No matter how many times certain ideas are completely debunked, many, nevertheless, have a way of always returning. The present push by Democrats to increase the federal minimum wage rate is one such debunked idea returning for its tired and predictable reprise.
Currently the federal minimum wage is $7.25-per-hour. The president and congressional Democrats would like to see this rate increased to $10.10-per-hour by 2015, a 39% increase. The city of SeaTac, WA, has recently increased its minimum wage for certain workers to $15-per-hour, from $9.32, a 60% increase.
The president and his allies frame this debate in terms of fairness. Why should some work at wage rates barely above the poverty line?
Unfortunately since many have little or no training in economics, have never learned how to focus on the long-term economic effects of various governmental programs, have never learned that wages are simply a name given to employers’ labor costs and have no special economic properties beyond that, harmful populist measures, such as laws increasing the mandated minimum wage, often pass with little thought to their long-term consequences. The primary long-term negative effect of mandated minimum wage increases is a guaranteed general increase in unemployment and a specific increase in unemployment among those already at the bottom–such as the black teenager, the unskilled, the uneducated–those for whom the minimum wage laws were supposedly created to help most.
Today the black teen-aged unemployment rate is about twice the rate of whites. This was not always so. Before the 1950s, before the time minimum wage rates were raised drastically for the first time, the black teen-aged unemployment rate was comparable to the non-black rate. And this was even in spite of large areas of the country still suffering from explicit racial discrimination against blacks. Yet the black unemployment rate at that time was hugely and significantly lower than it is today.
Why does raising the minimum wage rate tend to increase unemployment? A main reason is that many workers’ skills are not worth to their employers the required new, higher minimum rate. Although an employer may entirely need his workers at the lower rate, at the higher rate employing them may no longer be profitable. These workers lose their jobs.
So even though a worker is quite willing to work at the old lower rate, and the employer receives real benefit by employing the worker at the lower rate, the government deems this voluntarily agreement illegal. The employer by law must pay the higher rate if he wishes to continue employing the worker. The government, in effect, is stating that it would prefer the worker be unemployed than to work at the lower rate. Thus the obvious result: an increase in unemployment.
A less obvious result is that since a lower-skilled worker cannot legally offer his services at the lower rate, and thereby gain new skills while on the job so to be eventually worth the higher rate, he is thus effectively locked out of the legal employment market. The traditional avenue of working one’s way up the ladder, gaining new on-the-job skills, is, under these circumstances, removed as an option from the employee. He simply cannot legally do so. (The worker can, however, offer his services on the black market, out of view of the government, and no doubt many are forced to do just that. And ironically when this occurs, the government ends up, as a side effect, with less incoming tax revenue since black market wage payments are generally made in cash.)
In response to these mandated higher labor costs some may argue that employers can simply raise their prices to offset these increased costs. To some extent, this is true. But in most cases, raising the price of an item means consumers will choose to buy less of it, or to substitute for it some other less expensive item, thereby ultimately reducing the employer’s profits. For instance, if the cost of coffee rises, perhaps drinking tea becomes more attractive to the consumer.
Also one must consider that those employers who had been only barely surviving while paying the lower wage rate will have no choice but to raise their prices–for them any increase in business costs, labor or otherwise, is fatal. But once these barely surviving employers do raise their prices, many will soon go out of business entirely as customers, reacting to the increased prices, reduce their purchasing accordingly–thereby creating another route to more unemployment.
Some on the left argue from a misplaced moral perspective that industries who pay their employees below-sustenance wages should go out of business. But let’s follow that argument to its logical conclusion. First and most obviously, everyone working in such an industry that “should go out of business” immediately loses his job (thus, more unemployment). Second, consumers lose whatever products such an industry had provided, which will tend to increase consumer prices for that product, a reaction to its reduced quantity. Third, and most important and often overlooked, even though the worker’s pay rate had been low, it was (and probably still is) the best alternative he had at the time. Otherwise he would have taken a more attractive alternative to begin with.
Thus in spite of the worker’s own desires, he is forced into alternative areas he had previously deemed less desirable. And even worse for such workers, the additional competition for the available jobs in these less desirable areas will tend to lower these jobs’ wage rates.
What are employers’ wage-setting options? A rational employer raising or lowering an employee’s wages is not acting capriciously. He neither raises wage rates out of the kindness of his heart nor lowers them out of the greediness of his purse. Instead, based on a wide variety of competing market conditions and the existence of businesses in competition with his own, only a very narrow range of wage-setting options are actually available to any employer at any given time.
For example, if he pays employees too much relative to market conditions, his business suffers relative to his competition, and he finds himself at a disadvantage; his costs are higher than theirs. And if he pays noticeably lower than his competition, he will tend to lose good employees to his competitors, again finding himself at a disadvantage. So unlike the freedom a parent may have doling out allowance increases to a child, an employer is quite restricted: he has only a very narrow range of wage options available if he wishes to stay competitive.
And consider an employer hit with an increase in the minimum wage rate who had been planning to expand his business . This increased wage cost may prevent him from having enough capital to do so. As a result any new employment that would have arisen from his business expansion is prevented or reduced. And not just for those whom he would have employed directly. Other businesses with which he would have transacted during his expansion, but now will not, will be that much poorer, thus exacerbating unemployment forces in these other businesses as well.
And even if the employer were to borrow to replace the capital he must expend paying higher wages, and thus goes ahead with his expansion plans, the amount he borrows is then no longer available to other businesses to borrow, thereby creating an identical problem for these other businesses and their possible business expansion plans. These are the kinds of secondary effects that need thoughtful analysis when creating new economic policy, yet rarely get such analysis, especially from our political leaders.
No one denies that raising the minimum wage rate does indeed benefit some workers in the short-term. But when considering the longer-term effects of such a rate increase, the kinds of considerations we’ve made here, we see there is more to the story. The real, negative consequences of such rate increases are generally more than enough to wipe out any short-term benefits to society as a whole. These negative consequences, so often overlooked, are nevertheless easily understood when pointed out. Still, for political reasons, the fairness argument, of which you will be hearing much between now and the 2014 midterm elections, is constantly rehashed. But it is a nostrum, an emotional argument devoid of economic understanding.
The only real way to increase workers’ standards of living is by increasing their productivity and thus their worth to employers. These remedies include new time-saving machines and inventions, greater management efficiencies within industries, and better worker education. Quite simply, the more a worker can produce for his employer, whether a worker provides skilled or unskilled labor, the more he is worth to his employer. When such a productivity increase occurs, employers in competition with each other naturally bid up the price of labor. This competition increases workers’ money wages (the amount they get in dollars).
A final question. What prevents an employer from underpaying his employees and pocketing the “excess” profits that accrue after an increase in worker productivity?
The employer would like nothing more than to add this increased-productivity gain to his own profits. Indeed, that’s why he’s in business. But ultimately one of his competitors will realize that he would have a competitive advantage by using at least a portion of this “excess” capital to raise the pay rates of his employees, allowing such a competitor to attract better employees (better in the sense that he expects to gain more profit from their services), and thereby gain a competitive advantage. It should be noted that when such a competitor raises wage rates in this manner he does so not out of the kindness of his heart, but instead out of his own self-interest. Such is the beauty of capitalism.
This is a great example of the free market’s “invisible hand” of which Adam Smith wrote so eloquently in The Wealth of Nations: the self-interest of free market participants, without any government coercion, increases the wealth of society as a whole. In the case we’ve been considering, competitors acting out of their own self interests bid up the price of labor, allowing workers to share the benefits of their increased productivity. Again, an employer attempting to keep for himself all the gains resulting from increased worker productivity would, in short order, find himself at a competitive disadvantage.
And in their roles as consumers, workers enjoy further the fruits of their increased productivity–an increase in purchasing power. When workers are more productive, they (and all society) benefit from the resultant increase in quantity of available products newly available at lower prices because of this increased quantity. Indeed, this is the only definition of an increase in standard of living that is actually meaningful–one that results in an increase in purchasing power. In contrast, a government-mandated increase in the minimum wage does not increase society’s standard of living–just primarily its unemployment rate.
Robert Boxer: Insights 
A couple of years ago, I bookmarked your article. You may be interested to have a look at Minnesota, which provides a near-perfect real world example what you speak about in this article. Minnesota tends to be lauded by those wanting a higher minimum wage (or at least that used to be the case until reality hit home). There was lots of news about how they were going to raise the minimum wage in the state. Here is one such article: http://money.cnn.com/2014/04/10/news/economy/minnesota-minimum-wage/index.html They raised the minimum wage to $8/hour in August 2014, $9/hour in August 2015, and $9.50/hour in August 2016. And here is the resulting unemployment rate in Minnnesota. http://data.bls.gov/generated_files/graphics/latest_numbers_LASST270000000000003_2006_2016_all_period_M09_data_unemployment.gif Almost perfectly in step with those increases, the unemployment rate bottomed out and and is now on the increase. So the question to those who want a higher minimum wage really should be, “How much unemployment — particularly amongst those at the lower end of the wage scale — do you want?”.
An increase in minimum wage in San Jose; have we learned anything? It doesn’t look bad at all. – http://www.nbcbayarea.com/news/local/Reality-Check-Minimum-Wage-One-Year-Later-244821391.html
“We are left with a mound of data indicating that the minimum wage has relatively little, if any impact on job growth and hours in San Jose, though a few more months of data will provider a fuller picture.”
Here’s what they found:
– According the San Jose Downtown Association, registered businesses were up 3 percent from 2012 to 2013, but a healthy 19 percent in the retail sector, which includes restaurants
– On a broader level, the latest unemployment figures in the San Jose Metropolitan Area show the unemployment rate dropped more than 1 percent since the hike went into effect, per the California Economic Development Department
– In the sector most influenced by wage fluctuation – restaurants and hospitality – the California EDD shows more than 4,000 jobs were created year-over-year
The most recent figures for average weekly hours for all employees in the metro area, kept by the U.S. Bureau of Labor Statistics, are virtually identical now to what they were back in March
Fred, thank you for your comments.
I read the article you included, and basically the authors say that there isn’t enough data to make any judgement about San Jose’s increase in the minimum wage. I would argue with your description that your article concludes that things are not so bad. Much of the known data for the area, your article states, includes data from a broader area not covered by the increase in minimum wage.
That being said, pointing to examples, pro or con, proves very little without really digging into cause and effects. The point of my own article, in contrast, is to look at secondary effects, not just primary effects. The article you cite does not do this. For instance, what is the effect down the road of the mentioned restaurant owner who claims he absorbed the extra minimum wage costs out of his own pocket? Surely one of the effects would be much less incentive to open another restaurant or to expand his existing restaurant, actions which would have increased employment.
Your theory that a minimum wage hike will cause a jump in unemployment is a theory that depends on the assumption that all else is equal.
For example applying your theory to total employment. As far back as we have data — 1947 — labor compensation has risen each and every year. Now if the demand curve for labor is downward sloping, a rise in the price of labor should cause a drop in demand. So total employment should have fallen each and every year since 1947.
Of course it hasn’t because in the real world the demand for labor
is a function of many thing and labor cost is just one of those things and it is essentially always offset by other factors.
The same reasoning apply to the demand for minimum wage employment– it is a function of many thing. So while your theory is a fine theory, in the real world you can not say an increase in the minimum wage will cause minimum wage employment to fall.
Interestingly, about half of the US minimum wage hikes occurred in recessions and in those cases the wage hike was followed by a drop in minimum wage employment. But the other half of the minimum wage hikes happened during a business expansion and the wage hike had no apparent impact on minimum wage employment. What this demonstrates is that the stage of the business cycle completely swamps the impact of a minimum wage hike. That is why in the real world you can not predict that a minimum wage increase will cause minimum wage employment to fall.
This is why the data conflicts with the theory.
Spencer, looking at data in the way you do simply documents what happened at a particular time. But that’s not really what we’re concerned with here, at least I’m not. For example, if in a particular case raising the minimum wage does NOT cause an immediate increase in unemployment, this in of itself proves nothing. As you point out, there are many variables involved. Perhaps without the increase in minimum wage unemployment would have gone down instead of staying the same, which is better than simply staying the same. Perhaps an employer would have felt an incentive to expand his business more, further reducing unemployment. For these reasons, I do not cite too many studies to make a point because these studies generally do not have enough details to discern actual cause and effect.
For this reason it is best to think logically about economic consequences of actions. When I state, as I do in my article, that when an employer is left with more profit and is therefore more likely to expand his business, you can choose to deride it as theory, as if this makes it somehow separate from what happens in the real world. But theory such as this is really indisputable, unlike cherry-picked studies. An employer with more profits will be more likely to expand his business.
Thanks for your comments.
Robert, Which is it? If your point is to look at secondary effects, are you still sticking with the argument that logic is better than evidence?
Below you say: “when an employer is left with more profit and is therefore more likely to expand his business,” But “logic” would also suggest that such an employer would also be more likely to take profit, and give him or herself a raise. If your theory is based on “rational self-interest,” profit-taking seems more likely than other possible results from more profit.
Economics can indeed be a dismal science, but without evidence, I’m afraid it’s just plain dismal.
Hi Bill,
I would never say don’t look at evidence. What I did say is that these kind of primary studies are generally flawed in the manner I have outlined (ignoring secondary effects).
And, no, an employer, although he would certainly like to give himself a raise (which, incidentally would NOT add to unemployment, unlike when the minimum wage is raised by the government), he has more options, all of which benefit him (including giving himself a raise). It depends on current competition and other market conditions. I’ve outlined these extensively in the primary article if you’d care to give it another read.
Thanks for your intelligent comments. Much appreciated.
Robert,
I have a debate at 8am tomorrow morning on raising the federal minimum wage. I am on the negative and appreciate not only your article and the comments following, but your tasteful replies to almost all of them.
Thanks again for the great info, I will be using your information and article in the morning!
Hi Stephanie, Thank you for letting me know. And thank you for your kind words. A writer loves hearing that his work has value to a reader. Good luck in your debate tomorrow. If I can say so myself, I’m sure you’ll win the debate! Please feel free to leave a followup comment informing us how it went. Thank you, again.
Robert, The debate didn’t go over so well as my partner was not prepared. However, I still enjoyed the topic as it is very interesting to me. Thanks again for your insight.
Hi Robert, I’ve been really enjoying your insights and was wondering if you’d be willing to direct your insights at an article I read on Huffpo
The article regards increasing government mandated wage levels (minimum wage) leading to economic stimulation.
I’m not qualified to judge whether it does or not, but my gut tells me there must be some reason greedy capitalists aren’t cashing in on giving their employees more money to spend in exchange for the increased shopping sprees and the profit that would follow. Anyway. The article:
http://www.huffingtonpost.com/2011/06/07/minimum-wage-increase-help-economy-experts_n_872617.html
Thank you and regards,
–Will
Hi Will,
Thank you for the kind words. They are very much appreciated.
To answer your question, I will redirect you back to my article. Here are some excerpts where I discuss the very question you ask. If this doesn’t fully answer your question, please write back.
Thanks for the reply, Robert.
I did read that portion of the article and what you say makes sense to me. At least in regards to why employers don’t underpay their workers.
But what’s happens in the economy (if anything) when government forces all businesses to overpay workers out of the kindness of a politicians heart and a desire to create economic activity?
Robert Reich in his video asserts that it would lead to more employment, “Fifteen million workers would get a pay raise, allowing them to buy more and thereby keeping others working,”
He’s a smart guy, is he wrong?
“http://www.youtube.com/watch?v=ct8CGJy9eF8
I Thank you for your patience with my ignorance. Regards,
–Will
–Will
Yes, Robert Reich is certainly a smart guy. But he’s wrong in his analysis. He’s not taking into account anything other than the immediate effects of raising the minimum wage for employees, ignoring the rest of the economy.
When a business’s costs rise for any reason (wage increases or otherwise), the business has less money for other things. So, it follows, that the business will engage in less business activity after such a rise in costs. It will buy less and it will hire less. So that decreases economic activity. And if the business were to have planned an expansion, where new jobs would have been created, this also would be less likely to occur–more unemployment.
It’s certainly true that the employees who are kept on after a government-forced pay increase do certainly individually benefit in the short-term. But their individual purchases as consumers (that is, their economic activities) do not make up for the loss in the resultant economic activity by businesses, as I have just outlined, that Robert Reich ignores.
And I’m even ignoring the fact that those who are not worth to the employer the wage increase will lose their jobs, thereby straining the social safety net even further (welfare, food stamps, Medicaid, unemployment insurance), a safety net paid for, of course, by taxpayers and other workers.
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Where did you get data on the black, teen unemployment rate before the first minimum wage in 1939?
As far as I know such data does not exist.
I didn’t read past this point because that statement told me not to take you seriously.
Hi Spencer,
I’m not sure from where you are getting your 1939 year figure. My article does not refer to that year. What I do state is that before the 1950s, which is before we instituted drastic minimum wage laws in our country, black teen-aged unemployment was roughly comparable to whites. This was no longer so afterwards.
You can easily search for raw government data to back this up. Also, many of economist Milton Friedman’s articles and books refer to this.
A short essay by George Mason University professor Walter E. Williams also clearly spells this out. You can read it here.
1939 was when the first minimum wage law was passed.
The first minimum wage law in our country was passed in 1912 in MA. And the federal government’s first of a series of such laws were first enacted in the 1930s. But these earlier minimum wage laws were weak and very limited in their application. Most industries and labor markets were exempt from them in one way or another, thereby mitigating their detrimental effects on employment opportunities. It wasn’t until the 1950s that all-inclusive minimum wage laws of the type we think of today came into existence.
I just read Williams.
Found it interesting that he wrote about working as a teenager in the 1940s.
Apparently he was not aware that there were minimum wage laws in the 1940s, because he talked about how he had no problem finding work.
He also wrote about participation rates in the pre-1940s era but does not cite a source. I still doubt that data on black, teen participation exist prior to 1946.
Government data on employment start at 1946.
BLS data on black teenage unemployment, participation rates, etc., start in 1972.
So I still would like to see your defending your claim.
Spencer, Please refer to the references in any of Milton Friedman’s books, such as “Free to Choose,” where he discusses this subject.
The economics literature shows that the employment impact of an increase in the minimum wage is small or zero. Check out this 2013 paper reviewing the literature:
“The employment effect of the minimum wage is one of the most studied topics in all of economics. This report examines the most recent wave of this research – roughly since 2000 – to determine the best current estimates of the impact of increases in the minimum wage on the employment prospects of low-wage workers. The weight of that evidence points to little or no employment response to modest increases in the minimum wage.”
Source: http://www.cepr.net/documents/publications/min-wage-2013-02.pdf
Regarding your point about productivity in your blog post, productivity has increased extraordinarily, however the gains of productivity increases have not been shared very much with workers. Indeed if the minimum wage had kept up with productivity gains since the late 1960s, the minimum wage would be over $21 an hour by now — far lower than the minimum wage proposals on the table currently.
See: http://www.huffingtonpost.com/2013/02/13/minimum-wage-productivity_n_2680639.html
Nick,
Thank you for your contribution here.
Concerning your first point, I have, of course, seen these studies. And I do not specifically argue with their conclusions to the extent that they are examining only the primary effects of increasing minimum wage rates. But I have seen nothing in any of these studies that go beyond that, such as secondary effects, the kind I outline in my article. I refer you back to my article for my thoughts on secondary effects and why even if some workers benefit short-term from an increase in the minimum wage (which, of course, some workers clearly do), the negative longer-term effects on competitive forces and incentives are very damaging, but usually not mentioned. In fact, you didn’t mention them. Which is my point.
Now to your second point. Productivity gains–the kind that matters–is purchasing power, not nominal dollars. But you are focusing on nominal dollars, which do not track purchasing power, at least not in an absolute sense. Most workers’ purchasing power (in contrast to nominal wages) has definitely increased over the past 30 years as a result of productivity increases. They clearly have more and better goods at their disposal now compared with before.
Furthermore, when workers are already being paid higher than what the free market rate would be otherwise (because of minimum wage laws and similarly because of pro-labor legislation), there is no excess capital available to the employer, at least not in terms of the worker. Any excess has long gone to keeping employees paid at the above-free-market rate. However, those workers whose wages are not tied to the minimum wage (higher paid workers, for instance), will certainly see their wages rise as productivity rises. It is in the self-interest of the employer to do so. And it happens all the time.
Your article is quite consistent with a general theme I’ve noticed in conservative ideologies. It fails to delve into a subject beyond immediate and single layer cause and effect. Bigger picture thinking is something conservatives appear to universally avoid.
While I have worked multiple jobs at various times in my working life, I did so to elevate myself and my family above the bottom rung, not to simply maintain my grip on it as is necessary in today’s economy. Forcing people to work multiple jobs to simply exist is also a cause of unemployment. In a perfect world one full time job should, at least, provide above poverty line income. People would then have the ability to better contribute to society by increasing their skill sets with education (as conservatives always suggest) and by returning to a more traditional parent/child relationship that would greatly benefit everyone. These are foundational conservative values that are not attainable when working for subsistence demands all of one’s abilities.
Then there is the bigger picture of overall costs to society that are drastically out of balance. The demands placed on just surviving cut off one’s ability to move up the economic ladder, and that means roadblocks for everyone. America used to be the land of opportunity that everyone envied. That is no longer the case, as massive amounts of corporate money has infected our political system. Our nation was not founded to be a cheap labor/tax haven for business. In fact, that was one of the driving forces that inspired the founders as they sought to extricate the colonies from just such conditions. When much less resource and people rich nations overtake us we are doing something wrong, and that is easily plotted back to the turning point of our economy in ’80. Not all things conservative are bad, or harmful, but I think that four decades of evidence should not be dismissed because it does not support an ideology.
I don’t agree myself, but you nevertheless make a thoughtful case. I’d argue that a $15 an hour minimum wage is not a lot to ask. The true market value of labour is not that which is paid by the employers, but the total income that sustains a worker. After all, employers would not be able to employ people at $7, $8 an hour if the government did not supplement the income of people with benefits: left to its own devices, the market would set the lowest wages at the level workers could just survive on. The government effectively subsidises employers by allowing them to pay less than a living wage by picking up the shortfall.
So yes, a living wage would cost business, but it would save the government billions. In exchange for imposing a living wage, the government could lower corporate taxes with some of the money it was saving in benefits. That would be one way of easing any potential difficulty, insofar as it would actually exist. The UK has a minimum wage of just over $10 dollars an hour, (about 70%) of the Living Wage, and we could go further and help, not hinder, business in doing so.
You bring up a very important point. For 2013, the maximum Earned Income Credit in the U.S. is $5,891. This is a subsidy which enables employers to pay a lower wage.
Interesting.
Parroting conservative propaganda doesn’t make it true. Paying workers a living wage is both morally right and economically sound. FACT. No full-time worker should have to rely on government assistance to survive — assistance provided on the tax payers’ dime. I’m tired of my tax dollars subsidizing greedy corporations that refuse to provide fair pay and benefits. These 14 states are helping to lead the way, since the Tea Bagger Congress will refuse to let the whole nation act, even though the vast majority of enlightened citizens with a soul support paying fair wages.
Read more: http://www.businessinsider.com/map-of-fast-food-wage-increases-2014-1#ixzz2pyZldvnE
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In Greece we lived duplication of salaries in 90s that led to massive unemployement to private sector, with the public sctor (goverment) trying to cover the loos by hiring everyone to unproductive placements. But in USA is at the other side. GDP increased astronomically from the 80s but the wages increase didnt followed at all. Do you have a same unlobbied-uncoorupted related scientific explenation for that to ?
While your logic is mostly sound in pointing out a real problem with a raise to the federal minimum wage, your “alternative” (stated in the paragraph that begins: “The only real way to increase workers’ standards of living is by increasing their productivity and thus their worth to employers…” is exactly what HASN’T been happening in the last several decades, and is the very reason why this legislation will be considered.
I find this is a much more complete and knowledgable article, using a bit less idealogy and a few more facts: http://economix.blogs.nytimes.com/2013/12/13/raising-the-minimum-wage-old-shibboleths-new-evidence/
In any case, even if it were to turn out as bad as you say it would, the 10s of millions making minimum wage would mostly be able to support themselves with just one job. I don’t think you have to be a “progressive” or a democrat to think that’s a good thing. And if America’s economy is so dependant underpaid unskilled work, then perhaps it is due for a change. Surely the country will adapt, it has faced worse challenges.
Although you would probably say otherwise, your rhetoric shows very little confidence in the resilience and dynamism of the American economy and its people.
Thank you for contributing your thoughts. Please read my response to James: https://boxerinsights.wordpress.com/2013/12/31/an-increase-in-minimum-wage-have-we-learned-nothing/comment-page-1/#comment-141
In response to your final paragraph, I have great confidence in the American economy. The point of my article is to look at secondary effects in addition to the obvious immediate gains to workers by increasing minimum wage rates.
Great article, Robert! A point I made in my latest article on the subject is that maybe Democrats do believe it causes unemployment, otherwise they would be advocating for a $50 or higher, minimum. It all goes back to the belief that central planners have that they know just what level to set it to in order to not have it affect much, which is of course ludicrious. If unemployment would result from a $50 minimum, then even if it’s to a lesser exent, it follows that it must also result at any level that is unnaturally set by central planners and not the market.
Thank you, Pedro. I went over to your site and read your excellent article, “Yes, Minimum Wage Laws Do Cause Unemployment and Hurt the Poor,” and I encourage others to do so also.
You assume there is a linear relationship, but it’s nonlinear. Raise the minimum wage and you stimulate the economy, but raise it too high and unemployment rises. If there is no increase in the minimum wage, the risk is political instability. Whichever choice is made, there is always a cost.
The facts are clear, jurisdictions that raise the minimum wage do not lose jobs to adjacent jurisdictions that do not raise their minimum wage. http://www.cepr.net/documents/publications/min-wage-2013-02.pdf
The landmark study that came to this counter intuitive conclusion was by Card & Kruger http://davidcard.berkeley.edu/papers/njmin-aer.pdf
Prices for a fast food meal did rise but it did not adversely affect the viability of the businesses or employment. In fact, turnover decreased and productivity increased.
Thank you for your contribution here. Opposing views are always welcome here.
The studies you mention, although on the surface may have a lot of validity, fail to look adequately at secondary effects. For instance, if a study demonstrates particular cases where raising the minimum wage rate, by say 20%, is not followed by a subsequent rise in unemployment, such a study is not a proof that raising the minimum wage rate does NOT cause unemployment. Let me explain.
We all agree (I hope) that raising the minimum wage rate by a ludicrous amount (say, 1000%) would certainly cause unemployment. I don’t use that example to be funny. I use it to make a point that we all do agree that, at some given rate increase, unemployment would surely ensue.
Continuing, let’s now ask ourselves what happens when an employer is forced to raise the wages he pays his employees (because the minimum wage rate has increased) and he chooses NOT to lay off workers, and thereby accept lower profits (since his labor costs are higher). This is the situation that the left seems to think is what should happen. So let’s say it does happen, as it will from time to time.
Well, in this case we’d all have to agree that, assuming everything else remains unchanged, the employer will have less profits at his disposal. We all should agree on this point as uncontroversial since, in this example, the employer has agreed to these lower profits by keeping all his workers. So, continuing, since the employer has lower profits, he will subsequently spend less; he will expand his business less; he will not invest in the new business in which he had been considering investing. All these other businesses with whom he would have transacted new business had his profits remained higher are now that much poorer–that is, sales and services provided by these other businesses that otherwise would have come into fruition never do. And these other businesses, in turn, will be forced to cut back, probably cut back their employees. Thus, more unemployment, but occurring in different areas.
Considerations like these, and there are others I could cite, are the kinds of considerations that politicians and the media do not readily talk about. Indeed, many (if not most) of them do not have a basic understanding of economics and the trade-offs constantly occurring. Many speak a populist message that resonates with a public that is understandably confused on many of these considerations. We all can readily see the beneficial immediate effect a rise in the minimum wage would have upon a worker (leaving aside the worker’s role as a consumer, which in that role he will suffer, as will the rest of us, as a result of higher prices down the line).
But no one sees or talks about these secondary and tertiary, and beyond, negative effects. The would-be beneficial business transactions (beneficial to the community at large) that do not occur are simply invisible to the public since they, indeed, do not occur; the public sees only the immediate benefit to the original employer’s workers, completely ignoring the unemployment down the line for other workers–an indirect, but predictable, result of having raised the minimum wage.
To fully have a valid opinion on an economic matter, one must look at not just the immediate effects, but all effects. Most of the studies I’ve seen that come to the conclusion that raising the minimum wage does not have detrimental economic effects are generally guilty of ignoring these longer-term effects.
Robert, You’ve got a lot of THEORY in your original and here in this reply. No EVIDENCE to support it? Seems a bit fishy.
It’s easy to criticize one study or another for not being perfect, Where are the countering studies that prove your theories? And, please let’s quantify things. If raising the minimum wage increases unemployment by a small amount but carries with it other substantial economic and social benefits, shouldn’t the public and policymakers have that data to put into a cost-benefit analysis?
Bill,
If by evidence you are looking for research that shows that increasing the minimum wage does increase the unemployment rate, this is an easy look up on the Internet. Likewise, you can equally easily find research demonstrating the opposite view. I say this not to denigrate evidence. But what I have attempted to do with my article, and perhaps have failed, is to demonstrate logically what are the longer-term effects of increasing the minimum wage rate, the analysis of which is often truncated.
Why don’t I throw the question back to you since I believe I have already commented on the thrust of your question in a recent reply to a comment. If an employer has a fixed amount of capital and his costs go up (e.g., the minimum wage goes up) yet he keeps all his employees, indisputable logic tells us he has less capital to use for other purposes. Do I need to provide evidence beyond logic that this is true? What evidence beyond that is needed? It’s definitional.
Most studies demonstrating that minimum wage increases do not cause unemployment suffer from primarily looking only at the immediate beneficial effects to the workers, ignoring what must happen down the line. In my example, the employer MUST have less capital after the wage increase. The employer then MUST not be able to expand his business (for example) in the way he could have had the wages not gone up. This follows logically and indisputably. There’s nothing “fishy” about it. Even if the employer were, for example, to borrow money to make up the difference, the money he borrows would come from lenders who would have otherwise lent the funds to someone else, so that someone else now cannot expand his business. Diverting capital from Peter to feed Paul always has these kinds of effects, you just have to look for them.
I’m not saying anything radical here. One just has to follow the longer-term effects of short-term actions.
And, yes, there are cost-benefit analyses that should be done. But, again, my point is that many of our policy makers do not even recognize the costs. They are blind to what will be given up in the future because of their current actions. I certainly recognize that there are times when immediate needs are so great that we must give up future value for current need. But we must always be aware of what the future value actually consists of, before deciding to give it up.
This is where my problem arises Robert:
“When such an increase occurs, employers in competition with each other naturally bid up the price of labor. This competition increases workers’ money wages (the amount they get in dollars).
And most important, such an increase in productivity increases workers’ purchasing power, along with the purchasing power of everybody else. When workers are more productive, all society benefits from the resultant increase in quantity of available products newly available to consumers at lower prices.”
Where is the evidence that this is standard practice? I’m not a bleeding heart liberal or anything but in my admittedly anecdotal experience, large companies that suddenly see increased profit margins do not immediately hire more “bottom-rungers, nor do they tend to offer their lower level employees additional benefits and bonuses due to these improved numbers. They hire more executives and cut larger bonus checks to managers.
Most of the examples of how a minimum wage increase could have negative results focus on the “barely staying afloat” companies. If raising the minimum wage is such a terrible idea then come up with an idea that draws more from the companies seeing astronomical and record-breaking profits.
Hi James,
Great question. Let me attempt to answer you here.
Let me start by emphasizing that when an employer raises an employee’s wages, he does so not out of the kindness of his heart. Likewise, if he lowers an employee’s wages, he doesn’t do so over callousness. Based on a wide variety of competing market conditions and the existence of businesses in competition with his own, only a very narrow range of wage-paying options are available to any employer. If he pays employees too much relative to market conditions, his business suffers relative to his competition, and he finds himself at a disadvantage; his costs are higher than theirs. And if he pays noticeably lower than his competition, he will tend to lose good employees to his competitors, again finding himself at a disadvantage. I point out these somewhat obvious facts because often people, I have found, tend to think of the employer as having a huge range of options available when deciding wage rates; this is not the case. The employer is not a parent doling out increases in allowance to a child; the employer is quite restricted.
So, you ask, after there is an increase in worker productivity–whether by new production-enhancing technology, new management efficiencies, or by the increasing knowledge gained by workers on the job–how does the worker benefit? What’s to stop the employer from simply adding this gain to his own profits?
The employer would like nothing more than to add this increased-productivity gain to his own profits. Indeed, that’s why he’s in business. But ultimately one of his competitors will realize that he would have a competitive advantage by using at least a portion of this “excess” capital to raise the pay rate of his employees, allowing such a competitor to attract better employees (better in the sense that he expects to gain more profit from their services). Again, the competitor does not raise wage rates out of the kindness of his heart, but out of his own self-interest. Eventually, to stay in business, the price of labor in that field will be bid up by businesses in that field in order for each business to remain competitive. Without the additional productivity we mentioned, the capital for this sequence of events to occur would have been less likely.
Society benefits from this increased productivity by an increase in the quality and quantity of goods available to it, at lower prices. Prices tend to fall when quantity increases.
People tend to focus solely on wages and not purchasing power. This is an error. It’s purchasing power that is most important. If my wages are cut in half, yet my purchasing power doubles, I have gained. Suppose, as an extreme worst-case example, a person’s wages today are identical to what they were in, say, 1980 (after adjusting for inflation). Consider all the productivity gains occurring throughout society during this period, especially in technology. Think of all the new items and services available today, most of which are less expensive (in inflation-adjusted dollar) today than they were in 1980, assuming they even existed back then. Without any gain in wages, this person is much richer today than he was then. Much of this is a result of the cumulative increase in productivity. We can create more for less, and we all, as consumers, gain. As I mentioned in the article, this is the real definition of an increase in the standard of living.
Thus, as a corollary, any restrictions on a general increase in societal productivity ultimately tends to subtract from increases in the general standard of living.
“So, continuing, since the employer has lower profits, he will subsequently spend less”
If fifty years of this not happening haven’t proven it to you, I don’t know why I’m bothering, but no, you’re wrong.
Your false assumption is that all profit will automatically be reinvested back into business. In fact, above a certain point, profit does NOT get reinvested; that’s the static state that our financial system is in right now and is the very reason that minimum wage increases are being so strongly considered, because the market has proven inadequate to the job it has been tasked with.
Hi Rayph,
I am not understanding your point. You quote me with this statement:
“So, continuing, since the employer has lower profits, he will subsequently spend less”
then you say:
“If fifty years of this not happening haven’t proven it to you, I don’t know why I’m bothering, but no, you’re wrong.”
Anyone with lower profits will generally spend less. Not sure why you are claiming otherwise. I must be missing your point.
Also, concerning your final paragraph, I am not claiming that all profits gets reinvested. I am claiming that we need to look carefully at secondary effects when deciding whether a policy is beneficial or not. Please read this response.
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I just took my economics class in High School. Hearing that minimum wage is going up, its just going to be harder for me to get a job. Employers, who now have to pay a higher starting wage, aren’t going to want to hire someone who has no experience. If the minimum wage gets too high, its going to pretty much cut teens and inexperienced out of the work force by taking out the entry level jobs.
“Employers, who now have to pay a higher starting wage, aren’t going to want to hire someone who has no experience.”
Cheer up, young’un. The fact is, if they need labor, they will hire people and they will always pay the lowest possible rate that they can get you to agree to. If they don’t need labor, then the minimum wage can’t help, and if they do need labor, the minimum wage won’t stop the hiring. This has been not only been proven repeatedly, but never disproven, that’s why the author is so quick to dismiss actually citing evidence of his claims.
You should look at the research and not just spout libertarian nonsense. http://www.raisetheminimumwage.com/pages/job-loss
Kevin,
Thank you for your opinion.
Instead of simply providing a link (which I have dutifully clicked and read some of its opposing research) and discounting my research as “libertarian nonsense,” it would help the discussion to point out what in my article you disagree with. Did I present a logical error? If so, please point it out. We’re all here, hopefully, to enlighten one another. Perhaps you can enlighten me.
Some of the research your link presents is clearly incorrect. For instance, raising the minimum wage does NOT increase economic activity through increased spending. Spending is simply shifted from from person (or entity) to another. There is no sum economic gain from such a shift.
Nearky all union contracts have a clause that connects the union scale to the minimum wage rate in the local area.
Union scale is based on a multiple of minimum wage, and that guarantees wage increases for union members.
The politician do not care about the ‘entry level’ people, they DO CARE about getting union labor a big raise without the people noticing.
If the bottom rung of the union scale is 1.5 times the prevailing minimum wage $8.00 = $12.00 Which bumps to $15.00 – $23.50.
Nice raise, and it never gets public attention.
Here is the reason why entry-level jobs should not be $15 per hour.
I make $15 per hour and I work in a medical records office. I have to know medical terminology to perform my work. One of the jobs I do is to scan paper records into the computer based records. When I look at a record, I have to know if it is a procedure performed by a doctor or if it is just note the doctor wrote as an update to the record. They are similar and I must get it correct. Remember, these are private medical records; any mistake could mean my termination and a lawsuit against the medical firm.
I’ll bet that any of the $15 per hour minimum wage workers in SeaTac couldn’t perform any part of my job without training. But I’ll bet that I can perform 50%-75% of their job without training. All either of us would get is some basic direction. “Here, scan these records” or “Here, cook these fries.”
There is NO WAY that these entry-level workers are WORTH $15 per hour, especially not if MY job, which is 100 times more difficult than theirs, is also worth $15 per hour. And I KNOW my job is not worth more. So their job is definitely not worth more than about $5 per hour.
Stranded: You should feel yourself exploited and demand $30 per hour.
As an aviation refueler at seatac, I must say that your words have certainly made me irate. Ill have you know that I am trying to make it on my own. My average paycheck after taxes is about 650$ and I make 10.50 hr. I am young and have no established credit, therefore my car payment is almost $500 dollars a month. I was in a car wreck when I was 17 because someone hit me and caused me to spin out on an ice patch resulting in my hitting someone else. So needless to say my insurance skyrocketed to almost 200$ and that is with my fathers insurance. I don’t live with my parents anymore because I’m 22 years old and they said I need to have my own place so my brother and i live together.. I pay about 500$ to live there. So add all that up and tell me how much I have left to spend on a phone, food and gas.. I’m sure I will not be able to do your job ,miss, but for $15 dollars an hour I’m sure I’d learn pretty damn quick though. Oh and on top of all this, I’m going to college so not a lot of free time for anything..
Sincerely, someone who got their hopes up for having a few extra bucks to go see a movie.
If the minimum wage is increased by 100% and your wages don’t go up and suddenly match the minimum wage, it’s time to find yourself a different job.
You’re right. We shouldn’t raise the minimum wage. We should take over the means of production and eject the current owners. And this is why I love conservatives. While the progressives are out there trying to save capitalism by putting band-aids on persistent problems, you folks are content to let capitalism run itself into the ground. I hope you win, conservatives, because you ensure the coming revolution. Progressives recognize that happy workers are not revolting workers while conservatives are content to let them starve. When the number of people suffering under your unaided form of capitalism reaches critical mass, rest assured they will burn everything down. I can hardly wait.
And for the people who are priced out of the minimum wage job; are progressives content to let them starve?
That’s an easy one: history says progressives have no problem with starving the “unfit” if that’s the only way to reduce their numbers. We’re dealing here with Darwinianism of the most callous sort.
One of the things I miss most about the former Soviet Union was that it was an ever-present reminder of how well the “take over the means of production” reasoning works, without any propaganda needed to reinforce the point.
But Steak has a point: there is a huge problem, not with income inequality, but because a near supermajority of Americans believe the economic system is stacked in favor of the mythical “rich.” Whether that belief is justified or not is irrelevant, and wile it may not produce a communist revolution, it almost certainly will produce more government meddling in the economy–meddling which never actually helps anyone, but makes some people feel better for having punished “the rich.”
Well said, Andy Robinson.
Very nice piece. I think the issue of the raising minimum wage is purely a political one. I suspect that most of the smart politicians actually know better, but choose this politically expedient path to the end of securing the votes of their base.
Those people with the $15.00 an hour wages will be screaming bloody murder when they lose their entitlements due to the wage hike,or will they be marching in the streets with their silly signs demanding their food stamps,medicaid and WIC.. This country has sure gone to hell.
Excellent article, Robert. One less obvious factor is the linkage most unions have made to the minimum wage, with many positions paying some multiple of that figure. This means that a 39% increase in the minimum also accrues to far more highly paid workers as well, which vastly multiplies the effects you describe,
What unions haven’t realized is that raising the minimum wage works against the union. Why join or organize a union if the government will get you something for nothing?
Once the minimum wage goes into effect the organizing the unorganized into union decreases considerable. Union works get no benefit from this.
Bob Kastigar
IBEW Local 1220, Chicago
Your essay is another potent argument for changing the implied specifications we put on elected officials. It’s not nearly enough that they just be citizens, they must have the educational background to understand the lessons of economic logic and the implications of changes to the laws they dream up.
Furthermore, the obvious need for feedback from the results of government actions is so critical to avoid making the same bad decisions, that mere citizens can only wonder why the imperative of re-election continues to take precedence over sensible governance.
The other, even more important spec, that must be part of any official’s preparation is a formal educational background in America’s philosophical underpinnings, the American ethic so laboriously evolved over the first two centuries of the country’s existence. The men and women who are changing the nation’s guidelines today obviously know next to nothing about individual liberty, sovereignty, or freedom of action that people need in order to realize their own greatest potential in life, as their abilities and desires lead them.
Bill L.
Bill,
Thanks for your comments. Yes, we no longer have the thinkers in charge, that’s for sure. And a large swath of the electorate has no knowledge whatsoever about the ideas (individual rights and liberties, limited government) upon which this country was founded. To many, it’s all just a game of interest-group warfare, a zero-sum game, where one group wins at the expense of another group. The concept of long-term benefits for all of society has no place in such a world view.
Well-written article. Thanks. Now if only the Dems would read it.