Some of the academic discourse in The Redistribution Recession: How Labor Market Distortions Contracted the Economy
Traditional labor and macroeconomic theory predicts that marginal labor income tax rates and binding minimum wages distort the labor market and thereby reduce aggregate labor usage, reduce aggregate consumer spending and investment, and, in the short term, increase wages, labor productivity, and the usage of factors that can take the place of labor hours. As a result of greater labor productivity, part of the population—those (if any) not subject to the marginal tax rates or minimum wages—actually works more, even while aggregate work hours are less.
To understand why labor demand might be wage-inelastic, notice that prices are one of the ways in which employers might signal to their customers that the labor market has changed employment costs, and thereby create an elastic labor demand curve. For example, an increase in the minimum wage rate makes labor more expensive, in response to which the employers of minimum wage labor might raise their prices. Customers react to a price increase by purchasing less and, with fewer customers to serve the employers can cut back on their labor. This “pass-through” process, as industrial organization economists call it, links the amount of labor hired to the wage rate through a wage elastic labor demand curve like the one used throughout this book.
The Federal Minimum Wage Hikes Likely Reduced National Employment by Hundreds of Thousands, Especially Among the Young and Unskilled
Using the estimates surveyed in Neumark and Wascher (2008) and information about the amount and character of the July 2009 federal minimum wage hike, Neumark (2009) estimated that the July 2009 hike would reduce national employment among teens and young adults by three hundred thousand. Given that about half of all persons earning at or below the minimum wage in 2008 were under twenty-five and the other half over that age (U.S. Bureau of Labor Statistics 2009a), Neumark’s teen and youth estimate suggests that the nationwide employment effect (all ages) of the July 2009 minimum wage hike might be a reduction of about six hundred thousand,
My 2011 paper (Mulligan 2011c) estimated a monthly time series model of national part-time and full-time employment per capita for each of twelve demographic groups distinguished according to race, gender, and age, relative to prime-aged white males, whose employment rates were assumed to be unaffected by the July 2009 minimum wage hike. I used the model to estimate the amount and composition of employment losses due to the hike for the average month between August 2009 and December 2010, and found that lower-skill groups had the greater employment losses. The net nationwide employment loss estimate was 829,000, which includes employment gains among more skilled people
Among persons aged sixteen and over who were neither elderly nor household head or spouse, employment per capita fell from 58.0 percnt in 2007 to 52.3 percent in 2009. If instead their employment rate had continued to be 58.0 percent, about three million more of them would have been working. Thus, the minimum wage hikes since July 2007 might explain about roughly one-third to one-half of the employment decline among persons aged sixteen and over who were neither elderly nor household head or spouse.
Mulligan was talking about the comparatively small rises in minimum wage that occurred between 2007 and 2012. Much larger ones are scheduled, depending on the state and, more recently, on public pressure on companies such as Walmart and McDonald’s. I’m wondering if we can apply our experience as consumers to predicting what will happen.
Costco is known for paying higher wages than Target and Walmart. However, even a casual visitor to the stores in question can notice that the work being done per employee per hour is not the same. The Costco workers know what they are doing, move quickly around the store, and help move an astonishing amount of merchandise per worker. Target and Walmart? Well, let’s just say that the speed at which workers move is highly variable. Could it be the case that with higher minimum wages every retail store will turn into a Costco with a handful of reasonably well paid highly energetic workers? If Target cashiers scanned goods at the same rate as Costco cashiers Target could get by with perhaps 2/3rds as many cashiers.
The McDonald’s that is on my way to Hanscom Field used to have two workers running the drive-thru. One would take the cash and one would hand out the food. Since the Massachusetts minimum wage was pushed to $9 per hour (beginning of 2015) they’ve cut back to just one worker handling both tasks. Presumably they could increase throughput if necessary with a touch-screen ordering system and self-service credit card reader at the order entry position (maybe even simpler with the phone-based payment systems that are catching on).
It seems as though there is general political agreement in the U.S. that the lowest quality workers should be winnowed out of the workforce and the labor force participation rate should be kept on the low side. Nobody wants to see someone get off the couch and go to work all day for less than maybe $12 per hour. A natural question is “What should investors do about this trend?” Building low-income housing where the rent will be mostly paid by the government is already highly profitable. Perhaps invest in the relative handful of companies that are sufficiently close to government officials to be approved for this activity? Invest in Obamaphone providers? (how many are publicly traded?) People have been predicting doom and gloom for the cable TV providers but if there are a few million more customers who have been winnowed out of the workforce, isn’t that a solid source of revenue for them? An American who doesn’t work gets a lot more value out of a cable TV subscription than someone who is at work all day. Go long Comcast?
We will also need a word to describe what happens when a business goes from a large group of low-paid workers to a small group of gung-ho moderately paid workers. My vote: “The business has been Costcoed”.
I just got back from a trip to Germany. What I was surprised at was how few staff the shops have on hand and how highly skilled they were. For example I was at a local bakery / cafe. They had two people on staff (during breakfast time). One person was dedicated to grabbing baked goods and cashing people out. The other person was sandwiches for the lunch rush and helping the other person when it got busy. What was surprising was that she was just making sandwiches. She did not have an extensive instruction list that she was working off of. She was grabbing ingredients out of the fridge bread out of bins and assembling the sandwiches according to some system that was not written down. There was no manager hovering over her and checking her yield rate. She was also efficient. She wasn’t checking her phone, she wasn’t gabbing with the customers or with the other girl on duty. She was doing her job professionally and quickly. It was nice to watch compared to the average teenager working at McDonalds who when the manager isn’t looking is texting in their phone or gabbing with their co-workers.
I’m told that the Germany workers are paid well compared to their American counterparts and that is why they are more professional.
There is one downside though. In the US we are used to mass customization. If we were to walk into a cafe such as described above in the US you would expect to be able to order a custom sandwich made on the spot for you. They don’t do that in Germany. They have 4-5 sandwich types, pre-made and you get one of those or you don’t get one. I guess the high wages prevents the cafe from having enough staff on had to deal with the lunch rush and make custom sandwiches.
In Pennsylvania and surrounding states, we have convenience stores called Wawa – they are sort of like 7-Elevens if 7-Elevens were clean and pleasant and upscale instead of disgusting. They feature deli counters where you can order sandwiches with a high degree of customization – choice of meat, choice of bread and size, choice of condiments and garnishes, drinks, chips, etc. This is all done thru a touch screen self ordering system by the customer. The customers love it and Wawa has no need for human order takers (which probably account for close to half the labor cost in a McDonalds). For McDonalds with its simplified menu, it would be even easier to implement self-ordering and the technology already exists and is waiting to be rolled out immediately.
It also would be a small step for them to add a payment terminal to the ordering kiosk. At present, a human still presents you with the sandwich in exchange for your paid receipt but I could easily see a system where scanning your receipt or phone would cause your order to exit a chute. Nor would it be beyond current capabilities for many of the assembly steps in a McDonalds to be done by a robot. As you raise the cost of human labor, automation becomes more and more feasible and the customers will probably like it better – more sanitary, fewer mistakes, no one sneezing on your food. You could still keep a human or two around to address problems.
“If Target cashiers scanned goods at the same rate as Costco cashiers Target could get by with perhaps 2/3rds as many cashiers.”
You should see how fast Aldi cashiers work. It’s breathtaking.
As an european travelling in the US, I’m always amazed by how numerous inefficient americans workers are. Lots og security, lots of slow people. It’s not quite India, but you’re halfway between India and Norther Europe when it comes to inefficiency in low wage jobs.
Raising the minimum wage will probably mean more efficient businesses and workers. I don’t think it’ll change the overall unemployment figures much.
A little more reading:
http://www.cjr.org/the_audit/the_minimum_wage_and_the_danis.php
http://www.politifact.com/punditfact/statements/2014/sep/03/other-98/can-you-make-45000year-mcdonalds-denmark/
Regarding inefficient US workers, paying people more does not magically make them into more productive workers. Employers in the US have to fight using the army that they have, not the one that they would like to have. If they have to pay more, chances are they will use the opportunity to either upgrade with better quality workers that are attracted by the higher pay, or use more automation and fewer workers or decrease customer service levels (or some combination of these). The thing that they will NOT do, despite all the magical thinking attached to minimum wage, is pay a low productivity workforce high productivity wages.
BTW, despite Costco’s high quality workforce, you will notice that sales help out on the floor of the warehouse is basically non-existent. Nor do they label their aisles or provide a guide to where things are. This is all intentional – they want you to wander up and down the aisles and make impulse purchases while you are looking for what you really came for.
It appears that a much higher minimum wage in Seattle has not yet impacted the restaurant industry:
http://www.ritholtz.com/blog/2015/04/jobless-in-seattle-not-yet-anyway/
The link above does not prove much of anything. It just shows that the number of new permits for restaurant openings has not declined in Seattle. This does not prove that the law has not had any impact. The test of government regulation should not be “if a law does not totally bankrupt a business and cause it to close its doors, then we consider that it has “no impact” and consider it to be a good law.” If you cut someone’s throat and they bleed to within an inch of their life but they don’t actually die, we still consider this to be a crime.
However, this does seem to be the general attitude of unions – their goal with the automakers, airlines, etc. was always to bleed such organizations of all profits to the maximum extent possible without bankrupting them. Sometimes (many times actually) they guessed wrong and DID actually put their employers into bankruptcy. Oops.