Will a higher minimum-wage "trickle-up" to raise wages that are already above what the new minimum-wage will be? That is, will a worker earning an hourly wage of, say, $7.50 today (when the federal minimum-wage is $5.15 per hour) see his wages rise as a result of Uncle Sam raising the federal minimum-wage to $7.25? Today’s Washington Post — relying upon comments from staff at the Economic Policy Institute — reports that the answer likely is "yes."
Despite affirmative comments also from some actual DC-area private employers, I’m skeptical.
My priors tell me that a
hike in the legislated minimum-wage more likely will lower, rather than
raise, wages just above the minimum. The reason is that, by
eliminating some jobs that demand only the exercise of the most
rudimentary skills, a higher minimum-wage will push some low-skilled
workers into labor-market segments that pay slightly more than the
(newly raised) minimum-wage. That is, when jobs at which the typical
worker produces revenue of $7.00 for employers are eliminated by a
minimum-wage of $7.25, some workers who would have preferred to work
at, say, $7.00 per hour at those now-eliminated jobs will seek jobs
paying wages at or slightly above the minimum-wage of $7.25.
That
is, such workers would prefer to accept more demanding jobs at a higher
wages over being unemployed, even though their first preference is for
less-demanding jobs at wages lower than the new minimum-wage.
More
generally — and I confess that I cannot escape from believing that,
ultimately, wage rates are determined by workers’ productivity — I don’t see how raising the minimum-wage
leads to any consistent increase in the productivity of
workers’ earning wages higher than the minimum. And because I don’t
see that their productivities rise as a consequence of raising
the minimum-wage, I don’t see that raising the minimum-wage will have a
positive ripple effect up the wages scale. (Indeed, as explained above,
I expect that the marginal productivity of workers in such labor-market
segments just above the most unskilled will fall because of an increase
in the supply of labor to these segments.)
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Don: I'm little concerned about the minimum wage issue, at least here in my are (South Florida). Some colleagues of mine were talking about and it and decided to do research. In addition to not knowing any company that is paying minimum wage (including the evil WalMart) we couldn't find any jobs at all on the internet through the usual sources that pay anywhere near the minimum wage for even unskilled labor. About 8 blocks from my home is a Checkers fast food joint with a perpetual "Help Wanted" sign on the changeable marquis (right below the special for cheeseburgers). When you go up to the drive-through, lot's of info about the job are posted on the window-$8.50 an hour, benefits available, flexible hours-full or part time, assistant and full manager jobs available, etc. And still, they simply cannot find enough people to take the jobs at those rates. There was a lawn care company on my street over the weekend (I'm one of the few guys who still cuts his own grass in my neighborhood). I spoke to one of the workers there (my "Spanglish" is not too bad) who admitted he isn't legal but loves the amount of work he gets in the US-he makes $10 per hour (cash) and says if his employer wouldn't pay that much, he could work for 10 others that would. In short, the change in minimum wage locally will have no effect-except that it will nationwise no doubt hurt the poorest and most alienated parts of the population by reducing the number of jobs through consolidation of job duties, elimination of same and offshore outsourcing.
Here's one mechanism which might legitimately raise wages for the $7.50 lot. Assume you are running a business with $7.00 and $7.50 employees. Now suddenly the minimum wage hits you at $7.25. What can you do? One option would be to save $.25/hour by reducing the costs of working conditions (turn the heater down from 72 to 68!) Now, to keep the $7.50 employee who might now prefer to work somewhere with Proper Heat for $7.45 instead, you give him a raise … say to $7.75 to match the $.25 you are saving in order to keep the otherwise-only-worth-$7 guy on the payroll at the legislated minimum of $7.25.
I'm going to need to see a little more math with that analysis Don, to me it sounds like you're pulling numbers out of your arse.
Don,
A businessman's adjustment to not being able to legally employ workers of a certain skill range may not just involve workers previously below the new minimum wage, but may impact workers above it as well, as a larger portion of capital is added for each worker, increasing their productivity. In this case some of the workers previously above the new minimum wage may be let go and others may see a raise.
Regards, Don
My thinking as far as this argument goes is that, yes, raising the min.wage will raise other wages too, but only in nominal terms. I.e. A raise in the minimum wage will create inflationary pressure and thus nominal wages will increase, while real wages may decrease. Is that incorrect for some reason?
Will it really matter? After Social Security payments are unlinked from wage indexing — the option that politicians are most likely to get away with — and after increasing the payroll tax to fund SS/MediCare and inflating the money supply in order to pay for all the entitlement spending (so that the misery is completely spread around), today's workers will only feel as though they are better off with the new minimum wage agreement. And the retired folks wont notice the diferences too much; not enough to take up their pitchforks.
Is it true that many union contracts are indexed against the minimum wage? Or at the very least, tied to it as a bargaining point? I suspect that this alone is part of the reason so many on the left want it raised.
The Economics Policy Institute is imho, hardly as non-partisan as it claims to be, its 'about' page gives some clues:
"The mission of the Economic Policy Institute is to provide high-quality research and education in order to promote a prosperous, fair, and sustainable economy."
http://www.epi.org/content.cfm/about
The post about minimum-wage effects in S. FL. is no surprise – the regional prosperity has moved virtually the entire labor pool well above the new floor, thus a non-issue.
But what about poorer markets, E. Podunk AR. – where a measurable worker pool is at the current minimum? Toying with the wage floor will not improve productivity, but only increase production costs. The demand curve tells us that the quantity sold will go down, yada yada…
The minimum wage battle seems to be fought only by those whose ox will never be gored. (Gored???)
sameer: "A raise in the minimum wage will create inflationary pressure and thus nominal wages will increase, while real wages may decrease."
That was my thought initially. In the short run, employers will likely accept lower profits. But they'll eventually pass on the costs to consumers. I suppose, though, that we can't have widespread inflation unless the Fed grows the money supply, right?
How can we continue to take the likes of the New York Times and Washington Post seriously if they are going to continue to cite the EPI? Political activists posing as reputable economists should not be considered as a respected source. Its the worst kind of tabloid journalism.
True liberal, you are correct that workers in small towns – particularly in the South – do work for minimum wage. What's outrageous about a national minimum wage is that it applies everywhere, regardless of huge variations in living costs.
I think Sameer has it right – nominal wages will increase, but not real wages. It occurs to me that the real losers will be those on fixed incomes. And they will be hit especially hard if the minimum wage is indexed to inflation.
If there are employment effects then it must raise wages for those who remain employed. This is true because you believe people are paid their marginal productivities. Since there are fewer people across which to spread the same amount of capital, each person will have more capital and thus be more productive. I recall a paper that demonstrated that union labor benefit most from min wage increases.
The issue with minimum wages is whether or not there are tangible benefits from it. Now then, if a higher minimum wage produces greater productivity, less likelyhood of stealing company goods, better customer interaction, etc., then a higher minimum wage becomes a wash. However, if this is the case, then why didn't the employers raise their workers wages in the first place? Surely the company owners are more concerned about their own welfare and committed to it then those who support a higher minimum wage. If people are seriously upset about wages, then you shouldn't be raising the minimum wage; you should be organizing unions left and right, demanding that companies share more of the profits, or risk strikes, closures, and other calamities.
Taggart: "Since there are fewer people across which to spread the same amount of capital"
Will the same amount of capital be utilized? If a minimum wage were high enough to force closure of a factory, isn't it likely the factory will sit idle? If a seafood processor shifts production to a Mexican plant, is their any guarantee the former U.S. plant will be used for anything?
Even capital assets that remain in use may still be underutilized. If higher wage costs are passed through to higher prices, demand for a product may drop. If so, the producer may be forced to eliminate a weekend or evening shift.
Will the same amount of capital be utilized? If a minimum wage were high enough to force closure of a factory, isn't it likely the factory will sit idle?
In the long run, the amount of capital per worker is set by the rate of time preference. Underused capital is depreciated off.
guest,
Taggart was referring to the increased productivity of workers when he said " fewer people across which to spread the same amount of capital". His argument was that a reduction in employment would raise the productivity of remaining workers.
I say that won't happen, regardless of whatever are the accounting impacts. Worker productivity is generally raised if more capital is engaged per employee. Productivity of remaining workers is unaffected by freed but idle capital.
US black workers age 16-24 have an unemployment rate of 24.7%
I think we need to think about how raising the minimum wage will effect certain populations that might be more sensitive to it than the overall population.
I have thought of an appropriate case where this could be true. Imagine an employer of low skill $7 and high skill $7.50 workers. Imagine that conditions coud not be legally changed in order to reduce costs of employing $7 workers who must now be paid $7.50, resulting in layoffs of the low skilled workers. Some of the functions of the low skilled workers can be replaced by machinery, but there still may be small human interaction needed, which will be taken over by the high skill worker, requiring them to be paid more or else they could leave for an easier job.
This analysis is not completely correct however as the high skill job has changed and is no longer the job before the rise in minimum wage.
Wouldn't that be a fix, if the minimum wage caused inflation pressure, and the minimum wage becomes indexed to inflation. That way, any time something that really causes inflation were to happen, say a change in the reserve ratio, the inflation team (cpi + min wage) get to work amplifying the effect.
While I'm not sure I understand JDewey's 'liberal' remark, I believe he's right about the fed's control of inflation. Most of the costs of the minimum wage are felt by the unemployed, not the producers. Inflation pressure comes from stuff that affect the money supply, not it's distribution. If anything, a change that purports to skew the distribution toward the poor, would probably transfer M2 money to the M1, reducing the overall money supply, since most poor use cash more heavily than savings accounts.
Dewey, the fact that the minimum wage applies everywhere only means that it is useless in areas where the lowest available wage is greater than the minimum. That's something of a mellowing factor on it's impact. Am I wrong?
Sunny,
As I see it, a worker should be able to decide what's his living wage. Suppose he wants a very soft job in a tiny east Texas village. If he can get by on $4.00 an hour, and a local merchant is willing to hire him for that, why shouldn't he be allowed to do so?
The cost of living in Bogota, Texas, is a fraction of the cost of living anywhere in the Northeast. If a minimum wage makes sense at all, why not let Texas decide what it should be? Why should representatives of Massachussetts do-gooders and California flakes have any say in the matter whatsoever?
*******After Social Security payments are unlinked from wage indexing — the option that politicians are most likely to get away with…*******
You really think so? I'd love to see elements of the Posen Plan adopted by the government, but if the blogosphere is any indication, there is widespread, vehement, emotional and irrational opposition to this commonsensical idea in the liberal-left camp. Moreover, there isn't much stomach for such ideas in the ranks of GOP members of Congress, either.
People worry out loud all the time that Social Security "won't be there for them" when they reach their golden years. But I believe such worries fly in the face of all the evidence. The evidence — on the political front at least — is that the government will do whatever it takes to insure that the benefit checks of old people grow ever fatter — the consequences be damned. Indeed, the fact that older Americans continue to expand as a voting cohort strengthens my confidence that I'm (sadly) correct about this.
Don't worry about a skimpy Social Security check when you retire in 30 years' time. Worry, rather, about the destructive payroll taxes your children will surely be paying to keep those same checks generously funded.
Mr. Econotarian touches on the issue we can learn from the South Africans: During the apartheid era, white labor unions strongly supported minimum wage laws simply to keep less-skilled blacks and "coloureds" out of the job market.
While US labor unions may not have the same racist motives, they really like the effect of excluding competition from a low-end labor pool.
Don — if you actually looked at the data of what happens when the minimum wage is raised you might find the answer.
But the BLS has the data on minimum wage employment after the most recent increases in the minimum wage. The data shows that over the last 25 years the only time that minimum wage employment actually increases is right after the minimum wage is increased.
While I do not know this for a "fact" it seems reather obvious that what happens after the minimum wage is increased is that you get wage compression at the bottom of the scale. If the minimum wage is increased from $5.00 to $5.15 what appears to happen is that the individual who was making $5.15 before the minimum wage was raised does not get a raise, so that now both those who had made $5.00 and $5.15 now make $5.15. That seems to be the explanation for why the actual data shows that increases in the minimum wage actually leads to an increase in minimum wage employment.
Does anyone have any "facts of data" not half-assed speculation that contradicts this
analysis?
Question for : Mr. Econotarian .
What was the black teenage unemployment rate in the 1920s when we had no minimum wage laws?
Unless you can show me that black teenage unemployment was significantly lower when we had no minimum wage law the data you throw out has no meaning.
spencer,
Below is an excerpt from Thomas Sowell's recent article on the proposed Chicago minimum wage increase. I don't know the sources for his claim about black teenage unemployment, but I have no doubt he has very good data.
"Those who refuse to admit that the minimum wage is the reason for high unemployment rates among young blacks blame racism, lack of education and whatever else occurs to them."
"The hard facts say otherwise. Back in the 1940s, there was no less racism than today and black teenagers had no more education than today, but their unemployment rate was a fraction of what it is now — and was no different from that of white teenagers."
"What was different back then? Although there was a minimum wage law on the books, the inflation of that era had raised wage rates well above the specified minimum, which had remained unchanged for years."
"For all practical purposes, there was no minimum wage law. Only after the minimum wage began to be raised, beginning in 1950, and escalating repeatedly in the years thereafter, did black teenage unemployment skyrocket."
http://tinyurl.com/y45k5l
Spencer, here's an excerpt from research presented to a committee of the U.S. Congress. The staff apparently summarized the findings of 50 years of research on the minimum wage.
"Williams, Walter. 1977b. "Youth and Minority Unemployment." Study prepared for the Joint Economic Committee, U.S. Congress. Joint Committee Print, 95th Congress, 1st session. Washington: U.S. Government Printing Office."
"Points out that in 1947, prior to expansion of the minimum wage, black teenage unemployment was actually lower than white teenage unemployment, and that teenage unemployment generally was sharply lower than it is today."
http://tinyurl.com/2jkau
In the short run at least, labor demand is highly inelastic. (And in the long run we are all dead.)
Raising the minimum wage will, by necessity, will cause an increase in jobs paying wages slightly above the minimum, because the extra wages that jobs pay over the minimum is necessary to direct better qualified people into jobs where there skills are better used, or reward people for taking jobs that are more difficult.
half sigma: "In the short run at least, labor demand is highly inelastic."
Are you sure the demand for unskilled labor is highly inelastic? Perhaps around a narrow range of wages it is inelastic in the short run.
Businesses can change operations fairly quickly. If a retail store is only slightly profitable, raising the minimum wage from $5.15 to $7.00 an hour may not force the store to close. But it may cause the owner to reduce hours of operation.
Cost cutting takes many forms. My employer reduced the frequency of office trash collection when the contractor raised the rates only slightly. Janitorial services are obviously labor-intensive, and a small increase in labor costs can cause instant layoffs.
JohnDewey:
As Patrick has pointed out, there are many areas of the US where the federal minimum wage is not binding. How does minority unemployment compare in South Florida vs. Texas or Kansas?
guest,
I'm not exactly sure what you're asking.
I think the BLS website has minority unemployment statistics by state. Perhaps you should look there if you want an answer to your question.