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The Minimum Wage Fantasy
MaxSpeak is pushing a letter from economists, already signed by notables Alan Blinder, Clive Granger, Rebecca Blank and others, to raise the minimum wage. Don't worry, I won't bore you with the usual story about unemployment. A small increase in the minimum wage will have only a small unemployment effect, nuff said. Nevertheless, parts of the letter strikes me as absurd. The letter says, for example, that "The minimum wage is also an important tool in fighting poverty." Rubbish. But don't take my word for it.
The minimum wage is a blunt instrument for reducing overall poverty, however, because many minimum-wage earners are not in poverty and because many of those in poverty are not connected to the labor market. We calculate that the 90-cent increase in the minimum wage between 1989 and 1991 transferred roughly $5.5 billion to low-wage workers.... an amount that is smaller than most other federal antipoverty programs, and that can have only limited effects on the overall income distribution.
The source? Card and Krueger in Myth and Measurement (p.3).
The letter also states that most of the people earning the minimum wage are adults. Most workers are adults so this is hardly surprising. What is more surprising is that 25% of the workers earning the minimum wage are teenagers, even though teenagers are a much smaller percent of the workforce. In addition, over half the workers earning the minimum wage are younger than 25. The letter can spin things how it wants but it would be more informative to say that most of the workers earning the minimum wage are young workers who with a little age and experience would have their wages increased in anycase.
That brings me to a second strange statement, the idea that "the minimum wage helps to equalize the imbalance in bargaining power that low-wage workers face in the labor market." One wonders how bargaining power is defined. Do these economists really believe that the fat cats are getting rich slurping up surplus from the low-wage workers? If you measure bargaining power as a difference between wages and marginal productivity it is surely high wage workers who lack bargaining power.
The real rebuke, however, to the bargaining power idea is this: a lot of people earning the minimum wage are teenagers but more than 90 percent of working teenagers earn more than the minimum wage. Either most teenagers are very good bargainers or wages depend less on "bargaining power" than on productivity. Either way the letter is confused.
The debate over the minimum wage is more about rhetoric than reality.
Posted by Alex Tabarrok on September 20, 2006 at 07:16 AM in Economics | Permalink
Comments
Of that $5.5 billion transferred to low-wage workers, how much of it came from higher prices paid by buyers of products made from those workers?
I think if a Big Mac costs 10 cents more, in order to pay McDonald's workers higher wages, a big portion will come from low wage earners who buy such Big Macs.
Posted by: Tom Grey - Liberty Dad at Sep 20, 2006 7:35:23 AM
Suggesting that the minimum wage be raised is a nice gesture, unless the person making the suggestion suggests a minimum that is greater than their own wage. I suggest a minimum wage of about two hundred dollars an hour. Not only would that have economic consequences, I'd get a bit of a raise.
Are you going to make some nice gestures?
Posted by: Jim Lebeau at Sep 20, 2006 7:53:30 AM
"If you measure bargaining power as a difference between wages and marginal productivity it is surely high wage workers who lack bargaining power."
Alex will you explain/clarify this? It seems the opposite is true (as intuition would suggest).
Productivity is hard to measure and it is especially hard to measure in higher paying jobs. One way to think about this is there is uncertainty/variance in how productive a potential employee will be.
Another effect of this is that higher-productivity laborers are more likely to be overcompensated (to help cope with the greater monitoring costs of their jobs).
Is there a model/data that suggests bargaining power is a function of uncertainty in productivity? This seems to make sense to me, and to capture much of the intuitions that are expressed with regards to this debate.
Finally, it may be that lower-wage earners are equally savvy bargainers (or even assume they are less sophisticated bargainers), but they may bargain in ways that are we don't like (for instance rational teenagers face choice between drug dealing and working at McDonald's), we may prefer a queue at McDonald's to an efficient market (after-all Crack-dealers earn less than minimum wage, right).
All in all, there is substance behind the rhetoric.
Posted by: Drew at Sep 20, 2006 7:57:58 AM
Very few people in this area earn the minimum wage: demand has grown relative to supply so much that the equilibrium wage for unskilled, inexperienced, new-entrant workers is above the minimum.
So if folks want to raise the minimum wage advocates want to raise the minimum wage by some small amount, it probably wouldn't have much of an impact one way or another, and it might make some people feel better about themselves and society. Not that I want to promote stupid policies in the interests of "feel good" goals, but I really doubt that a small increase would do much harm.
Posted by: EclectEcon at Sep 20, 2006 8:04:22 AM
They are only asking for a "modest" increase in the minimum wage.
What I am surprised to see is that my dissertation advisor's name is tacked onto the letter at MaxSpeak's page. I have enormous respect for the man, he has done wonders for my career. However, here is a quote from his labor economics class I took with him:
"Does the Minimum Wage fight Poverty
Economists have been preoccupied with studying whether increases in the minimum wage due lead to a decline in employment. Evidence is mixed. Perhaps the best estimate is that a 10% increase in the minimum would reduce youth employment by 1 to 3 %. Given such small employment losses, is the raising the minimum an effective way of reducing poverty. No. Most minimum wage workers are teenagers and other part time workers. Poverty is primarily a problem of lack of full-time employment and raising the minimum wage does little for this.”
I mean, we even talked about the same things Alex points out in his post above.
Again, the small increase will likely do very little (although one piece of data I'd liek to see is what share of minimum wage workers are employed at small mom and pop businesses) - but I still am totally floored that my advisor's name is on this letter.
Posted by: Mike at Sep 20, 2006 8:16:41 AM
I really dont think that left liberals believe that the minimum wage is an effective tool for fighting poverty. I think that it has been associated with their cause for so long that they keep fighting for it for the sake of politics. There is no way that Maxspeak or the economists who signed the letter really feel that raising the min wage is going to be of some tremendous net benifit to the working poor. Especialy when the earned income tax credit exists and it has shown no labor displacement effects.
Posted by: John Pertz at Sep 20, 2006 8:35:23 AM
Don't teenagers have a lot of bargaining power? They can walk away from a job much easier than an adult employee. They generally don't have to provide for their own necessities. They generally don't have to worry about healthcare. They don't have to worry about how quitting a job will look on their resume. They are less constrained in what jobs they can take, frequently having parent provided transportation that a poor employee may lack and no need for child care which many low income adults need. The employer also has to compete with extra curricular activities which by improving the teenager's chances of getting into a good college could have significant value.
In the context of a low skill job, it seems to me that a teenage employee has more bargaining power than an adult relying on the job for their sole means of support.
Posted by: jon at Sep 20, 2006 9:23:38 AM
Is it true that some union contracts are linked to the minimum wage? I've often heard that it is, but I have never seen firm evidence.
Whether or not that it is true, IMHO union bargaining power is the primary reason that what John Pertz calls "left liberals" care about the minimum wage. Even though minimum wage workers aren't generally unionized, all the rhetoric about it comes straight from union manuals about "living wages" and "prevailing wages." I think it is seen primarily as a symbol, both to signal possible recruits and employers that unions are gaining political influence again, and as a stepping stone to a much higher federally mandated Davis-Bacon wages for everyone.
Not to mention that a little more unemployment among people at the margins of the labor force is a benefit, not a negative, to the skilled-worker unions.
Posted by: DK at Sep 20, 2006 9:58:18 AM
Drew here are a few reasons to think that MP>W is more likely for high-wage workers. there are fewer high wages workers than low wage workers, markets are thinner, there is less competition and more two-sided bargaining. eg. Movie directors can basically only work in LA and only for a handful of firms - low wage workers can work anywhere in the United States and have many potential employers. A movie director doesn't have a wage, he bargains and his effective wage will differ greatly depending on the movie, the producer, the firm etc. (See jon's comments about teenagers also.) High wage workers are also much more likely to generate externalities that they cannot capture, e.g. intellectual property, improvements in the productivity of others, increases in social capital etc.
Best
Alex
Posted by: Alex Tabarrok at Sep 20, 2006 10:04:18 AM
Mike, don't be so coy! I assume it was Blinder but do tell!
Alex
Posted by: Alex Tabarrok at Sep 20, 2006 10:05:19 AM
I would think the EITC is a better tool than the minimum wage.
Posted by: Anderson at Sep 20, 2006 10:24:36 AM
I agree that unions are the primary interest group that care about the raising minimum wage. What I don't know is what interest group is opposing it on the conservative side. It has overwelming support in public opinion polls so it is bad politics for the congressional republicans to block the raise. If they took economic theory seriously they would curb spending. So I conclude that some interest group is exerting power to block the raise. I would like to know who.
Posted by: joan at Sep 20, 2006 11:02:58 AM
Eclectecon: Don't be so quick to concede! The minimum wage may not be common where you live--it's certainly not where I live--but I'm from a small town in Tennessee with only a handful of major employers that would be quite harmed. The minimum wage gives producers in high cost-of-living areas an advantage over those in more rural areas. A national minimum wage hike could be very harmful given that wages in our nation are not uniform.
Posted by: Swimmy at Sep 20, 2006 11:17:40 AM
Joan ... "I agree that unions are the primary interest group that care about the raising minimum wage. What I don't know is what interest group is opposing it on the conservative side." .... uhh ... corporations, perhaps?
Posted by: Robert at Sep 20, 2006 11:24:45 AM
joan: "What I don't know is what interest group is opposing it on the conservative side. "
Certainly my group - small business owners in Southern states - oppose raising the minimum wage. But I don't think we're a powerful interest group.
Here's what I don't understand, Joan. Suppose I offer a job in my bookstore to a college student at $5.30 an hour. Suppose that college student takes that job instead of the $7.00 an hour job at the supermarket next door. What business is that of yours or anyone else's? Both the employer and the employee are happy with the arrangement.
Posted by: JohnDewey at Sep 20, 2006 11:32:20 AM
The best article, and one of the least often cited, on the minimum wage is:
"The Labor Market Effects of Minimum Wage Laws: A New Perspective" Author: McKenzie, Richard B. Source: Journal of Labor Research v1, n2 (Fall 1980): 255-64 Doc. Type: Journal Article
This article makes the argument convincingly and straightforwardly that the minimum wage makes both workers in the relevant markets and firms worse off.
Why hasn't it been often cited? Well for starters, it it doesn't fit in well with left-leaning academics biases.
Posted by: jim at Sep 20, 2006 12:23:25 PM
I was wondering if conservative and libertarian economists support the EITC. If so, why not start a campaign to increase the EITC (which liberal economists will surely join) if you find the minimum wage proposals so repugnant?
Posted by: eriks at Sep 20, 2006 12:23:36 PM
I don't think it is corporations. Even walmart pays more that the minimum. Swimmy post about the wages rural areas may point to the answer. New York State minimum wage is $6.75 per hour and it will increase to $7.15 per hour as of January 1, 2007. The high minimun wage probably has little effect around the city but if Swimmy is right should show some effect upstate. Maybe studies of minimum wage increases should be done in rural areas.
He end his post "The minimum wage gives producers in high cost-of-living areas an advantage over those in more rural areas."
Maybe it is the split shown on the red-county blue-county maps, showing democrats reflect the interest of cities and the republicans small towns and rural areas.
Posted by: joan at Sep 20, 2006 12:45:14 PM
eriks: "why not start a campaign to increase the EITC (which liberal economists will surely join) if you find the minimum wage proposals so repugnant?"
I'm not an economist, but I do have an opinion. I find government welfare assistance to be just as repugnant as governmet interference in private wage agreements.
Why are either minimum wage increases or EITC increases needed? No one in the U.S. is going without food. No one is being denied medical care. Every child receives an education. The only people who remain homeless are the addicts and the mentally ill.
If individuals wish to provide more than simple, basic needs, they can do so directly or through charities. How can anyone justify confiscating the hard-earned income of those who do not wish to do so?
Posted by: JohnDewey at Sep 20, 2006 12:51:19 PM
joan: "Maybe it is the split shown on the red-county blue-county maps, showing democrats reflect the interest of cities and the republicans small towns and rural areas."
I think the split is more Democratic cities and Republican suburbs. Many of those red-blue maps mask the fact that many states are toss-ups.
The city of Dallas is Democratic. But the Dallas-Fort Worth metro area - now fourth largest in the nation - is overwhelmingly Republican.
What is the political affiliation of the governors of California, New York, Massachusetts, Minnesota, and Connecticut? How could that happen in the largest blue states?
Posted by: JohnDewey at Sep 20, 2006 1:02:59 PM
jim: "This article makes the argument convincingly and straight forwardly that the minimum wage makes both workers in the relevant markets and firms worse off."
Since 1980 studies on the actual effect of minimun wage changes found them to be much smaller than expected. By your definition if you take the new informaion into account you are showing "left-leaning academics biases".
If I use the theory of gravitation I can make the argument convincingly and straight forwardly that steel ball and feathers fall at the same rate. I could even argue that you are not breathing because all the air molecules are lying on the ground.
Posted by: joan at Sep 20, 2006 1:08:28 PM
JohnDewey,
Perhaps you are unaware, but many people must make the choice to pay for heating or to pay for food. Or they face other similar tradeoffs for products that are "simple, basic needs."
I assume your preference for government non-interference in private wage agreements stems from a desire to see a true meritocracy where everyone gets what they deserve. The problem with this is lots of people get more and lots get less for no reason. Simply being born in a given location and time dictates much of your chances of even having the opportunity to enter into certain wage agreements. The quality of schooling in many areas is appalling and to even begin to think that the public schooling I received in Fairfax, VA is in any way comparable to that of somewhere only a couple miles away (say, South East DC)is a joke.
The EITC is a relatively cheap government program and has been shown to do a lot of good. No charity or non-governmental organization has the ability to provide the incentives to work that the EITC does. Do you simply disagree with all government expenditures if government derives its revenue from income taxes?
Posted by: eriks at Sep 20, 2006 2:44:42 PM
"How can anyone justify confiscating the hard-earned income of those who do not wish to do so?"
Hear, hear. We ought to tax the _unearned_ income of landowners and other economic rents, rather than burdening productive activity by taxing profits or wages.
Posted by: georgist at Sep 20, 2006 3:06:50 PM
"Simple, basic needs" like cell phones and computers?
I contribute every year thru my gas company to help those who can't afford
to heat their homes.
Posted by: Sandy P at Sep 20, 2006 3:09:12 PM
Joan: “Since 1980 studies on the actual effect of minimun wage changes found them to be much smaller than expected.”
Here’s a few recent studies that show a strong negative impact from minimum wage increases:
Minimum Wage Reduces Jobs for Low-Wage Workers in France and U.S. (NBER, Jul1997)
http://www.nber.org/digest/apr98/w6111.html
Each mandated hike in the minimum wage hurts unskilled workers (Employment Policies Institute , Jan1998)
http://www.ncpa.org/hotlines/min/jan98c.html
Expect the loss of 145,000 to 436,000 teenage jobs from raising the minimum wage (FRBSF, Feb1999)
http://www.frbsf.org/econrsrch/wklyltr/wklyltr99/el99-06.html
Workers initially earning near the minimum wage are adversely affected by minimum wage increases (NBER Feb2000)
http://www.nber.org/papers/w7519
Job loss following minimum wage hikes is economic reality (University of Georgia, May-2006)
http://www.epionline.org/news_detail.cfm?rid=72
There have been more. Please don’t argue that recent research is conclusive and ignore studies such as the above.
Why should labor disobey the laws of supply and demand that are obeyed by any other good?
Posted by: JohnDewey at Sep 20, 2006 3:19:20 PM
