The campaign for a $15 per hour minimum wage has become one of the keystones of Democratic economic policy. Its conceptual underpinning is something called in econ-speak the “downwards inelasticity of employment” with respect to wages. At the Wall Street Journal Michael Saltsman discusses a Congressional Budget Office report that to my mind demolishes the case for a $15/hour minimum wage:
Democrats pledged a $15-an-hour minimum wage while campaigning in 2018, and all but three of the party’s 2020 presidential candidates endorse the increase. But a new report from the Congressional Budget Office finds the policy could leave nearly four million workers without a job.
This week’s analysis is an update of CBO’s 2014 analysis of a $10.10 minimum wage, which said one million workers would be pulled out of poverty at the cost of half a million jobs. That conclusion was enough to tank the proposal; a Bloomberg poll at the time found that 57% of Americans viewed the jobs trade-off as “unacceptable.â€
Democrats have responded to CBO’s wage warning by ignoring it. The Raise the Wage Act of 2019, introduced in January, would set a $15 minimum wage by 2024. The trade-offs from this legislation are even worse than in 2014. CBO finds a $15 minimum wage would pull 1.3 million workers out of poverty at the cost of 1.3 million jobs in the median scenario, and 3.7 million jobs in the worst-case scenario.
Here’s a verbatim quote from the report cited above:
In an average week in 2025, the $15 option would boost the wages of 17 million workers who would otherwise earn less than $15 per hour. Another 10 million workers otherwise earning slightly more than $15 per hour might see their wages rise as well. But 1.3 million other workers would become jobless, according to CBO’s median estimate. There is a twothirds chance that the change in employment would be between about zero and a decrease of 3.7 million workers. The number of people with annual income below the poverty threshold in 2025 would fall by 1.3 million.
To my eye that fails to meet the moral standards for a $15/hour minimum wage let alone the pragmatic standards. My advice: try something else. From a cost benefit standpoint an increase to $10/hour is much better although it, too, rests on shaky moral grounds.
Persisting in campaigning for a $15/hour minimum wage at this point would suggest that your actual objectives in a $15/hour minimum wage are something other than helping the people you’re claiming you want to help. Objectives that have been suggested are to render non-unionized mininum wage workers non-competitive with unionized ones which seems pretty convoluted to me or giving unions with minimum wage multiple contracts an automatic raise.
According to the Bureau of Labor Statistics, the percent of hourly workers who receive the minimum wage or less is 2.3% of hourly workers, about 1% of total workers. They tend to be young, in the South, and work in the restaurant and food service sector. It would be interesting to see the effect of increasing the minimum wage on rents since the states that have increased their minimum wages also have higher rates of homelessness.
Because there are so many things wrong about this debate, I rarely get involved, but I will point out a few things.
A $15/hr pay rate does not include total compensation, and the $15/hr wage will probably eliminate many “benefits” because of means testing.
There will be economic distortions, but they will not be the theoretical projections. If it is cheaper to use $15/hr than to invest in automation, low wage workers will be used. Manufacturing was not offshored because of the futuristic automated factories in China.
On the other hand, robots do not call in sick or take coffee breaks, and they do repetitive tasks faster and more accurately than humans. They can get stuck in doorways, and the $15/hr worker will need to hold the door until Robot Central can fix it.
Additionally, $15/hr will go a lot further in Plaucheville than in NYC, and at some point, we will learn that $15/hr was not the correct wage. We will be told that the correct number is $20/hr.
Finally, how are unions going to help American workers whose union job is now in China? If manufacturing is never coming back, what jobs are unions going to protect? Honestly, are unemployed workers going to pay union dues from their unemployment check?
“A chicken in every pot and a car in every garage.“
The same ones they’re protecting now: the public sector. Just under half of all unionized workers are in the public sector. The highest rates of unionization (PDF) in the private sectors are in utilities, transportation, and warehousing. Despite the low rate of unionization in the private sector (6.4%) the majority of union members are still in the private sector but it’s a near thing.
Few people want to talk about the racist roots of minimum wage. The original minimum wage was instituted in the 1930’s by FDR and his New Deal as a political sop to effectively whites-only unions to shut out non-union blacks competing for the same jobs who were willing to take less money.
IMO the push for 15 is strongly tied to automatic wage increases in union contracts tied to increases in the minimum wage = more union dues = higher campaign contributions (bribes) to politicians willing to go to bat for them. With the job market this tight, mandating a minimum wage is stupid.
… public sector …
That is the answer I expected, but it does not make sense. It does not take many brain cells to realize that if everybody works for the government, nobody is producing anything.
It is similar to the free-trade mentality. Without a job, you can have no income, and if you are buying cheap Chinese goods, you have some type of government assistance, or you are borrowing. A country cannot free-trade its way to prosperity.
Guaranteed jobs, government provided universal basic income, or public sector unions have limits, and beyond those limits, the system will collapse. Unless the system is able to achieve some type of “escape velocity”, it MUST collapse.
Let me clear up something. Consumption requires production. Production does not require consumption. This is not a chicken and the egg problem. Buggy whip production does not require buggy whip consumption. If it were not so, Pets.com would still be around.
Apparently, I live in an alternate universe.
(A credit-backed monetary system does not have the same limits as the hard money version, but there are limits.)
“IMO the push for 15 is strongly tied to automatic wage increases in union contracts”
I think it came because someone noticed that most of the gains in income over the last 30 years have gone to the top 1% and thought it might be good if other people shared in the prosperity.
Steve
The key point is that, based on the CBO’s analysis, a $15/hour minimum wage would not have that effect. It would transfer from one group of the 99% to another group of the 99%. I don’t think that can be morally justified not to mention that it’s an error.
BTW, although he never said that “demand creates supply” in those words, that’s the underlying idea of Keynes’s General Theory of Employment, Interest, and Money.
At most perceived demand creates supply, but it usually creates oversupply. This mostly applies to existing products.
Except for pre-ordering, a supply must be available before there is a demand. This is what creates the business cycle inventory problem, and JIT cannot overcome this.
There is always some lag time which creates distortions similar to stop-and-go traffic. If everything moved at exactly the same instant, there would be no lags, but even a train has some lag time between the front and back.
Some supply, no matter how small must exist prior to any demand, and the supply will use price to control demand. This is not a trivial point. Businesses fail because they misjudge the demand for the supply they are creating, and the supply created can be either too much or too little.
“Some supply, no matter how small must exist prior to any demand”
Not to quibble, but the most successful suppliers anticipate demand. And then are copied until the market is satiated, and a new demand must be anticipated for sales and production to grow again.
$15/HR:
Why would anyone want to have the law limit their income? If you’re past 25 years old and making minimum wage, IMHO you are not trying, you may think you are, but you’re not.
@Grey Shambler
The most successful suppliers create demand for their products, and then are copied until they create a demand for a new and/or improved product. The others create a supply and adjust prices to create demand. Apple is excellent at creating demand, but even they produce a dud now and then.
Anticipated (perceived) demand is not actual demand, and I suspect that the difference is substantial most of the time. If it were that easy, pets.com would still be around.
Amazon started with a supply of books titles and a price. The price was of secondary importance. Unless there was an actual supply of books available, they would have closed long ago. Amazon fulfilment centers are a supply of available warehouse space with a supply of delivery services.
It is possible to just open a website without any products or services, but again, it is not as easy as it seems. If it were, we would all be doing it.
shared in the prosperity
Companies should create a compensation program. Those who want to “share the wealth” would be paid with shares of the company stock. Actually, this should be the only legal way to be compensated.
I have no doubt that the Enron employees are still happy with the company “share the wealth” program.
“The key point is that, based on the CBO’s analysis, a $15/hour minimum wage would not have that effect.”
“In an average week in 2025, the $15 option would boost the wages of 17 million workers who would otherwise earn less than $15 per hour. Another 10 million workers otherwise earning slightly more than $15 per hour might see their wages rise as well. ”
“. The number of people with annual income below the poverty threshold in 2025 would fall by 1.3 million.”
Steve
And as many as 3.7 million people would be thrown out of work entirely with the most likely number around 1.3 million. Throwing 1.3 million people out of work to raise 1.3 million beyond the poverty level is not a moral course of action because it treats people as means rather than as ends. It also isn’t good policy because there are other strategies that would have the same or better outcome without increasing unemployment like increasing the child tax deduction or introducing wage subsidies, just to name two.