There has been much discussion about the President’s M/W+ proposal and whether that is good policy. Among the issues for debate; whether the M/W+ (min. wage increase) actually helps low-income earners, the issue of spillover and upward pressure on wages above M/W, the impact the proposal will have on employment, and the upward sloping. To some level or another I address these issues, and in doing so, conclude that increasing the M/W is good policy. But now to the issues . . .
It’s probably not going to affect that many people. Putting it into context — those who are trying to support families are not who are making minimum wage.
Meanwhile, Megan McCardle wrote the other day for the Daily Beast:
But who are the people in minimum wage jobs? This is primarily being sold as a poverty-fighting tool, so it would help to know how many of the people making it are poor.
The answer seems to be no; most of the people making the minimum wage are not living in households below the poverty line. Over half the people earning minimum wage are below the age of 25; for them, this is not likely to be a permanent condition, but a first rung on the income ladder. Many are students or entry level workers who are part of established households with higher earners.
Older minimum wage workers are probably more likely to be poor, but on average, they’re not. To be sure, they’re unlikely to be wealthy–this workforce will be predominantly drawn from near-poor and lower-middle-class households. Undoubtedly, they have uses for the extra money. But it will not specifically lift people out of poverty, because most of the people earning minimum wage aren’t in poverty now.
Data from the BLS seemingly supports this notion that as a poverty fighting tool and effectively raising the living standards of a large portion of Americans, this proposal will be a failure:
In 2011, 73.9 million American workers age 16 and over were paid at hourly rates, representing 59.1 percent of all wage and salary workers. Among those paid by the hour, 1.7 million earned exactly the prevailing Federal minimum wage of $7.25 per hour. About 2.2 million had wages below the minimum. Together, these 3.8 million workers with wages at or below the Federal minimum made up 5.2 percent of all hourly-paid workers. Tables 1 through 10 present data on a wide array of demographic and socioeconomic characteristics for hourly-paid workers earning at or below the Federal minimum wage. The following are some highlights from the 2011 data. (emphasis added).
In the piece quoting Keith Hall, The Hill notes that this 5.2% is drastically lower than the 13.4% rate of 1979 (the first year the data was collected). So, it would then appear that this minimum wage increase is on par with bailing out the Atlantic with a teaspoon . . . right? Maybe, maybe not. There are a couple of things being left out of the data in the article.
First, one problem with the ‘percentage of workers earning minimum wage’ stat is that you only know just that . . . those people earning M/W. So, we know that in 2011, roughly 5.2% of the work force earned $7.25/hr. But the President is proposing $9/hr as the new M/W, so the number of workers is not the 5.2% (or those earning M/W or less), but those earning M/W (or less) plus those workers earning $8.99/hr. I have looked by have not been able to find any data on workers earning $8.99/hr. or less, but that figure would give us a better indicator of the impact on the labor force.
Second, anyone know why more workers were paid M/W in 1979 than in 2011? Before we delve into this, we need to create a better framework for how we are going to answer this. First, we can assume that the higher minimum wage is, the more people who will be paid at that wage. For instance, all persons today making $7.26/hr to $8.99/hr are not making minimum wage, but would be should the President’s proposal be passed. So, the higher the minimum wage, the more people earning that wage.
However, we are comparing two time periods some 32 years a part, meaning comparing nominal prices and wages is a bit like comparing apples to oranges. So, to get a better comparison, there is some simple wage data comparing 1979 and 2012:
|Year||M/W nominal||M/W 2011 $||Real Avg. Hourly Earnings nominal||Real Average Hourly Earnings 2011 $|
So, back to the question of why more 1979 earners made M/W than their 2011 counterparts. As we can see from the data, M/W in recall $ was higher in 1979 than in 2011. In other words, in terms of today’s workers, earners making M/W would be not just those earning $7.25/hr, but those earners plus those earners making $7.26-$8.99, which would, obviously, increase the total number of M/W earners. We can assume from this that the reason for the decline in earners making M/W is not because of upward income mobility, but because of a decline the M/W in terms of real $.
Second, it reveals how misleading it is to say that the problem with wages on the bottom end of the spectrum is not that paramount because there are (historically) fewer people earning M/W. By thinking, by having fewer people earning M/W, earners are better off. However, a person making $8/hr is earning above M/W today, but in 1979 would have been at M/W (and in fact would have been earning $8.99 in 2011 $), so they are in fact worse off?–and for the record, in December 1979, the U/E rate was 6.0% vs today’s 7.9% mark.
So then raising the M/W is the right tool to combat poverty then? No. Although it is true that a decline in those workers earning M/W is not dispositive to the growth in wealth by low-wage earners, we cannot simply assume that raising the M/W will increase the wealth of low-wage earners. In 2010, Joseph J. Sabia and Richard V. Burkhauser researched and authored a paper examining just that issue; how will low-income will benefit from a rise in the M/W. In their model, Sabia and Burkhauser examine “the effects of a proposed federal minimum wage increase from $7.25 to $9.50 per” on the working poor. Somewhat surprisingly, they conclude that:
[T]he newly proposed federal minimum wage increase from $7.25 to $9.50 per hour, like the last increase from $5.15 to $7.25 per hour, is not well targeted to the working poor. Only 11.3% of workers who will gain from an increase in the federal minimum wage to $9.50 per hour live in poor households, an even smaller share than was the case with the last federal minimum wage increase (15.8%).
The reason for this is the make-up of M/W earners:
Of those who will gain, 63.2% are second or third earners living in households with incomes twice the poverty line, and 42.3% live in households with incomes three times the poverty line, well above $50,233, the income of the median household in 2007.
Moreover, the targeted demographic of the President’s proposal, M/W earners who are the highest earners within their households with families, comprises just 26.2% of those workers who would be impacted if the M/W increased to $9.50 ($0.50 over what the President proposes).
This comports with the BLS statistics on characteristics of M/W earners in 2011:
- Minimum wage workers tend to be young. Although workers under age 25 represented only about one-fifth of hourly-paid workers, they made up about half of those paid the Federal minimum wage or less. Among employed teenagers paid by the hour, about 23 percent earned the minimum wage or less, compared with about 3 percent of workers age 25 and over.
- Part-time workers (persons who usually work less than 35 hours per week) were more likely than full-time workers to be paid the Federal minimum wage or less (about 13 percent versus about 2 percent).
However, a larger portion of M/W earners work F/T than indicated by the BLS numbers. The Economic Policy Institute estimates that:
[A]bout half (47.3 percent) of the 18 million affected workers are full-time employees, working at least 35 hours per week. Another 35.8 percent work between 20 and 34 hours per week, and only 16.9 percent work less than 20 hours a week.
We have found that raising the minimum hourly rate to $9.00 by 2015 would directly boost the wages of over 13 million Americans. The increase would also have a spillover effect, bumping up wages for another 4.7 million workers who earn just above minimum wage. (Presumably, the increase to M/W would strengthen the bargaining power of those workers making $9.01+/hr).
[T] he decline in the real value of the minimum wage explains a substantial proportion of this increase in wage inequality.
[E]xperimental results broadly confirm the stylized facts of spillover effects from the empirical literature: 1) the wage of workers that used to earn less than the new minimum wage rises above the minimum level, and 2) a minimum wage increases the wage of workers already earning a wage above Spillover effects of minimum wages: Theory and experimental evidence the new minimum wage. These results suggest that spillover effects of minimum wages also occur in labor markets that cannot be described by standard wage hierarchy or effort provision.
- All-time M/W high–1972 at $9.33/hr, and U/E was 4.5%
- All-time M/W low–1993 at $7.65/hr, and U/E was 6.2%
- All-time U/E high–2010 at 9.0%, and M/W was $8.75
- All-time U/E low–1968 at 2.7%, and M/W was $8.68 (in constant, 1982-1984 dollars)
Summarizing those studies is a daunting task, but two recent meta-studies analyzing the research conducted since the early 1990s concludes that the minimum wage has little or no discernible effect on the employment prospects of low-wage workers.The most likely reason for this outcome is that the cost shock of the minimum wage is small relative to most firms’ overall costs and only modest relative to the wages paid to low-wage workers. In the traditional discussion of the minimum wage, economists have focused on how these costs affect employment outcomes, but employers have many other channels of adjustment. Employers can reduce hours, non-wage benefits, or training. Employers can also shift the composition toward higher skilled workers, cut pay to more highly paid workers, take action to increase worker productivity (from reorganizing production to increasing training), increase prices to consumers, or simply accept a smaller profit margin. Workers may also respond to the higher wage by working harder on the job. But, probably the most important channel of adjustment is through reductions in labor turnover, which yield significant cost savings to employers.
For the range of minimum wage increases over the past several decades, methodologies using local comparisons provide more reliable estimates by controlling for heterogeneity in employment growth. These estimates suggest no detectable employment losses from the kind of minimum wage increases we have seen in the United States.
Our results indicate that employment increased at firms most affected by the minimum wage increase, while price changes appear to be unrelated to changes in wages resulting from the minimum wage increase. Of course, larger increases in the minimum wage may well result in employment decreases and price increases.
Contrary to the central prediction of a text book model of the minimum wage, but consistent with a growing number of studies based on cross-sectional-time series comparisons of affected and unaffected markets or employers, we find no evidence that the rise in New Jersey’s minimum wage reduced employment at fastfood restaurants in the state.
President Obama, Paul Krugman and Robert Reich have all been pushing for an increase in the minimum wage. I want to agree with them, and Krugman is certainly correct that the preponderance of empirical evidence shows that the minimum wage’s impact on total employment is negligible.
If raising the minimum wage is good economic policy, why stop at $9 per hour? Why not increase it to $90 per hour? By the President’s logic, doing so would dramatically increase the income of not just millions of working families, but tens of millions of working families, and indeed of almost all working Americans.
By the President’s logic, a $90 minimum wage would be good for American businesses because their customers would have more money in their pockets. A full-time worker making the minimum wage wouldn’t make $18,000 per year as the President proposes, but $180,000 per year.
I am, of course, joking, and in doing so I’m trying to demonstrate the flawed logic of a minimum wage increase of any size.
Which is interesting. I guess we could analogize this with the Laffer Curve, and the argument that the LC supports cutting taxes to increase revenues. I guess then if we want to maximize revenues, we should cut taxes to %1, or lower. ”I am, of course, joking, and in doing so I’m trying to demonstrate the flawed logic of a [tax cut] of any size.” (I don’t actually support this, but it is illustrative). Moving along . . .
In other words, businesses are not saddled with high employment costs currently, and earlier this past decade were running higher employment costs while earning similar profits:
Of course for some, such a Fox’s Elizabeth MacDonald, teenagers are the proverbial canary in the coalmine, and have argued that the recent decline in employment for 16-19 year olds since the last M/W+ indicates the problems the President’s proposal will have on the labor market. Just one problem with that (well, actually, many), teen employment has trended downward over the past decade plus:
In short, what we have is a policy that could not only increase the wages of the lowest earners, but cause a ripple effect throughout the income levels by creating upward pressure on wages to counteract the decline in those wages over the past few decades. Opponents are concerned about a bump in U/E with increased labor costs. Although labor costs will increase, employers have enjoyed suppressed employment costs over the past few years while profits returned to pre-crisis levels. Moreover, research indicates that increases to the M/W as proposed are likely to have a minimal negative impact on employment.
Conversely, there is some research to suggest that, at least for some industries, the labor demand curve is upward sloping, and an increase in the M/W could increase employment by incentivizing potential employees to take on the financial burden to retrain themselves and enter the workforce at increased wages. Of course, there are limits to the M/W+, but given that the M/W, real wages, ECI, and other macroeconomic indicators are below recent and historical trends, there is nothing to suggest this $9/hr proposal is opening Pandora’s Box.
- Thoughts on the Minimum Wage (thebigquestions.com)
- (Even) More on Min Wage (anirrationalviewoftheirrational.wordpress.com)
- Not all min. wage increases are created equal (anirrationalviewoftheirrational.wordpress.com)
- Paul Krugman: Raising The Minimum Wage Is ‘Good Policy’ (huffingtonpost.com)
- The real tragedy is that many Americans earn $0.00 per hour and live in poverty, because of the minimum wage law (aei-ideas.org)
- Paul Krugman: Raise That Wage (economistsview.typepad.com)