Tuesday, January 28, 2014

Minimum wage advocates skirt difficult questions.

The minimum wage is in the news again.  There is a movement on the left to increase in the minimum wage to $ 15/hr.  I am aware of no serious people who believe that is possible without serious negative consequences. While it is certainly true that even $15/hr does not yield a grand income, taking salaries to that level would wipe out much of the operating profit of McDonald's or other fast food chains. While some workers would earn more money (and the price of a Big Mac for everyone would rise), it seems inevitable that there would be substantial job loss as operators cut staff and automation becomes more attractive. We could expect to see a lot fewer new stores.

But what of a smaller increase in the minimum wage ? The Journal Sentinel editorial board endorsed an increase to $ 10, saying that it was not "buying" standard economic doctrine that minimum wage can increases reduce employment.

Let's take a closer look at why a minimum wage increase might not be an unalloyed good for the persons it is intended to help.

Minimum wage increases increase the cost of an employee. In response, one - or a combination - of three things must happen.  The employer's profits must be decreased, its prices must rise or it must reduce its labor costs, by cutting staff, reducing hours or somehow making the same number of workers do more. All of these latter three strategies involve less work for low income workers. (One might speculate that it is possible that an increase will somehow transform the value of a minimum wage worker by increasing the value of such workers - by, in effect, creating a new product - but this requires assuming that minimum wage employers know less than the  government about how to maximize productivity in their own business; an unlikely proposition.)

So ... reduced employment, higher prices or lower profits. That a meaningful minimum wage increase will only cause the latter two effects is extremely unlikely. Excess profits, i.e., returns that are greater than that needed to attract the required capital to a business, tend to be eroded over time by new entrants into the business.  To be sure, barriers to entry and brand loyalty and value can impede that process. But it's unlikely that industries with a great many minimum wage workers are earning above market profits that can readily be sacrificed. While Wal-Mart and McDonalds make a lot of money in the aggregate, their margins are slim.  On a store by store basis, there isn't much profit to erode.

The notion that those who must pay higher wages can simply raise prices assumes that the demand for whatever they sell is not price sensitive (or, as we learned to say in Economics 101, that demand for the product is "inelastic.") But that will rarely be the case. Again, the ability to raise prices may be enhanced by the fact that all competitors must pay the new minimum, but there are very few circumstances in which one can simply raise the price of something and not sell less of it.  This is particularly so where work can be outsourced to regions not subject to American minimum wage laws.

And even where a business cannot substitute foreign workers, it can replace them with automation. Indeed, low skill workers are the most vulnerable to being replaced by automation.  If employing a cashier becomes more expensive, the case for substituting an automated check out station becomes more attractive.

Of course, some workers may benefit from the minimum wage increase but others will be harmed. To the extent that the cost of those benefits are not entirely borne by fellow workers who will lose their jobs, they are unlikely to be visited solely upon the richies who employ them but also by the people - often themselves low income - who buy the goods and services that the affected businesses offer.

So the real question for minimum wage advocates - putting aside the moral and liberty concerns associated with forbidding people from entering into whatever voluntary arrangements they might choose - is whether the value to those who keep their jobs outweighs the harm caused to those who lose them - or are never hired in the first place.

That's an empirical question. As is so often the case in economics, studies go every which way largely dependent on the assumptions with which they begin. It strikes me as highly implausible that a 40% increase in the minimum wage (as an increase to $10 would be) will not have significant employment impacts. Advocates for an increase often note that  minimum wages tended to be higher in the 60s and 70s.  For some of that period, unemployment was low, although the real question is what it would have been had the minimum wage been lower.

More fundamentally, the world was different then, marked by a variety of protectionist and restrictive laws and mores regarding trade, immigration and discrimination on the basis of race and sex that are no longer in place. The ability to replace low income workers with technology is dramatically different.

There are two arguments typically advanced in support of minimum wage increases that don't help us answer that question. The first is that the income generated by the current minimum wage is not "enough."

It is certainly not much. But wages are not determined by what is "enough." They are limited by what an employer can pay, i.e., the value generated by an employee and what it must pay, i.e, the wage required to attract the labor market (i.e., what must you pay to attract the employees that you need.) They are not determined by whether or not the wage paid is sufficient to support a particular standard of living.  What I want from my employer does not determine his or her ability or willingness to pay it.

Saying that you don't like what the market "says" about the value of a particular job doesn't, as we have seen, mean that you can simply change that value by passing a law. To say that someone "should" be paid more does not make his or her employer able or willing to pay it.

The second is rumination about the "1%."

It is true that, over the past thirty years or so, that the earnings of the very wealthy have increased far more quickly that those of the rest of us (although the rate of increase of the latter is often, for a variety of reasons, substantially understated). But that phenomenon - which is global and, therefore, unlikely to be a product of domestic policies -  has not been caused by minimum wage laws. The market for CEOs or baseball players is distinct from the market for baristas and cashiers.  And, even if you could compel McDonald's CEO to work for free and redistribute his salary to cooks and counter workers, the impact would be negligible.  If the income earned by the 1% is a problem, it is largely a different one than the earnings of low paid employees.

Cross posted at Purple Wisconsin.


Anonymous said...

Very good points and a thought-provoking article. It would be nice if you would proofread your article before publishing it. Are writers now on tight deadlines?

Anonymous said...

How unjust for you to treat a Wisconsin Resident in a same sex marriage and tax imputed income from a health care benefit. Should not all US citizens be treated the same? Shame on you.