The Impact of the Minimum Wage on Employment

The Free Exchange blog quotes an anecdote about the employment effects of a minimum wage increase:

This piece from the Arizona Republic surprises me by filling out its column inches with anecdotes about the negative effects of Arizona's higher minimum wage:

Some Valley employers, especially those in the food industry, say payroll budgets have risen so much that they're cutting hours, instituting hiring freezes and laying off employees.And teens are among the first workers to go. Companies maintain the new wage was raised to $6.75 per hour from $5.15 per hour to help the breadwinners in working-poor families. Teens typically have other means of support. Mark Messner, owner of Pepi's Pizza in south Phoenix, estimates he has employed more than 2,000 high school students since 1990. But he plans to lay off three teenage workers and decrease hours worked by others. Of his 25-person workforce, roughly 75 percent are in high school. "I've had to go to some of my kids and say, 'Look, my payroll just increased 13 percent,' " he said. " 'Sorry, I don't have any hours for you.' "

That is the one good thing about this latest increase. It will give us lots of opportunities to collect data on examples like this one.

USA Today on the Minimum Wage

It gets tiring rebutting the silly things said in support of a minimum wage increase, but I suppose it has to be done.

A USA Today editorial says:

The arguments against the minimum wage are familiar and unpersuasive. Critics argue that it will cost jobs, but the economic literature suggests job losses are a minimal threat. The last increase in 1997 was followed by a surge in low-wage employment.

Well, that's certainly worded with careful vagueness, but it's pretty callous nonetheless. Job losses are "a minimal threat"? No doubt the threat to to USA Today editorial writers is minimal. But that's not much consolation to those who do lose their job or don't get hired -- and the statement effectively acknolwedges that this will be the case. Sure, there's a question of how many. But there's no doubt it will be quite a few.

USA Today goes on to say:

Some opponents argue that wages should be decided exclusively by the free market.

But the nation decided otherwise in 1938, when Congress created the minimum wage so the poorest workers would have a chance at a decent living. And it's hard to recall similar free-market complaints about the tax code, which is all about picking winners and losers - homeowners over renters, for example, or investors over workers.

This part is just embarassing. Is the writer really unaware of the widespread free market criticism of the tax code? I suspect the answer is yes. When you only talk to like minded people, you simply never hear the opposing view.

Why Do Business Leaders Support a Minimum Wage Hike?

The Economist's Free Exchange blog answers the question as follows:

CEO's who support higher minimum wages are not, as the media often casts them, renegade heros speaking truth to power because their inner moral voice bids them be silent no more. They are by and large, like Mr Sinegal, the heads of companies that pay well above the minimum wage. Forcing up the labour costs of their competitors, while simultaneously collecting good PR for "daring" to support a higher minimum, is a terrific business move. But it is not altruistic, nor does it make him a "maverick". Costco's biggest competitor, Wal-Mart, also supports a higher minimum wage, and for the same reason. Wal-Mart's average wage is already above the new minimum; it will cost the company little, while possibly forcing mom-and-pop stores that compete with Wal-Mart out of business. This seems blindingly obvious to me. Though I don't expect we'll see "the minimum wage—it's great for Wal-Mart!" in any Democratic campaign commercials.

I think this is pretty clearly right. Most business leaders are cold and calculating about these things. If they can push for a policy that hurts their competitors and makes them look good in many people's eyes (and significant majorities support the minimum wage hike), they'll do it.

The Minimum Wage Debate

I was looking forward to a good debate about the merits of a minium wage increase, but unfortunately some of its proponents do not seem up for the challenge. From a Palm Beach Post writer:

The House passed a bill raising the minimum wage last week. If the Senate also approves, trade association lobbyists have told us what they think will happen.

Nobody actually is paid the minimum wage, they told us. Only high school students in their first jobs get the minimum wage. And most of them, according to the lobbyists, are from suburban families with BMWs. If the wage is raised, employers won't hire as many people for minimum-wage jobs, so the working poor will lose opportunities. If employers pay minimum wage, they will raise prices, so the poor people in the minimum-wage jobs will be worse off.

That can't all be true. The spiel is inconsistent from one sentence to another. If high school students are the only people with minimum-wage jobs, killing the jobs can't affect the working poor. Adding a weak argument to a weak argument doesn't strengthen a weak case. It puts a spotlight on the weakness in the first argument.

If what they are saying is true, raising the minimum wage should lead to more unemployment and more inflation. In fact, we have been raising the minimum wage, off and on, since Congress set it at 25 cents an hour in 1938. The same trade association lobbyists made the same dire predictions they make today in 1938. They repeat them every time the subject comes up. Not only has no one been able to show the ominous predictions coming true, there is some evidence that raising the minimum wage actually creates a few jobs through its (mildly) stimulating effect on the bottom of the economy.

The last time Congress raised the minimum wage, in two steps, was 1996 and 1997. What happened? The economy grew and created jobs faster than it has created them lately. That is not to say one caused the other. The minimum wage is too inconsequential to have that much effect. But if events had gone the other way, the lobbyists still would be shouting, "Told you so."

Rather than address the core issues, the writer obsures them in a number of ways. First, he mis-characterizes the other side's statements. For example, he has opponents saying "[o]nly high school students in their first jobs get the minimum wage," and he then notes in response, "[i]f high school students are the only people with minimum-wage jobs, killing the jobs can't affect the working poor." Certainly it has been argued that many minimum wage earners are high school students, but nobody is arguing that they all are.

He also states: "The last time Congress raised the minimum wage, in two steps, was 1996 and 1997. What happened? The economy grew and created jobs faster than it has created them lately. " But the argument is not that a minimum wage increase will have a significant impact on the overall economy. Rather, it is that employers of low-wage earners, and the low-wage earners themselves, will be hurt.

And he says, "[e]very time Congress raises the minimum wage, business lobbyists say the sky will fall." In reality, nobody is saying the sky will fall. What they are saying is that some small businesses and many poor people will be adversely affected.

Somewhat predictably, this kind of article indicates that we're not going to have a real debate about the issue. Many of the proponents will simply avoid any type of logical thinking, preferring to cover their ears and ignore the other side's arguments.

The Real Impact of the Minimum Wage

This Christian Science Monitor article offers "[a] glimpse into the lives of people who live at bottom-rung pay rates illustrates why, to supporters of the change, the minimum wage is long overdue for a raise." It examines how much money people need in order to live, and examines whether $7.25 an hour is enough. But what about the people who lose their jobs as a result of the increase? They don't seem to rate a mention.

Relatedly, Greg Mankiw links to a CBO study indicating that a better way to help poor people would be through an increase in the Earned Income Tax Credit. But that would require the government to actually do something, of course, rather than just require private businesses to do something.

George Will on the Minimum Wage

George Will has this to say about the minimum wage:

"But the minimum wage should be the same everywhere: $0. Labor is a commodity; governments make messes when they decree commodities' prices. Washington, which has its hands full delivering the mail and defending the shores, should let the market do well what Washington does poorly."

Well said, I think, on the minimum wage. But I wonder why George seems to accept delivering the mail as a government task? It seems to me that this is also something Washington does poorly.

A Question for Those Supporting a Minimum Wage Increase:

Why not set maximum prices on vital commodities? Say, no more than $2.50 per gallon for milk?

AEI on the Minimum Wage

A couple of AEI folks are critical of a proposed minimum wage increase:

Perhaps the proposed legislation for the upcoming 110th Congress should be called the "2007 Minority Youth Unemployment Act," or the "2007 Bonus for Middle-Class Suburban Teenagers Act." If the 110th Congress wishes to lend a hand to struggling single mothers, minorities and the poor, it should do something other than increasing the minimum wage.

I agree with their conclusions, although I think their rhetoric is a bit too much. It's a delicate and sensitive subject, and as an opponent of a minimum wage increase I worry about coming across as arrogant and out of touch.

Minimum Wage Increase: It's Coming!

The mimium wage increase is coming:

Incoming House Speaker Nancy Pelosi wants to fast-track efforts to boost the federal minimum wage and could seek to bring a bill directly to the House floor in January.

...

In the new congressional session, a House bill boosting the federal minimum wage probably will go straight to the floor for consideration, bypassing the Education and the Workforce committee, said Pelosi spokesman Brendan Daly, lobbyists and others involved in the process.

At this point, Pelosi's preference is for a "stand alone" minimum wage bill that is not tied to other legislative endeavors, Daly and others said.

...

In the Senate, business lobbyists believe a bill to boost the minimum wage is more likely to be advanced through committee, giving them an opportunity to try and sweeten the pot with other things such as faster depreciation, for instance, of restaurant buildings, something the restaurant industry would like.

The only questions left are: how much, what exceptions will there be, and what gets tied to it.

Economists for the Minimum Wage

Greg Mankiw asked an economist who signed the open letter supporting a minimum-wage to explain his support:

My friend told me that he viewed the minimum wage as a second-best policy. He would prefer increased cash payments to the poor, such as a much-expanded earned income tax credit (EITC) or a more general negative income tax. But if his first-best policy was politically impossible, a minimum-wage increase was, in his view, an improvement over the status quo. He admitted that the minimum wage had adverse effects on employment, but he judged those to be modest in size. All things considered, he considered a higher minimum wage better than nothing.

I can understand the sentiment, but I wonder whether it would have been better to make this reasoning clear in the letter. If an expanded EITC is preferable, that should have been stated. Also, how "modest" are the jobs losses expected to be? I'd be interested to see what level of job losses is considered acceptable by minimum wage supporters.

The Minimum Wage: Economists' Views

Greg Mankiw posts about Robert Whaples' survey of PhD members of the American Economic Association. On the minimum wage, it turns out that "37.7 percent want it increased, while 46.8 percent want it eliminated." It's interesting to compare this finding to the one that 87.5 percent agree that "the U.S. should eliminate remaining tariffs and other barriers to trade." Both trade barriers and the minimum wage have similar effects: More money to a select few, with most of the country paying a little bit more and efficiency diminished. Yet somehow a large number of economists are in favor of increasing the minimum wage, whereas only a handful would keep trade barriers.

A Minimum Wage Increase: Some Expert and Not-So-Expert Analysis

Becker and Posner offer their sophisticated criticisms of a proposed minimum wage increase. Here's my less sophisticated take on it.

If the minimum wage is increased by legislation, the costs faced by industries who employ minimum wage workers will increase (as may those of industries who employ other low wage workers whose wages increase through the "ripple effect"). These increased costs will have one or more of the following effects (it could be some combination thereof):

1. The affected companies will increase prices to cover the increased costs
2. The affected companies will accept lower profits
3. The affected companies will reduce their costs by firing some workers or deciding not to hire some people they had previously planned to hire

Those who support the minimum wage increase may argue that #2 is the appropriate outcome. However, this possibility is somewhat deceptive. While it is possible that companies could choose to reduce their profits, the long term effect would be diminished investment in the industry due to lower profit rates. Thus, ultimately there would be job losses as a result.

If #1 occurred, it is likely that the increased prices would have a big impact on the poorest of the poor, as jobs that rely on minimum wage workers often disproportionately cater to them (e.g. fast food).

And finally there is #3. If #1 and #2 are not chosen, then the most likely result of the minimum wage increase will be job losses for those in low wage jobs.

So, anyway you slice it, a minimum wage increase will be bad for large numbers of poor people. Granted, those who keep their jobs at the higher wage will be better off (assuming prices don't rise too much). But it's a mistake to ignore the others who will be affected.

BusinessWeek's Take on the Minimum Wage

BusinessWeek seems to come down largely on the side of a minimum wage increase. After much talk about the "ripple effect" that an increase will have on incomes more generally, they do note the rise in costs and job losses that may occur. However, they quickly go back to an economist who says there won't be many job losses. Overall, I count 5 paragraphs that are favorable to a minimum wage increase, and 2 that are unfavorable.

Republicans and the Miminum Wage

Democrats will seek Republican help to raise the minimum wage ... incoming Senate Majority Leader Harry Reid said Saturday.

The way the Republicans, especially the 2008 Presidential hopefuls, approach the minimum wage debate is going to very interesting. I see the minimum wage issue as an excellent test of someone's views on free market economics. I'll be curious to see which Republicans support the Dems on this, which ones stay on the sidelines, and which, if any, stand up to oppose a minimum wage hike.

The Minimum Wage and Employment

It seems inevitable now that the new Democratic Congress will raise the minimum wage by a decent amount. For those who are skeptical about the benefits of this kind of policy (as am I), there is some good news: It provides a great opportunity to study its impact. No doubt teams of economists will be lining up to gather data the moment any new law goes into effect. Of course, there will be contradictory conclusions. Those in favor of the increase will find it doesn't hurt employment; those against will find that it does. But it should be possible to parse through the studies to see which are more credible.