Tuesday, December 3, 2013

A Few Points on the Minimum Wage

The NYtimes has a couple of articles advocating a hike in the minimum wage (here and here), as do many other news outlets. Scott Winship offers an excellent piece that takes a look at the actual facts in the minimum wage debate. Here's a few thoughts:

1.) First, in my post about the economics of the 1950s and 1960s, I made a point about the minimum wage being around $22 today had it kept up with productivity since the 1960s. This is technically true, but it is an entirely useless piece of data. In fact, to compare the relative minimum wage over time, we should look at the "real" minimum wage that is simply adjusted for changes in cost of living. Winship points out that the historical peak in the minimum wage (1968) would only be $8.32 today using a "chained" price index. That means that, contrary to what I said previously, President Obama's proposal would indeed raise the minimum wage above its historical peak. Even if we use a different measure of inflation, the minimum wage was still under $10 in real terms in 1968.

2.) Only 3% of the workforce is paid the minimum wage today compared to 8% in 1979. Likewise, this 3% has benefited from a greatly expanded EITC. This 3% has also benefited from cheaper goods (Wal Mart). The point is that low wage workers today are probably better off than the low wage workers of 30 or 40 years ago.

3.) The standard economic argument against the minimum wage is that it increases low skill unemployment and raises prices. The standard response to this argument is that the literature finds this effect to be very small if even existent. That is to say, advocates of the minimum wage frequently argue that the costs of the minimum wage are very limited. The fact that only 3% of the work force is paid minimum wage also suggests that the benefits of the minimum wage are quite limited. After all, at most, only 3% of the workforce are paid more because of the minimum wage. When doing a cost/benefit analysis of the minimum wage, we need to weigh the benefits of 3% of the population getting slightly higher wages compared to slightly higher prices for all and a small group that will not find employment because of the minimum wage.

4.) Winship does a good job of summarizing the empirical literature. However, given simple economic logic, even economists that are strong supporters of a higher minimum wage will usually admit the obvious truth that there is at least some cost in terms of employment that comes with a higher minimum wage. The only people who deny even a small impact on employment are advocates and non economists who are typically not very familiar with the empirical literature or economics in general.

5.) Despite claims to the contrary, the empirical literature suggests, with very little ambiguity, that there is at least some negative effect on employment stemming from a higher minimum wage (look here). The size of the effect is, however, much less clear.

6.) For whatever it's worth, Scott also points out that 70% of the workforce today reside in states that have higher minimum wages than the national $7.25. That means that, effectively, the minimum wage is higher than $7.25 for about 70% of the workforce. This was true of virtually nobody prior to 1980.

7.) It's often pointed out that the minimum wage disemployment effects should be low because, unlike manufacturing jobs, minimum wages jobs are usually in the service sector and cannot be outsourced. This line of thought seems to ignore the fact that, also unlike manufacturing, jobs in the service sector can be easily eliminated in favor of "self service". Gas stations, for example, no longer hire people to fill up tanks. Instead, they just have people fill up their own tanks. It's not unthinkable that the minimum wage had at least something to do with this shift. Service sector employment is not necessarily less sensitive to minimum wage hikes. More on this here.

8.) It is often argued that raising the minimum wage would reduce public spending on anti poverty programs by increasing the wages of low income workers to high enough levels to reduce their eligibility for such programs. Of course, this argument entirely ignores the disemployment effects of the minimum wage. If raising the minimum wage decreases employment, that means more people in need of more public assistance. As stated above, the literature is pretty clear about the fact that there are at least some negative employment effects stemming from the minimum wage. The effect on public finances depends on the size of this effect. All things considered, it seems quite unlikely that a higher minimum wage will actually reduce anti poverty spending.

9.) A significant portion of those earning minimum wage (37%) are teenagers living with their parents (look here). That's not exactly the portrait of minimum wage workers that the media often presents.

10.) It's fairly clear that raising the minimum wage increases prices at least somewhat (look here for some evidence on this). However, just like the employment effects, the size of this effect is much less clear.

When all is taken into consideration, my view is that the costs of raising the minimum wage far outweigh the benefits which is why I oppose such an increase. However, other views are welcome as always. Given the ambiguity in the literature, diverging views can exist even among those very knowledgable about the issue.

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