Raising the minimum wage: good politics, good policy.
House Democrats have made a minimum wage increase a centerpiece of their agenda. Politically, the move is a good one. Last month, Democrats beat incumbent Republicans and held on to seats in tough races by arguing convincingly that the proceeds of the growing American economy are being distributed disproportionately to the highest earners. From a political perspective, raising the minimum wage is one of the clearest ways to alter that distribution - in percpeption, if not in fact. But what about the economic policy behind raising the minimum wage?
The theoretical economic case against raising the minimum wage (or, more accurately, against having any minimum wage at all) is fairly straightforward. By establishing a price floor for labor inputs (i.e. supply), a minimum wage reduces the demand for that labor. In real terms, that means employers firing employees. Of course, the American labor market is not theoretical. And 600 leading economists – including five Nobel laureates and four past presidents of the American Economics Association – endorse raising the federal minimum wage to $7.25 per hour and raising state minimum wages as well.
What accounts for this disconnect between the theoretically correct approach and the economists’ endorsement? As far as I can tell, it’s data. I have noted before that I am a firm believer in using efficient markets to accomplish policy objectives. I am an equally firm believer in the imperfection of markets in the real world. Labor supply in America is simply too complex to encapsulate perfectly on a set of supply and demand curves. As it turns out, and as the economists note, modest increases in the minimum wage do not lead to diminished employment and they do not transfer jobs from adults to young, unskilled workers. In 1999, the Council of Economic Advisors reported to President Clinton that the 1996 and 1997 minimum wage hikes benefited 10 million workers, most of whom were adult women.
Personally, I think the most sensible argument against raising the minimum wage is that it does less efficiently what targeted tax credits would do better. But politics is about choices, and House Democrats have made a wise one by prioritizing a minimum wage increase that will better distribute the spoils of our economic victories.
“In 1999, the Council of Economic Advisors reported to President Clinton that the 1996 and 1997 minimum wage hikes benefited 10 million workers, most of whom were adult women.”
I am utterly and completely baffled that a minimum wage increase isn’t always a no-brainer. Your post states that one of the main concerns people (whoever is against it, besides rich, gigantic corporations) have is that an increase in minimum wage will cause businesses to fire employees. But this doesn’t make any sense. If a small, or big, business could run efficiently with fewer people to pay wouldn’t they already do that? I might be able to understand an argument that states prices would increase if minimum wage increased. A business would have to raise prices in order to be able to afford a wage increase. However, the most common argument I hear is that it will hurt small business, because they can’t afford to pay anymore and they are too easily priced out. But the only businesses I know that pay minimum wage are gigantic corporations- Wal-Mart, McDonalds, etc (though often times they even pay higher than minimum wage). Most small businesses I am familiar with cannot afford to pay anything less than minimum wage because they need dependable and skilled workers. I’m not really making a point anywhere yet. My main appreciation of this post comes from the quoted section above. The people who benefited the most from a minimum wage increase were adult women. Many of whom were probably single mothers and minorities. And the groups that probably benefited the most after that were male racial and ethnic minorities, and young people. All groups who are very popular during elections but not so much when business is being done in Washington. Screwing people over on minimum wage increases is just another way “the man” keeps people down.
December 13, 2006 1:44 AM | Reply | Permalink
Here is a common sense explanation why minimum wage hikes are ultimately bad for the economy. Pretend you’re a business owner that makes widgets using predominately minimum wage employees.
U.S. Company:
Sale Price 6
Shipping Cost 1
Material Cost 1
Labor Cost 3
Profit 1
Foreign Company:
Sale Price 6
Shipping Cost 3
Material Cost 1
Labor Cost 1
Profit 1
Then do this same math assuming we increase the minimum wage in this country by 40% or 5.15 to 7.25. Result: the U.S. Company goes out of business; unemployment goes up, welfare/foodstamp expenditures rise, taxes revenue drops, etc.:
U.S. Company:
Sale Price 6
Shipping Cost 1
Material Cost 1
Labor Cost 4
Profit 0
Foreign Company:
Sale Price 6
Shipping Cost 3
Material Cost 1
Labor Cost 1
Profit 1
December 14, 2006 1:28 PM | Reply | Permalink
Re: But the only businesses I know that pay minimum wage are gigantic corporations- Wal-Mart, McDonalds, etc
These businesses usually pay above minimum, albeit only a couple dollars or so.
I actually do not know anyone who makes minimum wage (if I include tips for people who have server and bartender incomes), though this is partly because I live in a high cost area, and perhaps also because the current minimum has actually become outdated, which of course mean that raising it will not result in unemployment or even price increases.
December 14, 2006 6:25 PM | Reply | Permalink
Re: Pretend you’re a business owner that makes widgets using predominately minimum wage employees.
"Pretend" is the operative word here because your example is unrealistic. Nearly all minimum wage jobs involve either personal service, retail, or agricultural work that, by simple common sense, is not and cannot be in competition with foreign firms.
December 14, 2006 6:30 PM | Reply | Permalink
First, there are numerous industries that no longer exist in the United States primarily because of our cost of labor versus the labor costs in other countries. I live in Massachusetts and one only needs to visit Lowell, Lawrence or Fall River to understand just how many jobs were lost in the Textile industry.
Second, if you need examples of service industries there are many. McDonalds competes with supermarkets every day. If eating at McDonalds becomes more expensive because of minimum wage increases then more people will spend more dollars at supermarkets (A lot of food sold in supermarkets stores is not produced in the United States). How about Amazon competing with bricks and mortar retailers? If we buy from Amazon versus The Gap will have to layoff employees. Any economics professor will tell you that when price goes up demand goes down.
Third, and admittedly this point is the most difficult to prove, but the vast majority of the population (including the poor), benefit from lower minimum wages. France is an excellent example. Have you ever bought anything in France, their minimum wage is equivalent to $10.46 U.S. Dollars, and the price of everything reflects how damaging high prices can be to a poor family trying to stretch their incomes further. http://en.wikipedia.org/wiki/Minimum_wage
December 15, 2006 7:01 AM | Reply | Permalink
Re: First, there are numerous industries that no longer exist in the United States primarily because of our cost of labor versus the labor costs in other countries.
Those jobs paid well above minimum wage and as such are not germane to this matter. Meanwhile, I suggest a visit to the rural areas of Alabama and Georgia. A whole lot of jobs were lost there too when machines became cheaper than human labor in the cotton fields. But so what-- want to bring back share-cropping-- or slavery? Or is it just possible that the descendants of those field hands are living better (and richer) than they did?
Re: McDonalds competes with supermarkets every day.
Actually no, because food bought at the grocery store is already far cheaper than fast food-- if you only take money into account. But fast food saves something else that people value highly: it saves time. Sure there would come a point when people would sacrifice time rather than pay more, though from personal experience I can say that we are a long, long way from that point, and a raise in the minimum wage which adds a few pennies to the cost of a Happy Meal is not going to push us that far.
Re: How about Amazon competing with bricks and mortar retailers? If we buy from Amazon versus The Gap will have to layoff employees.
Online retailing is already competing with bricks and mortar retail. And guess what: online retail is often more expensive (shipping and handling charges). I just got buned by that personally: even with a 10% off online orders coupon I still ended up paying more for my Xmas order from Barnes and Noble online than if I had just gone to the damn store. (Besdides which shopping in person is, for many of us, fun!) And again, the level of increase in the minimum wage we are dealing with here will not make a noticeable difference in the cost of in-person retail: pennies at most.
Re: Third, and admittedly this point is the most difficult to prove, but the vast majority of the population (including the poor), benefit from lower minimum wages.
Hmm, guess you really would like to go back to slavery, Stygian industrial slums and the world of the pre-conversion Scrooge. But unless you can convince me you'd like to hop in a time machine and enjoy the "superior" standard of living back in the 19th century, your assertion that low wages make for better living is an absurdity that should get you laughed off every blog site even slightly more liberal than a reactionary Russian tsar. Good grief, a ten year old child would laugh at that claim!
December 16, 2006 5:24 PM | Reply | Permalink
Your responses ultimately boil down to "money must grow on trees". According to you, minimum wage employers have extra money to give to employees and their customers have extra money to spend on their products/services. In other words, it doesn’t seem like there would be any adverse affects if the minimum wage was raised. With that logic, why not raise the minimum wage to $100? Don't waste your time answering that question. But there are a few other arguments I'd love to hear your response to:
If it ain't broke don't fix it-
The U.S. has the strongest economy, the highest quality of living, the highest percentage middle class and a comparatively low minimum wage to the rest of the world (industrialized nations only). Seems to me we’re doing good job, why jeopardize our success?
Freedom/capitalism-
In a free / capitalist society employers and employees are subject to the laws of supply and demand to determine the price / cost of everything. The laws of supply and demand is the only reason employers generally pay more than minimum wage. Having the Government determine the price of anything is ultimately socialism and we all know that doesn’t work.
December 17, 2006 7:04 PM | Reply | Permalink
I forget who brought up the little tid-bit on the single mothers and the average of how many adult women support the increase in the minimum wage - but I applaud you.
I grew up in a single income home - with a single mother who worked 14 hour days to support myself and my sister: and made only enough to get us by until I entered the work force and gave half of my pay to help with house-hold expenses (that and saving for college)
It sucked - even with that, we didn't have THAT much left for anything else (and it's worse now as I only work in the summer so I can study and keep up my grades so I can hopefully apply for a scholarship to go to college).
I feel that the minumum wage needs to be increased because there are so many people entering the work-force who didn't have the chance to go to college (as they probably grew up living pay-check to pay-check in single income or low-income families) and have small children or expensies that those jobs just can't seem to quench.
That - and the government shouldn't be aloud to give themselves raises and those who are earning over a certian amount of income should be required to pay more taxes (especially since probably HALF of the money they make - is provided by those who work for minimum/below minimum wage *cough*McDonalds/Wal-Mart*cough*)
Men often hate each other because they fear each other; they fear each other because they don't know each other; they don't know each other because they can not communicate; they can not communicate because they are separated.
December 20, 2006 2:18 PM | Reply | Permalink