Jared Bernstein, senior economist at the Economic Policy Institute, wants government to raise the legislated minimum wage. Here’s his letter in today’s New York Times:
To the Editor:
Implicit in "Union Claims Texas Victory With Janitors" (front page, Nov. 28) is the need to raise the federal minimum wage.
An executive of the Houston Building Owners and Managers Association is quoted as saying that the hourly pay of janitors in Houston is "generally above the minimum wage." According to the article, Houston janitors typically earn $5.25 an hour, a dime above the national minimum. The article also cites a worker who says she has not had a raise in eight years. It’s no coincidence that the last federal minimum wage increase was eight years ago.
In other words, there are still employers who set the wages for adult workers in real jobs based on the minimum.
Unless Congress stops ignoring this reality (and in the absence of successful organizing drives), these workers – millions of whom toil in our low-wage sectors – will be consigned to working poverty.
Jared Bernstein
Bernstein reads as evidence of the minimum-wage’s effectiveness the fact that many low-wage workers "typically" earn an hourly wage just about equal to the legislated minimum. So he reasons (I guess) that raising the legislated minimum will raise the wage that all currently employed low-wage workers typically earn.
But his reasoning is wrong. First – and less interestingly (if not less importantly) for those who know economics – wages are earned only by workers with jobs. To the extent that the minimum wage puts some workers out of work, the zero "wages" earned by the newly unemployed workers won’t show up in wage statistics – and these unfortunate victims of the minimum wage will be made worse off but be invisible to Mr. Bernstein.
Second, it’s hardly a surprise that the wages of many low-skilled workers hover around the legislated minimum. To see why, do the following mental experiment:
Suppose there are six classes of workers, ranging in skill from "very high" to "un." Skill group 1 has the highest-skilled workers (neurosurgeons and the like) while, at the opposite end of the spectrum, skill group 6 has the lowest-skilled workers (such as janitors and hotel maids).
Suppose that without minimum-wage legislation the equilibrium hourly wage for each skill group is as follows:
1: $500
2: $100
3. $20
4. $5
5. $4
6. $2.50
Now impose a minimum-wage of $5.15 per hour. What happens?
Employers of workers in skill-groups four, five, and six will reduce the quantity of work-hours they buy from these workers. This reduction in work-hours hired will occur until the marginal value per hour of workers hired rises to at least $5.15.
Hourly wages paid to workers in skill-groups four, five, and six will then be at or very near the legislated minimum wage.
(Incidentally, because skill workers are often substitutes for larger-numbers of unskilled workers, a legislated minimum wage likely increases demand for workers in skill-group three, thereby increasing the wages earned by these workers.)
Bottom line: Bernstein is correct to suggest that the legislated minimum-wage plays a large role in determining the "typical" wage paid to low-skilled workers. But the way that it plays this role – by reducing employment opportunities (and/or by decreasing the quality of the work-experience for these low-skilled workers) — is hardly a reason to endorse the minimum wage and to call for it to be raised.
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I think it was Russell who posed the question, if the minimum wage is a good thing, why not set it at $15/hour? The answer, of course, is that then the negative effects become visible. But the fact that this is not done, or even proposed, also implies that those who support minimum wage laws know this – that they are aware of the negative effects and are willing to accept them as long as they are invisible to the voting public. The minimum wage is not about egalitarianism, its about power.
P.S., perhaps the correct approach to calls for an increase to the minimum wage would be to call their bluff. They propose $7.50, raise it to $15.50.
Obviously the minimum wage eliminates jobs and increases unemployment of the younger unskilled. But even those who ignore those facts should realize the folly of imposing a single minimum wage throughout the entire nation. The cost of living in the rural South is probably half that of most east and west coast cities. For a single person, $11,000 per year is sufficient to pay rent, transportation, food, and all other living expenses in many small towns. A Southern couple with a combined income of $22,000 will neither starve nor sleep in the streets.
Unfortunately, the very workers who are victimized by minimum wage laws probably lack any understanding of economics. They don't realize how the Ted Kennedy's are hurting them.
Jared Bernstein doesn't ask the question about employee turnover. It was my understanding that most folks start with the minimum wage and get better jobs later. No mention of the workers' age and number of dependents? What a lame letter!
As a former minimum wage earner, I would have rather gotten 35 hours a week at $4.00 than 25 hours a week at $5.00.
Love the blog, found you through poorandstupid.com . . .
Great analysis Don! Whenever I someone tells me that the min. wage should be increased to $8, or say $10. I always ask them why not just make it $30 and let everyone live comfortably. It's been said that the firt thing a min. wage does is make it illegal to work if your skills are worth less than the prescribed rate.
Chris
http://amateureconblog.blogspot.com/
Again, Don shows he cannot reason rationally. His argument is that a raised minimum wage would cause employees to be
laid-off, as companies would no longer be able to afford to keep them. Yet surely if companies could afford to employ less staff to do the same work, they already would do – as – by his own logic in "The Wages of Wal-Mart", another company would have otherwise already have seized this competitive advantage.
If the "rationale" is that companies would consequently have to reduce production – and thereby profits – it is astonishing that the UK, which regularly raises its minimum wage, has any viable businesses left. Or, indeed, does not suffer from Don's predictions of spiralling unemployment.
This is simply trying to justify US corporations' maximization of their own profits at the expense of their lowest-paid employees.
As a side-bar, if the minimum wage is to have any value, it should be pegged to inflation. Otherwise it just pays lip-service to an ethical ideal to please the Left Wing.
Tom,
You're right. A raise in the minimum wage by a small amount would not result in many immediate layoffs. But the effect of a small increase is so minor that it is practically invisible. Only a few people lose their jobs. Prices rise only a little. And the people this effects negatively are politically invisible – workers with minimal skills and the poor. And that's how the politicians get aways with it. You hurt a few people in order to help a few people, and you make a name for yourself with the folks who think increasing wages and benefits is as easy as passing a law. The trick is to raise the minimum wage by just enough to reap the political benefits without doing any real damage to the economy.
Perhaps you think I'm wrong. Okay, then do you agree that we should raise the minimum wage to $15/hr? Why or why not?
When conditions of the market change, profit-maximizing choices change. Why is that so hard for some people to understand?
This is a terrible post.
I actually believe the opposite from the poster. For inferior goods industries, raising the minimum wage actually increases jobs…those that typically earn the minimum wage…younger workers etc…These folks actually consume alot of cheap food and other cheap services…therefore if you increase the amount they get paid, they will spend more on these items (if you raised the wage too high, then you would lose jobs and hurt business b/c with inferior goods as income rises, consumption actually decreases at some point.)
By the way, theory aside, can anyone provide me with ANY study that proves that increasing the minimum wage costs jobs? When has that actually EVER happened. People always throw out that economic defense, but I don't buy it…it MYTH. Raising the minimum wage a modest amountmerely transfers a more appropriate amount of income from business to labor. WE should do more of it! Look at the income data on the national level!
Hit the Bid,
Re; "Raising the minimum wage a modest amount merely transfers a more appropriate amount of income from business to labor."
Why do you assume this? A modest increase in the minimum wage is passed on primarily in the form of a modest increase in prices – which are in essence a form of regressive taxation. If the increase in the minimum wage is sufficient to force a decrease in profits (neither price increases not cuts in hiring have been sufficient to cover the increased costs) then at the margins, some business will go out of business and some startups will simply not happen.
In short, it is possible to pay for higher wages by cutting into profits, but you will do much damage to the very people you claim you want to help before reaching that point – and you will do even more damage when you reach it.
Unless I've missed the point. If what you want to do is benefit people with jobs at the expense of people without jobs, then you will probably succeed.
In respone to Hit the Bid:
There are plenty of actual economic studies that prove that raising the minimum wage increases unemployment. In fact I will give you three really large case studies to enjoy. The names of these studies are Italy, France, adn Germany. All kidding aside, there is only one study that was put out by two profs. at Princeton who discovered that during a two yeard period in New Jersey that after raising the min wage unemployment did not increase.
However, this study was refuted by a FED study that found that what actualy happened in New Jersey was the price level increased in response to the min wage increase. So if you are a worker at Mcdonalds earning 5.15 and you get a dollar wage increase to 6.15 but all of the places that you buy from increase their prices, are you any better off?
Tom, you're ignoring the cost vs benefit of having those employees. For example, I currently hire a maid to come in an clean my house for 4 hours every two weeks for which I pay $50. I do this because in my opinion the $50 that I give up is more than offset by saving 4 hours of having to clean my own house. However, if the maid were suddenly to raise her rates to $70 per week, then I may stop using her services because now the benefits are less than the cost.
The same thing applies to workers at Wal-Mart. If Wal-Mart currently pays retail clerks $6 per hour, but a forced increase raises that to $7 per hour then perhaps Wal-Mart will now only employ 4 clerks at a time compared with 5 clerks at the old wage. So, while the 4 clerks are now better off, that fifth clerk is now no longer employed, and customers are now forced to wait that much longer as there is one less till open. Basically the additional costs are forced onto customers in the form increased waiting time.
Tom,
Are you not embarrassed by your post?
You write that:
"His argument is that a raised minimum wage would cause employees to be
laid-off, as companies would no longer be able to afford to keep them. Yet surely if companies could afford to employ less staff to do the same work, they already would do – as – by his own logic in "The Wages of Wal-Mart", another company would have otherwise already have seized this competitive advantage."
Uh, when workers become MORE expensive, firms will not replace workers when they leave jobs, or may even lay off some workers. In either case, their profits certainly are not increased when they incur higher costs. So there is no unexploited profit opportunity.
Suppose you run a delivery business with two vehicles and one costs $10,000 per year in rents and the other $15,000 per year – and you can make 50,000 deliveries per year. what you are saying is that firms can make 50,000 deliveries per year with only one vehicle but choose to employ the second vehicle just for fun. No, the fact is this company cannot produce the same output with only one vehicle, yet it finds that by using the second vehicle that costs $10,000 is still worthwhile enough to expand production and still make a profit. How would this firm be better off if vehicles were mandated to cost at least $13,000?
And to Mr. Hit the Bid, you are confusing us. With regard to empirical evidence, there is much controversy over the Card and Kruger findings.
Here is a Scott and Neumark paper:
"Living wage campaigns have succeeded in about 100 jurisdictions in the United States but have also been unsuccessful in numerous cities. These unsuccessful campaigns provide a better control group or counterfactual for estimating the effects of living wage laws than the broader set of all cities without a law, and also permit the separate estimation of the effects of living wage laws and living wage campaigns. We find that living wage laws raise wages of low-wage workers but reduce employment among the least-skilled, especially when the laws cover business assistance recipients or are accompanied by similar laws in nearby cities."
Here is a Neumark and Nizalova paper:
:Exposure to minimum wages at young ages may lead to longer-run effects. Among the possible adverse longer-run effects are decreased labor market experience and accumulation of tenure, lower current labor supply because of lower wages, and diminished training and skill acquisition. Beneficial longer-run effects could arise if minimum wages increase skill acquisition, or if short-term wage increases are long-lasting. We estimate the longer-run effects of minimum wages by using information on the minimum wage history that workers have faced since potentially entering the labor market. The evidence indicates that even as individuals reach their late 20's, they work less and earn less the longer they were exposed to a higher minimum wage, especially as a teenager. The adverse longer-run effects of facing high minimum wages as a teenager are stronger for blacks. From a policy perspective, these longer-run effects of minimum wages are likely more significant than the contemporaneous effects of minimum wages on youths that are the focus of most research and policy debate."
There is more, if you are interested, pick up a labor econ textbook and look in the references section.
Consider the low paying jobs that were automated or outsourced or otherwise eliminated the past 30 years:
- garbage collectors (automation);
- waitresses (self-service buffets);
- lumberjacks (automation);
- agriculture field hands;
- garment workers;
- components assemblers;
- call center operators.
We could list dozens more.
Employers are constantly evaluating methods to reduce labor costs. Hiking wages will change the cost-benefit analysis of every labor reduction proposal. Minimum wage hikes will most certainly lead to job losses – not always immediately, but eventually.
I see all these arguments that a hike in the minimum wage will cause all these disasters. So, why when I look at the national data on the US economy do I see increases in the minimum wage accompanied or followed by strong employment and prosperity? I do not understand why all of the bad things you guys claim never shows up in the data.
As a roboticist, perhaps I should take a more self-interested view to the situation.
Normally, I would totally agree with the post: minimum wage increases either decrease employment, thus hurting the least skilled, or increase prices, thus hurting the least wealthy.
But if a waitress costs less than renting a next gen ASIMO, maybe robots would serve me more often.
I suppose that would either:
1) Precipitate a war between robots & their wealthy masters and the underclass
-or-
2) Just exacerbate the underground economy to allow jobs below the minimum wage.
All joking aside, robots won't cause mass unemployment because:
1) Increases in productivity are good
2) Automated education will aid the unskilled
spencer,
Are you saying that the data does not show an increase product/service cost when minimum wage is increased?
"The last time the minimum wage was increased, restaurant menu prices increased 2.6 percent in 1997 compared with a 1.7 percent increase in the consumer price index. Inflation in the service sector, in which most minimum wage workers are employed, rose 2.8 percent in 1997—1.1 percent higher than the overall inflation rate."
http://www.heritage.org/Research/Labor/WM19.cfm
Why do people not consider that the minimum wage is an entry wage, paid for jobs at the beginning and low end of the workplace? You do not raise a family, live in the suburbs, send your kids to college with a front-line job at MacDonalds – nor does anyone with any sense believe that you do.
You get a front-line job at MacDonalds to learn the ways of the world (show up on time, don't goof off, &c). As soon as you've got that part down well enough to convince your next employer, you're on your way to going up the skill group ladder.
If at all, the minimum wage should be indexed to inflation.
Spencer,
Social programs in the US, including the minimum wage, were all put into place during one of the greatest economic expansions in all of human history. Touch the brakes very lightly while holding the accelerator to the floor and you won't notice it much. The people we want to help, have been and will be helped more by the accelerator than by the brake.
Irvan Kirign — Since 1957 — as far back as I have data on the CPI for services — the correlation between the change in the minimum wage and the change in the CPI for services is 0.034.
This says that the relationship between the two variables is essentially random and implies that changes in the minimum wage has had no consistent impact on the CPI for services.
Sure you find individual incidents when two price increases coincide. But this is suppose to be an economics blog. So I would expect someone to show me some data that would survive the most simple statistical test of relationships.
Randy — You are right, over the last 50 years when the minimum wage was changed 14 times was one of the greatest expansions in economic history. I do not doubt that.
But I have read a list of claims that a rise in the minimum wage would have all these bad results. All I'm asking
is for someone to provide any data to support these claims.
Just for a starter. The correlation between the change in the real minimum wage and the unemployment rate is 0.02. Just about as random as with the cpi for services.
Spencer,
I can only fall back to the position of my earlier posts, that the increases have been purposefully insignificant – to achieve political gain without damage to the economy. My concern is that if a significant percentage of the population comes to believe that the minimum wage is a net positive, then the temptation will be to put larger increases in play. At which point, I think you will start to see some of the negative consequences described above.
Even if the minumum wage has only small effects, remember who makes the miniumum wage – it is largely not the poor that are supporting families – so why are we not thinking harder about BETTER ways to help those in need. Programs like EITC are a start, as are other programs that are not nearly as interventionist as wage setting.
I think the concern about the minimum wage from many here goes back to Hayek's point that there can not be "just a little" socialism.
Spencer, just curious to know if you've controlled for other factors that could explain unemployment rates, such as economic growth, among others. Additionally, are you using the unemployment rate for all citizens or just those who are unskilled and earning minimum wage? What time frame are you looking at for the changes, monthly/quarterly/annually? I would assume that an immediate increase in the minimum wage would take some time to work it's way through the system. I'm curious to know where you found this data as I'd like to see the results for myself.
The fallacy of the minimum wage has the resiliency of the broken window fallacy. No amount of reasoning or empirical evidence seems capable of stamping out these dumb ideas.
It drives me crazy.
The question that I have for the pro minimum wage people is if the min wage has no discernable negative effects on employment, inflation, or the general welfare of the working poor then why not advocate for a minimum wage of 25 dollars? In fact why not make it 100 dollars? Id love to have this question answered by those who doubt my criticism of the min wage.
One thing, Don, that Bruce Bartlett pointed out over a year ago: The New York Times, which, up until the 2004 Elections, had always (and, I mean, going back decades, in editorial after scathing editorial), ALWAYS, been AGAINST the minimum wage (a federal version).
Then, come 2004, they're suddenly for it……with no mention as to why, and no mention as to their decades-long opposition to it, or why they suddenly switched.
Yep. It's about power, not economics, or jobs, or even economic morality.
Love this blog! Found it via Powerline!
You have a good day, sir.
Spencer: there is no well-known empirical evidence that the minimum wage causes unemployment because when only a few people earn the minimum wage, you only get a little bit of unemployment. That ends up getting lost in the ordinary churn of job creation and elimination.
Some number of years ago, I found a book in the Potsdam State Library which told of a US minimum wage increase that accidentally applied to Haiti. It doubled the income of workers and destroyed the lace industry. Unfortunately, I cannot find that book now.
-russ
It truly boggles the mind that some folks refuse to acknowledge that raising the minimum wages costs jobs (and/or hours). I don't say "believe" because belief is for issues open to dispute; I say "acknowledge" because that is what one does when one is confronted by a fact.
The Law of Demand: All other things constant, if the price of a good goes up, less of that good will be consumed.
The LoD is ironclad. It applies to every rational (ie: sane) person, in all places, at all times. The services of an employee are a good, the employee's wages are the price of that good, therefore if wages go up, all other things constant, less labor will be purchased by employers. QED.
Walter Williams, in his 1982 book The State Against Black, has post-WWII employment data broken down along racial and age-group lines.
The data show that in 1948, the unemployment rate for black teenagers was just under 10 percent, which that for white teenagers was about 10.4 percent. Thirty-odd years, and many minimum-wage-hikes later, the unemployment rate for both groups had risen, but for blacks it rose far more than for whites, so that (if I recall correctly) the unemployment rate of black teenagers by the late 1970s was more than double that of white teenagers.
(Walter's working now on a revised and updated version of this excellent book.)
I realize that these data don't prove that the minimum-wage has a perncious effect — both in terms of increasing unemployment of low-skilled workers and of increasing racial discrimination in hiring and firing — but they are quite suggestive.
Warren Meyer, at Coyote Blog, provided three specific cases where minimum wage laws forced him to eliminate jobs:
http://tinyurl.com/a3zly
Warren's cases include job losses to automation, to outsourcing, and to business closure, all the direct result of minimum wage hikes.
I particularly liked Mr. Meyer's closing statements:
"It is astounding to me that people still want to believe the notion that minimum wages don't affect employment. Just look at France and Germany for living proof. Or, consider any other commodity in the market. If the government set a price floor for gasolene, say at $3.00 a gallon, would anyone out there argue that people wouldn't use less gas? But when we try to raise the price floor on labor, the media and politicians with a straight face try to argue that businesses won't use less labor. Or, for the reverse, look at the experience with natural gas and airline travel – the government removed price floors on these commodities in the lates 70s / early 80s and look at how demand has skyrocketed."
I suspect the reason that no one has every been able to demonstrate that the minimum wage has much of an impact in the US economy is that a rise in the minimum wage has many offsetting impacts that just about balance out.
Yes, a minimum wage increase does lead to a first round negative impact on employment of minimum wage workers. Or, if we were doing this analysis 25 years ago everyone would believe the first round impact would be higher prices and inflation. If it goes up 10% and firms lay off 10% of their workers that would be a first round impact just as many posters pointed out. But the remaining workers also receive a 10% increase in wages so their real income goes up sharply — presumably their productivity also rises 10% to justify the higher wages. None of this has a first round impact on demand and profits. The firm is still selling the same ammount, receiving the same revenues, paying the same labor bill and earnings the same profits.
When the employees now go out and spend that 10% real wage increase it has a positive impact on the economy and leads to greater employment. And that second round impact will absorb the labor that became unemployeed in the first round.
These are the two main impacts of a minimum wage increase in a dynamic econmy — so both the conservative argument that it cuts employment and the liberal argument that it increases employment can both be correct
if you do a dynamic or multi-stagge analysis.
The problem with most of the analysis in the earlier post is that they were static analysis and did not incorporate the dynamic second round impact.
But the end result is that in the dynamic real world of the US economy is that a change in the minimum wage just does not have a significant impact either way.
Spencer: Why do you assume that the demand for un- and low-skilled workers is inelastic? Only if this demand is inelastic (over the range of the wage hike generated by the minimum-wage legislation) will the total earnings of workers employed at the minimum wage be higher than their total earnings before the wage hike.
If demand for this labor is elastic, the higher minimum wage means that the total earnings of un- and low-skilled workers falls (because the percentage reduction in hours of labor bought at the higher wage is greater than the percentage increase in the wage).
I strongly suspect that demand for un- and low-skilled workers is elastic at prevailing wage rates — meaning that a minimum-wage hike REDUCES the total amount earned by all workers in these low-skilled groups.
Spencer: "But the remaining workers also receive a 10% increase in wages so their real income goes up sharply — presumably their productivity also rises 10% to justify the higher wages."
Why should we assume any productivity increase will be induced by a government-mandated wage increase?
The problem I see, Spencer, is that a minimum wage increase of 10% will not be accomodated by raising workers wages at all. What will happen instead:
- low-skill jobs are moved overseas;
- automation replaces low-skilled workers;
- companies eliminate or reduce services formerly provided by low-skilled workers (self-service retail checkouts and buffet service at restaurants, for example);
- some businesses simply are closed, such as the park concession Warren Meyer referred to over at Coyote Blog.
In the very short term, some businesses will be forced to pay unskilled workers artificially high wages. But the managers of those businesses will immediately start looking for ways to restore the equilibrium.
"presumably their productivity also rises 10% to justify the higher wages."
Why would we presume that productivity also rises? The 10% increase is a result of government force not market forces. I'd agree with the statement if it were solely market forces that increased wages, but the whole raison d'etre of a minimum wage is to artificially set a price level above the market clearing level.
As for the effects of remaining employees having 10% more to spend increasing overall spending and everything washing out in the end, don't forget that the 10% increase comes out of the pocket of the employers and the now unemployed worker who have less to spend. Alternatively, it could come at the expense of customers who face higher prices. So, even if those remaining workers have 10% more to spend, someone, somewhere has 10% less to spend.
If two parties engage in mutually beneficial free trade, they are creating wealth in the overall economy. Each party is better off by having traded, otherwise they wouldn't trade. But, if trade is forced upon one party, in the form of minimum wages, taxes or just plain theft, that's not improving the economy, that's just redistribution.
OK, scott. let mey see how your theory works.
You assume a static model where marginal costs of the minimum wage employee is equall to ther marginal products. Equilibrium in the static classic model.
One, an increase in the minimum wage causes the marginal price of minimum wage wage employee to rise.
Two, no change in productivity. Consequently the marginal product of all minimum wage employees remains unchanged.
Consequently, the marginal costs of all minimum wage employees now exceeds their marginal product. OK. this means that they would all lose their jobs.
So if you look at an increase in the minimum wage in the static, classic model our host apparently believes in and teaches at GMU and that you are arguing in favor of, you can reach no other conclusion but an increase in the minimum wage will cause all minimum wage employees to lose their jobs.
This can not be right. So whould someone please show me what is wrong with this?
Spencer,
In the first place, the marginal product of all low wage employees would not remain constant. That's why most $5.15 wage earners receive raises. So increasing the minimum wage will not force the unemployment of the many who were deemed likely to soon get raises.
Second, elimination of jobs after a minimum wage hike is not immediate for several reasons. In many cases, employers must honor contracts with customers, and so jobs may not be terminated until the contract is up for renewal. Other employers will try to automate jobs, but the development and acquisition of required equipment takes time. Still other employers will attempt to continue business as usual, hoping to find cost reductions or revenue enhancements to offset the labor cost increase. Eventually, though, the jobs will be lost after no solution is found.
I think anyone who has worked for large corporations realizes that management doesn't react immediately to changes in costs.
We are talking about an economic theory, not what large corporations do. Besides, I do not believe large corporations employee many minimum wage employees.
Unless you are also claiming that minimum wage increases also causes final demand and output to fall a drop in employment from an increase in the minimum wage must also generate an increase in productivity– it is just the way the numbers work.
Don Boudreaux — 1948 was the start of the massive post war black migration out of the rural south to northern cities. I suspect this major structural change did more to cause young black unemployment then the minimum wage.
If you want to attribute the rise in young black unemployment to one factor I would argue it was the invention of the cotton picking machine just as the invention of the cotton gin was a major factor a century earlier.
Why the assumption that minimum wage jobs demand is fairly inelastic? Perhaps because we don't see businesses employing workers that they could do without. Any small business that I've dealt with spend the minimum amount they can get away with in *every* field. When prices rise for an commodity they require (be it labour or anything else), they don't stop using it, they either eat the increase of increase prices.
No doubt when prices of any commodity rise, some businesses at the margin will be wiped out. But simply increasing the minimum wage reasonable amounts will undoubtedly increase total wages.
Why not raise the minimum wage to $30? Because, like everything, there's a sweet spot for maximizing wages. (Or simply put: why do people who believe that lowering the tax rate will increase the gov't tax income not believe that 0% is the tax maximizing rate.)
More to the point, I do not think it is in the interest of society to have those working full time living in abject poverty. To be honest, I believe that North American society is better off without jobs that are only viable when the wage is so low.
Spencer, perhaps I misunderstood your statement:
"But the remaining workers also receive a 10% increase in wages so their real income goes up sharply — presumably their productivity also rises 10% to justify the higher wages."
Were you referring to all workers, including those previously above the new minimum wage? Or did you mean the low wage workers who did not get laid off? I assumed the latter because you said they received a wage increase, implying they were below the new minimum.
Automation, induced by minimum wage increases or otherwise, should lead to a total productivity increase for a firm. But that's not to justify the higher wages of low-skilled earners. That's the result of replacing them.
Spencer, in the short run companies can't adjust to cost changes that quickly. So, for some time those companies will either have to eat the minimum wage increase or, if possible, pass along the cost increase to customers. In the long run, you're right some jobs will have to increase productivity. But this could mean workers now only working 4-5 hour shifts instead of 7-8 hours at the old minimum wage. Or, it could mean increased capital spending to improve productivity or perhaps replace the workers.
Another point that I rarely see mentioned is that even if those minimum wage jobs remain it might be different workers in those jobs. By increasing the minimum wage, it follows that you're increasing the labour supply (again, standard classic model). So, which workers do you think are more likely to have the new minimum wage jobs, those who are less skilled and were happy working at the old minimum wage, or those who are slightly higher skilled and who have now entered the market because of the new higher wage? My guess is that it'll be the slightly higher skilled employees as they're the ones more likely to, as you put it, justify the 10% increase.
So, while the immediate short run effect might be to increase the wages of those at the minimum, I think the long run will either see those jobs cut back, or replaced with increased capital spending or even replaced by slightly higher skilled employees. But the end result seems to be the same, those with the lowest will see less work.
What correlations can you assign to artificial constructs in economic models? Any kind you like. You just cannot prove them. To see the effects of an increased minimum wage, look at the effects of an automatic Cost of Living Adjustment. They are practically invisible. Why not index the Minimum Wage? I think the fear is that Labor, on the lowest level, strays too far from being a commodity open to competitive bidding. If the minimum wage fell to $1.25, do you think there would be full employment? Now, you see, that really depends on a price of a loaf of bread. Doesn't it? The same holds true if the Minimum Wage rose to $30/hr. What would happen to the price of a loaf of bread? Economist seem to be lost in this fog of micro-economics. The broader question is: "Should labor be regulated?" If competitive forces act on labor in an open market, then a Minimum Wage is really a moot point. I appreciate the fact that I don't make the rules or own all the toys, so I am willing to examine the problem as it exists. Who are the lucky people earning this $5.15 bonanza? Sales Clerks at the Mall, Fast Food Friers, Babysitters, and the Cleaning People, whether they speak English or not, all qualify. Suppose the price of labor is artificially set at $30/hr. The Clerks at the Mall get their pink slips and go home. The store at the Mall operates on the Honor System. The owners on the golf course fail to hit par, and recall the Sales Clerks. The Fast Food Franchisee tearfully bids the schoolkids goodbye and iniates a Fry Your Own Honor System. It works for all of an hour and a half; he can't hit par, either. How is he ever going to pay for his mansion? He calls the kids back and introduces two new menu items, The SNIFF o' WHIFF meal for 99 cents, and the $30 Dollar Burger. The Babysitters are totally out of luck. Mommas quit and look for assistance. The Cleaning People are history and America gets a whole lot grubbier. Renting a room for the night becomes a question of last nights sheets or last weeks sheets. All the people who are unaffordable, are now very dangerous. Which in turn leads to anarchy and chaos. All of this because government told people they are worth more than the market will bear. This is on the low end.
The high end is a different story. Regulating Labor on the high end produces socially damaging results that are of much greater concern. This is done through regulatory licensing. How much can a doctor earn befor you call him a thief? What does a Lawyer actually do? Are Universities complicit in this scheme? I know this is not the topic. Perhaps it is one best left to the professionals.
I think a possible answer is that both pro and anti minimum wagers are more right on some things and more wrong on some things. Believe it or not, employers still take advantage of employees, although they no longer shoot them and their children when they go on strike. (Although this is a very extreme and rare example, stuff like this did happen, remember company stores and the Pinkertons?)
On the other hand, minimum wages, welfare, and unions do force companies to pay more money to a worker he or she might be worth, do decrease the incentice to work, and do make it easier for employees to loaf and work less, while getting paid more. But, top management can also get pretty entrenched and help themselves to the detriment of the company, shareholders, the workers, and comsumers.
It doesn't make sense to totally disregard economic models that have been pretty good predictors. This is what pro-minimum wagers seem to want to do. But, it also doesn't make sense to put blind faith into models which require three impossible assumptions: perfect information, perfect competition, and zero transaction costs. This seems to be what anti-min. wagers are keen to do.
I don't think it is crazy to assume that there is some amount that workers are being "taken advantage of," or at least, that it is permissible as a society to require a mimimum amount to be paid for an honest day's work. Think of this is a way to adjust the model for un-perfect competition, transaction costs, and imperfect information. On the other hand, you can't go completely crazy and say that the guy mopping the floors should be able to afford a home, boat, daily latte, and cosmetic dental care, and that the only reason he can't now is because the greedy but talented CEOs working 70 weeks decided to artificially set low wages while sitting in their leather chairs drinking scotch and smoking cigars.
Bargaining power comes into play. Have you ever seen two poker players play a heads up game? The one with the big stack has the advantage.
How many minimum wage employees does it take to screw in a light bulb? None, if a light bulb needed to be replaced, the market would take care of it. (isn't that a joke on the Chicago school?) Who cares if everything will work out in the long run, because in the long run we are all dead. (Didn't Keynes say that?)
If you agree that absolute free competition does not exist in many industries, and that many are oligopolies, and that at the very least
In part it depends on your beliefs, but I can fathom that there are situations where some low skilled worker, who works hard but does not have access to as much information, reliable transportation, or the time to spend two weeks to look for another job or the money to move So somebody who doesn't mean an $8 one wouldn't do more good than harm. Even though an employer contracts with a worker, that employer has way more bargaining power.
oops. Please totally disregard the last 4 paragraphs of my previous post.