Posts tagged with: Minimum wage in the United States

outofworkIn almost every long-term clash over a cultural or political policy, there comes a point that I’d call the “comfort-level concession.” If the agenda of one side has been won — or has at least moved sufficiently toward achieving victory — the winning side often feels comfortable making concessions about claims that they may have previously denied.

Initially, they will firmly state, “The claims of our opponents are overblown; the detrimental effect they predict will never happen.” Once they’ve won the public over to their side, though, they become comfortable enough to admit the truth: “Well, maybe our critics were about the detrimental effect. But so what?”

This is where we are in the debate over a $15 minimum wage. For years, critics of wage floors have complained that raising the minimum wage to that level would increase unemployment. And for years supporters of the minimum wage claimed that wouldn’t happen. However, now that the $15 wage has been approved in two of the largest states in the union — California and New York — the advocates are willing to admit, “Yeah, it will lead to increased unemployment. But so what?”

If you think I’m exaggerating, consider a recent headline at the Washington Post: “The $15 minimum wage sweeping the nation might kill jobs — and that’s okay

In the article Lydia DePillis notes the very shift in response I outlined. Step #1: Critics complain about the detrimental impact, and are assured it will not happen:

minimum-wage-15Since 1938, when President Franklin Delano Roosevelt introduced the first federal minimum wage in the U.S., a debate has raged about whether wage floors help or hurt workers. But thanks to a radical economic experiment in California, we may be only a few years away from having a definitive answer.

California Gov. Jerry Brown and state legislators have reached an agreement to raise California’s minimum wage to $15 an hour by 2022. Under California’s plan, its minimum wage — already one of the highest in the nation at $10 an hour — would rise to $10.50 in 2017, $11 in 2018 and a dollar each year through 2022.

By 2022 we should know for sure how the change will affect California. In the meantime, here are ten things you should know about the ongoing minimum wage debate:


10200456-largeIf you ask most people why they support raising the minimum wage they’ll says it’s because it helps the poor. But as David Neumark, a scholar at the Federal Reserve Bank of San Francisco notes, numerous studies have shown that there is no statistically significant relationship between raising the minimum wage and reducing poverty.

That finding may appear to be counterintuitive. After all, if poor people have low wages then increasing their wages should help reduce their poverty. To some extent, this is true. However, what is overlooked is that minimum wages target individual workers with low wages, rather than families with low incomes. The reason that distinction is important is because most workers who earn the minimum wage are in higher-income families.

That becomes more obvious when you think about the composition of the American workforce. If you are from a middle-class family, your first job is likely to have paid minimum wage. The same goes for all your friends who are from families higher on the economic ladder. And it’s the same for young workers today. Go down to the mall and you’ll find that the young men and women working in Forever 21 and Abercrombie & Fitch are not from families that are in poverty. Increasing the minimum wage merely ensures that these young people who are (mostly) from wealthier families get a pay raise.

The relationship between being a low-wage worker and being in a low-income family is fairly weak, as Neumark explains, for three reasons:

the-new-york-times-website-is-back-after-two-hour-outageWhile it may be difficult to imagine, there was once an era when the New York Times was concerned about the poor.

Consider, for example, a 1987 editorial they ran with the headline, “The Right Minimum Wage: $0.00.” As the editors noted at the time,

[Raising the minimum wage] would increase unemployment: Raise the legal minimum price of labor above the productivity of the least skilled workers and fewer will be hired.

If a higher minimum means fewer jobs, why does it remain on the agenda of some liberals? A higher minimum would undoubtedly raise the living standard of the majority of low-wage workers who could keep their jobs. That gain, it is argued, would justify the sacrifice of the minority who became unemployable. The argument isn’t convincing. Those at greatest risk from a higher minimum would be young, poor workers, who already face formidable barriers to getting and keeping jobs. Indeed, President Reagan has proposed a lower minimum wage just to improve their chances of finding work.

Back then the federal minimum wage was $3.35 ($7 in 2015 dollars) and the editors of the Times had a basic understanding of economics. Today, their editorial board is apparently comprised solely of those completely ignorant about economics, for they published an editorial last week calling for wage to be raised to $15 a hour.

Their reasoning? No real justification is given other than that the government must do something. In their conclusion they write:

Blog author: jcarter
Thursday, December 11, 2014

Summer-JobsGiving disadvantaged youth a summer job reduces violent crime, according to a new study published to the journal Science.

In a randomized controlled trial among 1,634 high school youth in Chicago, assignment to a summer jobs program decreases violence by 43 percent over 16 months (3.95 fewer violent-crime arrests per 100 youth). The decline occurs largely after the 8-week intervention ends.

gaplogoThe furniture store Ikea has announced they will begin to base their minimum pay on what’s considered to be a “living wage” in each local area, rather than on what competitors are paying. Similarly, the clothing retailer Gap says it will set $9 as the minimum hourly rate for its United States work force this year and then establish a minimum of $10 next year.

This makes good business sense — but will lead to a lot of bad economic reasoning.

A prime example is the latest column by Slate’s business and economic writer, Jordan Weissmann:

Notably, Ikea isn’t raising prices on its furniture to pay for the raise. Instead, the company’s management says it believes the pay hike will help them compete for and keep talent, which is of course good for business. The Gap used a similar justification when it announced it would raise its own minimum to $10 by 2015.

Which I think hints at something about what would likely happen if the U.S. raised the federal minimum. Conservatives who argue that higher pay floors kill jobs tend to assume that businesses are already running at pretty much peak efficiency, and so forcing them to spend more on labor will lead to less hiring. But left-leaning economists see it differently. They tend to argue that increasing wages can lead to savings for business by reducing worker turnover, for instance, and forcing managers to make better use of their staff.

Both the conservatives and the left-leaning economists are largely correct. Higher pay floors do tend to kill jobs and increasing wages can lead to savings for business by reducing worker turnover. But where Weissmann and other liberals go wrong is in assuming that businesses can still prevent worker turnover when the minimum wage is increased.

minwage11Acton’s Director of Research, Samuel Gregg, recently  wrote about the effects of raising the minimum wage at the National Review Online. The latest CBO report estimates that increasing the minimum wage to over $10/hour in 2016 will not greatly affect the poorest in society; it is estimated that this increase will only help 2% of those living in poverty. The benefit of the increase will go to people “already comfortably above the poverty line.” Gregg discusses this phenomenon:

Is that just?

Given the minimal (pardon the pun) effects of mandated minimum wages upon poverty, one must ask why some people invest so much intellectual energy and political capital in a policy that tends to benefit, for example, teenagers and young people from comfortable backgrounds who won’t be staying in minimum-wage jobs for very long.

In part it’s the top-down approach at work. Legislating minimum wages gives us the illusion that legislators and governments can flip a switch and make things better. Legislated minimum wages, however, aren’t immune from the workings of supply and demand. (more…)