Figuring the costs of minimum wage hikes
Real News interviews Jeannette Wicks-Lim is an Associate Professor at the Political Economy Research Institute in Amherst, Massachusetts. Wicks-Lim specializes in labor economics with an emphasis on the low-wage labor market…
WICKS-LIM: Well, one of the things I’ve been thinking a lot about is that because of the recent proposal by President Obama to raise the federal minimum wage to $9 an hour, I’ve been thinking about the debate that always, you know, gets rehashed each time the minimum wage proposal is put on the table. And every single time the minimum wage proposal has been put on the table, there is this back-and-forth argument about whether there are negative employment effects from raising minimum wage. There’s almost verbatim this fight about, you know, whether or not raising minimum wage is going to cost jobs, and despite the fact that there’s been a large amount of research in the recent years that has pointed towards basically finding no negative employment effects from minimum wage increases, and we still have the same old debate.
And so I’ve been thinking about, you know, what is it that would really help answer this question about whether or not there are job losses from raising the minimum wage. And one of the simple facts that we’ve come up with here in PERI in our research around the minimum wage is that actually when you look at the cost that businesses face when the minimum wage goes up, the costs are actually quite modest. And that’s what explains why there isn’t some big negative, you know, job loss that you can associate with any minimum-wage hike. This is something that we try to make clear but seems to get lost in the debate.
I’ll just give you a very concrete example. One year, in 2006, we looked at Arizona state minimum wage proposal, which was a 30 percent increase in the state minimum wage. At the time, it was $5.15, and it was being proposed to be raised to $6.75. This [incompr.] typical size of minimum-wage increase.
And what we did is we went and we looked to see how much would this cost businesses. We looked at what are the wages of workers at the time, how many hours did they work. We added that all up. We looked at payroll taxes and how much that would go up for employers. We looked at the raises that would go to workers who earn more than the–that would be earning more than the minimum wage, that is, more than $6.75 [incompr.] little bit of a boost from the minimum-wage increase. We added all that up and we compared that to businesses’ sales revenues. So that’s sort of the capacity, what they had to work with to cover these costs.
What we found is, for the average business in Arizona, that the cost increase would be less than 0.1 percent. And so if you want to think about it in real concrete terms, businesses, by raising their prices by less than 0.1 percent, would be able to cover all the costs of a minimum-wage increase of a size of 30 percent.
Further reading in connection to Europe can be found here.
Elizabeth Warren can be found at Senate hearing asking food industry representatives about their claims there is a significant impact:
“average business”
One of the great flaws of economics.
“Average businesses” do not make payroll, real businesses make payroll.
Just saying.
As to full service restaurants, they also have M/W exempt employees that comprise roughly half (at least in my experience working in the food service industry) of the work force. I would guess, again based on nothing more than my own experiences, that the M/W increase would impact only a small handful of workers in a full service restaurant (maybe bussers and bar backs–though the issue of tipped/exempt positions arises here–, dishwashers, maybe prep cooks, etc.).
Those workers exempt from M/W are rarely ever talked about in the larger discussion, just as is the fact that a $1 increase in business costs does not mean a direct $1 decrease in profits–wages, like most business expenses, are tax deductible and come out of pre-tax revenues rather than profits.
But in the end, most of the price increases resulting from a M/W increase (8 cents, 4 cents, 14 cents for Papa John’s pizza re: the ACA, etc.) are minimal, and not really a deterrent to implementing policies like a M/W+.
The other day I was thinking that all the studies done on the minimum wage are about marginal increases when the minimum wage has shrunk one third while productivity has doubled — making all the studies irrelevant to any real catch up to what the minimum wage might conceivably be: doubled to add 43% to LJB’S 1968, $10.50/hr minimum — tripled to catch up with doubling of productivity since 1968 if you ask Elizabeth Warren. Lawyers get paid twice as much in a doubly productive economy — not because they doubled productivity but because the labor market can bear more.
Even the big anti-minimum wage book by Neumark and Wascher seems to admit upfront (haven’t read the whole thing yet) that the results of all the studies are close and could be upset by unseen factors.
Minimum Wages
So I came up with this — a thought experiment of what might happen if we doubled or tripled the minimum wage which should be what we want to do — and came up with this doozy:
The “black hole theory” of the minimum wage:
Physicists theorize that inside a black hole the laws of physics breakdown. When the US minimum wage falls far enough below what the market would bear the laws of supply and demand breakdown. Doubling today’s federal minimum wage should lead to a disproportionate explosion of demand for the goods of minimum to median wage paying employers.
If we cut today’s minimum to median wages in half that wouldn’t help McDonald’s or Wal-Mart, would it? This wage cut must already have taken place when we would need to triple today’s minimum wage to catch up with doubled productivity since 1968 (almost quadruple the early 2007 minimum wage — the median wage stagnated as productivity doubled too).
Elizabeth Warren: Minimum Wage Would Be $22 An Hour If It Had Kept Up With Productivity
Doubling today’s minimum wage to $15 an hour would add 50% to Wal-Mart’s wages but only 5% to Wal-Mart’s prices – 100% to McDonald’s wages but 33% to McDonald’s prices. $15 an hour being today’s median wage, half the workforce would get raises percentage multiples of pass through price increases.
This win-win effect could not go on forever. At $30,000 a year consumers would buy a lot more fast food and retail items than they will at $15,000 a year – hugely pent-up demand. Going from a $30,000 year minimum wage to $40,000 would raise prices (3% at Wal-Mart; 11% at McDonald’s) but not add much to demand – though some people would have more money to spend — a wash? Somewhere in between is the edge of the black hole.
I heard somewhere a few years ago that if lettuce pickers were paid $30.00 per hour the price of lettuce would go up 10 cents a head. That’s a lot less than the seasonal variation, which can be around $1 per head.
I just did a little thought experiment. With pickers making between $5 and $10 per hour currently (a blue sky guess on my part) you get a 10 cent per head increment at 200 to 250 heads per hour – about 3+ to 4+ heads per minute. If they’re making more than that, the heads per hour number drops. Crude – sure, but doesn’t flunk a laugh test anyway.
At exactly 200 heads/hr and $10/hr, picker’s labor is 5 cents per head; at 200 and $30 it’s 15 cents.
I believe it’s true [somebody who actually knows can correct me] that in most productive enterprises labor cost is in the range of 5 to 15% of total cost.
Just on that basis, fairly large percentage increases do very little to the cost structure.
Cheers!
JzB
Australia’s MW structure is interesting:
< 16 years of age $5.87
At 16 years of age $7.55
At 17 years of age $9.22
At 18 years of age $10.90
At 19 years of age $13.17
At 20 years of age $15.59
US and Australian dollars are only a few cents apart.
I wonder how many Australian 16 year olds are willing to show up for $7.50/hr? In Chicago half the gang age minority males (100,000!) are in drug dealing street gangs because they wont work for that little.
Interesting though. I think Australia has some kind of odd judicial setup for setting wages — going down the drain to the right wing like most everywhere else. Last I heard (a few years back) union membership in Australia had dropped from 40% to 20% over 25 years.
Almost everywhere else except where they have legally mandated, sector-wide labor agreements that is — where every employee in the same job category (e.g., retail clerk) in the same locale (where applicable — not airline crews) collectively bargains for a single contract with all employers. Fair and balanced economy — and politics — assured.
Supermarket workers and airline employees would kill for sector-wide legislation here, if only someone would inform them of the possiblity.
Reply to jazzbumpa…
Nice job on the calculations and your conclusion…
The problem is that lettuce growers have to be competitive so they don’t want to pay more than other growers. They could pay more, but they could wrap their heads around $30 per hour. They would instantly scream bloody murder, but if they did the math, you would hope they would calm down.
We have 150M working people in the US, 15M are green card or illegal immigrants and 15M more jobs in the form of the labor content of imported goods.
When our import/export account balances that’s 30M jobs appearing.
Then there’s the gas rationing or gas price increases that make a second income no longer cost effective for a two income family. That’s a lot of people now, even more when the dollar drops and American dollars are no longer desirable for labor or capital remittances.
You have no clue what’s going to happen to the central class (middle 80%) income, let alone the bottom 10% of the labor force.
Then there’s the technically skilled portion of the upper 10%, mostly engineers and nurses. Those and the bottom 10% are the ones that are most exposed to illegal and “needed skills visa” immigrants.
I’ve been watching our balance of payments deficit for about thirty years and even I have no idea what’s going to happen.
But the idea that the pivot line is around the 90th centile, with the upper 10% losing half their income to the bottom 90%, is probably a minimum.
The change in wealth will be much greater, of course.
Payroll for the flower shop last year was 26.5% of gross.
Raising the Price of Pizza 10 to 14 cents. . . http://www.angrybearblog.com/search?q=pizza
The same argument could be made on healthcare insurance also which I made earlier.
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