Two Economists Discuss a Minimum Wage Increase
Pollin ordered a burrito. Then he launched the opening volley. “We should have a minimum wage that enables everybody including all the people at the Pizza Hut and Taco Bell to lead a minimually decent life,” he said. “And in order to do that you can’t just rely on the market alone.”
Neumark said he agreed with Pollin on one count. “I don’t like the idea that people who work live below poverty conditions, or even somewhat above poverty conditions,” he replied. But, he added, “I think the question is: does a minimum wage actually help?”
Over at Marketplace, two economists discuss the pros and cons of raising the minimum wage, which is making news again after Congressional Democrats introduced a bill which would raise the federal minimum wage from $7.25 an hour to $9.80 an hour over two years. One argues that a higher minimum wage would lead businesses like fast food restaurants to eliminate jobs and raise their menu prices. The other argues that businesses would see more productivity because people who are decently paid stay in their jobs, which means a better relationship with managers and less of a need to train new people, who are less efficient or knowledgable as veteran staff members. The one thing they both agree on: a higher minimum wage won’t fix poverty—for that we need to fix unemployment because higher wages mean nothing if you don’t have a job.
Photo: Eric Marcus
The thing about economists and the minimum wage is, that the normal story you hear is that a higher minimum wage depresses employment and a better solution for alleviating poverty is major wealth transfers from rich to poor. And it’s like, cool, let’s do it! Let’s get a bunch of economists to sign an open letter to Congress calling for new legislation that transfers big chunks of money from rich people to poor people!
But it never seems to happen. There’s even less political will for that, than there is for a minimum wage increase. As such, a minimum wage increase looks like an OK second-best option for increasing the well-being of poor workers. Plus, empirical studies show that the negative impacts of minimum wage increases are fairly small.
@Sean Lai If you accept economists’ premise, that a higher minimum wage depresses employment, then it’s not a second-best option: It’s actually a net negative for the poor.
The research is pretty unclear as to whether they’re right or not but that’s how they see it, and my understanding is that the research suggests that both the advantages and disadvantages of raising the minimum wage are overrated.
It is a shame though that people are so opposed to the massive transfers of wealth idea.
Man, we are waaaay ahead of you on raising the minimum wage, at least here in Ontario. It’s at over $10/hour now.
I can’t see any reason in the world why the minimum wage should be BELOW the poverty line. That’s madness. Also, the poverty line should be considerably higher — at least $22,000 for a single worker with no children (it’s currently $11,170).
Personally I think both poverty lines and minimum wages should be calibrated to prevailing average rents — preferably at the state level and with supplemental increases in large cities. Not only would this realistically account for cost of living, it would also provide a great encouragement for affordable housing.
@stuffisthings Well, for one, setting the minimum wage above the poverty line might make more people poor by increasing unemployment. If setting the minimum wage to some arbitrary income level just magically elevated wealth, why wouldn’t we set it to $100/hour?
@deepomega Well my main counter-argument would be what Sean Lai says above. Ideally we’d have no minimum wage and some kind of reverse income tax to bring the unemployed and the poorest workers up to some socially acceptable minimum standard. Until that happens, making our existing safety net programs more accessible (by increasing the poverty line) and raising the minimum wage are likely to have significant positive effects. Especially at the present moment, when most employers are not doing a lot of hiring anyway, and are earning large profits and/or sitting on big piles of cash.
Let’s think about the likely positive and negative effects on Yum! Brands if the minimum wage were increased:
Immediate effects:
- More spending on employee compensation resulting in:
- Lower profits
- Spending less on stock buybacks or paying out dividends (which -came out to $1,401 per worker for Yum! Brands in FY2011)
- Drawing down $988m in cash reserves
In the medium term:
- Slower pace of hiring (I think layoffs are pretty unlikely, but they might close some unprofitable stores)
- More investment in capital goods/automation (though they are already automating out everything they possibly can)
- More investment in employee training
The question is: does the reduction in hiring offset the benefits to low-wage workers? If labor markets worked the way economics 101 textbooks say they do, then we shouldn’t still be arguing about the evidence for/against minimum wage effects on employment. They should be large and clear cut. They aren’t.
@stuffisthings Actually I think the standard story in the literature (maybe not in textbooks) is that labor markets are highly rigid and so the effects of an increase in the minimum wage should be an immediate windfall for minimum wage workers followed by a long slow substitution away from low-wage workers (read: low-skill workers become unemployable), as the market slowly moves toward a new equilibrium. One positive result (well, from a slave-driver’s perspective at least) will be that low-skill workers become motivated to increase their marginal product up to the level of the new minimum wage. This stuff is hard to study since it’s not clear what the time course of events is supposed to be, and there’s such a heterogeneous mix of predicted effects.
Note: I’m not exactly sure what my perspective is, just relaying the perspective of economists as I understand it.
I don’t have much to add to this discussion, other than point out that when I was working a minimum wage fast food job, the owners had their own island on a lake. Not just a cabin. An island. And they begrudged every cent the government raised the minimum wage, and (spitefully) raised prices a dime every time it went up.
I really loved this story when I heard it on the radio because it demonstrates that economists are not of a single mind on anything: they’re a diverse bunch with wide ranging hypotheses which they test empirically.
And I frequently think of the Billfold when I’m listening to Marketplace. Similar styles, I think, though slightly different focus.
One thing we can all agree on: having a Taco Bell and a Pizza Hut under the same roof helps no one.
In practice, I don’t think people ever spend more on labor than they have to — so companies are already automating everything they can, forcing each individual employee to work as hard as possible, and hiring as little as possible. I doubt that a raise in the minimum wage would actually cause a significant change in the number of minimum wage employees any given business employs, because that’s already at or near the minimum amount.
In terms of wealth transfers, what if those transfers were in the form of stocks? And what if the transfers went to the government, which then progressively distributed the dividends? I think that’s similar what Kuwait does with its oil profits — it’s not a totally hammer and sickle idea.