Wednesday, August 02, 2006

Minimum Wage Follies

One has to laugh at the jabber about the minimum wage. I don't think that raising the minimum wage does much harm, so maybe it's not a big deal. But it is offensive that nearly all the harm falls on those who the measure is supposed to help, the economically marginal.

And nearly all the benefits accrue to union workers, and people who make high wages, because now their pay is not so out of line, and they are better substitutes for unskilled workers.

Some points:

1. Very few workers work at minimum wage. I never did. I often worked two jobs, to pay for college. Construction, unloading timbers at a lumber yard, laying sod, working in orange groves. And if you work at minimum wage for more than a year or two, without getting a raise, you have other problems (productivity, attitude, attendance difficulties, etc). It is not clear that raising the minimum wage is the best way to help such desperately marignal people.

2. Job loss, job gentrification

From the EPI site, propaganda arm for white middle class union workers who are the actual chief beneficiaries of the minimum wage increase:

There is no evidence of job loss from the last minimum wage increase.

A 1998 EPI study failed to find any systematic, significant job loss associated with the 1996-97 minimum wage increase. In fact, following the most recent increase in the minimum wage in 1996-97, the low-wage labor market performed better than it had in decades (e.g., lower unemployment rates, increased average hourly wages, increased family income, decreased poverty rates).

Studies of the 1990-91 federal minimum wage increase, as well as studies by David Card and Alan Krueger of several state minimum wage increases, also found no measurable negative impact on employment.

New economic models that look specifically at low-wage labor markets help explain why there is little evidence of job loss associated with minimum wage increases. These models recognize that employers may be able to absorb some of the costs of a wage increase through higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale.

A recent Fiscal Policy Institute (FPI) study of state minimum wages found no evidence of negative employment effects on small businesses.

The minimum wage increase in the late 1990s was during one of the greatest economic booms in human history. Basically no one was making minimum wage, and so it is hardly surprising that there was no measurable job loss. It was really hard to find workers even at higher wages.

The Card and Krueger analysis is discredited. They themselves recanted, no one claims that specific industries go one way or the other, and the minimum wage increase differentially harmed mom and pop pizza shops, and helped McDendy's and Taco Hell: franchises face more inelastic demand, because of advertising. And, fast food prices in New Jersey (home of the C&K mythology) rose much faster than in surrounding states over the study period.

Finally, the unemployment rate among African-American teenagers is approaching 30%. In many parts of the nation, the unemployment rate among adults (if you count people who have given up looking for work, and account for the fact that we jail people for minor crimes that wouldn't be committed if they had more economic opportunities) is not much lower. If you have no job experience, and no sense of the need to show up for work on time, dressed properly and with an attitude that customers are your boss, you won't EVER have a job. The unemployment rate only measures people who have LOOKED for a job in recent past. Minimum wage increases mean that search is hopeless for anyone who would have been employed at $5.15, but not at $7.25. What is the effect on the measured unemployment rate? Zero! That poor teenager never even bothers to look for a job. We can always build more jails, though. (A screed from the OTHER EPI)

So, anyway, I really don't mind the minimum wage increase. We should just call it the "Legislation To Increase the Salaries of Middle Class White Union Workers Who Contribute Big Bucks to Ted Kennedy." Then, at least we would be honest about who is benefitting.

(you might check the very nice WSJ article by David R. Henderson, which got me thinking about this. Yeah, it's for subscribers. Waddya want for nothing, rubber biscuit?)

UPDATE: Dirty Davey makes a good point: restoring the real minimum wage is different from actually raising it. I worked on this a bit over at Div of Labour.


Dirty Davey said...

I think, though, that it is useful to distinguish between a real increase in the minimum wage (in the medium to long run) and a nominal increase that keeps the rate relatively stable with respect to inflation.

If you accept a minimum wage as a desirable and/or necessary form of regulation, then it makes sense that the specific wage should be adjusted for inflation. The politics of the situation have prevented even small adjustments for the last decade or so, meaning that now an attempt to move the wage to the long-term real level requires a larger immediate change (magnifying the other effects, because even an inflation adjustment is a "real" increase in the very short term).

Of course, it's not as if there is a serious chance we'll end up with a setup where the minimum is automatically adjusted for inflation.

Laurent GUERBY said...

French minimum wage is inflation adjusted, and is raised by law every July 1st. Government may add a bit to the increase.

Teri said...

Many states already have minimum wages that are higher than the federal minimum wage. Sometimes you will find a job that is paying the federal minimum wage. Since it's so much lower, they don't get a lot of takers.

There is just no getting around the fact that raising the minimum wage makes it more expensive to hire those people. And it means that those people won't have a chance for any jobs

Anonymous said...

It would seem to me that as the minimum wage rises, illegal workers become even more attractive, relative to Americans, increasing the incentives for them to immigrate, and for employers to hire them.

Kyle said...

As I wrote on my site. These laws don't do much of anything but will certainly cause prices to rise thus eliminating any "gains" by low income workers.
Its what I call Political-Economic Masturbation.