The Conservative Case for a Minimum Wage Hike
Most conservatives disparage minimum-wage laws with straightforward economic reasoning, based on Econ 101 textbook theory: demand curves slope down. If you institute a price floor, raising the price of labor, you’ll get less labor demanded — less jobs. This hurts poor people, especially entry-level folks like teenagers.
At first blush, the argument’s got legs. And there’s been a fair amount of research over the decades suggesting that higher minimum wages do hurt employment. But conservative economists know that life’s more complicated than that. There’s also good research suggesting that this effect isn’t very strong in the low-wage labor market; many other economic effects are at play.
One of those other effects — also based on textbook Econ-101 reasoning — bears serious consideration by conservatives: economic incidence. It’s often darned hard to know where the effects (the “incidence”) of a policy or system will land — who will get the benefits and bear the burdens — especially in a complex system with lots of moving parts. That’s a core conservative belief (“unintended consequences”).
On the minimum wage, it’s not crazy to suggest that minimum-wage employers — many of whose workers inevitably rely on government benefits — are the actual beneficiaries of those benefits. Those employers are able to get workers at lower wages than they would absent those benefits, so to some extent at least (depending on incidence) those businesses thrive at the expense of taxpayers. The dole goes, largely or partially, to the employer’s bottom line.
How do we suss out these incidence effects? In recent years we’ve seen some excellent new research on the employment and earnings effects of different minimum-wage laws, in particular great work by Arindrajit Dube et. al. comparing adjacent counties across state lines with different minimum wages (levels and changes).
This research has a big leg up on all the previous studies. It very cleverly exploits the implicit “control group” of an ongoing natural experiment across the whole country, over a quarter-century, to tease out cause, effect, and result. Dube and his cohort are incredibly careful, diligent, competent, and thoughtful researchers and analysts. Read their stuff. I think you’ll be hard-pressed to disagree.
Results? They find that minimum-wage laws have had little influence on employment levels, at the minimum-wage levels we’ve seen over past decades — too small to consider either statistically or truly significant. But they find significant increases in earnings from higher minimum wages. Minimum-wage laws have the rather intuitive effect of increasing poor people’s earnings. (Some might deride this intuition as unsophisticated “folk economics,” but: 1. it’s actually much more economically sophisticated than the Econ-101 thinking, and 2. it seems to be correct.)
And here’s the key takeaway for conservatives: if higher minimum wages increase poor people’s market incomes, they reduce their reliance on government handouts, and reduce government spending. That’s not even Econ 101. It’s just arithmetic.
Conservatives oughtta love that. And they should also like the part about responsibility: require all business owners to do what most already do: make a profit while paying the actual cost of keeping their workers alive, in decent health, trained, educated, mobile, and employable, rather than irresponsibly externalizing those costs onto taxpayers and pocketing the profits.
How do workers’ livings get paid for — through government benefits or employers’ wages? Conservatives would naturally vote for private enterprise.
But here’s where it gets a lot more interesting. A new study out of the Chicago Fed (PDF) uses the same adjacent-county, natural-experiment methodology, and looks at what happens to companies in higher minimum-wage environments:
Firm entry and exit both rise.
Again, they find minor employment effects and significant earnings effects. But there’s more churn among companies. New companies emerge that thrive and profit in the higher minimum-wage environment, because their business models are more labor-efficient and they invest more in productive capital. (Not just drill presses, but human and organizational capital developed through training, retention, efficient business processes, etc.)
Companies that are less labor-efficient and more reliant on low wages (and, hence, taxpayer subsidies/handouts) are less successful in this environment. Inefficient businesses that can’t pay the full cost of their workers and still make a profit, fade away and go out of business.
Schumpeter. Creative destruction.
In the language of (neo)classical economics, higher minimum wages (again, within the ranges we’ve seen over past decades) seem to push the whole system to a new, higher equilibrium. Employees earn more. Businesses invest more in productivity. All boats rise. The pie gets bigger. We all take another step, together, up toward that shining city on the hill.
The real (inflation-adjusted) minimum wage is at a historically quite low level right now, so it’s reasonable to expect that the effects of increases that have played out over past decades will also play out over the next ten, twenty, or thirty years. We’ll all be better off in three decades if we raise the minimum wage today.
But suppose that isn’t true. Suppose we end up in the same place thirty years from now that we would without a minimum-wage hike. Over the course of those decades, tens of millions of workers and their families will have lived better, more prosperous lives — for decades on end. The promise of American opportunity, embodied. To quote the great economist Abba Lerner, “In the long run, we’re always in the short run.”
If you’re a conservative who wants to:
• Get people off the government dole
• Reduce government spending
• Encourage investment in productive capital
• Spur the process of creative destruction, and
• Demonstrate the manifest benefits of hard work and American opportunity…
You might consider throwing your full-throated support behind a minimum-wage increase.
Dozens of the country’s most prominent economists, of diverse political persuasions, agree 4:1 that an increase “would be a desirable policy.” Bill O’Reilly supports it. So do hundreds of Patriotic Millionaires and Smart Capitalists for American Prosperity.
Here’s to suggest that other conservatives and business leaders might find a very comfortable seat on this bandwagon.
Cross-posted at Asymptosis.
Business owners already doing well are resistant to change. They see an increase in minimum wage as a hit to their bottom line rather than incentive to improve their business. They take the easy money, because they are already getting plenty, over the extra work to cover the minimum wage.
If I were the 101 professor for our progressive commentators on the minimum wage I would fail every last one — for an obvious charting error: putting the labor price line on the same graph with the product demand line.
If the minimum wage had grown to $20 an hour since 1968 — close to Elizabeth Warren wishes — Wal-Mart’s prices would have gone up only 7%. For your assignment I will allow our progressive economists and pundits to work out why. 🙂 (Hint: look for a “multiplier effect.”)
Concomitantly, every last historical study of what is never understood as truly teeny-tiny ($1-$2 an hour) minimum wage raises should be expected in advance to show little to no significant effect on employment simply because there is so damn little money involved.
To spell it out in eighth-grade (not college) math: a federal minimum wage raise from $8 to $9 an hour would shift $40 billion to low wage labor — one-fourth of one percent of GDP. (E.I.T.C. transfers $55 billion. It’s also obvious neither is going to wipe out poverty any time soon.)
A raise to $15 an hour would shift $560 billion to the lower 45% of American labor — all of 3.5% of GDP — not even counting other wages pushed up.
I am trying to tell you guys to shake the scales from your eyes and the cobwebs from your brains and look at what is actually going on in this starvation labor market.
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>>> Suppose we end up in the same place thirty years from now that we would without a minimum-wage hike. <<<
Hey; we are going to have to change a lot more than the minimum wage if we are going to pull this country out of the morass that we are sinking every day deeper into.
I always wanted to be a pilot (too late now). I've been reading “Cockpit Confidential” lately. Without getting into the details of all the years of schooling and hours of experience and money in advance it takes to get into the cockpit of even a regional jet — it may take $100,000 up front and until you are 35 years old to get into a regional — and guess what?
You are making $500 to $600 a hard week — and you are probably going nowhere better. There are (I could have this wrong but it’s ballpark) about as many regional as major airline jobs.
If all that training and time can down our exploitative labor market drain, how is anybody else ever going to make money …
if American labor does not completely re-unionize …
.. and the only method of unionization that can possibly work in this day of the balls to the wall corporate bean counters is legally mandated, centralized bargaining. The only way to restore political democracy too.
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Biggest obstacle preventing simple 101 common sense from taking hold: a tiny, pea sized section of the male human brain (females have one too, but it thinks for itself): hunting pack instinct focuses males so totally on what everybody else is doing that it is often (most often?) impossible to start a discussion when everybody else is very far somewhere else.
Two examples:
I used to get so frustrated seeing the official federal poverty line of about 12.5% quoted in all the media. Couldn’t get anywhere emailing around that the number is based on three times the price of an emergency diet — easily understood as off at least of factor of two. Finally came up with a 37% figure (with a question mark): derived from the minimum needs table on p. 44 of the, 2001, Ms. Foundation book “Raise the Floor” which shows a family of three needing more like $45,000 a year if they had to pay for their own medical. That was about 37 percentile on the US Census family income survey. Even when adjusted for medical that 37% to start with seemed just too much to ignore — in any case after spamming that around I did not see the stupid fed number in the media much anymore (academics still use it reason with unfortunately).
Take the 3.5% increase in overall prices a $15 an hour minimum wage would produce. That is all a female needs to know — she can figure out the rest. But, males only referenced what everybody else (the country; the politics) were thinking (yes, I am a mind reader; you didn’t know that? — I read my own and figure that at the primitive, instinctive level everybody is the same). But, throw in that the 45% of the country who would get that paltry raise are not going to be laid off from work over the paltry price increase — and the males suddenly woke up. You really have to hit (cave?) males over the head with a number club.
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So, are any of the males here willing to consider for a moment the multiplier effect on labor’s income that is easily obtained because it is only a fraction of the price — and to acknowledge its all importance out loud — to discourage further erroneous graphs? (I’m sure the individual gatherers would have no problem — their common sense unhindered by the fog of “common knowledge” — ask Elizabeth Warren.)
I know it would be too extreme a stretch for any of the males here to say the words out loud: “centralized bargaining” out loud (been trying to get them to for years). Someday, someway — maybe after we achieve the $15 an hour minimum wage, they may realize that common sense really can be sold — on merit alone; even if it is not what everybody at this moment is doing.
“Findings in the CBO report (yesterday): Raising the minimum wage in three annual steps to $10.10 an hour would result in about 500,000 jobs being lost by late 2016…and bring 900,000 people above the poverty threshold of $24,100 a year for a family of four.”
I tend to generally agree. Raising the minimum wage is not a jobs program. However, it can move the economy towards optimization, e.g. raising economic growth, lowering other production costs, boosting productivity, reversing the collapsed teen labor force participation rate, reducing government and parental support for low-wage workers, etc..
Weak or poorly managed firms will lose business or fail. However, stronger or better managed firms will gain their business, and also gain from the increased demand (low-wage workers have high marginal propensities to consume).
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If we really want to help the poor, raising the minimum wage isn’t enough. Regressive and excessive regulations should be removed and reduced, along with reducing taxes, fees, fines, fares, tolls, etc., to lower the cost of living, and prices, along with spurring economic growth and allowing higher wages.
Also, it’s inappropriate to use only the standard textbook model of supply and demand to explain the labor market.
A wage is more than the price of labor. A wage is also an input and income.
Prices don’t equal wages, and widgets don’t equal workers (for example, inputs are more flexible than output, and workers respond to incentives).
So, it’s inappropriate to use a partial equilibrium model, i.e. supply & demand, to explain a general equilibrium model.
I wonder if the CBO included this dimension in its report. I stated before:
A higher minimum wage shifts idle capital (earning enough for capital preservation), in the saving glut, into capital equipment (because labor becomes relatively more expensive).
So, better jobs are created, because workers are needed to create, build, ship, install, improve, maintain, operate, and manage those machines.
Currently, in the U.S., there’s an overabundance of capital and an education boom.
There are too many overeducated Americans working at low-skilled jobs, and too much (idle) capital kept in unproductive assets.
The decline in the real minimum wage isn’t the only factor that caused the teen labor force participation rate to collapse. However, it’s likely a major factor.
Why should teens work for less than $8 an hour, when they can stay at home, live off their parents (e.g. in a nice house, thanks to the homebuilding boom from 1995-06), and play with electronic gadgets all day, which became increasingly cheaper over the past 30 years.
Or, they can go to college, collect lots of free money, e.g. grants and scholarships, or run-up lots of debt in easy to get student loans.
The opportunity cost of giving all that up for a low-paying job isn’t worth it to many teens.
When the real minimum wage was above $8 an hour, roughly between 1960 and 1980, the teen labor force participation rate rose from below 45% to about 60%.
However, a general decline took place when the real minimum wage fell and stayed below $8 an hour, after roughly 1980.
It’s likely, raising the minimum wage, e.g. to at least $10 an hour, will begin to raise the teen labor force participation rate.
Chart – Teen Labor Force Participation Rate
http://research.stlouisfed.org/fred2/series/LNS11300012?cid=32449
Moreover, I may add, and stated before, raising the minimum wage will result in low income real wages rising more than high income real wages falling, through inflation, for a net gain in real wages, perhaps up to a $15 national minimum wage.
Higher real wages for low income workers mean they’ll buy more steaks at the Sizzler and fewer burgers at McDonalds. So, the Sizzler will gain jobs and McDonalds will lose jobs.
Jobs at the Sizzler, including related jobs, will likely be better jobs.
Furthermore, I stated before:
If the economy was able to absorb a $10 real minimum wage (in 1968, with a 3.5% national unemployment rate and a much higher teen labor force participation rate), why can’t it absorb a higher real minimum wage with low-wage productivity 25% higher, particularly, since per capita real income doubled, profits are much higher as a percent of GDP, and the proportion of real income of the top 20% became much more concentrated, while real median income was stagnant, and then declined since 2000.
Also, I may add, the U.S. economy hasn’t been able to (fully) absorb regulations.
Federal regulations, not including state regulations, cost $2 trillion a year. Adding more costly regulations has depressed growth over the past few years. A real recovery or strong expansion cannot take place, until the economy can absorb those regulations.
And, when a stronger expansion takes place, tax revenue will rise, spending on idle labor will fall, and tax rates can be raised to slow the expansion to a sustainable rate.
Denis says: “American labor…completely re-unionize.”
The danger there is labor will be overcompensated, e.g. resulting in higher prices and lower quality, or a slower improvement in living standards. It’s similar to a minimum wage that’s too high, e.g. $20 an hour, which will cause more harm than good.
If labor is partially unionized, then some workers will be overcompensated and some workers will be undercompensated.
A Libertarian, with a Ph.D in Economics from George Mason University, which teaches the out-of-the-mainstream Austrian School of Economics, once stated:
What do you call a person whose labor is worth less than the ($7.25) minimum wage?:
“Permanently unemployed.”
My answer was: Under 16 or disabled.
And, I tried to explain to him labor is not just an expense, it’s also an investment.
@PeakTrader:
I note in the CBO report Table 1: $10.10 indexed would increase low-end incomes $19 billion and reduce high-end incomes $17 billion, for a $2 billion GDI increase. Pocket change, but still. I attribute the $2 billion to the last phrase in footnote F to that table? I don’t think the figure in the beneficial incidence and efficiency effect an increased min wage would have in combination with EITC.
Peak Troller?
Steve, my statements have nothing to do with the CBO. I don’t know the exact number and don’t know how the CBO could possibly project an exact number.
I know if the minimum wage rises to $10 an hour, wages for low-income workers will rise more than the increase in prices, up to some level. So, low income real wages rise.
However, wages for high-income workers (e.g. lawyers earning $75 an hour) will be unchanged and high-income real wages will fall from the increase in prices.
This is an oversimplified example:
If the minimum wage increases 50%, the general price level may rise 10%. So, real income increases 40% for those who earned the minimum wage before the increase (or instead of roughly 1 1/2 hours of work at $10 to buy something worth $10, roughly 1 1/2 hours of work at $15 to buy the same item at $11) and increases less for those earning above the original minimum wage, up to some level. For someone earning $75 an hour, he only gets a higher price, i.e. a lower real wage.
However, I don’t expect the price level to rise much after a 50% increase in the minimum wage, because other production costs will fall, productivity will rise, and there will be some shift from profits and management salaries to low-wage workers, to keep prices low.
Here’s a real example (also, I may add, after the increase in wages, few new workers were hired and existing workers rose to the higher standard):
There was a fast growing firm that was also very disorganized, because it was so busy. One of the recommendations was raising the starting wage from $11 to $13 an hour for all factory workers. However, management decided that was a bad idea. One reason was there were always plenty of applicants for $11 an hour, over the prior five year period, and of course, there was concern profits would fall, substantially.
However, roughly six months later, management raised the starting wage to $13 an hour and something miraculous happened.
Turnover rates dropped like a rock, overtime was almost completely eliminated, including six day weeks, injuries fell dramatically, hardly anyone called in sick, damage to equipment and products almost disappeared, including steep declines in reject rates, quality rocketed, morale was lifted, management no longer had to spend enormous time interviewing workers, with related paperwork and training, supervisors no longer had to cover for sick workers, to do their jobs, and had time to actually do their work, and profits soared.
Experienced workers who rejected the job when they learned it was $1 or $2 less than they were willing to work for took the jobs at the higher rate. Management had much more time to manage and supervisors had much more time to supervise. So, operations became much more organized and efficient.
Here’s part of a 2013 article about CostCo:
“The no-frills warehouse chain, Costco, pays its hourly workers an average of just over $20 an hour, compared to just under $13 at competitor Wal-Mart.
Sales at Costco have grown an average of 13% annually since 2009, while profits have risen 15%. Its stock price has more than doubled since 2009. During the same period, discount retailer Wal-Mart’s sales grew an average of 4.5% each year, profits rose 7%, and its stock price increased 70%.
Cesar Martinez, a 37-year-old fork lift operator, has worked at a Costco in North Carolina for 19 years. He makes $22.82 an hour, gets health benefits and a pension plan. He manages to save, and doesn’t worry about hospital bills for his daughter, who suffers from asthma.
“That’s the reason why I’ve been here for so long,” he said. “The company gives you a decent wage and treats you with respect and takes care of you. That’s why we all give 100%.”
Research shows that it pays to pay employees well, because satisfied workers are more productive and motivated, according to MIT Sloan School of Management professor Zeynep Ton, who focuses on operations management.
“How many times have you gone to a store, and the shelves are empty or the checkout line is too long, or employees are rude?,” she said. “At Costco, you see a huge line that disappears in minutes.”
The productivity translates into sales, she said.
According to Ton’s research, sales per employee at Costco were almost double those at Sam’s Club, its direct warehouse competitor owned by Wal-Mart.”
Two trends over the past 30 years or so are:
U.S. corporate profits increased from 8% of GDP in 1980 to almost 15% of GDP in 2014 (from National Economic Trends by the St Louis Fed), while “Proprietors’ Income” (e.g. smaller businesses) stayed roughly flat at around 9% of GDP.
And:
ABC NEWS Business Unit
July 2, 2010
“We’ve seen, over the past three decades, a tenfold-plus increase in the gap between top executives and average American workers.
CEOs in the country’s S&P 500 companies make, on average, 319 times more than the average American worker…in the 1970s, that ratio was 30 to 1.”
I know no one needs me to, but I’ll just point out that those stated goals of conservatives are not at all their demonstrated goals, which are to put more money into the hands of already wealthy people. Lowering/eliminating the minimum wage would accomplish that goal.
Alex, it’s naive to believe only conservatives are greedy and only rich people are greedy.
I guess, you just don’t like what Joe Lieberman calls “Those wascally wepublicans” 🙂
What happens when you raise minimum wages?
MacDonalds low prices are no longer subsidized against their competitors like Burger Dive, Four, Five Guys, etc.
They have to raise their quality to match their new higher prices, or they’re pushed out of the market.
Denis Drew: If only 1/3 of the American workforce unionized the entire planet would benefit. For that matter 1/3 of the world wide workforce in unionization would STOP much of the labor abuse in places like Bangladesh, South Africa , sweatshops in South America, India, China, etc.
PT: NO one working is EVER overpaid!
Peak:
Please combine your posts