Minimum Wage Increase

danarhea said:

The government should not be in the business of dictating what companies should pay their employees. In a true market, if a company underpays, they will lose their best employees, and become less profitable, and could possibly even go out of business. That is the way the market works.

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Iriemon said:

This is false. The minimum wage increase over 21% between '96 and '98 and unemployment went down, not up.

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The economic case against minimum wage laws is simple. Employers pay a wage no higher than the value of an additional hour's work. Raising minimum wages forces employers to dismiss low productivity workers. This policy has the largest affect on those with the least education, job experience, and maturity. Consequently, we should expect minimum wage laws to affect teenagers and those with less education. Eliminating minimum wage laws would reduce unemployment and improve the efficiency of markets for low productivity labor.

There are a few economists who have been leading the charge for higher minimum wages. Some of these economists have obvious ideological leanings.

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Economists David Card and Alan Krueger have published studies of the fast food industry indicated that small increases in the minimum wage would cause only minor job losses, and might even increase employment slightly in some instances. These studies by Card and Krueger show only that a small increase in minimum wage rates might not cause much of an increase in unemployment. Such studies ignore the fact that the current level of minimum wages are already causing significant unemployment for some workers.

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Real statistics indicate that the critics of minimum wage laws were right all along. While it is true that minimum wages do not drive the national unemployment rate up to astronomical levels, it does adversely affect teenagers and ethnic minorities. According to the Bureau of Labor Statistics the unemployment rate for everyone over the age of 16 was 5.6% in 2005. Yet unemployment was 17.3% for those aged 16-19 years. For those aged 16-17 unemployment was 19.7%. In the 18-19 age group unemployment was 15.8%. Minimum wage laws do affect ethnic minorities more so than others.[3] The unemployment rate for white teens in the 16-17 age group was 17.3% in 2005. The same figures for Hispanic and black teens were 25% and 40.9% respectively. Of course, these figures decrease for older minorities. Blacks aged 18-19 and 20-24 had 25.7% and 19.9% unemployment in 2005. For Hispanics unemployment was slightly lower — 17.8% at age 18-19 and 9.6% at age 20-24.

Landsburg might maintain that most of these lost jobs are lousy jobs that teens will not miss. DeLong thinks that minimum wage laws can help to avert poverty — workers who keep their jobs at the minimum wage gain much, while unemployed workers lose little. Part of the problem with this argument is that it involves arbitrary value judgments. According to mainstream economic theory, we achieve economic efficiency when markets clear because this is how we realize all gains from trade. With teen unemployment in double digits — running as high as 40.9% — it is obvious that some labor markets are not clearing. If labor market imperfections led to such levels of unemployment, economists like DeLong, Card, and Krueger would call for government intervention to correct these "market failures." Yet they find double digit teen unemployment acceptable when it derives from government intervention. Why? Because they want to use such policies to redistribute income

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Supporters of minimum wage laws do not realize that prior to minimum wage laws the national unemployment rate did fall well below 5%. According to the US Census, national unemployment rates were 3.3% in 1927, 1.8% in 1926, 3.2% in 1925, 2.4% in 1923, 1.4% in 1919 and 1918, 2.8% in 1907, 1.7% in 1906, and 3.7% in 1902.[6] Even today, some states have unemployment rates as low as 3%. Virginia now has an unemployment rate of 3.1%. Wyoming has an unemployment rate of 2.9%. Hawaii has an unemployment rate of 2.6%. National unemployment rates seldom drop below 5% because some categories of workers are stuck with double digit unemployment. Given these figures, it is quite arguable that minimum wage laws keep the national unemployment rate 3 percentage points higher than would otherwise be the case.

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Economist Arthur Okun estimated that for every 1% increase in unemployment GDP falls by 2.5-3%. If minimum wage laws are responsible for keeping the national unemployment rate 3 percentage points above where it would otherwise be, then the losses to minimum wage unemployment are substantial. Since Okun's law is an empirical proposition it is certainly not constant. Eliminating minimum wages might not increase GDP as much as this "law" indicates. However, the elimination of minimum wage laws would surely have a positive effect on GDP. In any case, economic theory and available data indicate that minimum wage laws do result in economic inefficiency. The implementation of a "living wage" would only increase these losses. Do proponents of living wages really want to see unemployment rates among ethnic minorities and teens climb even higher?

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The economic case for a living wage is unfounded. Current minimum wage rates do create high levels of unemployment among low productivity workers. Higher "living wages" would only make these problems worse. The alleged moral case for a living wage ignores the fact that minimum wage increases adversely affect the very people whom advocates of living wages intend to help. If politicians wish to pursue sound policies, they should consider repealing minimum wage laws, especially where teens are concerned. Unfortunately, most politicians care more about political expediencies than sound economic policy. This being the case, minimum wages will increase unless public opinion changes significantly.

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Negative effects of minimum wage laws:

Excludes low cost competitors from labour markets, hampers firms in reducing wage costs during trade downturns (etc.), generates various industrial-economic inefficiencies as well as unemployment, poverty, and price rises, and generally dysfunctions as basically a special form of political-economic protectionism – the labour market equivalent or analogue of such things as tariff barriers to low cost imports.

Hurts small business more than large business.

Lowers competitiveness among businesses

Reduces quantity demanded of workers. This may manifest itself through a reduction in the number of hours worked by individuals, or through a reduction in the number of jobs.

Reduces profit margins of business owners employing minimum wage workers, thus encouraging a move to businesses that do not employ low-skill workers.[16]
Businesses try to compensate for the decrease in profit by simply raising the prices of the goods being sold thus causing inflation and increasing the costs of goods and services produced.

Increases prices for customers of employers of minimum wage workers, which would pass through to the general price level, which disproportionately affects the prices that poor people pay for goods and services.

Does not improve the situation of those in poverty. "Will have only negative effects on the distribution of economic justice. Minimum-wage legislation, by its very nature, benefits some at the expense of the least experienced, least productive, and poorest workers."

Is a limit on the freedom of both employers and employees, and can result in the exclusion of certain groups from the labor force. For example, during the apartheid era in South Africa, white trade unions lobbied for the introduction of minimum wage laws so as to exclude black workers from the labor market. By preventing black workers from selling their labor for less than white workers, the black workers were prevented from competing for jobs held by whites.

Businesses spend less on training their employees.

Is less effective than the Earned Income Tax Credit at targeting the truly needy, and is more damaging to businesses.

Reduces economic growth by skewing factor-choice incentives away from the optimum choice.

Increase in unemployment.

Decreases human capital by encouraging people to enter the job market instead of pursuing further education.

Hurts the least employable by making them unemployable, in effect pricing them out of the market.

Causes outsourcing and loss of domestic manfucturing jobs to other countries

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Because of inflation, minimum wage levels have been periodically reviewed, and therefore the general issues and growing evidence on the actual effects of the Fair Labor Standards Act have also been reviewed. What an automatic escalation provision means is that we stop looking at the evidence. And we would stop at a time when a growing body of research by independent economists around the country is documenting the negative effects of the minimum wage law—and particularly its devastating impact on job opportunities for minority teenagers.

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Even though 88 percent of academic economists supported the “war on poverty,” 61 percent of those same economists opposed the minimum wage law.3 In short, this is not opposition based on philosophy or political leanings, but on economic analysis and on the mounting factual evidence that the law increases unemployment among the very people intended to be benefited. Moreover, economic research has also revealed a disturbing correlation between teenage unemployment rates and teenage crime rates.

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...but it is increasingly clear that the consensus of these studies is that the law does cause substantial unemployment, and that is more fundamental than the question of exact numbers.

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The economic analysis which concludes that minimum wages increase the unemployment of low-wage workers rests essentially on the belief that labor is no exception to the general rule that less is demanded at a higher price than at a lower price. Attempts to overturn this basic economic principle usually reduce to one of four assumptions or assertions: (1) there is a fixed number of workers demanded, more or less without regard to wage rates; (2) low-wage workers are victims of employer monopoly power rather than low productivity, so that raising their wage rates will not price them beyond their value to the employer and therefore will not price them out of a job; (3) higher wage rates will cause employers to use labor more efficiently, so that workers will then become more valuable, and so will not lose their jobs; and (4) the increased “purchasing power” caused by higher minimum wages will lead to a greater demand for goods, and therefore a greater demand for labor, offsetting any tendency toward unemployment. These arguments will be examined in order.

Fixed Demand
The idea that an employer “needs just so many men” is an old one, which dies hard. Factually, it can hardly stand up in the face of declining employment after wage increases, or the virtual elimination of such occupations as Western Union messenger and elevator operator (despite the continued existence of telegrams and elevators). As a theory, it implies that the substitution of capital—and of higher priced labor—is impossible. The problem arises not when the theory is stated directly and explicitly, but when it is implicitly assumed (and therefore insulated from critical scrutiny), as in the belief that more jobs for teenagers mean fewer jobs for adults.

Employer Monopoly Power
Under special conditions, where there is only one employer in a labor market or a group of employers acting in concert, wages can be kept below what equally productive workers would earn otherwise. There is a special economic theory for such “exploitation” situations, and a minimum wage increase under those conditions would not produce unemployment.17 Unfortunately, low-wage workers are very unlikely to be in such situations. All sorts of firms, industries, and even households employ unskilled workers, and collusion under these conditions is out of the question. Even such a staunch advocate of minimum wages as the late Senator Paul H. Douglas noted that the market for unskilled labor was one of “almost perfect competition.”18 The sad fact is that low-wage workers are not so much underpaid as under-skilled, and there is no easy way around this problem without pricing them out of a job.

Efficiency
Theories of offsetting rising wages by increasing efficiency have long been used to claim that minimum wage increases will not reduce employment. Unfortunately, those who argue this way have not distinguished real efficiency—larger output from given combinations of input—from a mere substitution of one input for another as their relative prices change. The examples they cite of “better” or “more efficient” methods of production after a minimum wage increase are methods well-known to employers before the imposed wage change, and were not used then simply because they were not the cheapest methods available under the previous input prices. If higher wage rates lead to the substitution of capital for labor, then by definition there will be more output per unit of labor; but it is mere word play to call this more “efficiency” if the product now costs more to produce and society has to support unemployed workers as well.

Purchasing Power
The doctrine that workers' increased purchasing power after a minimum wage increase will sustain employment has many problems connected with it,19 but the most fundamental problem is that it assumes the very thing that is at issue: that the workers keep their jobs and work as many hours as before. If not, their hypothetical right to a higher wage rate will not buy anything. Workers can only spend real earnings, not hypothetical rights. Once this is realized, it is hardly necessary to go into the other deficiencies of the theory, such as the fact that inflationary increases mean that more spending power is not more purchasing power.

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The minimum wage law addresses a serious social problem, but creates no new options for dealing with it. In fact, it simply reduces the set of existing options available to the parties—employers and employees—who must voluntarily agree if there is to be a job. Trying to make people better off by reducing their options seems questionable even as a theory. In practice, what has happened is that fewer transactions (less employment) have taken place when there were fewer options open to the parties. It would be very surprising if it were otherwise.

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For many years it has been a matter of conventional wisdom among economists that the minimum wage causes fewer jobs to exist than would be the case without it. This is simply a matter of price theory, taught in every economics textbook, requiring no elaborate analysis to justify. Were this not the case, there would be no logical reason why the minimum wage could not be set at $10, $100, or $1 million per hour.

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These studies were exhaustively surveyed by the Minimum Wage Study Commission, which concluded that a 10% increase in the minimum wage reduced teenage employment by 1% to 3%.

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Summary of Research on the Minimum Wage

The minimum wage reduces employment.
Currie and Fallick (1993), Gallasch (1975), Gardner (1981), Peterson (1957), Peterson and Stewart (1969).

The minimum wage reduces employment more among teenagers than adults.
Adie (1973); Brown, Gilroy and Kohen (1981a, 1981b); Fleisher (1981); Hammermesh (1982); Meyer and Wise (1981, 1983a); Minimum Wage Study Commission (1981); Neumark and Wascher (1992); Ragan (1977); Vandenbrink (1987); Welch (1974, 1978); Welch and Cunningham (1978).

The minimum wage increases the number of people on welfare.
Brandon (1995), Leffler (1978).

The minimum wage does little to reduce poverty.
Bonilla (1992), Brown (1988), Johnson and Browning (1983), Kohen and Gilroy (1981), Parsons (1980), Smith and Vavrichek (1987).


Bell, Carolyn Shaw. 1981. Minimum Wages and Personal Income. In Rottenberg (1981a): 429-458.

Finds that increases in the minimum wage would benefit few families with incomes below the poverty level. Much of the benefit would accrue to upper income families with secondary earners, such as wives and children.




Beranek, William. 1982. The Illegal Alien Work Force, Demand for Unskilled Labor, and the Minimum Wage. Journal of Labor Research, vol. 3 (Winter): 89-99.

Finds that the minimum wage increases the employment demand for illegal aliens, who are less likely than legal residents to report violations of the labor laws




Bonilla, Carlos E. 1992. Higher Wages, Greater Poverty. Washington: Employment Policies Institute.

Finds that the 1991 increase in the federal minimum wage actually reduced the income of some single parents, after welfare and taxes are taken into account.




Colberg, Marshall R. 1960. Minimum Wage Effects on Florida's Economic Development. Journal of Law and Economics, vol. 3 (October): 106-117.

Finds that after an increase in the minimum wage unemployment increased most in the areas where wages were lowest and least in areas where wages were highest beforehand.




Cox, James C., and Oaxaca, Ronald L. 1986. Minimum Wage Effects With Output Stabilization. Economic Inquiry, vol. 24 (July): 443-453.

Finds that the minimum wage causes unskilled wages to be 15.7% higher than they otherwise would be, and that this causes employment to be 11.2% lower than it otherwise would be.




uty, H.M. 1960. Some Effects of the $1.00 Minimum Wage in the United States. Economica, vol. 27 (May): 137-147.

Finds that the increase in the minimum wage from 75 cents to $1.00 in 1956 did lead to an increase in pay for many workers, but at the cost of jobs. Long-term employment losses by industry ranged from 3.2% to 15%.



Forrest, David. 1982. Minimum Wages and Youth Unemployment: Will Britain Learn from Canada? Journal of Economic Affairs, vol. 2 (July): 247-250.

Estimates that 40% of the increase in teenage unemployment in Canada since the 1950s is due to higher minimum wages.

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A wage is simply a special type of price, specifically the price of labor services. The most universally accepted proposition in economics is the Law of Demand. When other things are held constant, if prices go up, buyers will buy less. Thus if labor becomes more expensive, employers will hire fewer workers. That is because some workers who would have been profitable to hire become unprofitable. A second well-accepted proposition is the Law of Supply. The higher the price suppliers receive, the more they will supply.

Putting the two laws of economics together, higher wages increase the number of workers willing to work but decrease the number of workers employers will hire. Artificially raising wages by governmental edict creates a surplus of labor, better known as unemployment. Despite the appearance of some recent studies to the contrary, a multitude of evidence has led most economists to accept this conclusion. The magnitude of the unemployment effects of minimum wage increases can be questioned, but the existence of those effects cannot.

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Raising the minimum wage hurts poor people. Sound counterintuitive? People earning minimum wage are undereducated, low-skill or entry-level workers. By raising the minimum wage, the government arbitrarily made low-skill/entry-level workers more expensive for employers to hire. Not surprisingly, employers eliminate low-skill/entry level positions, meaning there are less job opportunities for the very people the minimum wage hike is intended to help:


Economic research has shown time and again that increasing the minimum wage destroys jobs for low-skilled workers while doing little to address poverty.

According to economist David Neumark of the University of California at Irvine, for every 10 percent increase in the minimum wage, employment for high school dropouts and young black adults and teenagers falls by 8.5 percent.

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Originally Posted by rivrrat
Do you also realize that every time the minimum wage is raised, unemployment goes up? You really think companies are just gonna eat the loss in profit?

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Originally Posted by Iriemon
This is false. The minimum wage increase over 21% between '96 and '98 and unemployment went down, not up.

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rivrrat said:

Mythology of the Minimum Wage - D.W. MacKenzie - Mises Institute

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danarhea said:

The government should not be in the business of dictating what companies should pay their employees. In a true market, if a company underpays, they will lose their best employees, and become less profitable, and could possibly even go out of business. That is the way the market works.

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rivrrat said:

Are you implying that I don't work for a living?

Do you also realize that every time the minimum wage is raised, unemployment goes up? You really think companies are just gonna eat the loss in profit?

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Vader said:

I am saying that large corporations are perfectly willing to screw their employees. Don't believe me? Read about the development of the modern corporation.

Ask any coal miner what they went through to get unions in place or better yet ask them WHY they needed the unions in the first place. Read the stories about big corporations that made little school children work 18 hours a day in extreme conditions.
Need more evidence? Look up the motality statistics for children from 1875 - 1936.

As to your thoughts on a loss in profit; If providing the working class with a wage that allows them to feed their children, even if that means the overpaid corporate zoids may not get a six figure bonus, I am all for it.

The far right has always been against welfare... and yet they act like the minimum wage is a blight. Basically, they want people to get a job and take care of themselves yet they don't want to pay those people anything.

NEWS FLASH!!! You can't have it both ways. The higher the minimum wage the fewer people will be on welfare!!!!

Higher wages or welfare... pick one and live with it.

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Scucca said:

It grieves me to see the rights wingers abuse the nature of the empirical evidence into minimum wage effects. As I remarked earlier, the traditional “woe is wage protectionism” is based on Brown et al's articles who, in the early 1980s, attempted to provide a review of the minimum wage effects on teenage and young worker wages (given general unemployment effects cannot be found). They suggest that the sample period chosen has no significant effect on the estimated employment effects. However, we now know that is not the case. More recent evidence- given econometric improvements- has reduced estimated effects. Klerman (1992), for example, found that a 10% increase in the minimum wage will only reduce teenage employment by approximately only 0.5%. We then have to recognise that these studies, typically being time series in nature, continue to suffer from empirical bias. For example, empirical methodology- given publication bias where significant effects are more likely to be successful in passing the peer review process- is twisted towards overestimating wage effects. We therefore have to refer to the attempts in the literature to secure a natural experiment approach. Whilst not perfect, this entails a ‘before-after’ comparison of the effect of minimum changes on employment levels. An example of the natural experiment approach is provided by Card and Krueger’s (1994) study of New Jersey and Pennsylvania fast-food establishments. While the former state increased its minimum wage rate in 1992, the minimum wage rate in real terms was allowed to fall in Pennsylvania. The study uses Pennsylvania restaurants as the ‘control group’ and the New Jersey restaurants as the ‘treatment group’. Using this approach it finds evidence that, despite the minimum wage increase, New Jersey teenage fast-food restaurant employment grew at a faster rate than in Pennsylvania. Card and Krueger conclude that this provides evidence that a minimum wage does not have a significant adverse effect on employment (and may result in a small positive effect). However, the paper can be criticised on several grounds (e.g. Nemark and Wascher refer to the importance of Card and Krueger’s choice of data). We therefore have to supplement this analysis with other papers.

British data then comes to the forefront because it has seen substantial changes in its minimum wage: with the wages council system (i.e. industry-level minimum wages) demolished by Thatcherism (and then a national minimum wage introduced by New Labour, without any negative employment effects). Card and Krueger's findings are supported. Dickens et al. (1993) report evidence suggesting that Wages Councils had been able to both compress the earnings distribution and raise employment. Machin and Manning (1996, p. 672) conclude that ”there appears to be no evidence of bad employment effects from minimum wages set by the Wages Councils in the period from the late 1970s to early 1990s”.

Those suggesting that minimum wage have disemployment effects are combining a failure to understand labour economics with a warped view of the empirical analysis.

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Iriemon said:

I don't doubt that a minimum wage can have an effect on low cost labor employment if raised high enough; economics says that.

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But IMO the effects of a modest MW are being exagerrated. Looking at historical trends, the state of the economy has far more effect on employment than the MW we've had in the US.

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obvious Child said:

rivrrat, how many Americans are paid minimum wage?

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In 2006, 1.7 million Americans reported earning $5.15 or less per hour—just 1.3 percent of all workers in the United States.

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Minimum-wage earners fall into two distinct categories: young workers, usually in school, and older workers who have left school. Most minimum-wage earners fall into the first category: 52 percent of those earning $5.15 or less per hour are between the ages of 16 and 24.

Minimum-wage workers under 25 are typically not their family's sole breadwinner. Rather, they tend to live in middle-class households that do not rely on their earnings. Generally, they have not finished their schooling and are working part-time jobs.

Many support raising the minimum wage because they want to help low-income Americans get ahead. But minimum-wage earners are not much more likely to live in poverty than most Americans: Only 1 in 5 live in a family with earnings below the poverty line. Over three-fifths work part-time, and most are between 16 and 24 years old. Minimum wage-earners' average family income exceeds $50,000 a year. And very few are single parents working full-time to support their families—fewer than in the population as a whole. It is not surprising, then, that studies show that higher minimum wages do not reduce poverty rates.

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rivrrat said:

Who Earns the Minimum Wage? Suburban Teenagers, Not Single Parents




Also:

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Who Earns the Minimum Wage? Suburban Teenagers, Not Single Parents

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1069 said:

Well, I wonder who's manning (or womaning) the fast food counters during the day, while high school kids are in school? Dropouts?

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If I had a fast food franchise, I would rather hire grandma and grandpa for the day shifts than hire a dropout for any shift...would only hire a dropout if there was no other choice.

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1069 said:

And if I owned one, I'd staff it entirely with well-oiled Chippendale Dancers.
Your hypothetical principles are just oh so relevant. :roll:

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UtahBill said:

Perhaps, but I suspect your dancers would not work for minimum wage...so I am at least being more realistic.

Something about the label "dropout" bothering you?

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UtahBill said:

Gotta wonder where wait staff fits into this, and if tips are accurately counted? Not that I am accusing the people who do these studies of mispresenting the data....
We live in a college town, and a lot of resturaunt employees are college students. The fast food places don't appear to have many college kids behind the counter....I see mostly high school kids and older people there.

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But these numbers include workers who also earn tip income. Many of those earning less than the minimum wage work in restaurants and so make more than the minimum after taking tips into account.

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Some workers earn less than the minimum wage: Restaurants can pay workers less than the minimum if their tip income elevates their income above $5.15 per hour. Additionally, many minimum-wage workers appear to round their wages down to $5.00 per hour when surveyed about their earnings.

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UtahBill said:

Gotta wonder where wait staff fits into this, and if tips are accurately counted? Not that I am accusing the people who do these studies of mispresenting the data....

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Don't know how they figured in the tips, but I was a waiter at a popular restaurant while in college and we were paid sub-minimum wages hourly, but the tips more than made up for that, which brings up the point that people many people would gladly take an available job that pays less than minimum when there is a long-term incentive involved (such as job security/possible compensation or advancement past a paycheck). I started busing tables in that restaurant at the then minimum of 4.75 and worked my way up to 7.50/hr, but STILL made less than I did at the sub-minimum.

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American said:

Question for pro-minimum wagers:

If Congress raised the wage to $40/hour, would it help the poor live better?

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Iriemon said:

It would certainly help those who had previously made less than $40/hr and now are making $40/hr live better.

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