TCS Daily


A Minimum of Understanding

By James D. Miller - January 10, 2007 12:00 AM

Democrats want to raise the federal minimum wage from $5.15 to $7.25 an hour. But raising the minimum wage will harm unskilled workers. If the price of gas went up by 40%, people would buy less gas. Similarly, if the wages businesses must pay low skilled workers increased by the proposed 40%, then companies will buy (i.e. hire) fewer workers. Other commentators have already explained how the minimum wage destroys jobs. This article argues that even if raising the minimum wage caused a firm to hire exactly the same number of workers as before, the higher minimum wage could still harm the company's employees.

Fewer Advancement Opportunities

Let's say an unskilled worker, whom I'll call John, is worth $7.25 an hour to an employer. John went to a horrible school that didn't teach him any marketable skills. John, however, is ambitious and hopes to advance in the job market by getting on-the-job training from an employer.

Two firms want to hire John. The first offers him a job that pays $7.25 an hour but provides no useful training. The second pays $5.25 an hour, but offers training and could someday lead to a management position. This training is costly for the firm to provide, but the firm is willing to give John the training since it is paying him only $5.25 an hour.

A $7.25 an hour minimum wage could, however, stop the second employer from giving John his costly on-the-job training. If the business couldn't pay a lower salary in return for providing training, then the firm most likely wouldn't give John the training.

Perhaps, one might argue, the second firm would still provide the on-the-job training to make John a more valuable employee to them. But there is no reason to assume that John would stay at his job after he has received his training. And even if he did stay John would likely demand a higher wage from his employer.

Many firms offer lower wages in return for providing increased training and advancement opportunities. A minimum wage would restrict firms' abilities to offer lower salaries and so would reduce the benefit to firms of providing such benefits to their low skilled workers.

Worse Working Conditions

I predict that if the higher minimum wage is enacted bosses will yell more at their low skilled workers. By forcing companies to pay higher wages to low skilled employees, a higher minimum wage reduces the net value of these workers to their companies.

A higher minimum wage also reduces the total number of jobs available to unskilled workers. Consequently, raising the minimum wage makes it easier for bosses to replace any unskilled workers who quit. Under a higher minimum wage, therefore, bosses lose less if their mistreatment of employees causes some workers to leave. So unskilled workers who keep their jobs after a minimum wage hike can expect their bosses to treat them a bit worse than before.

Hire Different Types of Employees

Imagine that for some strange reason the government (A) forced Smith College to pay economists $1 million a year and (B) forbade Smith College from reducing the number of economists it employs. Well, for $1 million a year Smith College, my employer, could do a lot better than to have me as one of its economists. Under this $1 million a year minimum wage for economists, therefore, Smith would quite rationally do everything it could to fire me.

For any given wage it offers, a firm tries to hire the best workers it can. At a wage of $7.25 an hour firms will be able to attract higher quality workers than they can if they offer only $5.15 an hour. Consequently, even if the minimum wage doesn't cause a company to hire fewer workers, it will cause the firm to hire different types of workers.

Perhaps today some firm could hire either an inner-city teenager or a middle-class grandmother. The firm might prefer to hire the grandmother but, let's say, the grandmother won't work for less than $7 an hour whereas the inner-city teen would accept a wage of $5.15 an hour, so the firm hires the teen. If the minimum wage is raised to $7.25 an hour, however, the firm would quickly replace the teen with the grandmother. So even in the extremely unlikely case that a higher minimum wage doesn't reduce overall employment, it will likely reduce employment among our nation's lowest skilled individuals.

James D. Miller writes "The Game Theorist" column for TCS and is the author of Game Theory at Work He keeps a blog here.


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101 Comments

understandood for years already
The point that having minimum wages hurts the poorest people has been understood for years already, but liberals never give up on this stupid idea. One of the reasons is that the leftists who advocate it are not affected by it. They already get more than the minimum wage beacause most are already in a distorted economy; some a professors, some beaurocrats, etc. people feeding at the public trough. They are more concerned with control of people rather than their welfare, and always want to advocate force to make people do what they otherwise wouldn't. They think the use of violence against one group of society is better than more freedom within all groups. How morally corrupt is that?

Distortion of Wage Base and Skill Base
I have written many times on this site about the distortion of the wage base and how the minimum wage in essence reduces the purchasing power (or reference level) of the low wage worker to the same constant. In effect $7.50 becomes $5.15. However, many disagree trying to state the arguments in increased purchasing power. Yet not one counter argument can tell me why if not $7.50 then $20.00 or $30.00? Why the line? I am told $30.00 would be inflationary but $7.50 is majically not (without a good explaination). Now I see this similar argument about the distortion of the skills market as well. It is a interesting point and one well taken. Employers in all cases want performance for the money. To take the lowest skilled, essentially entry level employees, and continually push them into higher wage catagories to which they must compete with more skilled employees will result in the employer hiring the higher skill level employee (more bang for the buck). I predict this will be especially evident during a recession in which the job market declines and the pool of available workers swells. The minimum wage represents typical leftist thinking that the market can be tinkered with and adjusted to bring some perceived level if equity despite all evidence to the contrary. The market can be a cruel master but a wonderful servant.

One minor issue.
Why doesn't any one ever mention the fact that hardly ANYbody makes minimum age.

This is the stupidest none-issue in the press today. If I controled the ru[ublican party I would jsut use it as a bargining chip to get something else in return. In the end, it will not effect the whole economy at all.

Not to mention most states have a minimum wage higher then the fedural requirement as well.

Can we talk about something important now?

experience
In my experience, your average liberal only cares about intentions, not results.

The liberal knows that his intenctions are good. Supporting a higher minimum wage lets the liberal feel good about himself. Whether or not a higher minimum wage actually helps those targeted, is of no consequence.

two points
1) For every person making minimum wage, there are at least 2 or 3 that would work, but can't, because of the minimum wage. Every person put out of work by the minimum wage becomes a permanent member of the welfare class, costing the rest of us big bucks over his/her lifetime.

2) If we give in easily, the liberals will just come back for more next year. You can't negotiate with terrorists.

High School drop outs
Another issue that is rarely raised is that a higher minimum wage makes work look that much more attractive to high school students. The higher the minimum wage, the more students drop out of school to take advantage of it.

Liberals
Don't confuse liberals with any facts, compassion mandates feel good policies regardless of outcome.

2 more points.
1. There is no study that backs up what you are saying. If you can show me one that has actually evidence I will say I am sorry.

2. I am one of those Liberals. :-)

Hah
There is no study that backs up what you are saying. If you can show me one that has actually evidence I will say I am sorry.

Yes there is-unfortunately, liberals are by definition economic illiterates, except when they are dishonest prostitutes like Krugman or limosine liberals making sure they use economic disorder to keep power like Rubin.

2. I am one of those Liberals. :-)

No kidding.

Our owners don't want apprentice training programs
Our owners don't want apprentice programs because apprentice programs are run by labor unions and apprentices join the unions. Our owners want the young people to obtain work skills at community colleges because college graduates think they are to smart and to qualified to stoop to joining a labor union.

In this century, only teachers and other govt employees are smart enough to organize.

Flamer
Flame on.

Undocumented Economy
The biggest effect of this is to drive more segments of the low wage economy underground.

Most babysitting, yard work, house work, home repair, light retail (yard sales, flea markets, even small shops) are undocumented. I predict that this trend will increase. Changes in sales tax, minimum wage, reporting requirements, and greater local, state, and federal taxes will encourage it.

Imagine a 3-5 person landscaping company. Do you hire someone at 7.15 per hour and then pay FICA, offer insurance, various benefits and such or do you work as much as you want and turn the rest of the business away? Your personal salary, as a business owner, can be less than the minimum wage, does not require insurance, and has surprisingly little reporting requirements. So you take the best paying work, use only your partners, and leave the rest on the table.

Forget the fact that there are many people who would take the work at $5.15... or less. Or do you use undocumented illegal day workers for $20/day and keep making money.

every study ever done shows that minimum wage increases unemployment
most especially amongst those with the least skills.

you have that backwards
only people too dumb, or too lazy, to take care of themselves join unions.

The burden of proof is on you.
Name the study and real life evidence. Don't just make a statement. Sounds like you are just continuing retoric.

We are talking about jobs being eliminated because of the minimum wage being increased.

You are being decived.

Excellent points
The same thing will happen if the tax cuts go away. The people who can and do work harder to make more money will sit back and coast, to avoid falling into a higher tax bracket. These are generally the same people that help fuel economic growth and job creation.
When you add the higher minum wage to lower job creation, you have the late 70's when Jimmy Carter and the Democrats led the nation to double digit inflation and stagnant job growth.

The Biggest Effect Of Raising The Minimum Wage
Is essentially a regressive tax system imposed primarily by the private sector because of what amounts to yet another unfunded Federal mandate.

Assuming that employers will be paying these higher wages is a macroeconomic fallacy of the most egregious sort, roughly equivalent to the one which assumes that employers pay half of every employees' FICA contributions (discussion of this assertion is left as an exercise for the class).

The consumers of the goods and services provided by these employers will pay the higher wages in the form of higher prices on the open market -- in other words inflation. This isn't a big deal to the guy who's planning on buying a Cadillac Escalade -- the workers who put those things together already make a good deal more than minimum wage.

But everyone buys essential consumer commodities like toothpaste, toilet paper, staple foodstuffs and so forth. When the prices for those items rise, as they inevitably must, everyone pays a little bit more for them. Unfortunately, that "little bit more" is a good deal more in terms of net disposable income to those at the lowest end of the wage scale.

"But 'Berg," you say, "they're getting paid more precisely because of the increased minimum wage." True, but since almost noone buys such commodities direct from the producer and transports them home themselves, several intermediary transactions must take place for those items to travel from producer to consumer. Every step of the way, a higher-paid but not necessarily more efficient or skilled workforce is adding labor costs to those same commodities. The net result is that if the minimum-wage earner is actually as well off as he or she was prior to the so-called increase in his or her paycheck, he or she has been very lucky indeed.

The solution to this problem on a microeconomic scale is really quite simple, however unpalatable to statist policymakers and politicians: Encourage those currently making minimum wage to complete their educations, better learn how to do their jobs, remain employed with one employer long enough to climb the wage-scale ladder, and certainly most significantly (at least statistically), not to have babies without two parents available to the family. It doesn't have the "I did something good for the Pore N' Starvin" cache that almost always makes such policymakers feel better about themselves, regardless of what actually results.

And it's not the easy-way-out option of using others' wallets to buy personal political capital.

'Berg

Error
Shoe fits, wear it.

Here's some more economists weighing in on how bad the minimum wage law is
http://article.nationalreview.com/?q=YjJhNWZiZmQ2NzM3NzM2MDZmNTNkMDM3ZGEzY2JjNDQ=

you are the one who wants to steal other people's money
The burden of proof is on you to show that it will actually help, and not hurt.

There have been dozen's of studies over the years, everyone has reached the same conclusion.

I doubt you have been decieved, you are just lying.

Wrong again guys
The land of Oz has a min wage thats nearly three times your's yet we still have very low unemployment. So much so that we are importing workers like never before.

Author get's it wrong on the 2nd Sentence and goes down hill from there.
Some markets don't work like the standard model. Petrol prices is one of them and so is employment. When the price of oil double over the last few years we didn't see much of a drop in demand. Min Wage jobs tend to be in areas that people tend not to cut down either. Hell mabye it's different in the US, but here is Oz the min wages positions are in the service sector like cleaning. The fact is we need those services no matter what the cost of supply.

'dozens of studies?" Quote one
And not a theoretical study saying it should. a real world study shoinwg it does.

Same old same old
Chicago school theory, no real-world research, random statistics quoted without proof of cause & effect.

all markets work like standard models
They have different time frames, but they all work the same.

When the price of petrol rises, people use less of it. That's been proven time and time again. It's going on right now. Some of the change is immediate, as people drive less. Some of it takes longer as people buy more energy efficient appliances and more efficient cars.

Are you honestly saying that people will hire the same number of maids regardless of whether they earn $5/hr or $50/hr?

THere are an infinite number of ways to reduce labor, and the more labor costs, the easier it is to find ways to get rid of it.

I am sorry I should be clear.
Both sides of the argument are wrong.

It doesn't hurt and it doesn't help.

Its ahhhh Just plain dumb.

No not on me.
I am not a flamer.

I am a troll...

:-D

This is almost entirely politics and pandering...
It seems, but I have no studies to support this, that the people most interested in increasing the minimum wage don't actually operate any businesses (themselves) with direct labor workers. I say this because everything I see indicates that they base their arguments on intuitive reasoning rather than experience regarding the way the business world actually works. Therefore, let me make a couple of comments.

Neither $5.15 nor $7.25 constitutes a living wage in America and your worker is living a marginal existance, thereby. If you value such a worker then you will pay him enough to satisfy his basic needs.

If an employer is in an industry where the minimum wage is a significant issue regarding profitability then he probably already needs to consider hiring undocumented workers (or other people who don't file income taxes) as an option to stay competitive. Of course, the cash flow advantages of an under-the-table payroll are greater than this $2.10 bump anyway. Lots of the players who might be effected are already off the books.

An increase in the minimum wage for workers in businesses where this $2.10 will not make much difference to either the profitability of the entity or the viability of the worker himself will, by definition, not matter much.

Home Depot casual workers (probably undocumented and always Spanish speaking) earn $12 per hour in California plus some kind of "rounded up to an increment of $20 bills" bonus.

If wage rates really matter and there is significant direct labor involved (in a labor intense manufacturing operation) then that work is going offshore, sometime soon.

Undocumented workers in certain industries (roofing contractors) are off the books to avoid Workers Compensation Insurance. In other cases (meat packing) the undocumented workers are far and away the best operators available at any price. Minimum wage has zero impact in both such cases.

Politicians especially enjoy looking great and getting lots of favorable press for accomplishing terrific victories after a desperate struggle against the mindless forces of a savage opposition party...when the issue is purely emotional and has virtually no impact on anything substantial. This is one of those.

The Democrats just "came to power" and they need to deliver victory! The Republicans just "lost their butts" and they need to suffer some sort of immediate, crushing defeat. Otherwise the sham of American democracy starts fading toward transparency.

This minimum wage issue is just perfect. Very emotional. Politically solid. Liberals versus Conservatives. It makes perfect sense. Everyone feels like it came out correctly and that we got something that we voted for! And nothing very bad can happen because nothing very much will change.

If we are going to have a minimum wage ...
If we are going to have a minimum wage, then we should have multiple minimum wages.
1. A low one for high school drop outs.
2. A higher one for current high school students and high school graduates.
Then there will be no incentive for students to drop out nor a penalty for ambitious current students working to make themselves better.

Yes, I realize very few people would be hired at the drop out rate, but isn't that what we want?

Actually, raising the minimum wage affects relatively few people who aren't living in their parent's home, so this who political topic is just window dressing.

Some numbers
I rarely argue my case - that of limiting the GOV-AGs (Government Agents) to ONLY punishing the Wrong doers and to NOTHING else - using numbers, as Right(s) are not a matter of numbers.

No matter how many numbers (of people) say it is Right, it is Wrong for the GOV-AGs to force me (and that is exactly what it is) to pay more than I am willing to. And I have no illusions that I will be paying the new rate (when the law is passed) only because they (the GOV-AGs) hold the Guns.

Just as private person(s) have no Right to use force to gain a value from me that I am not willing to give voluntarily, the GOV-AGs have no Right to do the same.

People do not acquire new Rights by calling themselves GOV-AGs or supporting GOV-AGs. They may get away with it and most often DO. But, they are not Right. Right(s) are not a matter of fait accompli.

Still, here are some numbers.

In 2005, 479,000 people worked at $5.15 per hour, the current minimum wage.

http://biz.yahoo.com/ap/070110/minimum_wage.html?.v=13

That means, they earned $10,300 per year (40 Hrs/week, 50 weeks per year), costing businesses $4.9337 Billions.

If the wage is now increased to $7.25 per hour (a 41% increase), then, for the same amount ($4.9337 Billions), only 340,255 can be recruited, a drop of nearly 29%.

If the same number is recruited, then businesses will spend $6.9455 billions, an increase of nearly 41% (same as the wage increase).

Why do GOV-AGs (and those who support them) think that businesses won't reduce recruitment in response to raising costs? And even assuming that they don't, where will the extra money come from?

And another thing - - - -
The economic case against the minimum wage, or any other government price control, is logical and conclusive. Even the New York Times, in the days before it descended into a political propaganda sheet, held that there should be no minimum wage.

Some think the economic effect is so small that even tho it does some harm, the damage is so small it doesn't matter. This is an argument for putting just a little horse manure in the stew, because no one will notice.

Leftys and liberals who think that the least productive among us just do "deserve" to be given money, should give them their own money, or lacking that, other taxpayers' money. Why would you choose to punish and fine the very folks who are already helping the poor and unskilled by providing them with honest jobs and working experience?

not good eg
Australia is not a good example because it's such a small country, and one with a economy that has been doing well lately. But as a point of interest, how much do the guys that pack your grocer bags at the supermarket get? Is it really 3X, so about $15 or $20? Does a baby-sitter and the guy who cuts your grass also get that much there? Still, you said there was a low unemployment rate. But if there were no minimum wage, there would be Zero rate.

Minimum Wage
If the minimum wage stupidity now reigns, don't just blame the Democrats, as you actually are doing, Mr. Miller! You indeed prove that Conservatives are plain weaklings, for sure. The educator for all socialistic fever in America, is none other than the unconstitutional socialistic public schooling system. Neither side of the isle can claim purity in matters of understanding pure free market enterprise. Indeed America is in love with Socialism, with the growing National Debt to prove it. American so called capitalism, cannot generate enough to keep America going in its inlove with socialism, hence deeper and deeper in debt to keep the ever more monster Federal Government in business, and most certainly even also unconstitutionally. Here wise words from George Washington: "No pecuniary consideration is more urgent, than the regular redemption and discharge of the public debt: on none can delay be more injurious, or an economy of time more valuable". By the way, this American Heroe of all times would be shocked out of his boots if he could see America, with Socialism chocking her to death!

Grandmother Effect
The Grandmother Effect is real. You can easily see it if you just pay attention over time. The young are supposed to be the future, but they carry a lot of baggage. You have to train them on the basics of working and holding a job. They've got social lives, which they often put ahead of their jobs. You never can be sure if they are going to come in someday with a really repulsive new tattoo or piercing. So, breaking the shifts into small part-time positions and hiring old folks who need a little more cash for the casino makes sense.

But you know what makes even more sense? Robots! It's happening already. Have you ever used a self-check out? With a few tries, it's way faster than most shop clerks. If you do your own bagging, you don't have to worry them putting the cold cuts in with the raw meat - that drives me nuts. The McDonald's counter position is already half robotized. They used to actually have to fill the soda cups by eye, not anymore. Look past the drive-thru at that nifty conveyer set-up. It's only a few steps away from a fully automated drink delivery system. They just need to find a way to automatically set up the different cup sizes.

Taco Bell ran some experimental self ordering kiosks at one point. It wasn't a great experience, but as the cost of labor grows and technology gets better, it gets more attractive. If you put a couple of psychologists on the job, you could have a kiosk super-sizing orders in no time.

I remember some of my first work experiences fondly. There were ups and downs, but I was glad to have a chance to get some experience. It's a lot harder for kids these days to get those jobs. If you do land one, you find it's much more specialized than work used to be. Today's young employees learn a lot less because the tasks are so focused now to what the robots can't yet do. Add to that the huge supply of aging boomers who didn't all invest very well, and you've got a lot of reasons not the hire the young. I suppose they can always fall back on robbing the old folks on payday, at least until retail is 100% robotic.

Ironically, it's the old folks who are still singing, "The young man ain't got nothin’ in the world these days."

Meanwhile, back in the real world...
LIBERTY LAKE, Wash., Jan. 9 — Just eight miles separate this town on the Washington side of the state border from Post Falls on the Idaho side. But the towns are nearly $3 an hour apart in the required minimum wage. Washington pays the highest in the nation, just under $8 an hour, and Idaho has among the lowest, matching 21 states that have not raised the hourly wage beyond the federal minimum of $5.15.

Liberty Lake and Post Falls are divided by more than the state line.
Nearly a decade ago, when voters in Washington approved a measure that would give the state’s lowest-paid workers a raise nearly every year, many business leaders predicted that small towns on this side of the state line would suffer.

But instead of shriveling up, small-business owners in Washington say they have prospered far beyond their expectations. In fact, as a significant increase in the national minimum wage heads toward law, businesses here at the dividing line between two economies — a real-life laboratory for the debate — have found that raising prices to compensate for higher wages does not necessarily lead to losses in jobs and profits.

http://www.nytimes.com/2007/01/11/us/11minimum.html

Actually
Although the mw is one of those looney left ideas that carries so much visceral appeal among the uneducated, unenlightened and brainwashed, so its exempted from the normal legislative process.

In a NORMAL legislative process-any bill would be reviewed by appropriate committees who would obtain testimony and other evidence about the efficacy of a proposal, including its negative effects and unintendeed consequences. Then it would be debated and voted upon.

So in a rational world, not the absolute boobocracy that is Washington and various state capitals-The burden of proof would on the economic illiterates that think wage increases can be mandated by fiat without creating income and substitution effects.

But then again, its not what you do, its how you FEEL.






Neutral Effects -Merits Rational Inaction
If I stipulate that is true (its not) or that the effects are minimal (depends on what you consider immaterial)- then why bother wasting legislative effort on it, when we have numerous matters that are of consequence.

Schoolin' Good and None - Throwing Bricks from the Outside
Hey ERIC, where'd you get your econ degree that you see fit to dismiss what has been a most fertile ground for Nobel Laureates as same old.

Delusion leftist neophilia is the only reason to dismiss something because its "old".



New York Times
Same old same old, and definitely not the real world-not that marxist narcosis would allow Eric to recognize terra firma anyway...

yup
Just so.

Though becuse it is a none issue, the Republicans could give in and get some political capital. They are missing an opportunity.

Well said.
This is a feel good thing for the Dems. Has nothing to do with anything, interms of REAL econimic improvment.

nobody in your country makes less than $30K?
I find that very hard to believe.

reality check
If eric and the nyt thinks that the only thing that differs between the two towns is the mw, then he, and they are more delusional than previously advertised.

You see an error in the story, point out the error
But just saying "New York Times" and refusing to engage on the facts indicates a mind totally paralyzed with fear of learning something that contradicts their ideology.

Non-contribution unreality indication
If you know about these towns and have facts that were ignored or misrepresented, please bring forward your evidence. But you never have any evidence about anything, do you??

Just bringing up other views
Hey STUPIDTWEETER: Lots of eminent economists disagree with the conclusions presented, and they are citing actual studies of the real world, rather than doing theoretical fingerwagging. But the real world seems to be really threatening to you.

Well then, Lemming Try Answering The question
Actually HAVING an econ degree, I know the field is fool of whores charlatans and wannabees.


That still doesn't ANSWER THE QUESTION.

Where did YOU get the credentials that allow YOU to summarily dismiss the best minds in the business such as
the late great Milton Friedman, Gary Becker, Greg Mankiw, Donald J. Boudreaux, Richard McKenzie..

Before you start this "real world" crap, keep in mind to most people its not a show on MTV. Move out of mom's basement already, she has enough misery thinking that she walked through the valley of death to give you life.





Seems they already caved
..

Hmmm
So the dems will vigorously pursue ineffective public policy soley based upon its provision of emotion to the ignorant?

Real World
Since I provide financial advice to clients (for a fee they willingly pay) and my state is raising the minimum wage (in excess of the amount feds have in mind)..

Here’s just a few ways I’ve thought of dealing with the higher mw.

Longer probationary periods, more background checks, more and better experience.
Reduced overtime
Reduced “fringe benefits”, higher co pays, long waiting periods.
Reduced educational benefits
Reduced operating hours

I’m making money IN THE REAL WORLD finding ways to more value and less risk for people so it matches their increased costs

Hey what the heck! Thanks Eric, I should be grateful I’ll file a bigger quarterly now. Too bad for the young, inexperienced an the like, but I feel great about my increased billings and new Hi-Def TV.

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