Discussion of the evidence and research of government wage control, especially minimum wage. It's probably safe to assume that everyone in this thread has a working understanding of the arguments used by believers of either side, I'd prefer this to be more of an examination of the evidence than theory crafting.
By "debate threads are rarely needed" I hope Certis meant "please feel free to make one on the first day".
Recently there has been a lot of minimum wage back and forth in the 2016 Presidential debate thread.
BadKen posted this article by Paul Krugman in support of raiding the minimum wage. The link in that article that is most relevant to this thread is this analysis of several employment studies which indicates that raising the minimum wage has no to minor negative effects on employment.
Obirano posts this research paper which comes to the conclusion that there are larger negative effects than the previous (though later chronologically) paper finds.
It's important to note that while the 2006 paper finding negative employment impact is towards the negative end of the spectrum of literature on that linkage, and even that more extreme finding doesn't actually conclusively show that raising the minimum wage is a bad idea. Towards the end of page nine the paper has this summary of their overall results:
In particular, employment elasticities with respect to the minimum wage ranged from about −.1 to −.2 for teenagers and from −.15 to −.2 for the youth population as a whole.
For this paper "teenagers" refers to 16-19 year olds and "broader youth population" refers to (16-24 year olds). This elasticity is the factor on the minimum wage increase to get the employment adjustment. If the number is 0 that means that there is no change in the number of workers when you change the minimum wage: maybe most companies have enough extra profits to swallow the increased salary with no problem, or they cut costs elsewhere, if the number is -1.0 that means that the two are exactly in proportion.
For example, if you have 100 workers and the minimum wage goes up by 30%, with an elasticity of zero you'd still have 100 workers, with an elasticity of -1.0 you'd have 70 workers after the wage hike, and with an elasticity of -0.2 (the top of the range that paper finds) you'd still have 94 workers.
Note that the studies referenced by both papers are all based off of minimum wage/close to it industries. Surveys of fast food restaurants, retail stores, etc. This isn't a "There are 12 minimum wage workers at this company and half of them got laid off) scenario we are talking about, it's "there are 100 minimum wage or MW-adjacent workers, and six of them got laid off.
So even this finding on the pessimistic end of the spectrum doesn't really demonstrate that the minimum wage has a negative outcome, just that it has a negative effect on the employment rate. At this extreme the 30% increase in wages adjusted by the 6% decrease in employment means that this section of the population overall got a 22.2% increase in available money.
Well, as a thought experiment, let's pretend we raised the minimum wage, that which must be paid to all workers, to $1 million annually.
That, quite clearly, would destroy the economy. Very few companies could pay that kind of wage and survive, and those that could (a few tech companies) are reliant for revenue on a vast number of smaller companies and people, most of whom would be instantly unemployed. So they wouldn't die in the first week, they'd die a few months later.
So there's obviously some point at which a high minimum wage hurts employment. It's where that point is that's really being argued. I imagine it's probably not one size fits all; different local economies can probably handle different minimum wages.
It seems to me that what's being looked for here is the level for maximum overall benefit to the most number of people.... or at least that's probably how we would prioritize things. I'm not sure all sides of the argument really want those things. (For some, hell on earth would be just fine, as long as they're the ones in charge.)
Malor, the scope laid out is an exploration of the evidence rather than broad thought experiments. Try to keep it within the intended format.
NBD, it's a learning process as we feel out these thread types.
edit: actually, I think I should post this question in the more general thread, rather than this one.
I don't have a problem with the idea of a minimum wage, but I don't really understand how one thing can be considered "a fair wage" in both San Francisco and rural North Dakota. Cost of living is the biggest determinator of what counts as a fair wage.
That being said, I'm fine with there being a bare minimum set by federal government; I'd just like municipalities to adjust it for their own cost of living.
It's important to note that while the 2006 paper finding negative employment impact is towards the negative end of the spectrum of literature on that linkage, and even that more extreme finding doesn't actually conclusively show that raising the minimum wage is a bad idea. Towards the end of page nine the paper has this summary of their overall results:
In particular, employment elasticities with respect to the minimum wage ranged from about −.1 to −.2 for teenagers and from −.15 to −.2 for the youth population as a whole.For this paper "teenagers" refers to 16-19 year olds and "broader youth population" refers to (16-24 year olds). This elasticity is the factor on the minimum wage increase to get the employment adjustment. If the number is 0 that means that there is no change in the number of workers when you change the minimum wage: maybe most companies have enough extra profits to swallow the increased salary with no problem, or they cut costs elsewhere, if the number is -1.0 that means that the two are exactly in proportion.
For example, if you have 100 workers and the minimum wage goes up by 30%, with an elasticity of zero you'd still have 100 workers, with an elasticity of -1.0 you'd have 70 workers after the wage hike, and with an elasticity of -0.2 (the top of the range that paper finds) you'd still have 94 workers.
Note that the studies referenced by both papers are all based off of minimum wage/close to it industries. Surveys of fast food restaurants, retail stores, etc. This isn't a "There are 12 minimum wage workers at this company and half of them got laid off) scenario we are talking about, it's "there are 100 minimum wage or MW-adjacent workers, and six of them got laid off.
So even this finding on the pessimistic end of the spectrum doesn't really demonstrate that the minimum wage has a negative outcome, just that it has a negative effect on the employment rate. At this extreme the 30% increase in wages adjusted by the 6% decrease in employment means that this section of the population overall got a 22.2% increase in available money.
While I don't fault your analysis I would point out that estimate of elasticity would only be valid for the observed change. There is no guarantee that the elasticity wouldn't change if the scale of the change was radically different to the change that the estimates were based on. So I would be a little cautious that a 30% would have 6% impact ( I realise this was mostly an example for the purpose of illustration).
The youth employment market is a very distorted market in a lot of ways. This is due to a lot of factors. Most of the youth cohort is in education (and proabably the military in the US) so the proportion actually in the job market is relatively small making small absolute numbers cause large percentage changes. Also young people have more options for non-employment support (eg living at home) than are available to older groups.
I did this sort of econometric analysis back in my academic days and with the benefit of 20 years hindsight I'm more sceptical of its value. It's a bit too easy to achieve statistically significant results to fulfil your pre-existing bias 
I don't have a problem with the idea of a minimum wage, but I don't really understand how one thing can be considered "a fair wage" in both San Francisco and rural North Dakota. Cost of living is the biggest determinator of what counts as a fair wage.
That being said, I'm fine with there being a bare minimum set by federal government; I'd just like municipalities to adjust it for their own cost of living.
Don't some folks use the term 'living wage' to better encapsulate cost of living differences?
MilkmanDanimal wrote:I don't have a problem with the idea of a minimum wage, but I don't really understand how one thing can be considered "a fair wage" in both San Francisco and rural North Dakota. Cost of living is the biggest determinator of what counts as a fair wage.
That being said, I'm fine with there being a bare minimum set by federal government; I'd just like municipalities to adjust it for their own cost of living.
Don't some folks use the term 'living wage' to better encapsulate cost of living differences?
Yes, but that's the crux of the issue; "living wage" is a meaningless team outside of a geographical area. My father-in-law lives in the country about an hour and a half East of Nashville. I'm guessing $10/hour might be something you could live in there. Not comfortably, not with much sister income for emergencies or luxuries, but food and shelter are affordable. I live in the Twin Cities, and, while it has a lower cost of living than a lot of major metropolitan areas, it's not going to be possible to live in anything vaguely not resembling poverty, because money doesn't go as far.
Minimum wage is one of those things I feel like needs to exist as a catch-all to make sure people are at least getting something theoretically livable; I just have no idea how you federally mandate something that is so inexorably tied to the local economy.
Minimum wage is one of those things I feel like needs to exist as a catch-all to make sure people are at least getting something theoretically livable; I just have no idea how you federally mandate something that is so inexorably tied to the local economy.
Base wage plus cost of living index modifier to account for the local economy?
And then apply a cost of living adjustment to the base wage every year so we don't have real value of the minimum wage declining for years and years until enough political pressure builds up to increase it.
Does the scope here include discussing https://en.wikipedia.org/wiki/Basic_... ?
While I don't fault your analysis I would point out that estimate of elasticity would only be valid for the observed change. There is no guarantee that the elasticity wouldn't change if the scale of the change was radically different to the change that the estimates were based on. So I would be a little cautious that a 30% would have 6% impact ( I realise this was mostly an example for the purpose of illustration).
Sure, and one thing I imagined may happen in this thread is examination of where that line may be, however that's probably pretty much impossible. A 30% pay increase may stay within a single regime, especially in an area that hasn't had a MW increase in 20 years, while that same 30% increase in other areas (for example States that have been keeping their MW in pace with inflation) would see a much higher negative elasticity.
The 2006 study posted above ends with a great appendix that very broadly summarizes the examined papers: name, small blurb on methodology, and the found range of probable elasticity values. That could be a good place to start such discussion. One that I found especially interesting from a policy standpoint is Burkhauser et al, which attempted to find those values separately by race and education:
Teens: −.3 to −.6
Youths: −.20 to −.25
Black youths: −.85
Nonblack youths: −.18
High school dropouts (20-24): −.85
High school grads (20-24): −.16
This is really important because it changes how those "six lost jobs" are distributed. If those six lost jobs were distributed evenly throughout high attrition minimum wage jobs, then its entirely possible that the negative employment effect would be entirely swallowed by the increased minimum wage, as in, even an unlucky minimum wage employee that got laid off and lost two months of work between jobs would be a winner, because in those 10 months he made more money than he would have at 12 months at the lower wage: he just won less than someone who dodged the layoff bullet. (In this, more optimistic example instead of considering 100 jobs, 6 of which are lost, the negative employment is experienced as 100 jobs, 70 of which have their hours unaffected, and 30 of which have their hours lowered by 1/6).
However, studies like the above suggest that the employment hit won't be spread evenly, that, say, a black high school dropout is far more likely to lose their existing job/hours and then not be able to replace that loss. That's not by itself a reason not to increase the minimum wage, but it does suggest additional policies that may be helpful in reducing those side effects. For example perhaps some of the money saved in poverty assistance payments (because this block of the population is overall getting more money this would be expected to go down over the entire population) should be directed towards increasing the amount of time unemployment benefits are available, to help support the small number of people that are overall negatively impacted by the minimum wage increase. Another option would be to couple it with increased adult education, so that high school dropouts can use their higher pay to voluntarily reduce their hours to get their GED, or those that have had their hours involuntarily reduced can do the same.
The youth employment market is a very distorted market in a lot of ways. This is due to a lot of factors. Most of the youth cohort is in education (and proabably the military in the US) so the proportion actually in the job market is relatively small making small absolute numbers cause large percentage changes. Also young people have more options for non-employment support (eg living at home) than are available to older groups.
Yeah, this is especially annoying for me because I'm not as interested in the teenager population here. I understand that those of them that are saving are doing so for college, a huge societal good, and what they aren't saving is going right back into the economy. However I think that our decades of wage stagnation has hugely weakened the linkage between the youth and minimum wage in a way that many of these studies haven't adjusted to capture (and I am sympathetic to the immense difficulty of doing that). My own Mother-in-Law is earning within a quarter or two of her State's minimum wage, and she's over 65, and statistically she's not the freak outlier she may have been 35 years ago.
The 2006 paper does link to a lot of these though, if you search "Studies Focused on the Least Skilled" in the appendix you'll find the subset of examined studies that were not age oriented.
I did this sort of econometric analysis back in my academic days and with the benefit of 20 years hindsight I'm more sceptical of its value. It's a bit too easy to achieve statistically significant results to fulfil your pre-existing bias :)
Certainly, that's why I am (admittedly dubiously) sort of treating these studies as sort of bracketing the probable real world effect. If the cumulative literature studies on the subject range from the most optimistic of "increasing the minimum wage doesn't affect the employment rate" and the most pessimistic "increasing the minimum wage decreases the employment rate of the most affected workers by -20%" then I feel like it's pretty likely that those are the brackets of the actual real world effect. Theoretically, maybe, the optimistic ones are sort of massaged (intentionally or not) a small amount in the optimistic direction, and vice versa.
Does the scope here include discussing https://en.wikipedia.org/wiki/Basic_... ?
Unfortunately not really, solely since there is very little real world evidence either way for that. I believe that a Canadian County or two did limited experiments, so papers or good articles with actual numerical analysis on those experiments would be welcome, but there won't be much else. I think in the next year or so Finland is performing a larger experiment on the issue.
nel e nel wrote:MilkmanDanimal wrote:I don't have a problem with the idea of a minimum wage, but I don't really understand how one thing can be considered "a fair wage" in both San Francisco and rural North Dakota. Cost of living is the biggest determinator of what counts as a fair wage.
That being said, I'm fine with there being a bare minimum set by federal government; I'd just like municipalities to adjust it for their own cost of living.
Don't some folks use the term 'living wage' to better encapsulate cost of living differences?
Yes, but that's the crux of the issue; "living wage" is a meaningless team outside of a geographical area. My father-in-law lives in the country about an hour and a half East of Nashville. I'm guessing $10/hour might be something you could live in there. Not comfortably, not with much sister income for emergencies or luxuries, but food and shelter are affordable. I live in the Twin Cities, and, while it has a lower cost of living than a lot of major metropolitan areas, it's not going to be possible to live in anything vaguely not resembling poverty, because money doesn't go as far.
Minimum wage is one of those things I feel like needs to exist as a catch-all to make sure people are at least getting something theoretically livable; I just have no idea how you federally mandate something that is so inexorably tied to the local economy.
Well, maybe I wasn't clear, but the point being that 'living wage' is an attempt at nomenclature that better reflects the cost of living in a particular area - and hopefully varies depending on that cost - whereas a federally mandated 'minimum wage' is typically thought of as one number for everyone. $10 an hour in Pawtuckett is very different than 10$ an hour in NYC.
Tangentially, we have a Federal Poverty Guideline that is a blanket number for everyone. The guideline for a family of 4 is $24,300 (annual) for 2016.
Tangentially, we have a Federal Poverty Guideline that is a blanket number for everyone. The guideline for a family of 4 is $24,300 (annual) for 2016.
A number with the questionable advantage of being ridiculously low practically everywhere in the United States.
$24k is about what I'm making in a year in takehome right now, not including bonus. I could live off that semi-comfortably in my area if I wanted to (though part of that comes to likely living in the same area as my ex-wife, which I reaaaaaaaaaally don't want to do). With a family of four? I can't even imagine.
Tangentially, we have a Federal Poverty Guideline that is a blanket number for everyone. The guideline for a family of 4 is $24,300 (annual) for 2016.
It's a blanket number because that's what Congress agreed to back in the 1960s. The poverty threshold used by every needs-based program is calculated by the Census Bureau by comparing pre-tax cash income against three times the cost of a minimum food diet, adjusted for family size, composition, and age of householder.
The minimum food diet was set in 1963 (based on the Department of Agriculture's 1955 Household Food Consumption Survey) and updated annually using the Consumer Price Index. It also includes other outdated assumptions, such as "the housewife will be a careful shopper, a skillful cook, and a good manager who will prepare all the family's meals at home.”
There is, however, an ongoing push to develop an updated and more accurate way to calculate poverty called the Supplemental Poverty Measure which does account for things like geographic differences in the cost of living as well as the fact that households have more expenses other than just food.
Here's some research that takes a stab at measuring the long-term effects of an increased wage floor, and the results are not pretty.
As you read this and the other linked research, you'll notice a pattern - the people claiming that wage floor increases are acceptable are doing so defensively. In other words, they are trying to establish that wage floors can be created in some circumstances without negative consequences. The reason for this is that the consequences of price controls - which is what a wage floor is - are one of the few things in economics that come close to being a law. Price floors above the market price create a surplus, which in the case of wage floors means permanently unemployed workers. Long term, we would expect this to lead to significant decreases in employment rates. And there is strong evidence that is indeed the case, especially among the populations most likely to work minimum wage jobs and especially among the populations with the fewest skills.
Enforcing a wage floor, at best, does nothing - the wage floor is below any conceivable market wage, and has no effect. At worst, it disemploys some people in order to benefit others. And this disemployment is not random - the people it affects are the ones with the least to offer, the fewest skills, or other "undesirable" traits such as being an ex-convict or living in a place with an economy that's different. Or, depressingly, just having the wrong skin color.
After minimum wage rates were raised sharply, the unemployment rate shot up for both white and black teenagers. Even more significantly, an unemployment gap opened between the rates for white and black teenagers…. We regard the minimum wage rate as one of the most, if not the most, antiblack laws on the statute books. The government first provides schools in which many young people, disproportionately black, are educated so poorly that they do not have the skills that would enable them to get good wages. It then penalizes them a second time by preventing them from offering to work for low wages as a means of inducing employers to give them on-the-job training. All in the name of helping the poor.
But wait, it gets "better". What happens to the people who are disemployed by a wage floor? They don't go away. Instead, they turn to the shadow economy. Wage floors literally create criminals and scofflaws out of marginal populations. Employment in the shadow economy can be lucrative due to criminal risk premiums and a lack of taxes, but it comes at a heavy cost - violence, abuse, and instability. Instead of helping families, it actively damages them.
In short, the minimum wage - the wage floor - is one of the most cruel, racist, and economically discriminatory laws currently on the books. It sacrifices the most vulnerable workers in order to give better off people more money. It cuts off the bottom rungs of economic advancement, where low paying jobs offer on-the-job training and experience that develops into better skills and higher pay. And it is one of the best pseudo-science "wishful thinking with disastrous effects" examples of legislation in modern politics.
Enforcing a wage floor, at best, does nothing - the wage floor is below any conceivable market wage, and has no effect.
I really enjoy reading your arguments, Aetius, because I'm no expert on this subject and it's good to be exposed to new ideas.
HOWEVER.
Please refrain from making dramatic blanket statements like the above which are demonstrably untrue. Plenty of businesses provide the minimum legally required salaries and benefits for workers. Many workers who rely on tips are paid below minimum wage, even after tips. Also, many businesses steal wages with required overtime without pay and pushing the boundaries of legal break, lunch and even bathroom time.
In practice, the wage floor is no floor at all. Regardless of the relationship of a wage floor to market wages or even living wages, some businesses with unskilled or low-skilled employees work very hard to shove those people down the stairs into the basement.
At any rate, it is interesting and worthwhile to read the opinions of people who forgot more about economics than any of us will ever know.
Please refrain from making dramatic blanket statements like the above which are demonstrably untrue.
Badken, this is a debate thread and the scope requests evidence. If you think Aetius is making a claim that isn't correct, don't tell him not to make it, provide some evidence and carry things forward like you do in the rest of your post. Some links backing your own claims wouldn't hurt.
Please don't delve into telling people what is and isn't OK to say.
How about some anecdotal comments from Australia.
We have a national minimum wage of A$17.70 (USD 13.31) which is about A$672.8 (USD 505.83) per 38 hour work week. The minimum wage has been entrenched in Australian society since 1975 (earlier if talking about a decentralised basis across the States/Territories).
On top of this, there are various "awards" or enterprise agreements which vary depending on State/Territory and occupation, age, skill etc. This doesn't stop employers from underpaying employees - see this notorious case of national exploitation by 7-Eleven.
We also have a fairly accessible social welfare system (albeit the rising costs of living mean that it is pretty hard to survive on welfare payments). The base welfare payment for a single adult with no children is A$527.60 (USD 396.67) per fortnight.
According to this site the unemployment rate (the number of people actively looking for a job as a percentage of the labour force) over the last decade in Australia has varied between 4% to 6% with a mean rate of about 5%. Unemployment is trending upwards at the moment as Australia transitions away from over-reliance on commodities exports towards a service economy.
Numerically, welfare recipients have an income which is about 39% of a full-time employed single adult on the minimum wage. That is a pretty compelling reason to explain why working, even at the minimum wage, is better than remaining unemployed, and possibly/partially explains why Australia is experiencing far lower unemployment rates than say the US or Europe.
Certainly, the higher structural costs of wages in Australia has destroyed the manufacturing sector outside of a few notable industries such as health pharmaceuticals (baby formula, vaccines such as the cervical cancer solution, hearing aids etc) and agricultural derivative products.
I haven't seen any evidence to establish Aetius' proposition that a direct correlation exists between a wage floor and uneven wealth distribution, although it is beyond doubt that the wealth disparity in both Australia and the US continues to grow between the "haves" and the "have nots".
Badken wrote:Please refrain from making dramatic blanket statements like the above which are demonstrably untrue.
Badken, this is a debate thread and the scope requests evidence. If you think Aetius is making a claim that isn't correct, don't tell him not to make it, provide some evidence and carry things forward like you do in the rest of your post. Some links backing your own claims wouldn't hurt.
Please don't delve into telling people what is and isn't OK to say.
I didn't provide any links because I thought the things I mentioned were obvious. I hear news reports about workers paid below minimum wage and companies engaging in wage theft (and getting away with it) all the time. I could have worded it better, but the point I was trying to make was not "shut up" but rather that some bold claims have been laid down without any support. Aetius should provide some support for his overly broad assertions like "wage controls are economically certain to suppress job growth" and "Enforcing a wage floor, at best, does nothing - the wage floor is below any conceivable market wage, and has no effect."
From billmoyers.com in 2013: The Minimum Wage Doesn’t Apply to Everyone
Millions of working Americans make less than minimum wage. In fact, more Americans are exempt from it than actually earn it.
The Pew Research Center examined Bureau of Labor Statistics data and found that about one and a half million Americans earned the minimum wage in 2012, but nearly two million people earned an hourly wage that was even less than $7.25 an hour. These workers, for one reason or another, are exempted from the part of the Fair Labor Standards Act (FSLA) that requires employers to pay at least the minimum wage, and include tipped workers and many domestic workers, as well as workers on small farms, some seasonal workers and some disabled workers.
The linked study states: "According to the Bureau of Labor Statistics, last year [2012] 1.532 million hourly workers earned the federal minimum of $7.25 an hour; nearly 1.8 million more earned less than that because they fell under one of several exemptions (tipped employees, full-time students, certain disabled workers and others), for a total of 3.3 million hourly workers at or below the federal minimum."
The billmoyers.com article continues:
The largest of these exempted groups is tipped employees, many of whom work in food service. Today, tipped employees earn just $2.13 an hour — the rationale being that tips cover the rest. In fact, some of these workers do earn a reasonable living through their tips, but, as Saru Jayaraman, co-founder and director of the Restaurant Opportunities Centers United, told us, many don’t.
[...]
People at or below the federal minimum are:
Disproportionately young: 50.4% are ages 16 to 24; 24% are teenagers (ages 16 to 19). Mostly (77%) white; nearly half are white women. Largely part-time workers (64% of the total).
(emphasis mine)
The bottom line is that millions of people are making less than minimum wage, and the "market wage" for the jobs they work is not only below minimum wage, but puts them below the poverty level even if they are working full time (which many are not).
As far as wage theft is concerned, this 2014 Economic Policy Institute article says:
An Epidemic of Wage Theft Is Costing Workers Hundreds of Millions of Dollars a Year
A [2009] three-city study of workers in low-wage industries found that in any given week, two-thirds experienced at least one pay-related violation. (pdf) The researchers estimated that the average loss per worker over the course of a year was $2,634, out of total earnings of $17,616. The total annual wage theft from front-line workers in low-wage industries in the three cities approached $3 billion. If these findings in New York, Chicago, and Los Angeles are generalizable to the rest of the U.S. low-wage workforce of 30 million, wage theft is costing workers more than $50 billion a year.
I don't know if findings in NYC, Chicago and LA are broadly applicable. One thing that is broadly applicable is that companies that employ low skilled workers will do everything they can to minimize what they pay those workers. I suspect the same applies to companies with higher skilled workers. It's just good business sense to minimize costs, and in a tight labor market, an easy way to minimize costs is to minimize wages.
I was going to bring up company policies that encourage turnover in low-wage jobs, but the only information I have on that is anecdotal. Unsurprisingly, I wasn't able to find any studies demonstrating how some companies abuse their employees to encourage them to leave so that a new crop of fresh faces can be hired at starting level wages. One thing of note, though, is that WalMart used to have that kind of wage policy. They decided to turn it around in 2015 after studying it and finding the cost for their brand of retail operation might be lowered by increasing wages and encouraging retention. This year they have also announced changes in shift scheduling to better meet workers needs.
If WalMart can be nice to its employees, maybe there is hope after all.
He worded that a little poorly, but what he meant (I am nearly certain) was that "in a best case scenario the wage floor does nothing, because the wage floor is below what any market price would be anyways" imagine the minimum wage being a penny a day in 2015, or how, as a software developer, no one at my office is near my State minimum wage.
He's not saying that circumstances where the minimum wage is actually meaningful, like a Wal-Mart or McDonalds, don't exist. He's saying that those circumstances are worse scenarios.
Aetius, your arguments are predicated on the idea that businesses don't want (or need, depending on the skill levels involved) to raise their minimum wages over time. However, that (and the studies) seem to me to leave out the effects of inflation on the cost of living. Over time, a fixed minimum wage (whether set by the Feds or by an employer or state or city) will decrease as inflation slowly raises prices.
In the face of the studies you've shown, and the fact the companies that employ (and often prey upon) those in poverty with abusively low wages and zero job security, centered around the minimum wage and it's vicinity, what mechanism is proposed to counter-act the effects of inflation?
Are you for COLA or similar yearly adjustments to the wage to keep it's buying power steady? I also notice that a lot of libertarians seem to support a Basic Income. What's the solution, now that you've shown that there is a useful ceiling to the minimum wage?
Here's some research that takes a stab at measuring the long-term effects of an increased wage floor, and the results are not pretty.
To quantify "not pretty" they found that though after 1 year the employment elasticity was -.08, after 15 years the employment elasticity was -.4, that still leads to an increase in the amount of money that went into the restaurant worker population. To borrow my 30% example, the 30% increased wages correspond 15 years later to a 12% loss of workers, meaning that affected workers as a class even 15 years later when all of the negative effects have fully been felt (I assume the mechanism being restaurants needing time to adjust business practices and equipment to be more productive with less labor). And during that 15 years they got even more benefit than that. in that first year the sectors 30% wage hike gave a benefit of 26.9%. That's a lot of extra money for night classes, or day care, or car repairs, or just lower poverty assistance spending.
While it would be great if that number were lower, I can't see a long-delayed -.4 elasticity number as enough to make reasonable minimum wage increases a bad program, as long as measures are also taken to help ensure that that -.4 doesn't disproportionately impact the population, examples of which I gave above.
In real world examples, Seattle is enjoying some of the lowest unemployment numbers in awhile, despite their relatively high wage floor.
As a contrast, I actually employ about a dozen people that work at under the federally mandated minimum wage, because they are tipped employees. Not sure if anecdotes regarding their situations are welcome or if this is largely a data driven debate.
Here's some research that takes a stab at measuring the long-term effects of an increased wage floor, and the results are not pretty.
As you read this and the other linked research, you'll notice a pattern - the people claiming that wage floor increases are acceptable are doing so defensively. In other words, they are trying to establish that wage floors can be created in some circumstances without negative consequences. The reason for this is that the consequences of price controls - which is what a wage floor is - are one of the few things in economics that come close to being a law. Price floors above the market price create a surplus, which in the case of wage floors means permanently unemployed workers. Long term, we would expect this to lead to significant decreases in employment rates. And there is strong evidence that is indeed the case, especially among the populations most likely to work minimum wage jobs and especially among the populations with the fewest skills.
The wikipedia analysis of a price floor is based on the assumption of a free market including such characteristics of perfect information by participants, no market power, homogeneous products (ie everyone is interchangeable). These are probably not characteristics in most labour markets. Perhaps instead consider the example of a monopsony where a buyer has significant market power.
In my experience, the perspective someone has of the structure of the labour market significantly influences their perspective on intervention (be it minimum wage, training assistance or whatever). If you believe that the market is capable individuals negotiating on equal terms with employers you have a different view than if you see it as oligopolistic employers dictating terms to employees who have few options.
He worded that a little poorly, but what he meant (I am nearly certain) was that "in a best case scenario the wage floor does nothing, because the wage floor is below what any market price would be anyways" imagine the minimum wage being a penny a day in 2015, or how, as a software developer, no one at my office is near my State minimum wage.
Yonder said it better than I could. I wasn't talking about the current market, but about the basic economic dynamics of supply and demand.
Aetius, your arguments are predicated on the idea that businesses don't want (or need, depending on the skill levels involved) to raise their minimum wages over time.
They are not. Even with the wage floor we have now, businesses constantly adjust their pay levels in response to market differences and changes. Clearly, McDonald's is not paying its employees $1.50 an hour, as it could have in 1960. it's obvious that companies respond to the pressures of inflation by raising wages.
However, that (and the studies) seem to me to leave out the effects of inflation on the cost of living.
I can't speak for the specific research, but these kinds of studies are almost always inflation-adjusted (though of course, typically using the suspect CPI numbers - I won't go into that argument here).
Over time, a fixed minimum wage (whether set by the Feds or by an employer or state or city) will decrease as inflation slowly raises prices.
Which is one of the many insidious and subtle effects of inflation that transfers wealth from wage earners (especially the poor) to asset holders, and a strong argument for stopping that government policy.
what mechanism is proposed to counter-act the effects of inflation?
None are required. Assuming the government continues the destructive policy of inflation, probably the best thing that could be done would be to establish a credible alternative to the CPI. This would allow private businesses to adjust wages more quickly and with better accuracy.
Are you for COLA or similar yearly adjustments to the wage to keep it's buying power steady? I also notice that a lot of libertarians seem to support a Basic Income. What's the solution, now that you've shown that there is a useful ceiling to the minimum wage?
No, it should be clear from my posts that I'm in favor of abolishing the wage floor - it is an archaic relic of racism that just needs to go away.
To borrow my 30% example, the 30% increased wages correspond 15 years later to a 12% loss of workers, meaning that affected workers as a class even 15 years later when all of the negative effects have fully been felt (I assume the mechanism being restaurants needing time to adjust business practices and equipment to be more productive with less labor). And during that 15 years they got even more benefit than that. in that first year the sectors 30% wage hike gave a benefit of 26.9%. That's a lot of extra money for night classes, or day care, or car repairs, or just lower poverty assistance spending.
Of course the people who received more pay got more pay. But what about the 12% who lost their jobs? They got nothing. And the new people potentially entering the market who might have gotten jobs at the lower rate? They don't get anything either. Such an increase is literally taking jobs away from some people - the ones on the low end, with the least experience and fewest skills - and giving that money to others with better skills, better connections, or fewer negative traits. That is, as economics would predict, the fundamental problem with wage floors - not the benefits the workers who are still employed receive. As the research states:
The longer-run disemployment effects are potentially large ... In words, a 10% minimum-wage hike leads to a 0.8% decline in restaurant employment within a year but a 4% decline over the long-run.
Those jobs are gone - for good. They never come back, and new ones that might appear due to expansion never materialize.
In real world examples, Seattle is enjoying some of the lowest unemployment numbers in awhile, despite their relatively high wage floor.
One thing to keep in mind about these sorts of numbers is that they are ... well, manipulated. To quote the article:
The state’s civilian labor force — meaning those ages 16 and older who are working or actively looking for work— went up slightly in August, to about 3.63 million people.
Emphasis is mine. In short, if you lose your job, get depressed, and stop looking for work, the government stops counting you as unemployed - or indeed, at all with regard to employment (isn't that reassuring?). This is a common deception in government employment statistics. And indeed, Seattle's labor force participation rate has been declining again since 2009 and is almost back to the 2005 lows. So while more people looking for jobs are finding them, the total number of people with jobs or looking is either flat or declining - especially in a city that is experiencing rapid growth, where you would expect the participation rate to go up due to immigrants with jobs and the economic expansion associated with population growth.
This deception causes fundamental problems in evaluating disemployment, because the psychological and economic damage done by long-term disemployment often puts those people into the "not looking for work" category. A minimum wage increase could drive a million people into the gray market or extreme poverty, and the researchers would have difficultly detecting it because the unemployment rate didn't change. Instead, they'd have to look at reductions in the labor force and try to discern the losses there - a task which is both politically charged and affected by many other, larger factors.
The wikipedia analysis of a price floor is based on the assumption of a free market including such characteristics of perfect information by participants, no market power, homogeneous products (ie everyone is interchangeable). These are probably not characteristics in most labour markets. Perhaps instead consider the example of a monopsony where a buyer has significant market power.
Oh, it's far worse than that. Not only is there very little homogeniety to workers, the homogeniety of employers is even worse. The lack of information in employment markets is notorious, leading to an entire sub-market of headhunters and contractors who have largely co-opted the online job sites. Market power swings wildly in both directions. Sometimes it's impossible for companies to find qualified candidates, and other times the employers hold all the cards, usually due to legal or contractual restrictions enforced by a single entity (often one that receives favorable government protection like the NCAA).
Unfortunately for the monopsony model, high-end, highly specialized markets like the NBA, NCAA, and NFL are pretty much the only markets where real monopsony abuses exist, and those are subject to periodic market challenges that shake them up. The low-wage markets show little, if any, monopsony effects. In fact, as BadKen linked, many low-wage employers like Walmart have discovered that turnover is bad for business, and raised wages and other accomodations accordingly - pretty much the opposite of the predicted monopsonistic behavior. And evidence suggests that their labor market is still tight, and favoring the workers.
That said, the economists focused on the wage floor research are quite aware of how imperfect the labor market is. In fact, a lot of their effort goes into simply finding populations that are similar enough to make meaningful comparisons, and desperately trying to control the many, many economic variables that affect the market.
Which is one of the many insidious and subtle effects of inflation that transfers wealth from wage earners (especially the poor) to asset holders, and a strong argument for stopping that government policy.
I think you're missing a few steps here in the middle.
Inflation has multiple causes, it's not just due to government messing with the money supply. That's important, because while inflation can be a side effect of monetary policy, whether to help deal with a crisis or as a consequence of economic growth, it is something that occurs naturally in economies. And we can look at how it behaved before the Fed, and after it. That's not theory, it's history, and history shows that an active monetary policy is better than an inactive one.
When you compare the US inflation under the Gold Standard to inflation under the Fed, we are *far* better off with the Fed than without it. Even though we do have inflation, it's obvious that even imperfect monetary policy is better than simply tying our economy to a pile of gold in a vault and hoping for the best.
We should be working to tune the actions of the Fed based on past results, not trying to get government to just give up and go back to19th century policies. That was no economic paradise.
Given that we will always have to deal with inflation (until we reach an economy of plenty), any plan that does not account for it is unrealistic and harmful to low-wage employees.
Aetius - I gather you would not support a minimum wage . What about other forms of labour market intervention eg subsidised training, job search assistance, unions?
Robear - Can I suggest we break off the inflation debate to another thread - that's a different topic?
I believe that it's hard to discuss the minimum wage without taking note of inflation's effects on purchasing power.
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