Debating The Minimum Wage

Feb 13 2013 @ 11:40am

A reader quotes me from last night:

Does [Obama] believe that raising the minimum wage would have no impact on jobs growth? Does he believe it would actually increase employment and growth?

Here are three sources – 1, 2, 3 (pdf) -showing that changes in the minimum wage have little effect on employment, and the little effect they do have is actually a decrease in unemployment. While it seems like increasing labor costs would initiate layoffs, what actually happens is more money is available to spend, pay down debt, buy houses, etc., boosting the economy and overall demand a little. Small growth impacts then follow.

So yeah, I think President Obama probably does believe it will actually increase employment and growth. It may not be spectacular, but it gets more money in the hands of the working poor, and that’s a good thing.

Another agrees:

As far as the reason behind why raising the minimum wage could be beneficial: an employee rarely gets paid an amount equal to their production, period. And it basically never happens at the lowest rungs of employment. They get paid for the going price of their labor. Any sanely run company will – or should – hire based on the marginal value of that new employee. If that employee will produce more than he or she will earn, then hire up. The general difference between this added value and the labor market’s price for an employee largely contributes to profits. Those profits are then funneled to shareholders, and the amount that companies keep is invested or hoarded.

Workers earning minimum wage tend to face the fiercest competition for their jobs simply due to the vast number of people capable of fulfilling those positions, and I would argue that that competition drives the price of their labor well below their actual productive output, which is likely far higher than $9 an hour. So what a minimum wage increase would be is, essentially, decreased profits in the short term to lenders taxed at 15%. But longer term, think about it: lifting people out of poverty isn’t just feel-goodery, it will decrease the burden on the welfare state and reduce the deficit.

Additionally, individuals with lower incomes are significantly more likely to spend that newly additional income, either to pay for things they need (like food and shelter) or on things they desire as they begin to become more middle class (cars, TVs, etc). This sort of spending is the lifeblood of the economy. People can giddily invest in start-ups all they want, but it will all amount to wasted potential if less and less people can actually procure their goods and services. Think of it as a permanent stimulus with absolutely minimal government interference/pork and in order to be eligible you have to work.

One practical example: One of the few industrialized countries that is doing fairly well, Australia, has an unemployment rate of 5.4%. Their current minimum wage is about $13.50 in USD (about $16 Australian dollars). Granted, they only have about 22 million citizens, but a comparison to Australia – as opposed to European nanny-states – is probably a more likely model for what an America with higher minimum wage would look like.

Another points to further evidence along these lines:

The main point to realize is that jobs aren’t like tomatoes, where if the price goes up, people purchase less of them.  In fact, studies have found that increasing minimum wage at fast-food restaurants, for example, ends up increasing job stability, which in turn is good for the employer (it costs a lot of money to train newbies) and ends up saving them money.  In the meantime, of course, the working poor, because they have so many needs, spend their new-found money faster than any other group, which in turn, boosts overall consumer spending.

“Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania” (pdf) is a landmark study published in 1994 by David Card and Alan Krueger in the American Economic Review examining employment at fast-food restaurants on both sides of the New Jersey-Pennsylvania border after New Jersey raised its minimum wage to $5.05 an hour while Pennsylvania’s minimum wage held constant. The authors conducted a phone survey of over 400 fast-food restaurants and found no evidence that the increase in the minimum wage in New Jersey led to job loss­. In fact they found that employment increased in fast-food restaurants in New Jersey. For this and related research, Card was awarded the John Bates Clark medal, ­the so-called “junior Nobel prize,” granted by the American Economics Association every two years to the best economist under forty.

See also this post, which updates that study.  Money quote:

Dube’s findings indicate that a higher minimumwage helps service retailers attract and retain employees, increasing their productivity. He said that a restaurateur, for example, is likely to reduce his employees when the wage goes up if only one restaurant raises their wage, but if most of them raise it, the added cost is passed on to the consumer who is likely to absorb it without decreasing their demand.