California poised to raise minimum wage to $10
money.cnn.comI'm going to head off all the armchair economists, including the two* who have already replied as of 15 minutes after the article was posted.
http://www.igmchicago.org/igm-economic-experts-panel/poll-re...
Here's a real survey of actual economists, who largely agree, weighted by confidence, that "The distortionary costs of raising the federal minimum wage to $9 per hour and indexing it to inflation are sufficiently small compared with the benefits to low-skilled workers who can find employment that this would be a desirable policy."
And, economists are reasonably mixed (split between schools, I believe) on the belief that raising the minimum wage to $9 per hour would make it noticeably harder for low-skill workers to find employment, and no one strongly agreed or disagreed. The evidence, the science, of economics, is mixed, as has been demonstrated by a comprehensive meta-analysis by Doucouliagos and Stanley. You can find a graph and other analysis here:
http://www.cepr.net/documents/publications/min-wage-2013-02....
So, in summary, economists mostly believe the benefits of raising the minimum wage outweigh the distortionary economic effects, and none were willing to make strong assertions on the effect it might have on unemployment. Everyone, put down your pitchforks and take off your party insignias, let's just raise the minimum wage a bit and see what happens, because it benefits a lot of people and there is scant evidence of a downside for a marginal increase in the wage floor.
QED.
* Perhaps three, if my sarcasm detector is off?
I'm going to say the surveyed opinion is wrong and is furthermore asking the wrong question.
1) There is a welfare trap, and it is real. The more needy you are, the more your welfare programs are robbed with each wage increase. The marginal rate is very high and in some situations can exceed 100%.
Here's what the welfare trap looks like for low-wage families, in one graph: https://lh3.ggpht.com/-_-6Fsycanmw/ULO_5kk3fxI/AAAAAAAAAU4/y...
taken from: http://johnhcochrane.blogspot.com/2012/11/taxes-and-cliffs.h...
If you follow economics there is an astonishing difference in the quality of discourse between the two sides--the pro minimum-wage crowd does not seem aware of the data working against them.
2) There is furthermore research suggesting employers respond to minimum wage by scaling back future employment plans and by causing workers to work harder. Part of the reason minimum wage jobs are so awful is if they weren't, they would not be worth the money.
3) People think of minimum wage as a redistribution of wealth from evil corporate employers and rich consumers to the poor and needy. Notwithstanding who is evil and who is good, that is basically the effect. You can accomplish the same thing in a much simpler, market-friendly fashion: pay the poor for working. A minor version of this program exists--the earned income tax credit. It does the same thing as minimum wage--redistribution of wealth--without the overhead, without reducing workers' negotiating power, and without pricing new low-skill workers out. It can be done in a fashion that greatly reduces the welfare trap. For a while, this idea had broad bipartisan support, from Milton Friedman and Paul Krugman among others.
But now economists argue about minimum wage because it's an attractive political issue. Famously, Paul Krugman's opinion on minimum wage changes depending on who is president.
Bleh. Imagine if climate scientists or evolutionary biologists made political compromises. Worse yet, imagine if they started believing their own compromises.
4) Surveys are not of particularly high interest when it comes to discussing economics. Talking about theory, data, and consequences is a better use of time. Surveys are only social proof--backup evidence--when there is not a confident consensus.
Earned income tax credit is amazing. It is one of the few government initiatives that is an unquestionable success. It is such a good way to redistribute wealth without creating the negative incentives of welfare and the like.
> Earned income tax credit is amazing. It is one of the few government initiatives that is an unquestionable success. It is such a good way to redistribute wealth without creating the negative incentives of welfare and the like.
EITC, because of the phase out, has the same negative incentives as any other means-tested social benefit program which has a benefit reduction at less than a 1:1 level for additional income. (Its true that there are some other social benefit programs that have worse negative incentives at some or all points because either they are flat benefit with a sharp cutoff or because they have some range in which the benefit decline is greater per additional dollar of other income than EITC has, but its simply not the case that EITC doesn't have "the negative incentives of welfare and the like".)
Maybe I was mislead, but I thought that the EITC amount actually INCREASED (up to a point) as you made more money.
This makes it seem like there isn't a negative incentive: http://en.wikipedia.org/wiki/Earned_income_tax_credit
That CEPR paper is really the gold standard of "evidence-based" economics.
There's a wealth of real-life evidence that shows what actually happens when the minimum wage is increased. So put away all the theories about what should happen, and look at the extensive data on what does happen.
It turns out this is a lot more complex than just "higher price of labor = lower supply of jobs". Offsetting the higher cost per hour are lower turnover, lower training costs, upgraded skill levels, higher worker productivity, and higher demand when workers spend their bigger paychecks.
Believe it or not, the data shows that modest increases in the minimum wage do not reduce employment in any significant way.
I came to link the exact study you provided. Here's the executive summary from the CEPR paper:
"The report reviews evidence on eleven possible adjustments to minimum-wage increases that may help to explain why the measured employment effects are so consistently small. The strongest evidence suggests that the most important channels of adjustment are: reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners ("wage compression"); and small price increases. Given the relatively small cost to employers of modest increases in the minimum wage, these adjustment mechanisms appear to be more than sufficient to avoid employment losses, even for employers with a large share of low-wage workers."
Of course, it's worth noting that the first two impacts listed (reductions in labor turnover; improvements in organizational efficiency) could themselves have an impact on new hires and hours worked.
How many economists prefer the minimum wage to other benefit programs, like the EITC, a negative income tax, or direct competition in the labor market (like the Works Progress Administration)?
Genuinely curious, I couldn't find any good metanalyses at first glance...
Rather than worry about what economists think, I'd highly suggest talking to real people who employ other real people in jobs that are at the current minimum wage, and see what their reaction will be. Understand their thinking of how and why they make salary decisions.
The question "The distortionary costs of raising the federal minimum wage to $9 per hour and indexing it to inflation are sufficiently small compared with the benefits to low-skilled workers who can find employment that this would be a desirable policy." contains asssumptions that are very objectionable to someone trained in economics.
To most economists, it is wrong to think of the minimum wage as a tradeoff between distortionary effects, and a benefit to the workers. In particular, why do we want to benefit workers on the minimum wage? It seems that the people we really care about are people with a given (low) yearly income, and we can easily give/take benefits from them using the tax system.
To the extent that economists support a minimum wage, I assume it would be because it forms some kind of "default contract" that is less prone to cheating (e.g. promising one wage and delivering another).
In particular, why do we want to benefit workers on the minimum wage?
Maybe because they need the money?
Maybe you should have read past the sentence you quoted?
I did, perhaps I misunderstood where you were coming from though. I was just meaning that there is a definite and not particularly subtle reason for minimum wage laws, sure the economics is used to set a level and to argue on the theory, but the reason for them existing in the first place does not come from economic theory, but rather from political experience with hungry angry people.
If there was no welfare, and no tax system, then introducing a minimum wage would probably be a net improvement.
However, taxes and welfare already address the issue of hungry people (I don't particularly care how angry a person is). My problem is not with the goal of redistributing wealth, but with the minimum wage as a way to do this. Since the tax authorities already know the figure that we are really interested in (how much money a person makes in total), it makes more sense to lower the tax rate on low income earners, or increase welfare, than to increase the minimum wage.
If we had good universal welfare that did not depend on income, then having no minimum wage is politically fairly neutral. However when you have a situation where welfare is divisive and intrusive on the individual, then being able to leave welfare through employment is socially important. And it really does matter how angry the hungry person is, at least if you want to stay in government.
While there is some truth to what you say, I would point out that (A) a person making $9 a year would still be paying around $900 federal tax, and (B) my understanding is that TANF is not especially intrusive (not sure what you mean by divisive).
I still don't understand the logic of "X will make people angry so you shouldn't do X". Since I already care about how well off poor people are, why should I care about what makes people angry directly. While the government needs votes to stay in power, that doesn't change what in theory is the best policy, it just restricts the set of policies that we can choose from. While increasing welfare and decreasing tax on the poor, while (possibly) removing the minimum wage, might make some people angry, I don't see why this makes it a bad policy.
I'd really like to see an experiment conducted that can put the whole debate to rest: raise the minimum wage in half of the states, lower it in the other half. Run this experiment for three years and compare the results, and apply the strategy with the best outcome to the rest of the country.
This has been more or less done, on a more global scale.
Have a look at the minimum wage in every developed country compared to America. Now have a look at the standard of living for the average person on the street in all those countries compared to America. You have your answer.
Comparatively, America is a developing country.
The result of this experiment would be mostly useless unless the results were stark and causation can be traced back to this policy via other methods. It doesn't control for the millions of other factors that could affect the outcome.
I don't think that would help much. Let's say you have 7$ minimum wage in one state and 10$ minimum wage in a neighboring state. I would think it's very likely that more low end jobs get created in the 7$ state compared to the other.
However, if all states have a 10$ minimum wage then there's no easy substitute, except for going to another country, but that's much more complex.
This is exactly what the cited research in the original post did.
It looked at contiguous US states, where one raised the minimum wage and one did not. It measured the gain or loss in jobs with all these "natural experiments".
This study found minimal effects on employment when comparing the states that raised minimum wages against those that did not.
Instead of raising the minimum wage, I'm a proponent of increasing the Earned Income Tax Credit. https://en.wikipedia.org/wiki/Earned_Income_Tax_Credit
Rather than paying people more to flip burgers, I think it's better policy to top them off with cash and incentivize them to earn more money by getting better jobs.
The EIC is a form of Negative Income Tax that was originated by Milton Friedman. http://www.econlib.org/library/Enc1/NegativeIncomeTax.html
> Instead of raising the minimum wage, I'm a proponent of increasing the Earned Income Tax Credit. https://en.wikipedia.org/wiki/Earned_Income_Tax_Credit
Adding a state-level EIC would be considerably more administratively complex for California than changing the level of the existing minimum wage -- which, even granting for the sake of argument that such an approach would be desirable ignoring administrative costs, might strongly disfavor that approach.
> The EIC is a form of Negative Income Tax
No, its not.
The EIC is a means-tested social welfare program that has a benefit curve inconsistent with a negative income tax (particularly, it has ranges where more qualifying income increases the beneft, and ranges where it decreases the benefit, whereas the subsidy from a negative income tax is strictly non-increasing with additional income.)
Here is a map showing minimum wages across the US:
Wow... the inequity seems to be concentrated in the deep south. Something else is concentrated in the deep south too.
What is concentrated? Areas with a low cost of living?
And Minnesota...what the hell
"Something else is concentrated in the deep south too."
What are you referring to? It could be republicans, Black people (yes, look at a map), poverty, etc.
He is referring to racism.
$10 might have sufficed over a decade ago.
Hilariously, they're talking about $10 in 2016.
It will be something around $0.70 less than that, comparing 2013 dollars to 2016 dollars.
Why stop at $10? Why not $15? You know people can't live with $10 working at McDee.
It's $20 here in Denmark (de-facto, via the union wage-negotiation system) and I have no complaints. It means service-industry things like restaurants are considerably more expensive, but then since everyone makes at least $20/hr, that isn't a huge problem for affordability. It basically makes everyone middle-class.
It sounds like all that's happened is a form of inflation.
I'm from NZ and lived in Denmark for three months so here's some anecdata. Some prices increased but most are comparable to home, where the minimum wage is approximately half. The only things that are increased greatly are ones with the primary cost in personnel. Clothing and groceries are about the same, fuel too.
That's also my impression. Groceries are about the same as the U.S., restaurants considerably more. It's not general inflation, but specifically an increase in the cost of goods/services where the difference between paying employees $8 or $20 equals a large proportion of the good/service's total costs.
For example, a typical 'premium lager' category beer (Heineken or Carlsberg or the like) typically costs $6-10 in a bar, which is somewhat higher than in the US, but a six-pack typically costs $4-7 in a grocery store (tax included), which is somewhat lower than in the US.
An interesting aspect is that you can get quality increments relatively cheaply, because you've already paid for the labor: a fancy meal costs maybe 50% more than a burger, and a microbrewed fancy beer in a bar costs maybe 20-30% more than a Carlsberg lager— versus in a store, where the microbrew might be 3-5x the cost of the Carlsberg.
Because very smart people with pointy hats know the exact price of the labour just like Soviet Russia was so accurate in predicting price of goods.
Interesting thought: say you're a state that's broke and desperately in need of revenue. What happens if you raise the minimum wage so the extra tax the minimum wage workers are paying covers the deficit?
You'd need a large increase because people making minimum wage are a small part of the income tax base (many don't pay taxes on net). Large increases to the minimum wage would tend to be counterproductive at least in the short term.
Now watch teen unemployment jump, and prepare for a future generation of people who couldn't get early work experience, and so become less employable in the long-run.
I don't get this.. Is the theory here that companies have $X in a bucket to pay staff, Employees each make $Y, so X/Y is the number of employees?
Because that's not how it happens at all. Companies don't hire more staff than they require. If McDonalds needs 10 employees per shift to operate, they're going to hire 10 per shift no matter if they cost $8/hr or $16/hr.
The amount of work determines the number of employees, not the other way around.
The general principle is that an employee has to cost less than the money they bring in. The best HN-related example is that if you work for a software development firm, and if they bill you out to clients at $100 an hour, your total cost to them (your hourly wage + taxes + healthcare + benefits + extra) has to be less than $100.
To properly phrase your example, yes it is depend on "work", but work is dependent on revenue. If McDs needs 10 employees per shift where they generate $800, each employees total cost per shift cannot be more than $80, which works out to about $10 CTC (cost-to-company) per hour in an 8-hour shift.
If you now mandate that the worker salary MUST be $12 or higher than $12, McDs is losing money. So you either pray for an increase in business (sales), or cut costs (ie, fire people) and automate.
And lower-skilled jobs are easier to automate. It's easier to automate fast-food checkout by having (for example) iPads for people to place their orders, so your human workforce can just be the cooks at the back and the janitorial staff.
If you now mandate that the worker salary MUST be $12 or higher than $12, McDs is losing money. So you either pray for an increase in business (sales), or cut costs (ie, fire people) and automate.
Or you increase prices. Or a combination of the three.
You increase prices, yes. You might trim the workforce too. But so does every other business that has a large contingent of low skill, low pay labor. This means that most things that are "made on the cheap" become more expensive. So now, the cost of living goes up for everyone who consumes from that pool of resources. This squeezes middle income families and hurts lower income families. Does the cost of living for which a minimum wage worker rise higher than the wage? I don't know. But with a higher cost of living and potentially greater unemployment, I'm not sure that raising minimum wage is a win.
I'm not aware of all the complex reason for why the following is the case, but my brother's mom (I know how odd that may sound) was able to rent an apartment when she was 18 working in fast food without tips. There is _no way in h-e-double-hockey-sticks_ that that could happen anywhere in America today. I'm not convinced that raising minimum wage is the solution -- it could be part of the problem. Models of human behavior and economics can get tricky and counter-intuitive. It is a hard nut to crack; I'll just stick to writing software. Now, if someone wants to pay me to make and become familiar with those models....
Additionally, the floor on wages affects the floor on hirable skillset. Employee A is someone who understands how to work effectively and can handle 40 clients per hour. Employee B is someone who can only handle 20 clients per hour. In this example, the only reason to hire Employee B is if you can pay them half as much as you pay Employee A. If you pay Employee A $15/hour and you pay Employee B $7.5/hour, then all is well. However, if you have to start paying Employee B $10/hour, then you are better off hiring someone who can handle 27 clients an hour and paying them $10/hour.
This is a simplistic example and assumes unlimited supply of labor, but it illustrates the point.
The result is that the unskilled end of the spectrum are too expensive in relation to their productivity. These are the ones who end up unemployed.
I am not an economist, but that is how I understand it.
> The general principle is that an employee has to cost less than the money they bring in.
That's not strictly true. If you have two programmers, one produces $80 in value per hour and the other only $40 in value per hour you can still afford to pay both $60/hr each. This happens all the time because worker productivity is uneven and some jobs are more important/impactful than others. The requirement that revenue exceed costs is only true in aggregate, so the effect of increasing low-wage employee cost is to reduce profits.
This is really bad analysis, not least of all because it excludes the glaringly obvious option of simply accepting tighter margins of profit and lower executive-level pay.
If you want an intelligent, fair-minded, and properly-researched account of economics at McDonald's see here:
http://www.bloomberg.com/news/2012-12-12/mcdonald-s-8-25-man...
Overall teen employment is very, very slightly affected by a minimum wage, after adjusting for spatial and temporal inhomogeneity. At least that's the consensus from most recent articles I've seen on the topic.
The consensus is less conclusive on specific effects on minority groups. I've seen at least one paper showing short-term unemployment increase in minority groups. I've also seen at least one paper showing increased employment/earnings in younger, more affluent teens.
Some of the recent well-cited studies:
http://www.irle.berkeley.edu/workingpapers/166-08.pdf (2011) Looking at 1990-2009 CPS data: "Including controls for long-term growth differences among states and for heterogeneous economic shocks renders the employment and hours elasticities indistinguishable from zero and rules out any but very small disemployment effects. Dynamic evidence further shows the nature of bias in traditional estimates, and it also rules out all but very small negative long-run effects."
http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8543.2009.... (2009) "A 10 per cent increase in the minimum wage reduces employment by about 0.10 per cent (see column 4 of Table 3). But even if this adverse employment effect were true, it would be of no practical relevance. An elasticity of −0.01 has no meaningful policy implications. If correct, the minimum wage could be doubled and cause only a 1 per cent decrease in teenage employment."
Here in NZ there's a minimum wage of $13.75 but there's also a starting out rate of $11 for people under 20 who are in training. So there is an incentive for companies to hire teens and get them started in the workforce.
>Now watch teen unemployment jump
Not even an iota.
Businesses need those employees anyway. And the impact of an increased minimum wages is minimal. They pay them less not because paying them more would drive them out of business or really eat into their margins, but just because they can.
And it's not just teens. TONS of people work on minimum wage jobs that are older, including over fifty.
There's an obvious difference: people who have existing minimum wage jobs (your over fifties) likely deserve a pay raise and have the skills and experience and value to justify it. This is a great policy for most people who are in minimum wage jobs.
People who don't have those skills and experience (e.g. teenagers) will find it harder to justify their value to job creators, creating a vicious circle as they can't get experience without employment. If I have to pay $10, I'll seek to employ people who are worth $10+.
Youth unemployment is 34.6% in California[0] - the next generation of workers can't afford this.
[0]http://www.governing.com/gov-data/economy-finance/youth-empl...
>People who don't have those skills and experience (e.g. teenagers) will find it harder to justify their value to job creators
It's not like you need "skills" and "experience" for most minimum wage jobs. You just need to be able to take hard work, crazy hours, and living on near (or below) substinence levels. The churn rate is quite high anyway, for experience to matter one iota.
>creating a vicious circle as they can't get experience without employment. If I have to pay $10, I'll seek to employ people who are worth $10+.
Most people that make minimum wage work their asses off. That's with regard to work amount. As for their benefit to the company, that's more than their salaries anyway.
A lower minimum wage will not stop unemployment (whose reasons are completely different than wage demands). It's not like the pressure on companies is wage costs, and since minimum wage is the same in an area, there's no competition to businesses (e.g burger flipping, gas stations, cleaning, etc) from other companies as they all have to pay the same minimum wage.
>Youth unemployment is 34.6% in California[0] - the next generation of workers can't afford this.
That's because of lost business/industry/etc jobs, and not because businesses couldn't afford the tiny minimum wage that was already there. So the increase wont change anything.
Not to mention: economies can also die because greedy owners pay their employees less. That saves some money short-term creates a death spiral of diminishing incomes and less spending all around.
There's a reason Henry Ford wanted his pay his employees so that can "afford his cars".
I'd disagree with the notion that McJobs necessarily prepare people for future employment. Particularly when there is little in the way of responsibility or consequences. This is not to say that there is nothing to be learned from the fast food grind, but I think we give too much credit to the idea of "early work experience" without sufficient concern for the nature of that experience.
I definitely agree that early work in a McJob is not a good experience or a good use of time for middle-class kids who don't need to work. I have a younger sibling who wanted to work for some extra spending cash and my parents encouraged her to get a fast food job. She was a straight arrow up until then, but her high school performance seriously derailed because of the had-to-work friends (read: highschool dropouts, long-term poor, soft drug users, etc) she met while building tacos at Taco Bell. She finally wised up and made it to community college, but she was in a serious downward spiral for a long time. I know not everyone's experience is like this, but I definitely won't be pushing my kids to get a low-skill low-wage job when I could instead have them investing their time in skill-based hobbies or school.
Major corporations will, by and large, have far less trouble dealing with the extra $2 than workers would dealing with the lack thereof.
80% of the US economy [citation needed - just a stat remembered from school] is small business. Yeah, mega-corp can handle it. Can the small businesses handle it? Harder to say. A twenty person company with minimum wage workers may be hard pressed with a wage increase. Maybe not. Data needed.
Teen unemployment is already running around 22-23 percent:
http://www.bls.gov/web/empsit/cpseea10.htm
The question is, how many people are working minimum wage jobs who aren't teenagers.
Article says 90% are over 20.
So everyone who claims teenagers are the ones who are going to lose their jobs are very, very wrong. Good to know.
Some might, but it's only part of the picture. There are solutions to that as well such as a youth wage.
That's a really depressing number.
the real minimum wage is $0
That's fine, I'll replace a part-time employee with an unpaid intern to even it out.