Myth Pro and Con about the Minimum Wage

[Ziggurat]

So I guess that leaves me asking, if most businesses aren't paying min. wage...why raise it? Is it symbolic? Is it recession insurance for the poor?

I think largely because there are a LOT of people who don't understand basic economics, and simply believe that raising the minimum wage must be unequivocally good for the poor. There's also the problem that the positive benefits are felt directly but the negatives are felt indirectly. People who get raises because of a minimum wage hike know who to thank, but people who remain unemployed because they've been priced out of the job market (directly through their labor not being worth the higher cost or indirectly from reduced profitability for businesses) typically won't know who to blame. That dynamic makes it politically far more attractive than it should be.

 

[HeavyAaron]

HeavyAaron (or anyone, really), I thought of a couple of questions:

I see that the minimum wage came into effect in 1938. I'm assuming that's Depression-related, but haven't done my reading yet. So what made it necessary to institute minimum wage in the first place? Why wasn't the wage market regulating itself--was it largely the Depression? Or was it regulating itself according to the conditions at the time?

I am not qualified to answer your question. I have not the specific historical knowledge being requested. Sorry.

Now, this is probably simplistic, but, if that's so...why are there still employers paying $5.15?

Because some labor still has a market value of $5.15/hour or less. I know that's not really a helpful answer, even if accurate. Sufficive to say that there are more people willing to work no-skill jobs for $5.15/hour than there are people willing to pay $5.15/hour for no-skill jobs.

So I guess that leaves me asking, if most businesses aren't paying min. wage...why raise it? Is it symbolic? Is it recession insurance for the poor?

You'd have to ask a supporter of minimum wage instead of me. I think the short answer, though, is that many people (probably most people) believe it would help the working poor to do so and believe the only losers are nameless cooperations.

Recession insurance it most certainly is not. During a recession companies have a choice to lower wages or have layoffs. If you've just tied a company's hands on the first option, well... I'll let you reach your own conclusion. Btw. our culture causes the same problem with non-minimum wage employees. Even though most employees and virtually all employers would rather reduce wages then have a layoff during recessions, we instead have layoffs. Paycuts run so against the grain in our culture that the damage to employee morale would be enormous. I fine this a truely tragic reality.

Sorry I couldn't address all of your questions,
Aaron

 

[The Atheist]

..... but people who remain unemployed because they've been priced out of the job market (directly through their labor not being worth the higher cost or indirectly from reduced profitability for businesses) typically won't know who to blame. That dynamic makes it politically far more attractive than it should be.

I'm not so sure that increasing the minimum wage results in any more unemployment, which is one of the reasons I am so vehemently in favour of increasing it.

While the economic model in NZ isn't a clone of USA, the way it's worked here must have some relevance to USA. Here, we have a vastly smaller economy and we are hampered by the distance from our markets, which makes our goods dearer than yours on an adjusted basis, meaning that our economy is more susceptible to minor adjustment than yours will ever be.

Current US minimum wage is $5-15, current NZ minimum of $11-00 (and some cents) equates to USD7-30 on today's exchange rate. The cost of living is about 15% higher here, so we could say that the buying power of our minimum wage is actually USD6-21.(20% higher than yours) Despite that, we have the lowest unemployment rate in the OECD.

Now, I'm not suggesting that US' unemployment will follow in our footsteps by increasing the minimum, but it doesn't mean that an increase in the US' minimum will necessarily result in more unemployment either.

 

[HeavyAaron]

I'm not so sure that increasing the minimum wage results in any more unemployment, which is one of the reasons I am so vehemently in favour of increasing it.

While the economic model in NZ isn't a clone of USA, the way it's worked here must have some relevance to USA. Here, we have a vastly smaller economy and we are hampered by the distance from our markets, which makes our goods dearer than yours on an adjusted basis, meaning that our economy is more susceptible to minor adjustment than yours will ever be.

Current US minimum wage is $5-15, current NZ minimum of $11-00 (and some cents) equates to USD7-30 on today's exchange rate. The cost of living is about 15% higher here, so we could say that the buying power of our minimum wage is actually USD6-21.(20% higher than yours) Despite that, we have the lowest unemployment rate in the OECD.

Now, I'm not suggesting that US' unemployment will follow in our footsteps by increasing the minimum, but it doesn't mean that an increase in the US' minimum will necessarily result in more unemployment either.

Please keep in mind that measured unemployment has a very small bearing on actual unemployment. So, comparing two nations unemployment numbers is silly. It's akin to comparing the cost of gas in the US in gallons versus the cost of gas in NZ in liters. I guarentee they are different measures, btw, because the US measures it based on our own, unique, unemployment insurance system.

So another thing one needs to be careful about is using a known, heavily flawed measuring device, to infer causal relations between things.

Aaron

 

[Rob Lister]

Now, I'm not suggesting that US' unemployment will follow in our footsteps by increasing the minimum, but it doesn't mean that an increase in the US' minimum will necessarily result in more unemployment either.

Preface: I stand by my humble opinion that raising MW will have no long term impact on either poverty or the economy in general...that said

Raising MW may actually INCREASE employment in many non-public, zero-skill sectors, in the short term, but not necessarly employment at minimum wage rates.

Raising it will put at least some 'mom&pops' over a moral/legal threshold.

I have emperical -- yet admittedly anecdotal -- evidence of this.

BUT THAT'S ILLEGAL!

Yea, well, so is speeding.

 

[boooeee]

HeavyAaron (or anyone, really), I thought of a couple of questions:

I see that the minimum wage came into effect in 1938. I'm assuming that's Depression-related, but haven't done my reading yet. So what made it necessary to institute minimum wage in the first place? Why wasn't the wage market regulating itself--was it largely the Depression? Or was it regulating itself according to the conditions at the time?

Here's what I found on Wikipedia.

The first attempt at establishing a minimum wage in the United States came in 1933, when a $.25-per-hour standard was set as part of the National Industrial Recovery Act. However, in 1935's Schechter Poultry Corp. v. United States (295 U.S. 495), the United States Supreme Court declared the act unconstitutional, and the minimum wage was abolished.

The minimum wage was re-established in the United States in 1938 (pursuant to the Fair Labor Standards Act), once again at $.25 per hour ($3.22 in 2005 dollars.) It had its highest purchasing value ever in 1968, when it was $1.60/hour ($9.12 in 2005 dollars.) The current federal minimum wage is now $5.15 an hour.

link

The first attempt at establishing the minimum wage was part of the National Industrial Recovery Act (also known as NRA) which was a very wide-ranging attempt to regulate business and commerce within the USA. In a nutshell, it was central planning. The act was struck down by a 9-0 Supreme Court decision in 1935.

So, it looks like the minimum wage was a part of Roosevelt's general policy of attempting to affect positive change in the economy through government control of pricing and production.

Off topic: That little bit of research cleared up something that has always puzzled me. During the opening of the Marx Brothers classic Duck Soup, they display an embelem of an eagle clutching a gear with the initials "NRA" at the top. I always thought it was odd that the Marx Brothers would stick a plug for the National Rifle Association into their movie. It looks like that was a plug for the National Industrial Recovery Act.

 

[The Atheist]

Please keep in mind that measured unemployment has a very small bearing on actual unemployment.

No, unless US has a vastly different means of calculating unemployment, that is completely wrong. Our unemployment figures from both household labour surveys and the officially registered unemployed are so close as to be considered identical.

So, comparing two nations unemployment numbers is silly. It's akin to comparing the cost of gas in the US in gallons versus the cost of gas in NZ in liters. I guarentee they are different measures, btw, because the US measures it based on our own, unique, unemployment insurance system.

Which is exactly why I said that they can't compared, but has some relevance to the situation in USA.

So another thing one needs to be careful about is using a known, heavily flawed measuring device, to infer causal relations between things.

Aaron

See point 1.

 

[HeavyAaron]

Rather than try to address point by point, maybe some simple facts are useful.

Unemployment as defined by an economist, is the portion of the eligable population which is willing to work for the going wage rate but is unable to find an employer. Note that there is no known means of actually determining this value. All we have are proxies.

The measurement used in the US is particularly bad. We use the number of people collecting unemployment checks. This is a bad means for a number of reasons. First off, those checks only last so long. Even if you were actually unemployed for longer, you drop off after a set time frame. Next, many people drawing those checks are not actually looking for employment. They're taking a break between jobs. How do we know? Because there are two times during the drawing of checks people are likely to find work. Very early on and just before the checks stop arriving. Next, a person may simply be unwilling to work for the going rate. According to economists, this person is voluntarily not working, and thus is not unemployed.

ETA: forgot another major catagory. An unknown (but large) number of people never file for unemployment.

Asking a person if they qualify as unemployed also results in incorrect results. Most people don't distinguish voluntarily not working with unable to find a job. Moreover, it's likely that people who's minimum acceptable wage rate is above the market rate, may not know it. But this method that you say NZ employs would definately come up with different results then our method (better data, no doubt.)

Does that help?

Aaron

 

[Ziggurat]

Current US minimum wage is $5-15, current NZ minimum of $11-00 (and some cents) equates to USD7-30 on today's exchange rate. The cost of living is about 15% higher here, so we could say that the buying power of our minimum wage is actually USD6-21.(20% higher than yours) Despite that, we have the lowest unemployment rate in the OECD.

Apples to oranges. NZ isn't the US, and you don't have huge numbers of immigrants looking for work. Mexico, I believe, has higher unemployment than the US, but I'd bet good money any minimum wage they have is lower than ours.

Now, I'm not suggesting that US' unemployment will follow in our footsteps by increasing the minimum, but it doesn't mean that an increase in the US' minimum will necessarily result in more unemployment either.

If the price of something goes up, consumption goes down. If the price of labor goes up, consumption of labor goes down. Now, that might not get reflected in official "unemployment" figures. For example, if highschool kids can't get minimum wage fast food jobs because the job market shrinks, they don't count as unemployed.

The irony to this all is that if progressivity is really what you want (and that's really what minimum wage advocates argue on the basis of), there's a MUCH better tool for achieving that: the earned income tax credit. It doesn't discourage work, and it targets only those who supposedly need help, the working poor. Raising the minimum wage also boosts the earnings of a lot of middle-class teenagers who, let's be honest, don't really need the help.

There really is no good argument in favor of minimum wage. It distorts markets, it discourages employment, it prices people out of the workforce, and everything that its advocates hope to achieve by it can be better and more directly achieved through other means.

 

[The Atheist]

....The irony to this all is that if progressivity is really what you want (and that's really what minimum wage advocates argue on the basis of), there's a MUCH better tool for achieving that: the earned income tax credit. It doesn't discourage work, and it targets only those who supposedly need help, the working poor....

Yep, I agree with that - my understanding of the US tax system is that it would be nigh impossible to institute a national tax credit system, but if I'm wrong and it's possible, you;re quite right. We have a national credit system here, but it only cuts in for people with dependents as the MW is [almost] enough on its own for singles.


& Thanks Aaron - I guess that's why Mark Twain loved statistics so much, USA doesn't have very accurate ones!

 

[Rob Lister]

Yep, I agree with that - my understanding of the US tax system is that it would be nigh impossible to institute a national tax credit system, but if I'm wrong and it's possible, you;re quite right.

We have such a system. Have for years. Forgot when it started.

 

[Ziggurat]

Yep, I agree with that - my understanding of the US tax system is that it would be nigh impossible to institute a national tax credit system, but if I'm wrong and it's possible, you;re quite right.

It's already there, and it's called the Earned Income Tax Credit. Upping it shouldn't be any harder for Congress to pass than upping the minimum wage. In fact, I suspect it would be easier, since it would be hard I think for the Republicans to really unify in striking it down, since it could be marketed as a tax cut (which it isn't, really, but it happens when you file taxes). So dems interested in helping the poor (as oposed to just rallying the union vote) should press for EITC increases, NOT minimum wage hikes.