Wednesday, January 20, 2021

Minimum wages. People are not all the same.

The ancient argument over the minimum wage (WSJ) is heating up, another of economics' many perennial answers in search of a question. 

As in the linked article, I think it is a mistake to focus entirely on overall employment of low-skill workers. That is surely an issue. But the wage is one part of a detailed bargain between workers and employers. By putting its thumb on one part of the bargain, the government will ensure that other parts squish out. That's the larger issue. 

Does the job allow flexible hours? Does it provide other benefits -- transportation, employee parking, uniforms? How hard do you have to work? Which workers get the jobs, not how many get jobs overall? 

A near universal fallacy is to treat people in any group as identical, to have one stereotype in mind and apply that to the entire category. Minimum wages advocates often paint a picture of the sole breadwinner of a family valiantly struggling to provide on the low wages. Doesn't she deserve more? Well yes, we all deserve more, but that emotional appeal does not make the minimum wage a good idea. 

Not all minimum wage workers are the same.  Some are young kids who need some slack from employers as they learn about showing up on time, being polite to customers. Some are ex cons, recovering drug addicts, homeless needing a job so they can pay rent, or others with a spotty record, needing an employer who will take a chance on them. Some are recent immigrants, who don't speak English very well or understand American workplace culture. Many have complex family responsibilities, which means they can't take higher paid jobs with more rigid schedules. Some are old people, with health problems, who have social security and medicare but want a little extra cash -- Walmart greeters. A vanishingly small number are the stereotype, sole breadwinner of a family with children who if single has regular child care and can work an 8 hour shift on a regular basis. 

The minimum wage makes it easier for employers to engage in racial, ethnic, gender, age, orientation and other more subtle but legal discrimination. That was, for many years its purpose. Minimum wages were there to stop blacks moving from the south to northern cities compete for jobs held by whites. Even left-wing causes have a sordid racial past. 

Since about forever, young unskilled and poorly socialized people have worked for a while at low or no wages while they pick up skills. Historically it was understood, and part of the employer's obligation to give them skills and training as part of the deal, to "teach them the trade." This still happens. Hang out at any small business, and see a teenager sweeping up and learning a lot about how the world works. For rich white college kids it's called internships. The minimum wage,  restrictions on gig work, and other labor force interventions saying employers must offer either 8 hours full time work with benefits or nothing, cut off this long-standing institution for those on the lower end of the labor market. 

So the main effect of minimum wages is to encourage, nay to force, employers to be more picky about who they hire. It benefits the few who are already good workers and can put up with a harder, less flexible schedule, fewer other benefits, and so forth. It hurts the others, many of whom miss the second chance, the on-ramp to legal work. 

It's not so much about how many jobs there are. It's about who gets them. 

Minimum wages also affect some kinds of employers more than others. McDonalds "jobs" may increase. Why? Because the taco stand down the street, which pays less than McDonalds, goes under, and McDonalds gets more business. Like workers, the rule benefits businesses slightly higher up on the ladder at the expense of those at the bottom. 

Where do these workers and businesses go? How do they live? Many now go to illegal operation and employment, which is unsavory in many ways. Worker protections, access to the legal system to address mistreatment, wages paid in to social security and disability programs, are not advantages to be thrown away lightly. Why was Eric Garner selling illegal cigarettes in the first place, rather than working a legal job? 

The minimum wage is also (perennially) about who pays. Our government has a habit of deciding a group needs favor, and rather than raising taxes and sending them a check, it decrees that someone else must do so. See health care and insurance mess. Here, those running the government decide that people who earn less than $15 (or maybe now $22, or more) per hour should earn more per hour. Well, they could just pass a tax and send the workers a check. (Roughly, the earned income tax credit.)  In fact the minimum wage is entirely the same as payroll tax on low-skill labor plus a transfer to the employee. Even our government understands the disincentive effects of a payroll tax on low-paid workers. 

Why make business pay rather than raise general tax revenue? Well, that would look bad. And there is another fallacy around that "business'' -- especially the kind of small businesses that hire lots of low-skill labor -- have lots of money to hand around. Uh, look out the window at the boarded up restaurants that we are also paying trillions of dollars to try to keep afloat. (Michael Salzman notes this irony.)

So here we are in another puzzle. Our government seems to feel that interest rates are low so borrowed money is free. And its's sending rivers of that money to employers. Why is it so vital to make employers pay added costs and feel the disincentives to hire people?

Well, because it's an answer that has for 100 years been in search of a question, and it's hard to change that answer once you think rationally about questions. 

However to my free market friends, I think we too make too much fuss about the minimum wage. There are hundreds if not thousands of labor market distortions from federal state and local levels. The whole argument about "employee" vs. "contractor" tells you about the thousands of pages of regulation attached to each. Occupational licensing, mandated benefits, comparable worth, hours and terms of service, high payroll and income tax rates, the absurd growth of HR and compliance departments, union-friendly laws, and so forth are in my view bigger labor market distortions than the minimum wage. The minimum wage attracts attention because its so simple once you understand basic econ 101, and because it attracts so much unthinking spend-other-people's-money-to-make-me-fee-good adulation from its attractors, but that does not mean we should elevate it to the top issue in labor economics. 

(Jonathan Meer has done good work on this issue. A nice interview.)


  1. The minimum wage debate is somewhat puzzling. It is often framed around the question "Does a minimum wage reduce employment?" But this is the wrong question.

    I don't think anyone would claim with a straight face that a 1% minimum wage hike would do anything: it's not because we have nicely behaved functions in textbooks that we have to take the continuity of the response as a serious implication.

    Likewise, I would be extremely hesitant to extrapolate results for smaller hikes in particular states, whether significant or not, to a 100% hike nationwide... I can believe your D-in-D estimators as a local approximation, but not enough to generalize its conclusions too far outside the scope of the events found in the samples of those studies. You can find insignificant results because you lack power to detect small effects. Moreover, as professor Cochrane explains, the strategy space of employers and employees is much larger than the real line: other benefits and conditions matter, such that you might simply be missing a displacement of benefits.

    As much as there has been ink spent on this topic, it is also true that the functioning of the labor market is hampered in many more ways.

    Speaking of labor market, I attended a virtual seminar recently where Louis-Pierre Lepage presented his job market paper where he proposes a way to tie persistent statistical discrimination as the rational response of employers to an information problem. It might be of interest to some people, so here's a link. It's the first paper on his page:

    1. I respectfully disagree.

      Let us assume there is a federal minimum wage increase by 1%.
      Which increases minimum wage from 7.25 to 7.32. Let us take the example of a small business which has 10 employees which are paid minimum wage and they work 5 days a week.

      Total Cost Per Hour of the total Workforce Minimum wage workforce.
      Hour Day(8h) WorkWeek(5d) WorkMonth(4w) WorkYear(12M)
      PRI 72.5 580 2900 11600 139200
      PSI 73.2 585.6 2928 11712 40544

      PRI= Pre Increase
      PSI=Post Increase

      Then the cost of this small business increases by 1344 dollars per annum.

      Most businesses will be able to absorb such a cost.

      There is however a but. If the person running the business is a 32 year old with a business management degree, 4 years experience running a business, and 4 years previous work as a general manager. Then if his average total compensation dropped from 52k to 50.666k. Then he could reasonably decide he is better off working as a manager for the nearby company which offers 60k in total compensation rather than continue operating his business.

      Even if it dropped from 62k to 60.666k it would be reasonable to close shop and get the much less stressful white collar job.

      The result, 10 more people are unemployed. Let us assume that the number of small businesses like that are the 0.0001%(in 2019 there are about 30.7 million). That is still a loss of about 30700 jobs, but we are not done.

      In bigger corporations if we take the previous number aka an increase of yearly costs by 1344+ per 10 workers then a company with let’s say 10000 minimum wage employees has a cost increase of 1,344,000 per annum.

      I think the numbers speak by themselves.

  2. Another question - How much are minimum wage jobs simply transient positions? Do we really think there are career minimum wage earners out there? The cashier at McDonalds started there at 16 and is still there at 40? I would presume they eventually matriculate to other positions of higher pay.

    1. Most of the people in the bottom 20 percent rise out of that bracket inside of a decade. Indeed, more of them end up in the top 20 percent inside a decade than remain at the bottom.

      Only 3 percent of the American population remains in the bottom 20 percent for as long as 8 years.

      Dr Thomas Sowell

  3. Thank you for your thorough analysis of the minimum wage.

    Ralph Strong

  4. The minimum wage is around USD 15 in Australia, which is perhaps the country most like the US (maybe even more than Canada is?). There isn't mass unemployment though unemployment is higher in relatively poor South Australia and Tasmania. There are fewer low value uses of labor like "Walmart greeters" and supermarket baggers. Stores and restaurants are open for shorter hours. So, I would predict that employers will reduce hours to focus their workers on the periods when revenue generation is higher and eliminate low value jobs. Low wage workers will probably work fewer hours for higher rates and work harder when on the job. Retired people etc. wouldn't be able to find extra pay. It would be harder to get a job in places like Alabama. Consumers will get less convenience that is expensive to provide. Some workers would be forced to upgrade their skills when there are fewer easy options available to allow delaying going to community college etc.

    1. I'm glad that you brought up supermarket baggers.

      Much of the discussion about business reaction to a higher minimum wage focuses on substituting automation for lower-wage labor. In many cases, however, lower-wage workers are substitutes for customer labor.

      That can go hand-in-hand with relative cost advantages for different business models. A discount grocery store tells customers to bag their own groceries. A fast casual restaurant (order at the counter) uses less paid labor per customer than table service dining, and the whole restaurant industry is a substitute for consumers using their own labor to prepare their own meals.

      That's part of the reason to believe in a downward-sloping demand curve for lower-wage labor. There are business models offering different levels of customer convenience, and it's reasonable to expect customers (in the aggregate) to shift to using more of their own labor in response to a meaningfully higher minimum wage.

    2. One difference between Australia and the U.S. is concentration of the population.

      Australia's five largest metro areas have 65% of its total population.

      In the U.S., the five largest metro areas have less than 20% of the total population.

      That concentration conceivably influences the impact of a relatively high minimum wage, though I won't say I'm certain that it does.

    3. Your analysis is reasonable, but it misses a key dynamic component: by eliminating low value jobs, you eliminate the first rung on the labor market ladder. This makes it harder for people on the margins of society (recovering drug addicts, ex cons, etc.) to get that first marginal job that is their first step in returning to the labor force and that could eventually lead to them becoming a productive member of society. You are, in effect, cutting off the path that for some is the only way back to long-term gainful employment. So the end result is more people staying on the margins long term.

    4. Unknown,

      That's part of the economic plan for Democrats - keep the recovering drug addicts, ex cons, etc. on the public dole needing government support.

      So much for land of equal opportunity. And you wonder why extremist groups like the "Proud Boys" exist?

  5. It is one thing for a state to adopt a minimum wage law, it is quite another for the Federal Government to impose a uniform national minimum wage law. There are many places in this country where a $15/hr job is not minimum wage. It is one of the best jobs in town.

    It is now clear that many high cost of living places, especially, Mr. Cochrane's neighborhood, are beginning to lose jobs to places with lower costs of living. See:
    "They Can’t Leave the Bay Area Fast Enough: As a tech era draws to an end, more workers and companies are packing up. What comes next?" By Nellie Bowles, Updated Jan. 17, 2021

    You might suspect that the proposals to set a high uniform minimum wage are an intentional method of kneecapping the competition. But, we should remember Krauthammer's apothegm that you should never attribute to malice that which can be adequately explained by stupidity.

  6. I should also add that we do not often enough emphasize the real point that the real minimum wage is not a number selected by our legislators it is always zero $0.00.

  7. Very good article. The real line item is total cost of employment. Before I retired as a senior electrical engineer my effective pay rate was about $50.00 per hour. My normal charge out rate to clients was about $135.00 hour. The engineering firm were I worked made about $20.00 hour on my time. The difference included benefits, cost of equipment (computers, etc.), contribution to support personnel, continuing education, etc. The employee wage is only part of the equation.

  8. In 1964 the minimum wage was $1.25. My father operated a small hardware store located near Inland Steel. East Chicago Indiana. Also a predominantly Hispanic neighborhood. A Spanish high school kid asked my dad for a job. Margins were thin and he couldn't pay the $1.25 an hour. The kid said he would take a dollar an hour but my father said he could sued. The kid pleaded and my father took a risk and payed the buck an hour. As it turned out, the kid went on to IU and worked summers for my father until he graduated.

  9. Could it also be that the minimum wage isn't about either the teenager learning job skills OR the lifelong minimum wage earner with a family of 4? Could the minimum wage be about other groups of higher earners with labor/service contracts tied to a multiplier of minimum wage?

  10. For however many decades it is I've been making a corollary of this point:

    "Minimum wages also affect some kinds of employers more than others. McDonalds "jobs" may increase. Why? Because the taco stand down the street, which pays less than McDonalds, goes under, and McDonalds gets more business."

    The Card and Krueger paper looked at chain fast food restaurants at a time of a minimum wage rise. But that's not the minimum wage world. Chain plus independents is that world.

    In fact, we could easily construct a model where the labour lite, capital heavy, chain restaurants gain employment even as the independents shrink more than that.

  11. I think it's worth making a distinction between the federal minimum wage and state minimum wage. Many states have already raised their minimum wages far above the federal minimum. Others have not. So why do the representatives and senators from California or Illinois want to raise the federal minimum wage to a level that their states are already meeting? To ask the question is to answer it. The federal minimum wage is about lowering the costs of self-imposed state minimum wages for states that, for political reasons, want to have a high minimum wage. It's a form of regulatory collusion.

  12. Christina Romer favored EITC over Min Wage in 2013

    She even says it may harm the very people whom it is supposed to help.

  13. Me versus someone who supports a higher minimum wage:

    Me: Ok, so you want a higher minimum wage. What do you think the government should do to employers who break the law, i.e. pay people below the minimum wage? 

    Someone: Well clearly there should be penalties for doing that, otherwise how can you enforce the law?

    Me: So are you saying that setting a higher price to breaking the law will reduce the quantity of lawbreaking?

    Someone: Um...

    Me: I think we're done here.

  14. Wouldn't a change in the wage level also affect the pool of labor willing to work for that wage? Politicians think that a boost to the minimum wage will simply give more money the the people currently earning that wage. But consider a college grad living in his parents' basement: he may be unwilling to work at a fast-food joint for $10/hour. But what if the offered wage is now $15? Won't some of these people come out of the basement for $30,000 per year? The same might be true of some stay-at-home mothers with grade-school children. As a result, there may be a different, better educated pool of workers vying for the same jobs. Who do you expect the business owner to hire--the current min. wage type with marginal qualifications or the new entries into the labor pool?


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