Myth Pro and Con about the Minimum Wage

[Dancing David]

Most of the myths occur because people don´t understand the mechanisms in economics. One of the things that happens is that we tend to think that one action leads to a specific reaction. Well, maybe in Physics this is the case, but not in Economics.



Yes and no. Most of the time, a demand to increase the MW is a result of inflationary periods. When governments decide to increase the MW in this situation, this leads to more inflation. Then in this respect it is not a myth. It just depends on when it is that you increase wages. In stability periods it will not raise prices because higher wages are the result of rises in productivity or higher GDP for example.




This also depends on the circumstances. If the MW increases when no productivity has occured then costs will increase because labour costs represent a large proportion of total costs. So this will erode any gain in wages because prices will go up. But if the MW increases as a result of productivity or efficiency then any change in prices and costs will not affect real profits and real wages.

I understand all that but it is a question (What benefits or detriments are there to an increase in the minimum wage?) that I occasionaly pose to economists and financial types who are on a call-in talk show on my local NPR station, and they stateed these things as though they were absolutes, they did not couch it quite as carefully as you have.
I do understand that an increase in the minimum wage can be detrimental, I stopped being a union supporter (of non-local unions) when the auto workers struck for higher wages in 1979-1981, despite the fact that the economy was already in stagflation and the companies they worked for were bloated at best.

 

[WildCat]

Deserve being the key word, how many people make a lot who don't deserve it at all, or get a raise when they don't deserve it at all?

That's a management issue, not an economic one.

 

[Ziggurat]

Sorry, suffering a little whiplash here, watching the goalposts.
"The law" - I've lived with minimum wage legislation since I was in High school, back in the cave dwelling.

Not with the minimum wage set at 5.15 per hour, you haven't. I was commenting on a particular study which looked at employment at this particular hike in the minimum wage.

So I'm sure that in 1995 their were several data points that could have been determined.

Yes. And a number of them indicate that minimum wage increases also increase unemployment. This particular study indicated it did not, but it also only studied the 1997 increase (which, again, passed in 1996).

The fast food industry does have inelastic labour requirements, what minimum wage job doesn't?

Yard work, I bet, has a pretty elastic demand. That's just one example, I'm sure there are others.

I guess if the employer is deciding between mechanisation and labour this might be the straw, but most jobs that can be mechanised are.

Even that isn't an either/or. There's a large number of possible tradeoffs between capital (mechanization) and labor. If I need a small hole dug in my backyard for a fence post, I'm probably not going to hire a backhoe. But if I need a medium sized hole, it will depend on the cost of the labor to dig it versus the cost of renting the backhoe. Raise the cost of labor, and you'll generally lower its usage. Plus, there are jobs that might just not be done at all - if it's too expensive, I might just not put up that fence at all.

I think if we just stick with the use of the minimum wage to reduce poverty (with the concurrent increase in GDP, given that every penny poor people earn is immediately spun back into the economy)

Two problems: first, that "every penny gets spun back into the economy" goes both ways: if the businesses aren't paying employees more, that money ends up getting spun back into the economy too, just via different routes. So there's no reason to think that there's any first-order effect on GDP. Second, I don't think we've seen any real evidence that minimum wage DOES reduce poverty. And why should it, if people being paid minimum wage, or even at levels where advocates propose raising it to, are still poor? But I can tell you what will KEEP people in poverty: unemployment.

 

[BPSCG]

Fixed it for you. The only reason anyone deserves a raise is because he is providing more value to his employer than he used to.

Deserve being the key word, how many people make a lot who don't deserve it at all, or get a raise when they don't deserve it at all?

To answer a rhetorical question with another one, how many people get paid the minimum wage who don't deserve even that? Why should they get paid more than they are worth?

And if you don't think it's a substantial number, try getting a replacement LP tank for your grille at my local Home Depot with me sometime.

 

[shuize]

Deserve being the key word, how many people make a lot who don't deserve it at all, or get a raise when they don't deserve it at all?

Let me answer this silliness with a movie quote: "Deserve's got nothing to do with it."

As BPSG already pointed out, if we paid people under the touchy feely category of "deserve" a lot of them would end up getting less than minimum wage.

See, in the real world, people get paid exactly what they're worth. How do we know how much that is? Easy. It's exactly the amount a willing employee agrees to work for and a willing employer agrees to pay. "Oh, no, man. I'm really worth more than minimum wage," you say? Great, feel free go out and find an employer willing to pay you more.

But why an employer should have to pay someone who slept through school any more than the market wage -- the price at which other unskilled workers are willing to do the same job -- to push a mop around is beyond me. Oh, wait. I forgot. Because they need it. That makes all the difference.

You know what I need? A blowjob. This very minute. So I think I'll demand Natalie Portman hop over and give me one.

 

[BPSCG]

You know what I need? A blowjob. This very minute. So I think I'll demand Natalie Portman hop over and give me one.

Doesn't work. All that happens is the guards rough you up and you end up with a court order to not approach within 500 feet of her.

Trust me on this one.

 

[HeavyAaron]

And whose fault is it that minimum wage earners have to hold down two jobs (or three jobs) in order to make ends meet? The economy isn't getting any better, and they're still making the same wages they have for years. How many "professional" people here would work for a corporation that ignores the cost of living and doesn't compensate with an annual raise?

Has it occurred to you that the reason for that is minimum wage law?

Suppose that a certain worker position would pay $3/hour if totally dictated by supply and demand. However, minimum wage is $5.15/hour. Further imagine that this position is one of the luckier ones that isn't cut due to minimum wage but instead pays $5.15/hour.

Now, years go by, and the minimum wage stays at $5.15. Most employees get annual raises of 3% or whatnot. But why would the minimum wage employee? The second year his job would pay $3.09/hour, all else held equal. The next year would be $3.12/hour, etc. It'd be a long time before the wage would exceed the price floor. We should expect that most minimum wage employees do not get COLAs because they ARE ALREADY PAID TOO MUCH. Eventually, if minimum wage law is left alone for long enough, low wage positions start to exceed minimum wage. This is presently happening, btw. (Check out the actual wages for fast food employees accross the nation. You'll see that in many/most locales, the pay is over the minimum wage.)

Aaron

 

[HeavyAaron]

Well the lacking do seem to breed more often, but it also seems the middle class is having more kids.

Obviously "middle class" is not well defined. But if we're restricting ourself to the USA, your statement is patently false. The birth rate in the US (as well as all developed nations) is below replacement level and falling. This is happening specifically because we all all becoming richer in real terms. Children are "inferior goods." That is, all else held equal, the richer you are the fewer children you have.

As an aside, the tired phrase, "the rich become richer and the poor become poorer" has never been true. It should be "the rich become richer and the poor become richer, but the rich become even more richer much faster."

Aaron

 

[HeavyAaron]

I know little about economics, but I do know that it is something done by economists. The last and best book I read on the subject was "Wall Street: How it works, and for Whom" which is now available as a free download on the net.
From pages 140-141 of the on line edition (a .pdf) discussing bias in economists we have:

There’s one sterling example of that dependable bias, the minimum
wage, almost universally regarded by economists to be a job-killer. Their
reasoning is pure Econ 101 — raise the price of something (and a wage is
the price of labor), and you depress demand for it. Therefore, boosting
the minimum wage has to result in an employment decline for low-end
workers. But in surveys of employers taken just before and after changes
in the minimum wage, David Card and Alan Krueger (1995) showed that
this just isn’t true. They paused for a few pages in the middle of their
book, Myth and Measurement, to review some reasons why the academic
literature has almost unanimously found the minimum wage guilty as
charged. They surmised that earlier studies showing that higher wages
reduced employment were the result of “publication bias” among journal
editors. They also surmised, very diplomatically, that economists have been
aware of this bias, and played those notorious scholarly games, “specification
searching and data mining” — bending the numbers to obtain the
desired result. They also noted that some of the early studies were based
on seriously flawed data, but since the results were desirable from both
the political and professional points of view, they went undiscovered for
several years.

Using the example of the fast food restaurant, a minimum wage worker receiving a 10% increase will sell about 100$ of merchandise with a cost increase of less than 1$. The cost will be passed on to the customer. The store has many more customers than employees, and the customers are quite likely in the range of people whose wages are affected by the MW increase. (That effect is not limited to minimum wage earners, but it does vanish as you approach the average industrial wage.) So it's hard to argue that the price increase will reduce the sales, and that means that staff reductions are unlikely since fast food outlets aren't prone to overstaffing.

So we have a theoretical model that predicts that employment will not decrease (that's my theory and what it is too) and empirical evidence that it does not. Therefore: raise the minimum wage QED.

By the bye, this is an argument in favour of higher wages that was originally proposed by Adam Smith. The reference is in the book, finding is left as an excercise for the troops.

These studies were very in vouge in the late eighties and early nineties. I admit that one from the mid nineties is a little more recent thatn most that came to this conclusion. But they've all been discredited with more recent research.

Aaron

 

[HeavyAaron]

The free-market is the magical pixie, it doesn't exist.

As in an absolutely free, unregulated free-market? Yeah, I don't know of any. But it's a sliding scale. And there are nice, predicatable inverse correlations between the level of regulation and the growth of the economy.

Aaron

 

[HeavyAaron]

That was not the point i apparently didn't make very well. I have heard moted economists say that there are many reasons for the minimum wage to not increase, one of which is that "because of an increase in the minimum wage, prices will rise and that will mean that those who recieve the minimum wage will have a net loss in income'.

Costs might rise , that is true, but our governement also spend money in a lot of foolish ways and gives people tax breaks for some very interesting and strange things, so i am just asking about myths concerning the minimum wage.

So the government does a lot of dumb things, what's one more is your line of reasoning?

Aaron

 

[HeavyAaron]

Hey guys! Isn't this a strawman argument? Nobody I've heard proposes an increase to $35/hr. Well, it's SOME fallacious statement of some sort.

And we've already seen what happens if you leave wages and labor practice entirely to the whim of the market.

No one proposes it, that's true. But why DON'T minimum wage activists propose it? If they honestly believe raising the minimum wage does not have a negative impact on employment, why not raise it to $35/hour, or $350/hour for that matter?

Aaron

 

[HeavyAaron]

Just me rambling on my meta thoughts on this:

My personal belief in why people support minimum wage (and it is widely supported) is a belief in "fairness." Economists have historically ignored the whole concept of fairness. But I think the results of The Ultimatum Game" http://en.wikipedia.org/wiki/Ultimatum_game may be changing that. But as with the results of "The Ultimatum Game" I fear that this fairness notion often gets in the way of optimal/rational results.

I'm lothe to give up the rationality assumption of economics (there are solutions for "The Ultimatum Game" that resolve with the rationality assumption). My personal beliefs are that most people are ill-informed in the economic reprocussions of policy decisions. Why would they be informed, after all? And when that happens this emotional ties to the fairness concept kick in.

For those who are honestly seeking answers, the data is available. This is science, after all. It's not hard, cold science. But it is science. Economists hypothesize models, then test the models. Then when questions like "what would happen if we raised the minimum wage" we can test such things with the models. Of course models are sometimes wrong from over simplification. But it's all about improving those models. Adam Smith published his "Wealth of Nations" over 200 years ago. We've had time to refine the models. There are lots of good scientists investigating these questions.

Unlike most political decisions like "would sealing the border with Mexico be a good idea" which are unanswerable, questions like "what would happen if we raised the minimum wage" we have answers to. Of course, that's not quite the same as "would it be a good idea?"

We don't arm chair critize other sciences. If you want to disagree with a concensus of economists, you'd better have some dang perswaysive reasons that aren't just appeals to emotion.

Aaron

 

[Tony]

But it's a sliding scale. And there are nice, predicatable inverse correlations between the level of regulation and the growth of the economy.

That's only a good thing if you value the "economy" over everything else.

 

[HeavyAaron]

That's only a good thing if you value the "economy" over everything else.

I'm not sure what's up with the scare quotes... but I wasn't making a value judgement. I didn't say that growth of the economy takes precidence over anything else.

I will say, however, that I'm unsure what thing or things outside the economy you're contrasting with.

Aaron

 

[Tony]

I'm not sure what's up with the scare quotes...

Nothing against you. But I've observed that the word "economy" has been used as euphemism for big business or corporate interests.

but I wasn't making a value judgement.

I didn't say that growth of the economy takes precidence over anything else.

Thanks for clearing that up.

I will say, however, that I'm unsure what thing or things outside the economy you're contrasting with.

Things like personal freedom, human rights, individual rights, family, health or nation. There are instances throughout history where the economy has been elevated to the detriment of these values.

 

[Snide]

Just me rambling on my meta thoughts on this:

My personal belief in why people support minimum wage (and it is widely supported) is a belief in "fairness." Economists have historically ignored the whole concept of fairness. But I think the results of The Ultimatum Game" http://en.wikipedia.org/wiki/Ultimatum_game may be changing that. But as with the results of "The Ultimatum Game" I fear that this fairness notion often gets in the way of optimal/rational results.

I'm lothe to give up the rationality assumption of economics (there are solutions for "The Ultimatum Game" that resolve with the rationality assumption). My personal beliefs are that most people are ill-informed in the economic reprocussions of policy decisions. Why would they be informed, after all? And when that happens this emotional ties to the fairness concept kick in.

For those who are honestly seeking answers, the data is available. This is science, after all. It's not hard, cold science. But it is science. Economists hypothesize models, then test the models. Then when questions like "what would happen if we raised the minimum wage" we can test such things with the models. Of course models are sometimes wrong from over simplification. But it's all about improving those models. Adam Smith published his "Wealth of Nations" over 200 years ago. We've had time to refine the models. There are lots of good scientists investigating these questions.

Unlike most political decisions like "would sealing the border with Mexico be a good idea" which are unanswerable, questions like "what would happen if we raised the minimum wage" we have answers to. Of course, that's not quite the same as "would it be a good idea?"

We don't arm chair critize other sciences. If you want to disagree with a concensus of economists, you'd better have some dang perswaysive reasons that aren't just appeals to emotion.

Aaron

Well said (not bad for rambling!). I'm actually for an increase of the current federal MW. But that doesn't mean I don't know it will most likely cause an immediate hike in unemployment. I get more than a little upset at folks who seem to think that just because you favor a minimum wage hike, you must never have taken an econ class.

 

[HeavyAaron]

Well said (not bad for rambling!). I'm actually for an increase of the current federal MW. But that doesn't mean I don't know it will most likely cause an immediate hike in unemployment. I get more than a little upset at folks who seem to think that just because you favor a minimum wage hike, you must never have taken an econ class.

Snide, that's great. If we can agree on what the effects will be but simply disagree on whether those effects are "good" or "bad" I really appreciate that. As an economist I fundamentally respect your preference function.

Aaron

 

[slingblade]

But why an employer should have to pay someone who slept through school any more than the market wage -- the price at which other unskilled workers are willing to do the same job -- to push a mop around is beyond me.

I'm betting you're young. It always seems to be the young.

If you have indeed graduated high school, do yourself a favor and leave it behind now. Also utilize a little critical thought and make yourself aware that lack of education is only one, and not a universal, reason for working a min. wage job.

Thanks. Because I'm really sick of being insulted in this fashion by children.

 

[a_unique_person]

Just me rambling on my meta thoughts on this:

My personal belief in why people support minimum wage (and it is widely supported) is a belief in "fairness." Economists have historically ignored the whole concept of fairness. But I think the results of The Ultimatum Game" http://en.wikipedia.org/wiki/Ultimatum_game may be changing that. But as with the results of "The Ultimatum Game" I fear that this fairness notion often gets in the way of optimal/rational results.

I'm lothe to give up the rationality assumption of economics (there are solutions for "The Ultimatum Game" that resolve with the rationality assumption). My personal beliefs are that most people are ill-informed in the economic reprocussions of policy decisions. Why would they be informed, after all? And when that happens this emotional ties to the fairness concept kick in.

For those who are honestly seeking answers, the data is available. This is science, after all. It's not hard, cold science. But it is science. Economists hypothesize models, then test the models. Then when questions like "what would happen if we raised the minimum wage" we can test such things with the models. Of course models are sometimes wrong from over simplification. But it's all about improving those models. Adam Smith published his "Wealth of Nations" over 200 years ago. We've had time to refine the models. There are lots of good scientists investigating these questions.

Unlike most political decisions like "would sealing the border with Mexico be a good idea" which are unanswerable, questions like "what would happen if we raised the minimum wage" we have answers to. Of course, that's not quite the same as "would it be a good idea?"

We don't arm chair critize other sciences. If you want to disagree with a concensus of economists, you'd better have some dang perswaysive reasons that aren't just appeals to emotion.

Aaron

It's BS, not science. Eg, ABARE, the Australian Bureau of Agricultural and Resource Economics regularly comes down hard on anything to do with fixing greenhouse warming, and criticises it's own scientists for their findings. Currently Australia is suffering it's worst ever drought, and farm incomes will crash because the wheat harvest is a pathetic and there is a national water crises.

"The Death of Economics" by Paul Ormond (sp?) is a good insight into why it is BS. One of the basic assumptions that it fails on is that people are not capable of unexpected behaviour, but make rational decisions based on being able to anticipate just what they should spend for the best outcome.

In contrast, Companies, for example, big and small, tend to focus on the bottom line for this years bonus for the execs.