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Minimum Wage and the Supply Curve

The other day I read an interesting comment at Division of Labor.

Art Carden of Rhodes College

I’ve had a great time in Great Barrington, Massachusetts while I’ve been visiting the AIER. It’s absolutely beautiful up here, but I was at a coffee shop yesterday when I noticed a sign saying “please bus your own tables” (I paraphrase). I saw a similar sign at an ice cream place last week; I interpret both as examples of the deadweight loss from the state’s $8.00 per hour minimum wage. Someone somewhere might be willing to bus tables at coffee shops for $7.00 per hour, but they are prevented from doing so by state law.

Now let me see if I an interpreting this correctly. He is saying that if a restaurant can not attract sufficient labor at at a wage of $8.00 /hour all they have to do is lower the wage they are offering to $7.00/hour, for example, and they will be able to attract sufficient labor.

Now I know that opponents of the minimum wage always claim that demand curves slope to the left but I did never realize that they also believe that the supply curves also slope to the left.

\Cardem probably would respond that this is not what he meant even though it is what he says. Actually, to me this looks like a prime of example of what I’m starting to think of as the George Mason Economics syndrome. This syndrome is assuming you know something you do not know. Cardem assumed he knew that the restaurants in Great Barrington were not willing to pay $8.00 for someone to bus dishes. What he did not know is that the Massachusetts tourist industry is suffering from a labor shortage this summer because the usual supply of tourist trade workers from Eastern Europe and the Carribean has been cut off by anti-terrorism restrictions on immigrant labor by the Bush Administration. However, the Massachusetts tourist industry has become highly dependent on immigrant labor over the past decade because it can not attract sufficient domestic — read teenage –labor at the prevailing minimum wage. To attract labor at the minimum wage they have to import it from abroad.

Consequently, I stick with my original reading that Camden’s argued that the restaurant that can not attract labor at $8.00/hour will be able to attract that labor at $7.00 — that the supply curve slopes the same as the demand curve.

Many people assume that teenagers make the minimum wage. But if you check the data in 2007 373,000 16-19 olds were paid the minimum wage. But that is out of 5,915,00 16-19 year olds that were employed. So that means that only 6 % of teens were paid the minimum wage and 94% were paid more then the minimum wage.

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Minimum Wage Employment

It’s amazing how any discussion of the minimum wage brings out all kinds of discussion and comments.

We have a school of thought that believes very strongly that increases in the minimum wage causes firms to fire minimum wage workers, so higher minimum wages harm the very people it is designed to help.

I am a reasonable man, and understand the theory very well. But my problem is that I’m a semi-retired business economist — one that does not forecast –and for my entire career I have been driven by what the data says. But the data does not support the theory that increasing the minimum wage leads to a decline in minimum wage employment.

Contrary to what a lot of people seem to believe the Bureau of Labor Statistics does publish data on the number of minimum wage employees. It is only available on an annual basis and it is not all at one location. You have to dig it out. But here is where you can start:

The datastarts in 1979 and this chart compares minimum wage employment to the minimum wage since 1979.

Since 1979 their have four periods when the minimum wage was increased.
The following table shows what happened.

The way to read the table is that from 1979 to 1981 the minimum wage was raised from $2.90 to $3.35. That was a 15.5% increase and over this period minimum wage employment rose 13.2% while total wage and salary employment rose 1.1%.

We have four examples of minimum wage increases and the average increase was 14.7%. At the same time the average increase in minimum wage employment was 22.2% versus a 2.1% gain in total wage and salary employment.

Part of the gain in minimum wage employment is due to wage compression at the bottom. When the minimum wage is increased from $5.50, for example to $6.00 it is not only the people who were earnings $5.50 that receive a wage increase. The people earning between $5.50 and $6.00 will also have their wage increased to at least $6.00. Moreover, some people earning $6.00 will not get a pay raise. So when the minimum wage was $5.50 minimum wage employment consisted of those earnings $5.50. But when it is $6.00 some people that were earning more then $5.50 will now be added to the number of minimum wage workers earning $6.00.

I have no idea how much of the 22.2% average gain in minimum wage employment was due to wage compression. I’ve tried to work some different scenarios and concluded it probably was not the dominant factor.

Does anyone know of any papers that have calculated how significant this wage compression is?

But here is my bottom line. I see this great theory that minimum wage increases cause minimum wage workers to lose their jobs. But I look at the data on minimum wage employment and it tells me that the theory can not be right.

Ok, Mark Perry, Don Boudreaux or any of the others teaching their students that minimum wage increases cause minimum wage workers to lose their jobs, can you explain to me why I should reject this data and accept your theory.

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By Spencer

With the jump in the unemployment rate today the old line that increases in the minimum wage causes teenage unemployment to rise is being tossed about..

So look at the record. We have a long record to compare the teenage unemployment rate and the minimum wage. If you look at the two series you see a very inconsistent record. Sometimes a rise in the minimum wage is followed by a drop in the teenage unemployment rate and sometimes it is followed by a rise in the teenage unemployment rate. Essentially, the correlation between the teenage unemployment rate and changes in the minimum wage is zero, strongly implying that there is no causal relationship.

So what drives the teenage unemployment rate. It sure looks like it is the business cycle. If you compare the teenage unemployment rate and the total unemployment rate you see that there is a very strong correlation. The correlation between the teenage unemployment rate and the total unemployment rate is 0.9. Yes, correlation is not causation. But if you look at the long term record it is very hard to conclude that the teenage unemployment rate is a function of the minimum wage. Rather, the evidence very strongly implies that the teenage unemployment rate is driven by the business cycle.

I’ll leave it to others to do the econometrics and demonstrate how to weight each. But, all those like Larry Kudlow blaming the current rise in teenage unemployment on the rise in the minimum wage rather then the business cycle need to to prove their argument.

P.S. here is a chart of teen employment and the real minimum wage.

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Plastic Bags

by spencer

Yesterday I was in line at the grocery store behind a woman buying a weeks supply for her family.
Nothing unusual about that, but she had brought her own bags so she would not be using plastic and/or paper sacks that would be thrown away after one use. She had about a half dozen bags.

What happened was the cash register operator spent half her time placing the many items in the different bags according to a logical pattern that spread the weight around, put bottle in different bags, fresh fruit and vegetables together and boxed items on the bottom. All the things I learned to do years ago when I worked as a bagger as a teenager.

All this turned out to be a very time consuming exercise that on balance meant that the productivity of the grocery store clerk plunged.

In light of this mornings report of very good productivity growth, will poor grocery store clerk productivity be an unintended consequence of conservation measures? Is this one example of how conservation will generate unintended trade-offs? The productivity slowdown from 1975 to 1995 has never been adequately understood and I’ve always believed that shifting investment from minimizing labor to minimizing oil use was a major factor behind the slowdown. Was my experience yesterday just a leading indicator of what to expect and is the recent strength in productivity the tail end of a trend that high priced energy will bring to an end?

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corporate tax rate

I guess this is pick on Mankiw day.

I see he is now in favor of the McCain proposal to cut the corporate tax rate to 25%.

But the effective corporate tax rate was already 24.2% at the end of 2007.

So I wonder which corporations he thinks should pay higher taxes?

P.S. Mankiw promises many benefits if we cut the corporate tax rate from 35% to 25%.
OK, in the first quarter of 2000 the effective corporate tax rate was 35.3%. It is
now 24.2%. We have had a real time actual economic experiment where we actually
achieved the proposed policy change. But I do not see the benefits Mankiw
promises like a drop in the cost of capital. Would someone care to show us where I can find the free lunch the Republicans keep promising.

P.S.S. Maybe cutting the corporate tax rate to 25% would be a good idea. I propose we write tax
legislation to do exactly that. However, the new tax legislation will eliminate all other
provisions of the corporate tax code. This would include things like oil depletion
allowances. It also means that foreign earnings would be taxed at 25% in the year they
were earned regardless of whether or not they were repatriated. Corporate
depreciation of capital spending would either be on a cash basis, 100% in the first year , or straight line depreciation. No other depreciation methods are allowed. All other provisions of the corporate tax code are hereby rescinded and eliminated.

Do you think the Mankiw would agree to this change in the corporate tax code?

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Gas mileage and driving

I keep hearing on CNBC and reading at some blogs that if cars get better mileage that people will drive more by enough to offset the improved mileage.

I can see that people could drive more because of the savings. But to argue that reducing mileage by 20%, for example will lead to people increasing their driving by more then 20% seems like a very questionable conclusion. I’m willing to listen to an argument that increasing gas mileage would be partially offset by increased driving, but not that the responses would be more than 100%.

Does anyone have any idea of the original source or research of this belief by so many Republicans, Conservatives and Libertarians?

Is it just another Wall Street Journal editorial page finding that is too good to be true?

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A few days ago in a post on Greg Mankiw we got into a discussion of stock market valuation where vtcouger wondered about using 10 year trailing earnings to evaluate stocks. vtcouger wondered why Benjamin Graham recommended using 10 year trailing earnings rather then one year trailing earnings. Remember, Benjamin Graham was writing in the 1930s when earnings volatility was much greater then since WW II. Moreover, earnings growth was much weaker
As the chart shows, from 19871 to 1940 EPS growth was only 2% and the volatility was much greater. It was so great that if you used trailing one year earning growth to estimate stock market valuation it could generate major problems. For example, the day FDR was elected president was one of the best time ever to buy stocks. But based on trailing one year earnings the market PE was 25,which said the market was massively overvalued. To get around that problem Graham and Dodd advocated using trailing 10 year earnings. This measure of EPS would include both peak earning and trough earnings and so generate an estimate of normalized or trend earnings so that investors would not be mislead by using peak or trough earnings to calculate stock valuations.

Just as an aside, note that from 1875 to 1900 EPS did not grow. But we see many people talking about that as a great era of prosperity and deflation. I wonder how many of those who thing the late 1800s was so great would really be happy with decades of falling earnings or profits.

Since WW II earnings growth has become much more stable and market valuation has come to depend on future earnings growth rather than dividends.
Corporation now retain a much larger share of earnings and investors buy stocks much more on the basis of expected future growth from these retained earnings rather than current dividends that were so important to Graham and Dodd. Note, when they wrote in the 1930s expected earnings growth was 2% and now it is 7% and in the late 1990s bubble it was even higher.

But investors still have the problem that basing valuation of peak earnings or trough earnings can distort valuations even though EPS growth is now much more stable then it was before WW II. For the market as a whole you can use the Graham and Dodd practice of using trailing 10 year EPS that includes both peak and trough EPS. Another way to do it is to use trend EPS growth. If you look at the above chart on EPS since 1960 you see the dotted 7% EPS growth trend. So rather than using actual trailing EPS, or forecast EPS, use this trend line to estimate market valuation. This chart does just that.

In addition I have shown my estimate of what the PE should be given current interest rates. The estimate is based on the actual relationship between 1960 and 1996 before the late 1990s bubble so it excludes the bubble from the regression results.

I hope this explains things to your satisfaction vtcouger.

Note: my EPS data is reported EPS until 1989 and since 1989 it is operating EPS.

Note: read Brad Delong at

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