Minimum Wage, Minimum Work, Minimum Dignity

California, predictably, has passed a $15/hour minimum wage.  New York is likely to. A few cities have done it already.  Bernie Sanders wants a Federal wage of $15, while Hillary Clinton wants a $12 wage.  And so the issue is once again on the table, at a time when wages are stagnant and unemployment is tepid.  In fact that is why the issue has become so important again to its advocates.  It looks like the high minimum wage is being pushed by two groups:  the organized low-income workers, operating through various interest groups and, in California, the public sector unions.  Both those are expected advocates.  But my concern here is with the actual effects of the wage increase.

Some people—all too many—don’t know anything about economics.  Now right away, I will have a few responses saying that the research on the effects of minimum wage is ambiguous.  It is true that there is some research that appears to indicate that the minimum wage does not result in more unemployment than before.  I submit that those studies are either limited or flawed, limited in that they do not address what actually happens to low income, low skill workers, and lump the numbers together with all workers/potential workers, flawed in that some fail to make the right comparisons.  The New York Times published an editorial on February 17 that said a wage increase to $15/hour (essentially a doubling) would have no economic effect.  The editorial board invoked studies for support.  But what do the best studies show?

One example of a useful study comes from the recent work of Jonathan Meer and Jeremy West.

at Texas A&M and MIT (“Effects of the Minimum Wage on Employment Dynamics”  Journal ofHuman Resources published ahead of print November 30, 2015), who found that “Using three separate state panels of administrative employment data, we find that the minimum wage reduces job growth over a period of several years.” (Ibid.).  Another by Jeffrey Clemens at UC san Diego (“The Minimum Wage and the Great Recession: Evidence of Effects on the Employment and Income Trajectories of Low-Skilled Workers,” NBER Working Paper No. 20724, December 2014, NBER Program(s)):

“We estimate the minimum wage’s effects on low-skilled workers’ employment and income trajectories. Our approach exploits two dimensions of the data we analyze. First, we compare workers in states that were bound by recent increases in the federal minimum wage to workers in states that were not. Second, we use 12 months of baseline data to divide low-skilled workers into a “target” group, whose baseline wage rates were directly affected, and a “within-state control” group with slightly higher baseline wage rates. Over three subsequent years, we find that binding minimum wage increases had significant, negative effects on the employment and income growth of targeted workers. Lost income reflects contributions from employment declines, increased probabilities of working without pay (i.e., an “internship” effect), and lost wage growth associated with reductions in experience accumulation. Methodologically, we show that our approach identifies targeted workers more precisely than the demographic and industrial proxies used regularly in the literature. Additionally, because we identify targeted workers on a population-wide basis, our approach is relatively well suited for extrapolating to estimates of the minimum wage’s effects on aggregate employment. Over the late 2000s, the average.”  effective minimum wage rose by 30 percent across the United States. We estimate that these minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point.” (Ibid., Abstract).

Finally, a European study involving a few contries one would have expected to already have minimum wages.  Steve Hanke of Johns Hopkins University published an article in which he compared unemployment rates in EU nations that had a minimum wage with those not implementing one.  The results are below in graphic form:

Remember that EU nations are geographically close to each other, which helps control for cultural differences.  In addition, their economic systems are much the same and they interact with one another economically.  The one variable that is most important then is the minimum wage.  The differences are striking.  If we look at youth unemployment, they are even more striking:

It is also interesting to note the seven EU nations that don’t have a minimum wage: Austria, Cyprus, Denmark, Finland, Germany, Italy, and Sweden.  Notice Sweden, the epitome of what modern liberals think the United States ought to resemble.  In fact, Sweden has backed off of some of its social democratic policies in recent years.

It is those who need a job the most—low skill, low income—that cannot get one because an employer calculates that he can’t afford to hire them compared to the cost and lack if skills.  Moreover, highly paid workers who are not in professional or white-collar fields, are usually found in unions.  It is unions that have advocated for the minimum wage.  But as long as they have work at all, they are likely to be unaffected by the higher wage, though their overall wage rate may go down if a minimum wage is not implemented.  But this would depend on the prevailing wage for skilled workers—and would not help the unskilled worker at all if the wage is increased.  It is not that his or her wage would be increased. It would be if he had a job.  But it is that he or she will not now be able to find a job as easily if at all.  Jobs will simply not be there.

Why do we insist on a policy that harms the very people we say we want to help?  Modern liberals cannot seem able to innovate in the realm of policy ideas.  I can’t decide whether it is because they are ideologues or, more cynically, that they want to either control people’s lives, “buy” votes, or just spite political opponents.  Whichever the reason, if any of them, it is time to eliminate the minimum wage and put people—real people—back to work.

19 thoughts on “Minimum Wage, Minimum Work, Minimum Dignity”

  1. Good post, I completely agree with your statements about the effect of minimum wage. It’s ridiculous to have a $15 minimum wage.

  2. What do you think would happen to low wage workers if the minimum wage was done away with? Would we end up with more unions?
    And, what do you predict will happen to the employment numbers and the economic growth in those states that are raising the minimum wage, compared to the average or low minimum wage states?
    Do some of the countries you mentioned that have no minimum wage, like Denmark, have strong unions with wages well above the US minimum? If we did away with minimum wage could we end up unions and wages like them?

  3. Regarding the effects of increasing the minimum wage on low-wage workers, many if not most of them would receive a pay raise that would increase their family’s income, and some of those families would see their income rise above the federal poverty threshold.

    At the same time, some jobs for low-wage workers would probably be eliminated. The income of most of these now-jobless workers would fall (especially if they did not get new jobs). Probably the share of low-wage workers who are employed would fall slightly.

    Increasing the minimum wage is no panacea, obviously, but is it right as a nation to allow working people–many of them very hard working people–to live in poverty?

    Viscerally I feel uneasy about an arbitrary minimum wage (why $15,?). That said,. does that mean we should just forget about the concept of a living wage? As a Christian, I would say no. The working poor are people too and deserve dignity as such. Many of the working poor have disabilities that they had at birth. Just letting them suffer is to me unconscionable.

    Unless we want to accept the atheistic concept of social Darwinism, we have to figure something out. I would prefer a combination of policies and fresh ideas based on data (those are not easy find, I will admit).

    But doing nothing is not an option except for the social Darwinists among us.

    1. I am not suggesting that we should not help those in desperate need who are unable to care for themselves or achieve any significant level of wages. But our programs at present are a nuclear approach to what needs to be precision surgery. Help those people with specifically targeted programs that give dignity at the same time.

      1. Like, um, what? Which specifically targeted programs to you have in mind?

        The minimum wage is insufficient in providing dignity to the arguably biblical concept of work, since a person who earns that, often by doing far more demanding work than sitting at a computer and reading books, is unable to earn a living wage (especially if children are being supported with that wage, which they often are).

        A person who works doing his or her best should not have to be faced with abject poverty.

        If you want to end the minimum wage so wages go down, fine; but you need to be more specific in finding and arguing for something better that will provide dignity through a living wage. That is, unless you are indeed a social Darwinist. If that is what you are, come clean about it, and then repent.

  4. It is interesting that many of the people who are proposing a minimum wage have never operated a business who employed minimum wage workers. I have owned two small businesses which have actually employed minimum wage earners, one of which employed over 30 people.

    If the minimum wage is raised, the owner of a small business generally has only two alternatives: raise prices to customers or go out of business. If the small business owner raises prices, that makes the business less competitive compared to the large chain stores which may be vying for all or a portion of the same customers. That may also result in the small business going out of business.

    I will give one quick example. One of the business we owned was a pet store, operated by my daughter. It sold pets and “dry goods”, the supplies that went with the pet. Contrary to popular belief, the real profitability came from the dry goods portion of the business, not the pets themselves. The maintenance associated with the pets (bathing, grooming, cleaning cages or aquariums, shots, vet. visits, etc) was very labor intensive and resulted in low profit margins on that segment on the business. The primary value of the pets was getting people into the store. We were marginally profitable until a Walmart Store opened nearby. They sold the same dry goods at a lower retail cost than our wholesale cost. Needless to say, our days were numbered.

    So turning to the first alternative that you can raise your costs without a loss of customers due to decreased demand or competitive pressures, what is the end result–prices are increased to customers. Thus, the increase in the minimum wage results in price inflation. Who is hurt most by price inflation? I doubt that many millionaires will be hurt by price increases so the people most hurt will be lower-paid workers and people on fixed income. Since price increases lessen the value of the minimum wage, a further increase in the minimum wage will be necessary resulting in an inflation spiral. Any well-educated person knows that significant inflationary pressures are bad for a country.

    To summarize, all sides of our economic model need to be considered, not just the effect on employment.

    1. It certainly helps to have real world experience to help understand the situation. I envy you being able to own several small businesses but have you ever tried to live on minimum wage that’s an experience? That’s as impossible as trying to run a small business with a $15 minimum wage.

      1. I empathize with people trying to live on minimum wage. It’s tough. I know first hand, I have my grandson and granddaughter, both of which make very close to the minimum wage, living with my wife and I. But, you totally missed my point that wage increases inevitably leads to price inflation.

        I actually lived with my wife and a child on a $2.50 per hour wage. How? Gas cost $0.19 per gallon. We bought a loaded pizza for under $2.00. Our rent was $95 per month.

        What happened? Price inflation. That’s why gas now costs $2.00 per gallon, you can’t get a loaded pizza for less than $10, and rent costs more a lot more than $95 per month.

        If increases in the minimum wage are good for the country, why stop at $15 per hour? Why not make it $20 per hour? Why not $40 per hour?

        Inflation has ruined a lot of economies.

  5. I think it is interesting that California, New York, Bernie Sanders, and Hillary Clinton are wanting to raise minimum wage. Clearly they do not realize/ they are refusing to notice that raising minimum wage only helps for a very short term time period and then is not worthwhile in the long run. Good point on asking the question of “Why would we insist on a policy that only hurts the people we are trying to help?” I agree and believe that is what raising the minimum wage would do also.

  6. I enjoyed this informative post. I hadn’t thought about some of the indirect results of hiking up the minimum wage such as the “internship” effect or even lost wage growth associated with the reductions in experience accumulation. For companies, it does truly come down to a cost-benefit analysis of whether hiring a human adds or detracts value. The study shows the negative effects, but it would be interesting to hear if they had any “innovations in the realm of policy ideas” as you state.

  7. I agree with you that raising the minimum wage has the potential to harm the lower income workers that are proposing the increase. It seems as though many individuals believe that businesses will be able to afford a wage increase without any significant changes, or that business will just make less profit without changing anything. Companies in the business of making money will figure out ways to make the same amount of money as before, whether its by automating tasks or seeking cheaper labor in other countries, both of which would be harmful for low income workers in America.

  8. I agree that a minimum wage that is so high is something that should be avoided. I think more accurate studies and articles like this one need to be released so that there is more information that people can base their opinion off of.

  9. Everyone just assumes that getting a higher wage will just give low income workers more money. Some may get a higher wage, but many will be laid off and prices will have to be raised to cover this cost. This rise in price will force everyone (including low income workers) to spend more money for the same products. Everyone loses in this scenario.

  10. Why do we insist on a policy that hurts those we intend to help?

    Because this is a much more complicated issue then what you make it.

    The minimum wage has dropped due to inflation, do we raise it back to the point it was the last time it was raised? Do we let it drop further? Do we increase it?

    Common sense dictates that if you raise minimum wage even to the point it was before in real dollars that someone has to pay that. Who pays is the question. Is it small businesses? Is it large corporations? Is it the employees? Is it customers?

    Many economists say that raising the minimum wage, even as high as $12 won’t hurt jobs. Many economists say that raising it at all will be a cataclysmic event.

    So what are we to do?

    I believe that most everyone can agree that having anyone work full time or more and being in poverty is a tragedy. I’d like to eliminate all poverty, but I don’t see that happening anytime soon.

    Here’s my proposition. Dr. Clauson you’re going to hate this :) don’t raise the minimum wage, institute a government program (limit the number per year so the cost isn’t outrageous) where education for some trade (electrician, welding, etc) is fully paid for, and the person enrolled gets a stipend to live off during that time.

    1. Thanks for at least offering an alternative solution. I wish others could do the same. Might be helpful if some of our Economist had a lesson in history and social science. If we don’t do things to help our citizens make a livable wage you get what you reap, Bernie Sanders and the Donald. You might avoid them this cycle but you won’t the next.

  11. In theory, it makes complete sense that a higher minimum wage causes unemployment, but it is interesting the some studies indicate that this is not the case. Whether these studies are flawed or show that the connection is not as simple as some economists believe is still up for debate. I tend to believe that it does cause higher unemployment. However, I still support a higher minimum wage. Working 40 hour weeks, 52 weeks per year, at $7.25 per hour (the federal minimum wage), a parent with one child will only make $15,080 in a year, which is actually below the poverty line of $15,930. This shows that at present levels, minimum wage is not much of a wage at all. It seems that high employment rates may not be that important if those employed can hardly provide for their families. A higher minimum wage makes sense if a population is being hurt more by low standard of living than unemployment. Right now in America, I see the former being a bigger problem than the latter, and so I’d have to agree with Hillary’s proposal.

  12. This reply is to several comments that state or imply that the minimum wage on balance is the best policy for addressing the problems of “underemployment” or inability to make living wage while working. I understand that there a some living in relative poverty at the same time they work and a low wage really may not be of much help. My point is that a minimum wage–if it is set too high (and I am convinced $15/hr is much too high)–is a shotgun approach to addressing what is really a poverty issue. If you confuse the problems you tend to get bad policy prescriptions. So the way to address the very low wage problem for those already in poverty is not a general minimum wage. Rather it would be through some form of supplemental payment for the truly poor that would not at the same time jeopardize work or prohibit work. That way the teenager, or the entry-level worker will stand a better chance of getting a job that has real benefits (not just monetary). Otherwise the business faced with the costs of a minimum wage and knowing that the least skilled positions are not worth the added payment (and cannot be afforded) will simply cut jobs for any and all.

    Now having said that, I am suggesting this as a last resort for the very poor and in a way that does not discourage more work and improving skills. Ideally I don’t like a minimum wage at all. But if political exigencies require, I prefer my suggestion.

  13. Just the other day I was talking with a staunch Bernie-supporter. She claimed that raising the minimum wage would increase the amount of jobs available. I frequently find myself talking with people who make these sorts of nonsense arguments. They tend to have one thing in common: they all struggled heavily to pass high school economics.

  14. It amazes me that people support a higher minimum wage without considering the consequences. A higher minimum wage leads to job loss and higher prices. I bet if you went to the people making minimum wage and asked them if they would prefer to work for $8.10 or not have a job; I bet they would say work for $8.10 every time. People need to be educated on the real causes of raising minimum wage.

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