Economists say that minimum wage laws are bad. They prevent young people from getting job experience. A minimum wage may prevent the job market from clearing in that a low-skilled worker might not be able to find a willing employer. Minimum wages help older workers and union workers by preventing new entrants to the workforce from undercutting them, but weaken the overall economy. Despite the fact that classical economics is against the idea of a minimum wage, the federal government has one and many states have their own minimum wages that are higher than the federal government’s nationwide minimum wage (chart).
It isn’t obvious why individual states have minimum wage laws. This posting explores the idea that a state might be better off with a moderately high minimum wage.
Consider a typical state with a mostly unionized workforce. By contract the state must pay $200,000 per year (including health care and pension obligation) to the average schoolteacher and $300,000 per year (including health care and pension obligation) to the average police officer. For every 1000 residents, the state must hire a fixed number of teachers and police officers, whose salaries, benefits, and pensions will be paid by taxing those 1000 residents. The richer the residents, the easier it will be to raise sufficient tax revenues to meet the union contract requirements. Poor residents, by contrast, may require the hiring of additional teachers and police officers. The poor are more likely to be involved in crime and their children are more likely to require special education.
Some states have such deluxe ways of running the government that they might need taxpayers who earn a minimum of $25 or $30 per hour in order to come out ahead. Why not establish a minimum wage, therefore, of $20 per hour? Anyone whose skills aren’t valuable enough to justify at least that level of wage will be forced to migrate to another state. Industries that can’t pay at least $20/hour will be forced to move as well and good riddance to them. Why have workers at $20/hour when the state needs workers at $25 or $30/hour to meet its past and future pension obligations? The state might want to encourage some younger workers to remain in the state to build skills and eventually command a $25-30/hour wage. Perhaps the minimum wage law could be tailored to worker age, so that it was legal for a 25-year-old to earn $20/hour but if he or she had not advanced to $30/hour by age 40, he or she would be forced to emigrate.
Why aren’t we seeing states with budget difficulties raising minimum wages?
Raising the minimum wage would also increase the general cost of living. Groceries stores would have to employ $20/h cashiers, and therefor raise the price of groceries.
Earning $30/h is nice. But if you have to pay $25 for a coffee at Starbucks, you would probably consider living elsewhere. I think that’s what happen in NYC: lots of folks work in New York but live outside the state, where life is cheaper.
Henry: Higher priced groceries would be good for the state, which can now collect more in sales tax. Expensive cashiers would induce supermarkets to invest in capital equipment such as self-checkout systems. Those can be taxed upon installation and taxed every year as property.
The NYC situation you describe is ideal for New York State and NYC. Joe New Jersey works in New York and pays confiscatory New York and NYC income taxes. Joe’s employer pays massive property taxes on the office space. Our Manhattan worker pays savage sales taxes on meals and sundries purchased during the working day. Nearly everything that Joe does that costs a government money is imposed on New Jersey, however, where he lives. If Joe has kids, the taxpayers of New Jersey pay the $200,000+/year for each teacher required. If Joe has a dispute with his wife, it is a New Jersey police officer who comes to the door.
At the state level, I doubt it would work. There is a heck of a lot of state-switching going on already to get better tax deals, isn’t there?
Make it federal and it might just work.
Australian minimum wage is almost twice of what it is in most US states. Most taxes are higher too, yet we have half the unemployment. I guess the higher paid low-end workers buy more stuff, which keeps more people employed?
Bas: “make it federal and it might just work”.. we already have a federal minimum wage. The question is why individual states would have their own. Perhaps you meant maybe the federal minimum wage should be $20 and we should try to force our least capable citizens to emigrate all the way out of the U.S.
I found http://www.abc.net.au/news/stories/2010/06/03/2917094.htm and 15 AUD/hour is indeed pretty high (USD$13.75) compared to U.S. minimum wages. However, Australia has exceptions for disabled workers, young workers, and trainee/apprentice workers. The U.S. does not have such broad exceptions. In Australia, according to http://www.fwa.gov.au/alldocuments/PR072010.htm , it would be legal to pay a worker as little as 10 percent of the minimum wage if that worker is young, disabled, or needs training.
Finally, don’t forget that Australia is a resource-rich country that is very lightly populated, more like Norway than the U.S. We have decided to increase our population to 310 million, mostly through immigration, which means that we can no longer depend on extracting Nature’s bounty (or the bounty we stole from the American Indians, depending on how you look at it). Something that works in Norway (only 0.08 km^2/person but gushers of oil everywhere) or Australia (0.35 km^2/person) would not necessarily work in the U.S. (0.03 km^2/person), whose land area per person is closer to China’s (0.007 km^2/person).
That is correct, but how long could a supermarket chain claim that they cashier is training? While there are some longer apprenticeships situation, there are very few people on those lower wages. And the alternative to those apprenticeships is to go to college, pay tuition and not make any money at all.
Furthermore, instead of not hiring disabled people at all because they would be too unproductive to pay the full minimum wage, they are now working for some of their own money, not requiring full benefits from the government (my taxes) and have something useful/meaningful to do with their lives, which can only be good for their mental health. Which is good for the country overall.
The Netherlands only has 0.0025 km^2 per person, population growth fuelled mostly by immigration, no resources to speak of and doesn’t have the problems the US seems to be having.
To me, it seems the US government and Wall Street are too inept or unwilling to use the advantages given to them by the economies of scale inherent in the US to provide quality of life for everyone.
In fact, there used to be a good quality of life for just about everyone until Reagan started to lower the top marginal tax rate to an unsustainably low level while at the same time taking away the reasons the rich owners of companies had been paying decent wages and benefits to their employees.
Paying the most unproductive citizens $15/hour might actually make them more productive. Why would you bust your guts working for $7/hour knowing that at the end of it you will still have to go through the indignity of paying for your groceries with food stamps?
I don’t understand why you (and most of your fellow countrymen) are so convinced that “what works elsewhere won’t work in the US”. I say: what works elsewhere will work even better in the US due to economies of scale. Norway and Australia may make a lot of money from the resources they export but the US is still an enormous exporter of high-value goods made with the oil and steel that only *seems* to stay at home.
Bas: Most of the people working for minimum wage in the U.S. are suburban teenagers, according to this study. They don’t pay for their groceries with food stamps; they take them out of their parents’ refrigerators.
Your assertion that paying Americans more will make them more productive has been tested, I think. The U.S. greatly increased the compensation of its existing public employees, notably schoolteachers, of its CEOs, and of its Wall Street executives. Academic outcomes seem not to have improved (i.e., U.S. high school graduates can be as dumb as bricks), the S&P 500 has returned nothing to investors, and Wall Street executives wiped out their shareholders (absent a bailout by the U.S. taxpayer).
U.S. exports are somehow comparable to Norway’s oil wealth? It is true that Intel exports some processors, but dividing that by 310 million leaves a lot less per capita than Norway’s oil exports. Norway’s per-capita GDP is nearly $80,000, compared to the U.S.’s $46,000. If every American produced an additional $34,000 of stuff, a lot of things would become affordable for us (though maybe not chasing down biplanes with F-22 fighter jets).
If all the minimum wages were increased, it would just cause inflation, and the real value of the money would go down. Make the minimum wage $100/hour and watch the cost of goods like food go straight up. If the minimum wage is increased the extra money has to come from somewhere, which means the FED has to print money faster, causing inflation.
So School teachers and CEOs are your examples, nothing in between? That’s not a very good argument for “having tried.”
That study only focusses on who earns the minimum wage, completely excluding those that make a single cent more. It speaks of half of older minimum wage earners having a *family* income of 36K. It doesn’t take a degree that is barely more than than twice the minimum wage, i.e.: two minimum wage incomes. Even if one partner is part time, the second one still doesn’t make anywhere near what is considered minimum in most parts of the civilised world.
And the dumbest thing about it is the conclusion of only raising the wage of teenagers. Uhm, an adult earning $11/hour when the minimum wage is $9 will also start earning $15 or more when the minimum wage is raised to that level. (But I do support a “youth” minimum wage that is lower; the number of kids at any given time in the age range of minimum working age and full-minimum wage-age is not significant enough to stop adults being employed.)
Finally, they use the magic number of “poverty line” and show most people living above it. As if 20K for a 4-person family really is going to give them comfortable lives and allow the kids to flourish in society when they grow up.
Did a bunch of “dumb as bricks” high school graduates do that study?
The comparison with Norway is a poor one because that country is a statistical anomaly. Comparing to Australia, which has virtually the same GDP per capita as the US, where people live in the same type of McMansions in sprawling suburbs and drive almost the same gas guzzlers, is a much better one.
There is plenty of wealth in the US; it’s rulers and citizens simply decide not to spread it more equally. Honest pay for an honest day’s work…
Bas: I don’t think that your proposal goes far enough. Aside from unions, public employees, cartel members (e.g., medical doctors), and corporate looters, wages in the U.S. are set by a reasonably free market. If folks don’t like the answer that the market gives them, e.g., that a low-skilled young person is worth only $8/hour for weeding a backyard, a government with police state powers can declare “market failure” and mandate that homeowners pay at least an “honest pay rate” of $20/hour.
The problem with setting the wage above a market-clearing rate is that the homeowners may decide to let the weeds grow and not hire anyone at the $20/hour rate. So the government needs to coerce people into hiring a minimum number of honest day workers at the official honest pay rate.
What would be ideal for spreading wealth and making sure that everyone had a good job at a fair rate would be a central planning agency in Washington, D.C. The agency could employ America’s smartest people to develop five-year plans that would ensure full employment as well as optimum utilization of our industrial facilities.
The “market clearing rate” has come up often in this blog especially in association with the minimum wage. This concept of market clearing rate is certainly seductive but should probably be used carefully, along with its companion idealism the idea that all unemployment is voluntary. Like many classical economic concepts they are somewhat tautological. Presumably employers would be willing to hire the entire market were the price cheap enough (perhaps we’d have to pay them to take certain employees). Certainly the vast majority of potential workers could provide positive utility to their employers and would thus not even need subsidies were they willing to work for free. I would suspect (with no real justification) that more often than not rather than not being able to get jobs due to an artificially high minimum wage they choose the utility of not working (potentially subsidized) against the risk that taking a lower wage job might hurt their long term earning potential.
It would certainly make some of these discussions more fun to at least consider these aspects. For example perhaps you’d win by setting the minimum wage closer to a salary at which most people who “voluntarily” choose unemployment would instead choose to work. What would that point be? It would depend on subsidies given to people who don’t work of course, and possibly on other incentives for working. Of course if this salary turns out to be too high then employers might not hire…but you could I think reasonably argue that a higher minimum wage could lead to more employment and overall economic output. I personally think that the market is probably not so bad at setting minimum wages even without help but then I’ve never carefully considered the issue.
As a moral issue, employers should not be forced by the state to pay employees a certain wage. If there’s no clear, substantive social net benefit to the minimum wage, fine, let’s abolish it.
However, thanks to illegal immigration and the Great Recession, we have a huge surplus of unskilled workers in the economy. So if the minimum wage is abolished, why wouldn’t stories like this multiply, in the race to the bottom:
http://motherjones.com/kevin-drum/2009/09/how-not-deal-recession
“After hearing the news at meetings last month, employees cried and screamed, said Drupattie Jungra, 55, who had worked at the Cambridge Hyatt for more than 21 years and made $15.69 an hour, plus benefits.”
“…The outsourced workers make $8 per hour with no benefits.”
“There is plenty of wealth in the US; it’s rulers and citizens simply decide not to spread it more equally.”
Ah, yes, the old “spread the wealth” idea. Because all that wealth is just layin’ around and it wouldn’t be fair for some people to get it just because, you know, they created it. The people who lay around smoking dope and drinking malt liquor also deserve their share, obviously. I see your point.
http://www.leftycartoons.com/minimum-wage-in-theory-and-practice/
I think we need to take this issue in its constituent parts.
First, is there any evidence, when looking at developed countries outside the United States, that a high or higher minimum wage causes tangibly higher unemployment? (answer: No)
To afford a highly comparable example, let’s take the Canadian Province of Ontario. Right on the U.S. border, and in competition with a U.S. business under a Free Trade Agreement, with a common language, and a currently pretty close to par.
Ontario is not particularly resource rich (no oil or gas to speak of)
Its minimum wage is currently $10.25Cdn, or about $10.00USD
Its unemployment rate is below the U.S. national number and at or below most of the U.S. states which it borders.
Its minimum wage was also increased steadily to that level from approximately 2004. During that time, excluding the most recent global economic turmoil, unemployment held steady or declined.
If one wishes to use an alternate Canadian province or the Australian example or a host of others, the results are almost uniformly the same.
So the minimum wage (and any increase in same within normative levels) does not provoke any increase in unemployment.
****
Now, having said that, of course, if you lifted the wage by100% all at once, or imposed other drastic changes (100% tax hikes or massive regulatory change such as mandating 4 weeks paid vacation all at once up from none or 1) then you would expect an extreme consequence.
That however is a function of the sudden and drastic nature of the change, not necessarily the theoretical policy.
*****
Next what of inflation, we need to dispel this notion that a reasonable (and above minimum wage hike creates large scale inflation).
Let’s review this idea 2 ways.
1) The U.S Federal minimum wage was raised from $5.15 per hour to $7.25 per hour over the 2007-2009 period.
An increase of $2.10 over 3 years or expressed a percent 40.7%. When taken equally over the 3 years, this would be an ‘average’ of 13% per year.
So what was the U.S. rate of inflation during this period? Was it 13%? No! How about 10% ? No! 7% ? No……
In fact the U.S. inflation rate during these years was roughly in line with historical averages 2-3% and there was no appreciable effect on the retail price of goods sold to a typical U.S. consumer.
2) A second way to look at this is to take a model business and look at the impact.
One quick example will be to take mid-range pay employer, it could be a dentist’s office, or a autobody shop or accountancy firm. Where typical wage profiles will be anywhere from $20 – 40 per hour; a minimum wage increase typically will not drive ANY wage increase pressure on this type of business, and will have no consequential effect on its supplier/capital costs either (not too many minimum wage impacts on the cost of high tech dental equipment or office software)
An alternate example will take a typical fast food establishment, probably the peak-impact employer for a minimum wage hike.
So, let’s look at their cost profile:
Non-labour (food stuffs, equipment, taxes, energy, rent/mortgage) equals around 50% of costs.
Labour therefore is the other 50%.
Now, let’s take the typical labour cost on your fast food combo. You pay $6.00, profit margin 15%, so cost-of-goods sold is $5.25 1/2 of which is labour, so $2.62
Current price to you is predicated on a minimum wage of $7.25 per hour.
Let’s increase it to $9.25 per hour.
Assuming no automation or efficiency or change is sales per square foot.
We have a 27.5% increase in the cost of wage labour. However, this is not really true as a portion of labour cost is fixed and non-wage based (sick days, vacation, cost of hire/termination, uniform if applicable, benefits etc.) as these supplementary benefits will be quite low in the fast food setting, let’s only reduce the increase in labour cost to 25%.
However, let’s now apply that as a portion of cost-of-goods sold to the price.
What we get is a 10% increase in the cost-of-goods sold.
In theory, if the fast food business passed on 100% of its cost-increase to the customer, and made no gains in efficiency, then that’s the price increase you would face.
So your $6 combo is now $6.60.
Except, studies show this isn’t true.
First, at a higher and less desperate wage rate, employee turnover will decline, reducing training and overtime costs, but also leading to more workers who with experience are faster at their jobs allowing them to get more done within the same time allotment. (compare employee productivity, wages and profits per square food Walmart vs. Costco) this proves out.
At the same time, typical fast food businesses cater to the less well off customer disproportionately. When that customer gets a 27% raise, they can and will spend a large portion of it, some of which feeds back as more business for the establishment in question.
On top of which, efficiencies will be found, see the recent trend towards fast food places having customer fill their own drinks.
End result an increase in the combo of 5% or to about $6.30, only slightly ahead of inflation.
When taken with the small segment of the economy represented by minimum wage or minimum wage sensitive jobs, your aggregate inflationary impact is under 1%
On top of which, the higher level of income generate by the low-wage earners will allow governments to lower taxes (as they collect more from wage growth) , and will reduce the need for and cost of poverty abatement programs.
*****
In the end, a reasonable minimum wage, arrived at a reasonable rate of increase, provides for a more efficient economy, with less gov’t redistribution of wealth and produces no real negative side effect.
Any marginal loss of employment by 17 year olds who don’t need the money, is more than offset by the increase in earnings of 22 year olds who do.