A Minimal Minimum-Wage Hike, Ctd

Dec 17 2013 @ 7:32am

Several readers are piling on this one:

Not that I ever had second thoughts about resubscribing to the Dish next month, but if there was ever a question, your first reader’s response reconfirmed why your endeavor is important not only for journalism, but also just for human decency – because you treat your interns like humans, and not simply economic units. I was particularly dismayed when the guy wrote:

I personally know at least a dozen seniors in high school and freshmen in college who would jump at the opportunity to work with me for nothing, let alone $3 per hour or $5 per hour. All of the ancillary skills and benefits would far outweigh any wage they may earn. Yet, the minimum wage laws prevent this from happening.

The only thing preventing this clown from hiring these students and paying them a livable wage is his own greed. Maybe there is room for a student minimum wage that’s lower, to allow for greater experience-gaining. But the sad reality of today’s economy is that there are also many people who are working in these low-wage jobs as a daily reality of their lives.


One of the striking features of this businessman’s argument is his lack of economic perspective. From his view as an owner, any dollars spent on labor are simply flushed down a gigantic economic toilet. Yet, while economists argue about whether the minimum wage increases or decreases overall levels of employment, there is near-universal agreement that raising the minimum wage increases the size of the whole economic pie (i.e., the overall GDP). His analysis shows a lack of awareness that the increased wages to workers are either invested or spent on taxes, goods, and services – which ultimately allows other companies to hire workers. He seems totally unaware that creating a regulatory environment that promotes hiring people into jobs that are so unproductive that they cannot produce $8 per hour in economic value is not a path to national prosperity. He sees the economy through some narcissistic lens of “receivables good, payables bad,” without realizing that everyone’s accounts receivables are someone else’s accounts payables and vice versa. The economy is not a business.

Meanwhile, the businessman takes issue with his earlier critics:

Your readers continue to show tremendous economic illiteracy. Let’s examine the first response you posted:

[I]f he could pay two teens $5/hour or three teens $3/hour, why can’t he afford to pay one teen $7.50/hour – or even the $15/hour implied by three teens at $5/hour? Since he won’t suffer with three, two, one or no hires, as he says, the minimum wage should make no difference. So why the discrepancy? Well, that would probably be because he’s completely full of crap.

This is a simple problem that my 10-year-old can solve. I’ll kindly illustrate:

Three teens – Bob, Steve, and Mike – are looking for work. They have few-to-no skills but are desperate to learn. Each can add additional profit to the bottom line of my business. Bob’s skills can generate additional profit of $2 per hour. Steve’s skills can generate additional profit of $5 per hour. Mike’s skills can generate additional profit of $7 per hour. At what wage would I, as an economically literate business owner, hire each of them individually?

If you’re the above Dish reader, you’d say $7.50 or even $15 per hour. And you’d be quickly out of business.

The correct answer is that I’d hire Bob for any wage under $2, Steve for any wage under $5, and Mike for any wage under $7. If there were no minimum wage law, I as a successful business owner would gladly hire all three at these wages. All three would be employed and begin to learn some valuable skills. But there is a minimum wage law. And the law says I must pay a minimum wage of $7.25. At $7.25 per hour, it is no longer profitable to hire Bob, Steve or Mike.

Instead, I hire Mary. Mary is a skilled assistant with years of experience in the financial services industry. She knows the business and can add value on day one. She can add incremental profit to my business of $20 per hour and will accept a wage of $15 per hour. The $15 per hour she demands is above the minimum wage, so it is legal for me to hire her. In addition, it is below the $20 additional profit she will bring to my firm, so hiring her is also profitable.

Only a total idiot would hire any of the teens at $15 per hour. And to answer your reader: no, I am not completely full of crap. I simply understand Economics 101.

As for your second reader: he is simply trying to kiss up to Andrew by trying to add to the “epistemic closure” files. What could one man know compared to professional economists with centuries of combined training who have spent decades studying this question? I’ll gladly answer. This one man knows and understands business. He is simply proving false the argument that the minimum wage does not kill jobs.

The above example is a real-world example that exists in my business today, although I’ve simplified the numbers. And that is the real-world effect of minimum wage. It protects the skilled worker at the expense of unskilled workers.

As surely as the sun rises, so does the minimum wage kill jobs. That is why the teen unemployment rate is so high. That is why unskilled minorities have such a high unemployment rate. That is why jobs are shipped overseas. I don’t care how many decades and how many centuries of experience professional economists have. They are simply playing upon the economic illiteracy of the majority of the population.

Another reader:

Your very successful financial advisor may need to go back to school. The US Dept. of Labor carves out teen workers from the usual requirements for the minimum wage:

A minimum wage of not less than $4.25 may be paid to employees under the age of 20 for their first 90 consecutive calendar days of employment with any employer as long as their work does not displace other workers. After 90 consecutive days of employment, or when the worker reaches age 20 (whichever comes first), the worker must receive at least the federal minimum wage.

In addition to being a very successful cheapskate, he/she hasn’t bothered to spend 30 seconds investigating the minimum wage laws.

Another looks abroad for more perspective on the issue:

Perhaps the financial planner who won’t hire teenagers at a higher minimum wage, and those who endorse an increase in the minimum wage, could be satisfied by a system like Australia’s. That country’s minimum wage for those over 21 is $16.37 AUD per hour, but it drops by a percentage year by year for people younger than 21 until those under 16 receive 36.8 percent of the minimum wage for adults. Here’s a chart showing the breakdown:

Screen Shot 2013-12-16 at 4.52.16 PM

Another asks:

My challenge to the minimum-wage boosters is: what is the optimum minimum wage level? Why not raise it to $20/hour? Or $50/hour?

Let’s understand the historical basis for minimum-wage laws. They were meant to protect unionized labor from competition. Unions want to suppress wage competition from the underemployed, who would gladly bid wages lower in competition to win employment. No sane economist denies this or that minimum wage laws decrease the quantity of labor-hours paid for by employers, ceteris paribus. The rational arguments in favor of the minimum wage are based on static, wealth-redistribution analysis that show that the share of total income earned by the lowest quartile of wage earners will increase. In other words, the gains in earnings by those that keep their jobs exceeds the losses in earnings by those who lose their jobs.

So the optimum minimum wage according to a rational minimum-wage supporter would be one that redistributes the most to the lowest cohort of the income scale. However, from a dynamic perspective, the effect on long-term economic growth by minimum wages could actually harm the long-term well-being of these workers if job creation is stifled, as it surely will be.