workers are paid, STFU.

    No, really, STFU.

    Link

    By the way for shits and giggles I looked at my total compensation, and almost a 23% of it was in “benefits”. Excluding non-cash compensation is just moronic steve.

  • steve

    “Ooops. Time to find a new hobby horse.”

    Hmm, wonder what could have happened to drop that 2010 number? Ahh, yes, the Great Recession. What happens if we continue past 2010?

    http://www.nakedcapitalism.com/2013/02/yes-virginia-the-rich-continue-to-get-richer-the-1-got-121-of-income-gains-since-2009.html

    You dont really need to read it. In your heart, you know I’m right.

    ” Excluding non-cash compensation is just moronic steve.”

    Ok, I wasnt really trying to make a comprehensive post, so you are partially correct. However, the fact remains that the real wages people take home have been stagnant. The growth in total compensation is mostly about health care, as it is with the federal budget. Income for executives, not just CEOs, has gone up even when you account for benefits. Can you make the case that their income has gone up because they are much more productive than their predecessors?

    Steve

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