Raising the Minimum Wage
A co-worker sent me a link to this page a few days ago. He mentioned the part about raising the minimum wage and noted that it wasn’t very good.
1. Raise and index the minimum wage to half the average hourly wage. At $5.15, the federal minimum wage is at its lowest level in real terms since 1956. The federal minimum wage was once 50 percent of the average wage but is now 30 percent of that wage. Congress should restore the minimum wage to 50 percent of the average wage, about $8.40 an hour in 2006. Doing so would help nearly 5 million poor workers and nearly 10 million other low-income workers.
The implication here is that raising the minimum wage is only a good thing. If this is the case why not simply raise it to a level sufficiently high enough to eliminate poverty amongst minimum wage earners. That is if the minimum wage level necessary to eliminate poverty amongst minimum wage workers is $22.89/hour and since there is no down side to raising the minimum wage then morally one should insist on the higher wage and not the $8.40/hour that would still leave some people in poverty.
Now one reason they don’t go for the higher wage is that there are downsides to a high minimum wage. At our hypothetical of $22.89/hour there will almost surely be an increase in the drop out rate from high school. Why stay in high school where you are struggling, getting crappy grades and are going to end up with the minimum wage anyways? Nobody really wants to promote a policy that will promote ignorance.
Another thing is that the raising the minimum wage is likely to have little impact in some markets. Think of it this way, suppose we have not just one low skill labor market, buy several that are regional. In some regions the prevailing wage will be the minimum wage. In others, such as where I live, many low skill workers will earn more than the minimum wage. In these latter markets the wage rate is already above the minimum wage so if the minimum rises to a point still below the market clearing wage, then there is no harm done…no benefit either, but no harm.
There is also some issue about the efficacy of what is being done here in terms of economic growth. It is possible to replicate the effects of the minimum wage with a tax and transfer scheme. This means that there is a deadweight loss associated with the minimum wage as well. This deadweight loss are lost economic transactions to society that are simply gone. There is no way to spin this as a good thing save to argue that the increased welfare from the minimum wage accruing to those earning the minimum offsets the losses suffered who are bearing the burnt of the deadweight loss. Also, when you tax somebody, say $100, and give it to another person, it is not clear that the economy will grow more. After all we took $100 from one point in the economy, and injected that same $100 at another point (assuming a costless transfer program). In short, the transfer merely re-arranges who has money, it doesn’t create new money or output.
And the last reason nobody advocates this is that there would be serious problems with unemployment. While there are debates over how much unemployment, if any, raising the minimum wage a $1 or $2 causes, raising the minimum wage to something like our hypothetical would cause massive widespread unemployment. Why? Value added. Firms are only going to employ a worker when that worker adds value to the firms output at least equal to the worker’s wage. And for many low skill jobs the value added is slight. What is the value added by a McDonald’s worker? Certainly isn’t $22.89/hour. At the prices McDonald’s would have to charge given such a high minimum wage I’ll go home and make my own burgers, fries and milkshake thank you very much.
So while there is lots of debate and quite a bit of uncertainty as to the positive and negative impacts of changing the minimum wage a little bit; there are still potential problems with large changes. This kind of thing should not be ignored, especially when the topic of a living wage comes up. If a living wage is large enough it could actually end up hurting the very people that it is trying to help.
Well gosh, given a choice between promoting poverty or promoting dropping out of highschool I know which I’ll take. Hint: dropping out does not = ignorance. A reasonably affluent drop out has any number of options to better themselves. A poverty stricken high school grade generally doesn’t.
Only if you try to ignore every side effect of raising a worker’s compensation (like say lower turn over and higher motivation). you do NOT simulate those things with a tax and transfer scheme.
As opposed to buying something which is different because…erm…uh…
Oh yeah. They are both simply transfers of money/goods with no creation of new money or output. Gosh I wonder why we have capitalism at all then?
The reason we do it is because by keeping the money moving around we allow it to seep into all those projects that do create new wealth and value. One important aspect of that is to keep it from pooling up so that you don’t have flush “areas” and dry “areas.” A minimum wage law is one minor mechanism for keeping it flowing.
Which is why this extreme case is not really that practical a counter argument. Yes raising the minimum wage to some strataspheric level will cause problems. but nobody is seriously suggesting such a move. And there is really no solid reason to believe the moves that are suggested will cause any issues at all.
Which might be a good point except that the minimum wage hasn’t kept up with inflation. It’s not the fault of poorly paid workers if big corporations like McDonalds cut their own throats by charging a fee that doesn;t match inflation, and if they do charge a rate that matches inflation then they can afford to raise their workers wage based on an inflationary adjustment.
Perhaps the more fundamental problem is the concept that problems can be fixed by government fiat by someone with a pure heart.
Where is this implied?
Wow Steve, it took you that long to come to that conclusion?
And how about the simple argument that any minimum wage reeks of socialism, and since it is anti-capitalistic it results in slavery of business owners? (actually, ignore that last sentence, it might leave you up all night writing another long dissertation)
So we should abolish government altogether? Cause if not then you are automatically saying that at least some problems can be solved by government fiat.
[quote]Well gosh, given a choice between promoting poverty or promoting dropping out of highschool I know which I’ll take. Hint: dropping out does not = ignorance. A reasonably affluent drop out has any number of options to better themselves. A poverty stricken high school grade generally doesn’t.[/quote]
Sure, I guess if that are the only choices, but it isn’t. There are other policies for reducing poverty than the minimum wage. And yes, you are correct that dropping out of high school does not equate to ignorance and good thing I didn’t write that. However, I will maintain there is a high degree of correlation there.
The point is that it is a transfer scheme and it is like a tax in terms of the deadweight loss.
The very basis of trade is that both parties are made better off. Hence there is an improvement in welfare–i.e. economic growth. If this weren’t the case then no trade would take place. Duh.
Flush and dry “areas”? You know in the two decades or so I’ve been reading, studying, and doing economics I’ve never heard of these terms.
Please, try googling things like “living wage”. Granted such proposals are usually in the $10 to $12 range, but doubling the minimum wage would be a very large change, not just a dollar or two. Even the $8.40 is a pretty big change.
Yeah, and many low skill workers already earn more than minimum wage. And when companies start “cutting their own throat” they leave behind what are called “the unemployed”. Do you know how much the unemployed earn per hour? $0. Yeah, big improvement there Tlaloc. Sheesh.
Mark,
There is no discussion of the downside of raising the minimum wage by proponents of raising the minimum wage. In fact, many have now taken to asserting that not only is there now downside, but raising the minimum wage actually increases employment. Thank God, make the minimum wage $100/hour and there wont be a person left in the country without a job!! (Hint: That last line there was sarcastic, for those who missed it.)
Christopher,
Well Christopher, what can I say, we can’t all be as smart as you.
Steve,
There is no discussion of the downside of raising the minimum wage by proponents of raising the minimum wage.
Just like you leave out any discussion of the upside of raising the minimum wage (which is what the commenter meant to correct). Also this “let’s raise the minimum wage to $100 / hr is so lame it’s frightening that it even passes for legitimate debate by someone who claims to be conscious. It’s the same lame argument was “if lower taxers bring in higher revenue let’s eliminate them and the government treasury will be flooded”. Please Steve stop with that line, it makes you sound retarded.
I know this will cause you to reconsider, but I thought this was a good analysis.
I’m always a bit amazed by these discussions. Rarely are employers mentioned. Apparently, business owners are obligated to solve societies problems, providing jobs isn’t sufficient. Also, the people earning minimum wages are victims who have no control over their lives and are not responsible for their decisions.
Here’s a thought: you want to make money? get some skills and work hard. Does dropping out of high school = ignorance. Yep. So does lifting a big rock with your back rather than using a lever. If your incapable of understanding the relationship between skills and earnings, you are ignorant.
As for higher wages affecting motivation and turnover, people not motivated to complete high school won’t be motivated by an extra $1 an hour. Further, what’s wrong with turnover in unskilled jobs? Is McDonald’s supposed to be your terminal job?
Except that you did in fact write that. You said raising the minimum wage would encourage kids to drop out of high school and then went on to say “Nobody really wants to promote a policy that will promote ignorance.” That statement only follows if you equate dropping out of highschool with being ignorant.
That was your point, but it was wrong for the reason I detailed: a minimum wage hike has a numebr of effects that a “tax and transfer” scheme wouldn’t. Two things that have different attributes can’t be said to be identical. Thus a minimum wage raise is not a “tax and transfer scheme.” QED.
And this is different than paying your employes better how exactly? You pay them more, they are more motivated to keep the job and less motivated to move on. They generally do better. Both sides do better. As you said: “duh.”
Wonderful thing about metaphores: you are free to make up new ones. What matters is not whether they are “established” but whether they get the point across.
In other words I said nobody is seriously suggesting making the minimum wage $20+ an hour and you… give me an example of someone not seriously suggesting making the minimum wage $20+ an hour.
Couldn’t you have saved us both time by just saying “You are right”?
And that matters how?
In your twenty years of studying economics did you ever look at a thing called a profit margin? That’s something that can change. It does not, as your argument here presupposes, have to be maintained constant.
And for that matter there are various discretionary (as opposed to fixed) costs that can be manipulated.
All before you ever have to consider firing one employee.
To put it more succinctly if unemployment goes up when the minimum wage rises it is due not to “market forces” but pure greediness on the part of the companies doing the firing. they choose to prioritize ridiculous executive compensation over paying a decent living wage. and they should be pilloried for that.
Business owners have no right to own a business. It is a privelege. And it is one they will earn, or it will be revoked. End of story.
Am I the only one troubled by the actual math involved here? Index the minimum wage to the average wage? Doesn’t that mean that for every increase in the minimum wage, the average wage would also increase, prompting yet another increase in the minimum and so on?
Wouldn’t this also give incentives for employers to not offer higher wages to deserving employees, as that increase would prompt a mandated increase in the minimum wage paid to those who did not earn a promotion?
Wow, ….just, wow. I guess there really are actual socialists among us.
Tlaloc,
Are you a commie? C’mon, you can admit it! You talk like one, act like one, smell like one, so you must be!
Business owners do have a right to operate a business. That right is called FREEDOM. Maybe you have heard of it? They are still working on it in Mother Russia. (isn’t that where you buddy Ensign Chekhov is from?)
If you are paying them minimum wage, and the minimum wage increases, how will that increase employee motivation and retention? The only way increasing pay will do that is if it makes their current job better than another one, increasing the minimum wage doesn’t do that, minimum wage here is the same as minimum wage there.
By all means point out your constitional right to operate a business.
Oh, there isn’t one. You have a right to private property but that isn’t the same thing. There’s a reason you have to file for a business license: because it is not a right but a privelege.
No, communism doesn’t seem to work any better than capitalism does. Both fail at the extrmes. A blend of both systems is the only one that has shown any longevity (which is precisely what we have in America, the issue is finding the right blend).
No, actually I haven’t heard of a right to “freedom.” Free speach? yes. Freedom of the press? yes. Freedom of assembly? Yes. Bear arms? yes. Proportional representation? yes.
But “freedom”? No. Perhaps you can point out where in the constitution that right is defined?
You’re literally asking me how paying someone more to do the same work will make them more satisfied and less likely to leave their job?
If tomorrow you get a raise of $5 an hour will that make you a bit happier with your job?
Yes.
Will it matter if the guy down the street (whose job you could apply for) also got a raise of the same amount?
No.
Because the issue is pay for the work performed.
Business ownership a privilege? You might want to check out the 4th, 9th and 10th amendments. The Federalist Papers might also be enlightening.
Regarding “ridiculous executive compensation”, I suspect you’ll be hard pressed to find minimum wage workers in large corporations. They work primarily for small businesses. Should there be a minimum profit for businesses? I haven’t heard that suggested by supporters of the minimum wage.
“Half the harm that is done in this world is due to people who want to feel important. They don’t mean to due harm; but the harm does not interest them. Or they do not see it, or they justify it because they are absorbed in the endless struggle to think well of themselves.” – T.S. Eliot
Tlaloc – learn something about economics before you spew nonsense. What do you think happens when businesses make less money? Perhaps less investment? You think that might cost a job or two? A machine tool not purchased might reduce employment on the part of the machine tool maker, ya think?
Alright let;s check them out:
4th amendment:
Nothing there that says you have any right to operate a business whatsoever. Again a right to private property is not the same thing.
9th amendment:
Again no right to own a business.
10th amendment:
And again no right. Government has an express right concerning commerce (see for instance the Commerce clause for Congress). Hence that right is no reserved for the people.
So again, where is this right to own a business?
I take it you’ve never heard of a little mom and pop company called McDonalds? They only have a net income of 2 billion dollars a year. oh and they paid their CEO $20 million in 2006.
I’m sorry you were saying…
That’d mean more if you hadn’t just been embarrassingly wrong in both points you made.
That’s certainly an option. Of course let’s go back to the McD’s example. If they paid their CEO say $1 million a year (a sum that anybody can live on comfortably) they’d have enough cash left over to pay some 4500 of their full time employees another $2/hour. And that’s not even touching all of their other executive’s compensations.
So, no, they don’t have to cut back on research or investment if they don’t want to. Not in a time when executive salaries are vastly inflated. There is a ready source of discretionary funds they can easily tap.
Almost all McDonald’s are franchises. They are small businesses. The corporation earns fees from over 2,400 franchise owners. The corporation does not set restaurant wages.
As for the constitution, the founders did not determine which rights they would grant us, that would be more along the lines of the Magna Carta. If it’s not specifically stated in the constitution it is left to the states or the people. Regarding the Commerce Clause, states are not allowed to impede interstate commerce, it has nothing to do with the rights of property ownership or business ownership. Businesses in the U.S. were virtually unregulated until after the Civil War. Having to follow rules set by the legislature, primarily related to public health and safety, does not mean we don’t have the right to own a business.
As a larger point, as a non-owner, who are you to dictate decisions of a business owner? If you’re wrong and the business fails, are you going to pick up the pieces? You want a right to meddle in other’s affairs (essentially take away their rights – rights for me, but not for thee) yet have no intention of suffering any ill affects. That’s quite a sense of entitlement.
Fortunately we have government here to do it for them.
🙂
I asked to be shown where the right to own a business is stated. It isn’t, at least we agree on that much now. You can make an argument that there is an undeclared right, but it is only that: an argument.
Put it this way- can you start up any business you want any time you want? No. You have to get a business license and there are a number of businesses that you cannot start without substantial compliance with state and federal regulation. So at best you can argue that you have a sharply limited right to own a business. Frankly the position that owning a business is a privelege is a lot better supported.
You left out that Congress can regulate interstate commerce. In other words the federal Congress was explicitly given control of the issue of businesses at least when they cross state lines. Meanwhile I suspect you’ll find every state constitution gives similar power to the state government when it comes to intrastate commerce.
So yes, it does in fact have everything to do with owning and operating a business, and it put the power in the hands of the government, not the people.
Just because the government didn’t bother to enforce it’s perogative over business doesn’t mean you have a right to it. Just as the cops choosing to ignore jaywalking doesn’t make it legal.
Simple, I’m a citizen of the country where this business is allowed to exist. I have no individual right to dictate to them, but the electorate as a whole certainly does. As before- they *only* exist because we permit it. Assuming they want that permission to remain in place they will follow the laws we make.
Meddling in the affairs of others is exactly why we have a government. It exists to adjudicate these kinds of disputes. You’re right that I have no intention of suffering the ill effects, why should I? It’s not like the business is rushing to give me their profits either.
So long as they have no detrimental effect on this country I am content to allow them to operate. But when the business world as a whole pays a sub-living wage that *is* a detrimental effect. They’ll learn to be more reasonable, or they’ll suffer the consequences of being so short sighted.
The United States Constitution is a document that limits the power of its government, not the power of its citizens. Perhaps beginning with the United States Declaration of Independence would be useful:
The United States Constitution is an attempt to codify a set of rules that allows for this. To claim that I have no right to own and run the business that I do own and run because it isn’t spelled out explicitly in the United States Constitution is silly. Perhaps you’d like to show us where the right to abortion, forced busing, freedom from religion, the Supreme Court’s authority to declare laws unconstitutional, or even the application of stare decisis can be found in the United States Constitution.
I could go on about common law traditions, the right to be secure in your property, etc., but what’s the point?
It spells out the powers of the govenrment, and one of those powers is over commerce.
*shrug*
The law is often silly, but it remains the law.
Abortion is interpreted as a function of privacy, which is a right based on the 4th amendment.
Forced busing is not a right.
Freedom from religion is a consequence of the first amendment preventing the establishment of religion.
The SCOTUS power to rule on the constitutionality of laws is not a right but it is in fact the very purpose of the SCOTUS as laid out in the Constitution.
Stare Deicis is also not a right, instead it is a legal idea of precedent.
You seem to be awfully confused about what does and does not constitute a right.
I agree that it would be a waste of time for you to try and teach others. You might however find time spent learning to be well rewarded.
Frankly, life is too short to waste any of it trying to converse with you again Mr. T.
If leaving my job meant making less money, I would be less likely to leave. If I couldn’t possibly get less money, no matter where I worked, I wouldn’t be any more motivated to stay. When you’re at the bottom of the ladder, it doesn’t really matter how tall the ladder is, you’re still standing on the ground, and moving to another ladder is still just as easy.
How exactly is it not the same thing? Is a farm private property or a business? In-home child care? What about people who run their business out of their home, using their private property? Where do you draw the line? Tell me what makes a business different than private property in your opinion?
Business is private property, it belongs to the owners. Paying somebody some wage to improve that business is no different than paying somebody some wage to improve any other private property.
Minimum wage is a privilege granted by the government..
True, but if the guy down the street got no raise, I would be more motivated to stay where I was, and if that guy got a $10 an hour raise, I would be more motivated to leave. That shows that motivation is based on the relative difference in benefits between options, not the absolute benefits. Raising the absolute benefits but not the relative benefits doesn’t make one option more or less appealing than before.