The point about minimum wages

by Russ Roberts on January 24, 2008

Some people seem to have misunderstood the point about this post on minimum wages. The point was simple. A lot of people I speak to, not just "regular" students, but legislators and journalists who I sometimes teach, think that only regulations or unions keep businesses from exploiting workers. They are shocked to discover that less than 10% of the private work force is unionized and that somehow, most workers, something over 96%, maybe closer to 99%, manage to make more than the minimum. Usually half of these groups when I survey them think that at least (at least!) 20% of the work force earns the minimum wage or less and that only legislation keeps it from being lower. But legislation turns out to be relatively unimportant compared to supply and demand—that is, competition. if you try to pay less than the going rate for the skills you want to hire, you can’t attract workers.

Meanwhile, Tim Worstall points out something I missed:

Unfortunately, on the page he’s taken his information from he’s missed one thing which makes his case even stronger.

Nearly three in four workers earning $5.15 or less in 2006 were
employed in service occupations, mostly in food preparation and service
jobs.

That’s your waitron units and barkeeps folks. And what do we know
about people who do these sorts of jobs? Well, perhaps you have to have
actually done them (as I have, everything from the graveyard shift in a
Denny’s to tending bar around the corner from this guy’s
place): they all make tips. In fact, so much so that there is (or at
least used to be when that BLS report was prepared) a special minimum
wage for those in such jobs, one lower than the official Federal
minimum wage.

For example, way back when, the min. wage was $3.35 an hour. Waiters
got $2.01. You didn’t really care because even serving pancakes at 5 am
you made another $25-$30 a shift ($50-$150 in a decent place). Barkeeps
got $3.35 plus tips.

The BLS numbers are reporting what employers paid employees, not
what people are actually earning. So we might in fact say that while
the number being paid the minimum wage or less is 2.2% of the workforce, the number actually earning that figure is more like 0.5%.

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Acad Ronin

Interestingly, Germany, that standard bearer for ruthless Anglo-Saxon capitalism, does not have a minimum wage, though they are trying to introduce one.

Ian Lippert

I think another point that these articles bring up is that all the advocates of minimum wage have to do is show us data where a large percentage of workers are making the minimum wage.

If our theories are correct the percentage of workers making the minimum wage will never be greater than a certain percentage. You are either making the minimum wage or you are unemployed. As we increase the minimum wage more people go from being minimum wage earner to unemployed labour.

Historically has there ever been data showing a large percentage of people making minimum wage? Say over 10% for example.

DeeWilliams

Herb Stien once said something along the lines "If you asked 100 people what surface the temperature of Mars was, the only answer you wouldn't hear is 'I don't know'".

jorod

My son is a busser and his tip share is bigger than his paycheck.

Gil

Pray tell what then is the point of laws? Wasn't it Plato who said good people do the right thing anyway and criminal types just find ways around the law? Why have drugs laws? It still get trafficked anyway? Why have speeding laws? People speed anyway. Why have laws against murder? People keep turning up murdered anyway. Do laws simply create 'unintended consequences' that only hurt the good whilst bad people keep evading the law (except, of course, the slow-witted ones).

David Peterson

Not that I support it, but I wonder how many of these people take in less than the so-called "living wage"

Methinks

Not that I support it, but I wonder how many of these people take in less than the so-called "living wage" - David Peterson

As soon as someone can clearly define what a living wage is. During her trip around with world, Rose D. Friedman observed that there's practically no level of poverty below which humans cannot find a way to live. What many consider a "living wage" here is considered "very wealthy" in Egypt.

spencer

But this is after years of a falling real minimum wage. if you go back to 1980 when the real minimum wage was much higher you find that minimum wage workers were 9% of employment. Over this period the minimum wage as a percent of average hourly earnings has been cut by over 50%.

Since 1980 the only years minimum wage employment rose were years after a rise in the minimum wage.

For all practical purposes the opponent of the minimum wage have won the battle by just allowing inflation to reduce the value of the minimum wage. It is not really a significant issue to anyone but a few ideologs any more.

Randy

Spencer,

I'd say that is because "the minimum wage" is a political tool, not an economic tool. It is useful for demonstrating that Republicans are heartless, but even its so called supporters aren't dumb enough to try to put a real minimum wage into effect.

Ken

Gil,

The point of the minimum wage laws was to keep women out of the workforce. Men started lobbying for minimum wage laws when women started working for less money than them.

Now the economics has been twisted and the minimum wage laws are on the books under the assumption that it helps workers, when it actually hurts them. Minimum wage laws specifically say that if you can't earn at least X amount of salary, then you can't have a job. Of course, these laws aren't presented this way, but that's what they are.

Your argument is weak that murder laws are useless because people murder anyways. Laws are supposed to make society as a whole better off. Murder laws provide people with peace of mind that they won't be murdered (in the US and other civilized societies anyway). Making people safer promotes better societies.

Minimum wage laws and drug laws, however, make society worse off. Minimum wage laws keep otherwise able people from working. Drug laws reduce liberty and create a black market along with the current drug culture that is far worse than just allowing people to use drugs.

-Ken

David Peterson

Methinks,

I'm not referring to the reality of what "living wage" implies, but rather what the political movement proposes as a minimum wage under the guise of the name "living wage." What is it now, something like $12/hr. Minimum wage laws are after all, what this kind of post are aimed at. I do think that it's completely relevant to ask who would be directly effected by popular policies.

Lee Kelly

Ken,

From what I understand, one of the first minimum wage laws was implemented in South Africa, during Aparthied. The Purpose was to take away the competitive advantage of blacks, who would typically charge less for their labour. In fact, the free market actively undermined the Aparthied system, and created equality in pockets of society.

The market is not kind to those who treat irrelevent facts, such as the colour of an individual's skin, as important when deciding who to hire. The same, unfortunately, cannot be said of the political process, where those who encourage division and strife often flourish.

Economic liberty and social liberty are interdependent. People always need to be reminded of that.

Methinks

Yes, David, it's relevant. I was merely pointing out that it's a stupid concept to begin with as a tangent. I'm willing to bet that $12/hour won't go that far in NYC and since everyone I know (including me) pay housekeepers more than twice that amount, I doubt many people in NYC make less than $12/hour already. And all without a "living wage" law. I'm sure it comes as a shock to all those advocates that knuckle-dragging, mouth-breathing maids (which I assume is how they see them, given the contemptuous and patronizing way activist treat the subject of their activism) can induce their employers to pay them well above the "living wage" without intervention by holier than thou advocates.

spencer

Randy -- you may be right about the current impact of the minimum wage as a political talking point. But this was not true some 30-40 years ago when the minimum wage was running at about 50% of average hourly earnings and accounted for a much more significant share of employment.

Randy

Perhaps they learned a lesson...

Python

I think the problem that we are discussing is not really how many people make the minimum wage. The problem to analyze is: a) how many people make less than the proposed level that Politician X wishes to raise the minimum wage to, and b) how many other people will also be affected by wages tied to minimum wage or other similar market forces.

Python

Spencer,

Back in the time when the minimum wage was half of average wages (I'll take your word for it even though I've never seen the stats), the world was much different. In today's economy their is a large variance of incomes due to specializations, education differences, and even more free market concepts. Joe DiMaggio at his greatest was only making something like 30 times the average income ($100K in 1950 vs 3K). Now, Alex Rodriguez makes something like 500 times ($25 million vs 50K).

Doctors and lawyers who once made 3 times average, can make up to 10 times average.

We have basically stretched the bell curve to the right (x-axis is income), and the minimum wage has deservedly stayed near the left edge. We can never again bring it to anywhere near 50% of average.

Alex

it seems as though unemployment and illegal immigration can be linked to minimum wage. The theory is that if unemployed people could work for less money, then they would be hired, but the reality is that Americans are just too lazy. If there is business for illegal immigrants on an orange farm in southern California, why are there so many unemployed, homeless Americans living in LA? The answer is that if they are going to work, Americans need their vacations, coffee breaks, health insurance and stock options. If they don't get those things, they might as well be living on welfare for no work at all. Granted, minimum wage is still part of the problem; It is illegal for the orange farm to pay below minimum wage, but it is also illegal to hire illegal aliens. You would think that if you are willing to hire illegals for $4.00 per hour, why wouldn't you hire Americans for $4.00 per hour? It all comes down to the fact that Americans are just too lazy.

t freak

who was getting minumum wages and zero tips? I was.

i was a foreign student when i worked for a cafe in the student union of a university. i did all the kitchen work and received 10 cents above minimum wages, whereas the same service in private sector was paying much higher. i got no tips either.

without a working license, you might say i should have already felt blessed for getting a job, rather than none. But i couldn't get a chance to compete with other citizen workers. while at the same time, i was paying tuition twice or triple as much as my peers.

well, you may say such a tough situation didn't deter my decision to study in the States proved the fact that i was better off. Yes, i was. But if the states allowed foreign students to work freely as they choose, they would attract more talents and benefit both Americans and foreigners.

cpurick

Spencer:

"this was not true some 30-40 years ago when the minimum wage was running at about 50% of average hourly earnings and accounted for a much more significant share of employment."

To whatever extent this is true (and I have my doubts), it's likely the minimum wage also accounted for a more significant share of unemployment as well.

John Dewey

Alex: "It is illegal for the orange farm to pay below minimum wage, but it is also illegal to hire illegal aliens."

Are you implying that illegal workers earn less than minimum wage anywhere in the U.S.? I know people who hire unskilled illegal immigrants in Texas. They've told me they must pay $9.00 an hour for hard labor and a little less for softer jobs.

I have read that some agriculture jobs pay less than $6.00 an hour, but those jobs usually include the benefit of room and board.

A study released in November by the Center for immigration Studies showed that the average household income for illegal immigrants was over $45K. Certainly some earn less, but I doubt it's much less for a two income household.

I haven't seen any evidence anywhere of illegal immigrants earning less than minimum wage. Have you, Alex?

Gil

So it can be hard to find those who get paid less than the minimum wage? Does that mean Conservatives, instead of taking the unpopular route of removing the minimum wage, let inflation erode the minimum wage such business operators aren't affected by it? Who says inflation be all bad then?

Python

Everyone,

Check out http://oregonstate.edu/instruct/anth484/minwage...

There is some commentary there, but the stats are presented in a clear way.

vidyohs

Methinks,

You are dead on with this comment. It applies to other things as well, such as "affordable housing", "adequate medical care", etc.

"Not that I support it, but I wonder how many of these people take in less than the so-called "living wage" - David Peterson

As soon as someone can clearly define what a living wage is. During her trip around with world, Rose D. Friedman observed that there's practically no level of poverty below which humans cannot find a way to live. What many consider a "living wage" here is considered "very wealthy" in Egypt.

Posted by: Methinks | Jan 24, 2008 1:03:06 PM"

The problem with so many very decent and intelligent people is that they have never seen with their own eyes, heard with their own ears, nor smelled with their own nose the realities of the world outside of their own chushy existence. Then to top that off they do not have the developed imagination that allows one to truly understand that which they can not see.

I say walk through the open central market in Lagos, Nigeria; Luanda, Angola; Abi Jan, the Gold Coast; Monrovia, Liberia; Freetown, Sierra Leone in Africa and tell what your definition of "affordable housing", "adequate healthcare, is after seeing, hearing, and smelling.

And, make no mistake, slums of equal nature can be found in India, South America and South East Asia as well.

For many you see "affordable housing" would be an empty shipping container which would vault them to middle class in their society. "Adequate healthcare" would be the first ever visit to a doctor.

For people who have never seen and experienced to make pronouncements about how it "should" be done is simply a mark of willful ignorance.

Dave Tufte

In graduate school I had a stipend.

I was urged to live minimally off of it, and do better at school.

Instead, I chose to keep my job delivering pizzas for the biggest outfit in Buffalo.

This was 1985, and I did the math. One 8 hour shift, one 6 hour shift, and one 4 hour shift a week during school (and heavier work during vacations) made me the equivalent of the after-tax income of a $22K per year job. A barely acceptable shift was about $5 per hour in tips (tax-free) plus minimum wage.