Megan McArdle has what I think is a reasonable post on the minimum wage. Read the whole thing but I’ll summarize it as bullet points:
- Small minimum wage hikes don’t seem to produce large, immediate declines in employment.
- Companies are not rationally maximizing machines that automatically find the best, perfect price for their products.
- ncreasing wages can lead to greater productivity.
- Some jobs can’t be automated.
- Doubling the minimum wage is a whole different story.
- Timing matters,
- A big hike means big cost increases for industries that employ a lot of minimum-wage workers.
- It can’t all come out of profits.
- Companies aren’t all-knowing value maximizers, but they probably know more about their pricing power than a random person on the Internet.
- Time frame matters.
- Most of the efficiency wage arguments you read fundamentally misunderstand how efficiency wages work.
- It isn’t true that paying workers at the bottom a lot somehow magically makes the economy grow.
She fleshes out each of her points a bit but that’s the gist. I agree with nearly all of what she writers here. Her post is the sort of “more light less heat” post that I wish there were more of.
I think the bottom line is that we just don’t know. That’s why I’ve been asking questions. For those who think that a sharp immediate increase in the minimum wage is worth the gamble, that’s just as faith-based a position as being convinced that such an increase would be disastrous. We just don’t know.
It’s not been clear if there is an actual proposal on the table to evaluate?
Is this an argument for McDonald’s and only McDonald’s to double wages? Then I think the result is — buy stock in Jack-n-the Box. It would also be unconstitutional.
Is this an argument for doubling the minimum wage across the country, it cannot be considered a small minimum wage hike comparable to small past hikes. The median income in the United States is less than twice the minimum wage. ($24,062 is the median income for ages 18 and over; assume 34.5 hour work week, equals $13.41 per hour)
By the way, here is an economist poll on minimum wage. Raising the federal minimum wage to $9 per hour would make it noticeably harder for low-skilled workers to find employment?
34% Agree; 32% Disagree; 27% Uncertain and No Opinion.
If you read through some of the caveats or explanations, I think that each dollar higher, fewer would disagree. Perhaps at doubling the wage none would disagree other than a few that would explain that there have been no natural world precedents to support such a claim.
(Also, I believe some of those that agree, would argue that there are better alternatives to increasing the minimum wage, such as government subsidies)
I haven’t researched this to know if it’s true, but I’ve read that the minimum wage is low historically on a constant dollar basis. If that is true, there should be at least some empirical evidence to suggest what might happen if the minimum wage were returned to some historical level.
As far as process goes, rather than sudden increases I think it would be better to program changes in over time in order to reach some level, and then adjust to inflation after that.
MM says,
I would add two more potential answers – The companies may know something others don’t; and, the companies are sensitive to concerns besides maximizing. One example of the latter is the current very high demand for firearm ammunition, which is actually hard to find. Stores have, for the most part, instituted policies of modest price increases and rationing rather than pricing where the supply/demand curve dictates. Most businesses are not divorced from the communities where the do business and so are sensitive to perceptions of the people in the community they operate.
I think this needs extrapolated as well: “Small minimum wage hikes don’t seem to produce large, immediate declines in employment.”
When the minimum wage increases, there is little evidence that employers fire anybody (or anybody they would have already). Employers do hire fewer people in the future. This study This studyshows that a .35% per year reduction in overall net job growth for all jobs from a 10% increase in the minimum wage.
This is the kind of thing I fear. Our ability to create jobs is a death by thousand minuscule, largely invisible, slices.
@Andy- Correct. In real dollars, the minimum wage peaked in the 70s. Can find the link if you want.
PD- The number of studies showing no effect or minimal effect is about the same as the number of studies showing it decreases employment. Link to a summary of many of them.
http://www.cepr.net/documents/publications/min-wage-2013-02.pdf
I think the explanation for why an increase in minimum wages might decrease employment is easier to understand. What is disconcerting is that if it is so obvious, it should be easy to show in studies. Mankiw commented on that long ago saying that the two camps are pretty solidly entrenched and it will only be decided by empirical studies. (The leading theory for those saying it does not cause job loss is that employers of minimum wage employers have monopsony power in their hiring. Those opposed to increasing the minimum wage say that is not true. It seems to me that we have a had a general glut of low skilled workers who are nearly interchangeable for quite a while. One burger flipper is not that much different than another. If you get someone who is bad, it is just cheaper to fire them and hire another rather than increase wages to try to get a better worker.)
Steve
Not surprising. Truth is, we don’t really know and there’s only one sure way to find out.
Perfect summary of the state of “economics.”
34% of physicians believe it’s an imbalance of the humours, 32% believe it’s evil spirits and 27% think it’s either witchcraft or the heebee-jeebees.
Let’s all run our lives on their professional advice. Or we could just whip out the tarot cards.
Not even that. Unless we could hold every other factor constant.
@steve, the study I linked to recognizes that the studies to date have been rather confounding, but argues that they are analyzing the wrong metric:
I gather the story is that employees faced with higher wage costs become more cautious about whom they hire and changes to operations that would necessitate additional labor. The effect is gradual over-time.
Stephen Colbert doing it better than I could: http://www.upworthy.com/stephen-colberts-scathing-hilarious-response-to-mcdonalds-mcminimum-wage-budget-7?c=fea
And, PD:
Nothing about that conclusion says “bullshit” to you? Employers become “cautious” do they? Right. Because ordinarily they feel so relaxed they hire six or eight unnecessary workers and just pay them for fun as opposed to pushing their labor costs relentlessly downward in order to maximize profit.
If they’ll squeeze you at $10 an hour they’ll squeeze you at $7.25 an hour, which is obvious when you realize that minimum wage today is lower than it used to be in constant dollar terms. Meaning that minimum wage has not been raised to the level that used to apply to a much younger employee base, and yet employers seem “cautious.”
PD- As I recall, a number of the studies in the linked paper look at longer term effects. Given all that happens in the economy, I will say that I would be skeptical about claims affecting employment more than a year or two out.
Steve
steve:
Yep. So, lacking a convincing argument for continuing to pay people below-survival wages, maybe we should try behaving like human beings rather than automata and see whether we cannot gradually begin the process of paying people enough to allow them to survive.
The same arguments were raised when we eliminated slavery, when unions took over the mines, when we eliminated unequal wages for blacks and women, and each and every time we raise the minimum wage. There’s always a predicted apocalypse when the bosses are forced to stop treating people like crap. And yet, here we are, the richest nation on earth.
Totally OT, but wow, I wish you could all see what I’m looking at right now. One of the racing catamarans blowing by on the Bay at speeds you would not believe. He just went the length of San Francisco’s northern shore in under a minute. A billionaire with his toys, but damn fast.
My wife’s family was very much into speedboat racing. The boat manufacturing company started by her uncle although no longer in the family is still famous in speedboat racing circles. They also number several professional water skiers.
This is a sailboat. And I swear to God it’s somehow going faster than the wind. It’s like seeing a supernatural event occurring in the real world. I’m watching distant cars on the Bay Bridge and the mast of that boat, and perspective must be playing tricks because it’s outrunning the cars.
@michael, as an employer who has hired a number of people and felt constrained from firing employees that have not met my expectations, this makes a lot of sense to me. It’s also consistent with what I hear from clients, friends and families. It also explains why companies too frequently have dreadful service representatives.
Employers don’t know whether a prospective hire will be a poor, fair or good employee. Heck, the employee might not know either. The younger, the less-skilled, the more there is a lack of information.* On-the-job-experience is often the only way to know. A lot of employers want to hire low and use pay increases or advanced job assignments if they learn the employee is good. (Fast-food chains have limitations here. They have narrow margins; few if any mid-level positions for promotion; and many are still in school, planning to leave in time regardless)
If the employee is bad, the process is usually painful on both sides, and the employee might simply quit on their own accord. If the employee is fired, the employer not only faces the additional time and expense of looking for and training a new employee, the employer (usually) pays increased unemployment insurance to the state.
Fair or middling employees are the problem spot. Most employers will retain such an employee, though possibly at the lowest wage possible, for fear of all incurring all of the extra costs of firing only to replace him/her with a poor employee.
So, no I think employees even at the lowest sector are often employed at wages above replacement due to the cost/expense/uncertainty of the replacement. And I also not that nobody ever seems to mention the earned income tax credit when claiming that the minimum wage is below poverty levels.
* Though the problem extends beyond unskilled labor. If given a choice, employers will prefer the college graduate to the high school graduate, not because the job requires skills obtained from college, but because the choice is safer. And then there is the more prestigious college versus the less prestigious. There is a gross inefficiency problem here that has troubling implications for social equality.
@steve, the study I linked to is dated July 2013 (though earlier drafts were in circulation earlier this year) and purports to answer the analysis you linked.
Thanks PD. Went back and looked at it a bit more closely. I think their methods are ok, but I find it kind of odd that they insist on using establishments and not firms. Their explanation for this choice sounds a bit weak to me, but YMMV. I dont know enough about their choice of data source, BDS, to know if that makes a difference. What I will say is that I feel like I am back to my original statement. If there is a difference, it is very small. If you have to spend this much time and effort to find it, if you have to start using unusual data sets, use fairly esoteric statistical models and try to control for data during a time when job growth was already slowing, there likely isnt much effect.
Steve
PD:
I’ve also hired and fired. And yeah, the first part is kind of cool and the second part is kind of harrowing at times. (One firing in particular haunts me to this day – almost 40 years later – because I was wrong and an arrogant young asshole. If I remembered her name I’d try to make amends.)
But it was never about the wage, it was always that I needed someone to do X. A shift. Several shifts. Full time, part time. What I would need was a warm body to do a specific thing. I wasn’t eager or reluctant depending on the set point of the minimum wage, I either needed someone or I didn’t.
More often than not in the restaurant biz at least I was hobbled by the minimum wage. I wanted to pay more and get capable people, but the corporate parent or owner wasn’t buying. There were times I could have gotten someone halfway competent for 2X or 1.5X but had to settle for a complete imbecile at X. I’d be working a new restaurant, maybe as head waiter, maybe assistant manager or graveyard manager, maybe couldn’t offer much in tips since we didn’t have business yet or it was a lousy shift, and a bump in wages or benefits would have given me someone halfway decent, someone who would have helped me actually build business as opposed to moving cases of beer and burgers out the back door and pissing off customers.
Human judgment seems to be lacking. Everyone has a “policy.” Everyone has “guidelines.” You know how I knew whether I could teach a waiter or not? I watched them move. Stack these glasses. Fill those ramekins. Heft that tray. If they moved slowly and couldn’t speak clearly they were useless. Untrainable. If they moved fast and could talk, I could teach them. There were times I’d have paid them out of my tips or wages to get them because I knew they could be taught to carry tables on a Saturday night, and I needed them to do that. But no: minimum. So I took the moron and fired him two weeks later. Then the next moron. Rinse and repeat.
There’s this assumption that businesses know what they’re doing, that they brilliantly follow laws of supply and demand, moving inexorably toward efficiency. What a load. Mostly they’re not very bright and make stupid, short-term decisions based on untested assumptions and inexperience.
I have also turned a blind eye to people skimming. Why? Because by God they would show up and they could carry an extra half station if I needed them to. So rip off the till and give your buddies free shrimp, not my problem. And true confessions time: sometimes I was that guy. You don’t want to pay me what I deserve? Fine: I’ll pay myself.
You ever watch a really good short order cook work? Or waiter? Or dishwasher? The best can do three times the work of the worst and leave the place ready for the next shift. So we pay them exactly what we pay the worst guys. Because “minimum wage” and “policy.” Brilliant.
Minimum wage and mistreatment is not the way to run a restaurant or a country. How much did Subway lose from that minimum wage kid showing up on YouTube putting his dick on a sandwich? Maybe should have considered not treating him like he was worthless. Or spent another 2 bucks an hour to get someone who was actually supporting a family and gave a damn. Would have been cheaper in the end.
Unfortunately, too many people’s notions of what they deserve are governed less by what they deserve or need than what they’d like to deserve and want. Your explanation? That’s the same argument that Bernie Madoff made when bilking his clients. It’s the same argument used when CEOs milk their companies for bigger compensation plans.
Who is to say what they deserve? You? Me? Why is that?
Do I think that grown men and women should be paid a living wage? Of course.
In my view the underlying problem is too many businesses building business models around paying extremely low wages (whether the workers are in Chicago or Longhua). I’ve heard these plans explained with my own ears and seen them operate with my own eyes. They can get away with them not just because minimum wage is so low but because they can depend on a steady stream of people willing to accept a very low wage.
As some folks may know, years ago, in another of my lives, I had a long conversation with Milton Friedman and his wife for a magazine article I was writing. They were the nicest people, and Prof. Friedman as a joy to talk to. One thing he said that has stuck with me all these years later was that a corporation is a collaborative enterprise between management, workers, and customers. This was in the 70s when the American labor movement had not yet been hollowed out. But even then I thought to myself that, Uh, Prof. Friedman, it seems to me that the workers are the ones asked to do most of the cooperatin’. But I wasn’t there to argue with him. Now when I think back on that conversation and that point, I recall Saul Alinsky’s story about the labor problems in small company in the midwest.
The company and the union had been in a protracted negotiation on a new contract. After much wrangling, both sides came to an agreement. However, the union rules were such that before the contract could be finalized, 100% of the membership had agree to it, and one guy would not.
His co-workers tried to convince to agree. No. The leadership of the union tried to get him to agree. No. His wife was even enlisted in the attempt. No. Finally, the president of the company called the guy into his office and, said, “Listen. If you don’t agree to this new contract, I’m gonna fire your ass on the spot.” The guy says, “Ok, I agree with the contract.” The president says, “Wait a minute. Your co-workers and the union have been trying to convince you for weeks. Even your wife couldn’t bring you around. I talk to you for two minutes, and you agree immediately. What’s up with that?” The guy says, “Well, you see sir, before I spoke to you, nobody had explained to me.”
In restaurants, the problem is never one or two staff skimming. The problem is the rest of the staff letting it go, failing to enforce standards or protect the employer. That doesn’t happen unless there’s in effect a social justice problem. It happens when people feel aggrieved, ripped off. When one employee can say to any other random employee, “Hey, dude watch out for the boss while I boost these steaks,” then it’s game over.
Expanding out a bit, you see it in crime in neglected neighborhoods, or indifference to corruption in chronically corrupt nations (or cities), in tax cheating in countries where the taxpayer is made to feel like a sucker. People, by and large, obey rules. Some don’t, of course, but the random sociopath (Madoff) is less the problem than a more widely disenfranchised, embittered or hopeless population. Once the people stop believing they have a stake in things – wether it’s a restaurant or a nation – the rot sets in and the enterprise dies.
When you have millions of people working 40 or 50 hours a week and yet unable to take their kids to a doctor, you have a population that has lost faith in the unifying ideas of the country. That’s dangerous to stability long term. It’s a slow poison in the system.
Many years ago I recall interviewing a bowling alley proprietor who remarked that he wondered why he was driving a ten year old jalopy while his bar manager drove a new Cadillac every year. Then he installed a bar control system and realized that his bar manager had been skimming from him for years.
There’s a pathology all right but it has nothing to do with justice. It has to do with greed and a lack of barriers, whether internalized or external.
In your example (“…unable to take their kids to a doctor…”), they aren’t unable to do so just because they aren’t paid enough but because those who work in the healthcare system, not just physicians but many, many people, are paid too much. They are convinced they’re worth it and there are no barriers, whether legal, economic, or moral, to impose limits.
@michael reynolds
… you see it in crime in neglected neighborhoods …
The people in the neglected neighborhoods may be despondent and resigned to their plight, but they do not have more criminal tendencies. They do not have the resources to move, and since they do not have the resources to sue, the police do not need to be “on their best behavior”. Also, the police provide the best service to the highest paying customers. NOTE: This is true for most city services.
There is less crime in middle and upper income neighborhoods because people move away from the criminals. Poor people need suitcases and U-Hauls. If you really want to help the poor, require the gated communities to allocate some portion for lower income housing.
On the minimum wage topic, why is there not a maximum wage? This would solve the wage disparity. Does anybody need more than $250k per year? There could also be a $250k limit for investment income.
In Toronto there is a zoning regulation that requires each new building to have a certain proportion of retail space, housing space, and parking. The effect of the regulation is that more affordable housing is available than would otherwise be the case.
@Dave Schuler
I am generally against regulations, but I am not against reasonable regulations. I think a lot of the problems with the poorer areas could be dramatically reduced if they were in the better neighborhoods. I would like this to be accomplished without regulations, but this may not be possible.
Unless a community is totally independent, it relies upon many public services. Streets, street lights, street numbers, property titles, water, sewage, garbage, mail services are a few. I think that a case could be made that the price for these services include provisions for lower income housing.
The problem is eliminating the rent-seeking that would result.