The Minimum Wage Probably Doesn’t Help

Last night Pres. Obama proposed a federal minimum wage of $9/hr.

Last night, Pres. Obama proposed a federal minimum wage of $9/hr.

A few posts ago I alluded to the fact that most economists oppose rises in the minimum wage, while non-economists in general support them. I’m not an economist. But I think we need to take economists seriously, just in case they know something we don’t.

During the State of the Union address last night, President Obama told Congress that he would like the federal minimum wage to be $9/hour, instead of $7.25/hour. His reasoning was that it isn’t right for full-time workers to earn less than $9/hr. That premise isn’t a bad one–I think we’d all like to see wages rise and the standard of living along with it. But the effect of the minimum wage isn’t generally to raise wages. What it tends to do is cause unemployment among unskilled workers. This is true especially for teenagers, who are new to the labor market and lack experience and skills. In the US, the minimum wage has also been shown to disproportionately hurt minority workers.

Here’s the intuition behind it. Imagine the President had proposed raising the minimum wage to $40/hour. You, like just about everyone, would quickly write the idea off as ridiculous. And it would be. Obviously, the costs of employing people would rise so much that employers couldn’t afford it. They’d have to lay people off, starting with the least valuable employees–in other words, the ones whose labor isn’t worth more than $40 to the company. But while not as drastic, minimum wages at any level work on the same principle. If the minimum wage were raised to $9/hour, then workers whose value to the company was less than $9/hour would over time lose their jobs, and companies would hire fewer low-skilled workers.

I’ve sketched out a really simplistic model of the labor market. I don’t want to get into the involved, jargony theory behind why the minimum wage is thought to reduce employment. So here’s the empirical data. In 2008, David Neumark and William Wascher published a book titled “Minimum Wages” that analyzed data from around 100 studies that included short-run and long-run data from many jurisdictions. They concluded that the minimum wage has a modest, but negative effect on employment, and that it especially makes it harder for teenagers and other new workers to find jobs. It has often been theorized that the minimum wage would delay entry into the labor market for new workers and reduce lifetime income for individuals, and the longitudinal data show just that. In other words, if you eventually want a high-paying job, your prospective employer wants you to have experience. But if you aren’t able to get experience because your base skills aren’t enough to justify a minimum wage, then the years you spend looking for a job will delay your wage increases throughout your whole life.

Others have analyzed the data since to check Neumark and Wascher’s findings. One study argues that Neumark and Wascher didn’t control enough for the differences in different geographic locations, and so the findings turn out a bit differently. But they also conclude that the minimum wage has a modest negative effect on employment which clearly outweighs any wage gains at the margin.

So when you hear voices from Congress (including some surprised Democrats) and the business sector arguing against this increase in the federal minimum wage, it probably doesn’t mean they don’t care about the poor. More likely is that they realize that the minimum wage is a well-intentioned but ineffective anti-poverty tool. A more effective way to promote a basic income would be simply to establish a basic income, via a negative income tax or earned income tax credits.

I can’t help myself from liking Pres. Obama, but I really hope the next president is more competent when it comes to economics, whichever party he represents.

123 thoughts on “The Minimum Wage Probably Doesn’t Help

  1. A fantastic debate. I’m not sure that raising min. wage would help. Even here in CA, $9/hour wouldn’t feed my family of 5. It might keep us from getting raises, or not. The big picture vs. the individual. Production increases would be nice. Spending isn’t going to cut it. Inflated housing prices hasn’t worked. Who knows? Living with what we’ve got might be a start, and living within our means– personally and nationally.

  2. I’m sick of this “logic” being thrown about. It’s. Not. True.

    http://www.americanprogressaction.org/issues/labor/news/2011/06/07/9747/an-increased-minimum-wage-is-good-policy-even-during-hard-times/

    http://www.cepr.net/documents/publications/min-wage-2011-03.pdf

    http://davidcard.berkeley.edu/papers/njmin-aer.pdf

    Even if it hadn’t been proven incorrect several times over, the logic itself is horribly flawed. You talk of unemployment “especially for teenagers”, bellying the ideology beneath all this ‘conservative’ nonsense that it is only high school kids who earn minimum wage. Large corporate employers, which tend to pay minimum wage, rely increasingly on independent adults, not kids off for the summers. It’s easy to pretend from the privileged position of a university undergraduate economics class that minimum wage earners are simply transitory; that such jobs are merely steps onwards towards greater careers. That simply is not the fact for the majority of low income people. We do not live in a socially mobile culture.

    Switzerland has a minimum wage dramatically higher than the U.S or Canada. What’s their employment rate? 3.4%. http://www.tradingeconomics.com/switzerland/unemployment-rate

    You’re pulling this **** out of your ***.

    • It’s interesting which articles and papers you linked to; most of them are consistent with what I’ve argued.

      In the first link, the writer cites the Dube paper which I linked to in my own entry. I don’t know if you’ve read the paper, but the article misrepresents it. Here’s a quote from the paper’s conclusion: “The national level estimates suggest a labor demand elasticity close to -1. This implies that an increase in the minimum wage has a very small impact on the total income earned by affected workers. In other words, these estimates suggest that the policy is not useful for raising the earnings of low-wage workers, as the disemployment effect annuls the wage effect for those who are still working.” So they concluded that there is a small disemployment effect which is actually large enough in their analysis to “annul the wage effect.” I don’t see this as contradicting my argument, which is that the minimum wage has a modest, negative effect on employment. The other Dube study the article cited said this, “Dynamic evidence further shows the nature of bias in traditional estimates, and it also rules out all but very small negative long-run effects.” Even this study suggests the reality of small, negative effects on employment. Neither study brings itself to suggest a positive effect on employment.

      The other study the article brought up was the Card-Krueger study, famous for its uniqueness. This is perfectly fine to bring up. It’s one of the very few studies I’m aware of that suggests that the minimum wage increases employment. The drawback of it is that it’s very limited in scope, being a survey of fast-food restaurants in two states over a short time period. It’s one study, with only a few other studies showing similar results, but it’s worth taking into account.

      Your second link is to another good paper. From its conclusion: “Overall, the evidence is consistent with the view that minimum wages set at “modest changes in the minimum wage have little systematic effect on employment””. This is not inconsistent with my argument, that the minimum wage has a modest, negative effect on employment.

      Your third link is to the Card-Krueger paper I already addressed. As for the fourth link, I couldn’t comment on Switzerland’s unemployment rate without at least attempting to control for factors other than the minimum wage.

      Like I’ve said to a few other commenters–there do exist studies that give support to the minimum wage. Of the few you’ve brought up, there’s one that suggests a a positive effect on employment (the Card-Krueger one). The whole point of the Neumark-Wascher book is to avoid the selective representation of studies by doing a meta-analysis of the data. The overwhelming conclusion of the data is that the minimum wage has a small, negative effect on employment. At best, it’s a poor anti-poverty tool, being ineffective at raising wages and employment. At the worst, it’s a very poor one, actually harming workers. The most interesting conclusion of Neumark and Wascher was the longitudinal data, suggesting that the minimum wage actually depresses lifetime earnings.

  3. It’s also worth noting that when the minimum wage goes higher, so does the cost of living. So it doesn’t end up helping the poor, and it negatively affects the monetary worth of the skills of people who work for more than minimum wage.

  4. First of all, workers are not thinking about themselves as if they are the boss. They just want to be paid a liveable wage. It really is a Catch-22. When the minimum wage goes up so does the cost of living…thus ensuring that the poor stay poor. But without a Federal Minimum Wage there would be plenty of unscrupulous employers paying people in ‘company cash’ or $2.00/hour despite the increase in the cost of living. There are employers out there now paying 7.25 only because the government makes them even though it is nowhere near a livable wage. If you doubt me just look at how many jobs have been shipped to China over the years. It isn’t taxes that takes the jobs but the fact that in China they can work people to death for 0.35/hour and no one stops them. We have an obligation to protect our workers and make sure everyone who has a job can actually live on the money they make at that job. How to do that? I have no idea…but if we could find a way to control cost and raise wages that might be a start.

  5. Tom do you work? Do you earn the minimum? Do you have to try and feed children with your income? You don’t even realize how “Probably wouldn’t help” sounds to someone in the real do you? Change your perspective and you’ll be a lot wiser.

    • Do some study on Nixon’s wage and price controls. You’ll find they were directly responsible for the double-digit inflation, unemployment and interest rates prevalent under Ford and Carter. There was a similar pattern during the Great Depression, when Roosevelt’s policy resulted in higher wages and forced higher prices, resulting in 25% unemployment and people literally staving to death. Two good books on that subject are Amity Schales “The Forgotten Man” and Burton Folsom’s “New Deal or Raw Deal.” Both include extensive footnotes for the information they used.

      • You really ought to analyze economics logically and not emotionally. I’m sure the author understands that it is hard to work at the minimum. As he said, it becomes harder to get an entry level job (much less keep it) after minimum wage is increased. It is the principle of the thing that you need to understand, More money does not necessarily mean more spending power. Think about it. The people working for 3 bucks in the 80’s had the same if not more buying power than those who are working for 7 now. If minimum wage was gotten rid of, while we might be sacrificing “more” money, we would see an increase in buying power because the market would adjust. The factories could sell goods cheaper because they are not having to pay workers huge amounts of money. It is greedy to want more money. It is wise to want more buying power.
        Another reason why we should get rid of minimum wage is because it would increase entry-level employment. Here is an example to consider. Have you ever seen a depiction of a gas station in the 40’s and 50’s? Do you notice how many workers come out and wash your windows, check your oil, and fill up your tank without you having to get out of the car? Do you know where those fellows went? They dissapeared once minimum wage was enacted. The owner of the gas station did not find it worth it to pay his servicemen the new minimum wage so he fired them. 20 guys now without jobs. Multiply that by how many gas stations there are across the country. Yeah. This also goes to show that minimum wage ruins service and creativity in the employer. “If I have to pay 3 dollars an hour for someone to fill up your tank, you can fill up your own tank. Thus, welcome to now. No employment, self-service, and rising prices of everything.

  6. The scope of the issue goes far beyond minimum wage. My jaw dropped when discovering that my son’s girlfriend (living in Washington state) is not paid overtime after 8 hours. Being canadian, I was astounded. For her, overtime only kicks in after 40 hours a week. Yikes. No wonder low income earners are losing their minds, while big business laughs all the way to the bank.

  7. I found your article very interesting. I live in Italy, a country where unions and regulations are much much stronger than those of US or Switzerland.
    Our minum wages are regulated by nationwide contracts and are usually quite high.
    Employees can’t be fired easily, and thus the labor market suffers from extreme rigidity and that leads to a high (official) unemployement rate.
    That would easily lead to your argument.
    However, there a few issues that puzzle me.
    Italian unemployment has always been higher of the US one, but incredibly quite stable. That means a reasonable long term planning capability. Therefore individuals would live better, but national productivity tends to be very low. That’s not the way to make our country compete in the global market.
    From another standpoint, I think that although probably raising minimum wages is not THE solution, the argument used by President Obama is quite reasonable: how it is possible that in the wealthiest country in the world, there are millions of people working full time and not able to make it?
    Even families with two people working full time might have problems with rent, health costs, etc

  8. I think you nailed it in your last statement that even though you like the current POTUS, you understand he is weak in economics. But that is what you get when a community organizer/Ivy League Law Professor takes the Oval Office. A lot of big ideas and idealism but no real world understanding of how to turn the economic cog. If you think about it, his only exposure to workplace economics are from establishments that don’t produce money, but receives money and most of that money pipes in from some form of government venue (community organizer – charity from the wealthy, gov grants, and social programs and Ivy League Professor – where the wealthy attend mixed in with the bright that are assisted by more grants and loans – even research is funded by charity and grants – no one is producing a product with instant profit return. Those students will produce something, but it more than likely will not yield back to the school). I think most of the politicians are like this, look at DC, it has one of the top largest economies and fine wine sales in the US, however they don’t produce squat, they have their own personal pension and health plans and they can’t and won’t even do he job they are elected to do. San Francisco was built on the Gold Rush, Michigan was built on car manufacturing, NY was built on Industry, middle America was built on harvesting crops. DC is built on OUR tax paying money- a blank checkbook to them. Minimum wage increase is just a joke, there is no way someone can live outside of poverty ANYWHERE in the US making $9 an hour let alone with two kids. I am not an economist, you are not an economist and 99 percent of the US are not economist and we all can connect the dots… why can’t Washington? That answer lies in the fact that most in DC are not held accountable to doing their job that they are paid for, they have lost sight of money, money that is not theirs to be idealistic with yet WE keep electing them into office, the ones who actually know what is in our bank account on any given day. Why do we keep doing that and allowing for the same outcomes? That is the true question.

  9. Pingback: The Minimum Wage Probably Doesn’t Help « In my own words…

  10. “Here’s the intuition behind it. Imagine the President had proposed raising the minimum wage to $40/hour. You, like just about everyone, would quickly write the idea off as ridiculous. And it would be. Obviously, the costs of employing people would rise so much that employers couldn’t afford it. They’d have to lay people off, starting with the least valuable employees–in other words, the ones whose labor isn’t worth more than $40 to the company. But while not as drastic, minimum wages at any level work on the same principle. If the minimum wage were raised to $9/hour, then workers whose value to the company was less than $9/hour would over time lose their jobs, and companies would hire fewer low-skilled workers.”

    $9 relative to what? If we want to talk about value we cannot talk about singular things/wages/etc. in a vacuum. In short, businesses have experienced a decline in their ECI for wages and salaries:

    http://research.stlouisfed.org/fred2/graph/fredgraph.png?&id=ECIWAG&scale=Left&range=Max&cosd=2001-01-01&coed=2012-10-01&line_color=%230000ff&link_values=false&line_style=Solid&mark_type=NONE&mw=4&lw=1&ost=-99999&oet=99999&mma=0&fml=a&fq=Quarterly&fam=avg&fgst=lin&transformation=chg&vintage_date=2013-02-22&revision_date=2013-02-22

    Which of course comports with the decline in the M/W and the stagnation of wages overall.

    There is also an assumption made by those proposing that M/W increase will increase U/E: that the M/W proposed is above competitive wages. Of course, to determine the CW, we look at the rest of the industry, and there are two problems off the bat. First, for most labor, there is an incentive for companies to have a race to the bottom with wages so that when negotiating with a potential employee, they can look to the rest of the industry and say, ‘see, no one else is getting paid what you are asking, so you will have to take less.’

    And then that leads into the next problem: an assumption that there is asymmetric bargaining power between labor and the firm. What do most people do (particularly in a down economy) when they are offered a job, but at wages below what they believe they are worth? Hold out and negotiate? How well will that work. In other words, for the majority of jobs, firms can offer wages with a ‘take it or leave it’ proposition, which is not conducive to negotiation. Or do people take the job at the lower wage? And in that case, what happens with the “competitive wage”? It gets reduced, so we don’t really have a competitive age, we have a form of a monopsony labor market. Of course, there are far more than one buyer, but, we have a similar characteristic; the firm dictates to labor the terms of employment.

    So, yes, under particular circumstances, an increase in M/W can increase U/E, but it could also have no net effect. Look at this way; this ridiculous proposition being thrown out by opponents of the M/W increase are arguing “if 9 dollars, why 90, why not 900, why not 9000,” and in Keith Hennessey fashion go on to argue that the absurdity of the latter (90 or 900 or 9000) proves the absurdity of the former (9). In which case, one can make the same argument re: the Laffer Curve. Proponents tax cuts often cite the LC as support for their assertion that tax cuts will not increase disposable income, but it will increase tax revenues (which is true, there is an optimal tax level to maximize revenues while minimizing negative economic harm). Okay, so if the initial tax cut is similar to the initial $9 proposal, then saying that we could maximize tax revenues by pushing tax rates to 1% is the same thing as suggesting we make the M/W 9000/hr. Well, if, regarding M/W, the former is ridiculous, and therefore the latter is too, the same logic can be applied to the LC, where we negate the whole argument based on carrying it to an absurd measure.

    I

  11. Reblogged this on thewordpressghost and commented:
    Friends,

    Here is a well-researched blog on why raising the minimum wage is not a good thing.

    Ironically, this young man was quickly attacked by those who want to use nonsense to attack common sense. And he continued to be reasonable in his response.

    I think it was well written.

    Do you?

    Ghost.

  12. You know, as someone who worked a fair number of minimum wage jobs back when I was a kid, I can’t help but point out that — minimum wage is NEVER where you are stuck if you work hard, are a good employee and make some smart choices.

    I have a couple of good friends who are business people. One tells me that he hires every new worker at minimum wage as a matter of course. It’s a one-month introductory rate. If you’re a good worker, you get bumped a dollar an hour at the end of the one month. He’s got two workers who have been with him for a long time who consistently take home more pay than he does. They’re good workers; they worth what he pays. To keep them, he pays them what they’re worth. Mediocre workers, however, don’t move up in pay scale because they don’t help his company make more money and they’re not worth more than what he pays them currently. If the minimum wage jumps 24%, they won’t be worth it and he’ll have to let them go. He’ll work more hours himself or he’ll hire his teenager who will work for whatever payment his dad says he’s worth.

    That’s the reality of most small business people, btw. They aren’t getting rich and a lot of them take home less money than their more valuable employees who always make more than the minimum wage.

  13. You did a great job of explaining the dilemma President Obama has gotten himself into. He may be a good speaker and very persuasive, but he as you have eluded to in your commentary a lousy economist!

  14. Pingback: The Minimum Wage Probably Doesn’t Help | The Great Tribulation is Coming

  15. To the author, I respectfully disagree with you on this. Here’s my take on this: as a member of the society of the working poor, we need this raise because the state of the living wages is high in this country; everything is HIGH from grocery to the basic needs of life.

    In order to catch up economically, we have to raise the “working man’s wage”. My wife and I have to sometime if we does literary choose between food or rent. I make okay money but it doesn’t equal my pay to the cost of living.

    I believe it will work and it is very much needed for the average “working man”. Unless you are rich, this will mean NOTHING to you! The rich will not miss it at all one RED CENT!

    So there, what say you?

  16. Pingback: US Income Inequality: Taxes Aren’t the Problem | Virtuous Society

  17. First and foremost this is a way POTUS wants to stimulate the economy he dare not ask for a stimulus package so this is a better avenue to pursue Its been more than10 years since the last increase, I think its about time

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