Minimum Wage Wars Round 23

President Obama has proposed increasing the federal minimum wage from $7.25 to $9. Since the demand for low-skilled labor is quite elastic, this will kill off a few jobs that would otherwise have been created. Not very many, because relatively few people would otherwise be paid between $7.25 and $9 anyway (in an economy with an average wage of about $20/hour); but this is a job-killing idea.

The President’s proposal to index the minimum wage to the CPI is nearly excellent (except we should tie it to average wages, not the CPI).  Doing this would end the repeated fighting over the minimum wage that distracts attention from other labor issues that are so very much more important. It would be a great saving of political energy not to have to debate the minimum wage year after year.  I’d even be willing to see it increased to $9 next year if in addition it were indexed as I propose. 

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  1. Dave says:

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    • Enter your name... says:

      All that does is promote outsourcing to someone who can pay the baseline. If I’m the CEO of a huge company, and my employees have a minimum pay of $50 an hour, then I just look at the payroll and fire everyone who is paid less than $50 an hour. Then I hire another company, someone with a CEO who is paid much less, to provide me with people to sort the mail, vacuum the floors, answer the telephone, or do whatever else needs to be done but isn’t worth paying $50 an hour for. Nobody actually gets a higher paycheck this way. All it does is let you feel righteous.

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      • Dave says:

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      • James says:

        If CEOs make too much, why don’t the stockholders (that is, the Board of Directors) fire them, and hire someone equally competent at a lower salary?

        Alternatively, if Company X pays its CEO (and other management) way too much, then it should be possible for you to start Company Y and compete with X on cost.

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      • Seminymous Coward says:

        James:
        Sometimes Company X has patents, network effects, licenses, customer goodwill, exclusive contracts, a back catalog of copyrighted works, key real estate holdings, literally all the best employees in a small specialty, economies of scale, peering agreements, political pull, or perhaps an outright monopoly. Starting Company Y has opportunity costs, as well. Contrary to the perfectly competitive situation in a economics classroom, most real businesses don’t have to be lean, efficient machines to survive.

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      • Dave F. says:

        @Dave

        One of the myths we love to believe is that the average board of directors out there aren’t paying a CEO based on their own best interest, but rather they have a selfless desire to see another man made super rich…

        No, it doesn’t really make sense, does it? I recommend Thomas Sowell’s chapter in Economic Facts and Fallacies which covers this directly. CEOs get paid a ton, but evidently it is tough to be a successful CEO and the market acts accordingly.

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      • Matt says:

        How many outsourcable (is this a word?) jobs are really 7$ an hour jobs? McDonalds employees can’t be outsourced. I am curious.

        You just can’t make this kind of argument on generalities. Give us some data.

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      • Jim C says:

        Matt,

        There’s a difference between domestic outsourcing and moving a job overseas. If I don’t want to pay the person who vacuums the floor of my office 1/20th of my salary, I can hire a cleaning company with a lower paid CEO to provide me with a person with the skills needed to vacuum the floor.

        The job is now outsourced, even though the vacuum operator must reside in the same area as the office.

        And yes, every job at a McDonald’s could be outsourced.

        I don’t have data on how many companies use their own employees to vacuum their floors, but I expect it’s a very small number.

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      • Bjoern says:

        @Enter your name…
        Not really. These minimum wage jobs are typically not of that kind. For example they are in the construction industry. So the house needs to be built anyway. What will happen? The construction company will employ people with higher education/better qualification instead of the previously employed. There will still be the same number of ppl employed or even if some are getting fired, overall, the average worker becomes more money so there is more money earned & spent which helps demand and thus the economy. That’s what my economics professor said, and yes, I was at a Business School, and not a liberal one….
        ____
        @James
        Actually CEOs are often appointed due to outside recommendations, networking etc. (I think there are studies showing that all jobs are mostly allocated this way). Well, certainly CEOs are seldomely appointed for their abilities.
        ____
        What is it with that outsourcing logic? I don’t understand that. You cannot outsource a salesman job at McDonalds in New York to India or China. Well at least, not yet.

        Please forgive me bad english, it’s not my mother tongue.

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      • Dave F. says:

        @Bjoern
        CEO salaries are not determined by how well a networked recommendation is. I guarantee that if you are going to be paying millions to a guy to get him to run a company, you are going to vet him extremely well and look over all his previous experiences. It is pure silliness to believe that board members are willing to pay those sorts of prices without being convinced by evidence that the CEO is worth that salary.

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    • Alf says:

      Yeah, that would show them! I am not sure what exactly, but it would definitely show them something.

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  2. Flex727 says:

    So, increasing the federal minimum wage will kill jobs, therefore we must make sure that it increases without end? Please explain your logic.

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    • Seminymous Coward says:

      The count of jobs is not the only metric. Perhaps the author simply feels that the “repeated fighting” is a higher cost than the “not very many” jobs lost.

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    • Troy says:

      Yes, but it also increases income – that’s the point of a minimum wage after all.

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      • Todd says:

        It might increase income for a limited number of people (a subset of those who currently make less than the new propopsed minimum) but it will decrease income for some (those who make less than the new proposed minimum and whose employers can’t afford the increased wages, and, therefore, terminate their employment) and it will definitely result in fewer new jobs created as employers decline to employ new people at the new increased minimum wage rate.

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  3. Jim says:

    It’d be hard to argue for indexing minimum wage to CPI when many on the left side of the aisle oppose chained CPI for entitlements.

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  4. Becka says:

    What if we have a two-tiered minimum wage? One for under 18 and one for over 18? What do you think this would cause?
    Thanks!

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    • Jamie says:

      Current law kinda/sorta allows for this.

      http://www.dol.gov/dol/topic/youthlabor/wages.htm

      “The federal minimum wage for covered nonexempt employees is $7.25 per hour effective July 24, 2009.

      The Fair Labor Standards Act (FLSA) requires a minimum of not less than $4.25 per hour for employees under 20 years of age during their first 90 consecutive calendar days of employment with an employer. After 90 days of employment, or when the worker reaches age 20 (whichever comes first), the worker must receive the minimum wage.”

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    • Dave F. says:

      This initially sounds great, but unfortunately it really doesn’t work because it provides a cheaper alternative good for adult labor. Instead of an adult competing on equal footing with teenagers (with the advantages of some experience and maturity), the jobs usually done by minimum wage adult would be ‘outsourced’ to the teenage work population.

      It would be fairly analogous to a tariff on only some goods in a market. Some of the more expensive good would still be purchased if it was higher quality, but all in all it greatly hurts the product being discriminated against.

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      • Enter your name... says:

        Because of the time limits, this is really only a major issue for temporary jobs. When the employer is hiring in the hope of a long-term employee, the ability to save $3 an hour for 90 days is not a strong incentive. Most employers don’t even take advantage of the “training wage” even when they can. Those that do are usually explicitly hiring large numbers of teenagers for summer jobs.

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      • Dave F. says:

        @Enter…

        Have you looked at the distribution of minimum wage jobs? While many are looking for long term employees that aren’t in school, there are also tons of minimum wage jobs that can easily be filled by high-schoolers. It really depends on the industry. I don’t think that it is an intelligent argument that cost isn’t a large incentive. $3 doesn’t seem like a lot of money, but 13 weeks full time is going to add up to $1500 in that 3 months. An alternative way of looking at it is that an unskilled adult has to be 50% more productive than a younger counterpart. Sure, the adult has more maturity, but the under 18 employee has more energy and arguably (if he is working younger during summer vacation) is likely to have more drive. At the end of the day, there is no way to avoid that if you tamper with price, you get bad signals from the market.

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  5. David says:

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    • big picture says:

      The company has only so many dollars to spend on wages, this is variable but still just a single pool to draw from. So, you can either pay fewer people more or pay more people at the same rate. By paying more people at the same rate that is taking more off of unemployment so it isn’t sucking more out of our economy. Maybe not creating more, but slowing a drag at least to hopefully net out ahead. I am not saying we shouldn’t raise the minimum wage, but saying your logic on more disposable income isn’t right. We can’t, contrary yo popular belief with some politicians, just create money out of thin air. If you are creating on one side, then someone else is hurting. Example would be rates today. It is helping those with debts and those wanting to buy a home or refinance by lowering payments and giving them more money to spend. However, we just took it out of retirees pockets bc instead of making 5% on bonds that they could then spend, they are now getting 2-3%. So you can’t just put more money into citizens pockets and expect no one else to lose out. Also, if u are making minimum wage and get that extra 70 a week, it is probably going to pay bills and not going to help a lot of other local companies.

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      • David says:

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      • James says:

        But if the company paying minimum wage produces a discretionary product – say restaurant meals – and they pass the cost of an increase in minimum wage on to their customers, then a certain portion of their customers will choose to cook at home rather than eating out.

        Alternatively, the management may choose to replace workers with machines. As for instance, once upon a time when you stopped to put gas in your car, an attendent would come to the car, pump your gas, take your money and return with change. Then that got too expensive, so you pumped it yourself, and went into the store to pay the single attendant. Nowadays some stations don’t even have that – you just swipe your card in the reader, and pump. So what happened to all the people (mostly high school/college age kids at their first job) who once filled those minimum wage jobs?

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      • Terazilla says:

        While I largely agree, the unemployment thing doesn’t hold up that great. The minimum wage isn’t enough to actually live on, so even somebody working more or less full time may still be getting a bunch of assistance. I’d imagine that’s part of the motivation behind this.

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    • Dave says:

      Where is the money going to come from? Why don’t we just give everyone in the country a 10% raise? We’ll all be better off and have more money. All raising the minimum wage will do is get rid of low income jobs. So yes, some of those people will have more money, but there will be less of them. Teenage employment will go up higher than it already is. You are essentially pricing out all jobs that don’t deserve $9/hour. I understand the purpose of minimum wage, but people don’t seem to understand the unintended consequences. Not everyone is trying to feed a family of four on minimum wage. Some people are trying to pay for new school clothes, a prom dress, or a down payment for a car.

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      • Daniela says:

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      • Mike B says:

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      • James says:

        “Below a certain wage people truly are better off not working…”

        I guess your experience of life has been very different than mine. I can’t say I was ever particularly fond of fruit picking, scrubbing hotel toilets, or even (dating myself a bit here) pumping gas, but I assure you those jobs beat the heck out of not working, and thus facing a choice between hunger & dumpster diving.

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      • samiam says:

        Spot on!
        I find it so interesting that the president is focused so much on the minimum wage as a way of providing for the poor. Empirically, the MAJORITY of people working at minimum wage jobs are members of a family making $50,000 a year. Very few individuals or families actually rely on a minimum wage job for their basic income. While the number of jobs lost is ‘few’ in comparison to the total number of jobs in the United States, within the target group of the poor, these employment effects are large! Trying to maintain real wages at a decent level is a worthy goal–however, heterogeneity in the types of people who work minimum wage jobs makes the overall effect on the poor ambiguous at best and devastating at worst since they compete with teenagers and other adults that might be doing quite well even without a job. Why not expand EITC if you want to help the poor? Because EITC costs government money and takes an explanation. Mandating a minimum wage scores political points with ZERO monetary promises from the government and little to no accountability for the subsequent increase in unemployment that comes from it. So the president (or anyone else for that matter) capitalizes on policies that, at face value, make him appear to care about the well-being of the poor while ignoring policies that might actually work but are more complicated to explain… This is why I study economics rather than politics.

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    • Enter your name... says:

      Yes, you’re right: Overall, it helps. But it’s a case of helping a lot of people a little bit (the people whose pay goes up, and the businesses the patronize) and hurting a few people a lot (the people whose income drops dramatically).

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    • Billy D says:

      A real minimum wage is inflationary and kills entry level jobs. Job creators will look to do without adding additional payroll. My question is: what is the real minimum wage in America right now? I would think few people who are not in their teens work for much less than $9 an hour. The argument for raising the minimum wage is for the most part moot unless one wants to see teen hiring hindered.

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  6. Carl C says:

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    • Chad says:

      A better idea is to abolish it all together but if it’s low enough it doesn’t do much damage. Median is better than mean because of skew in income distribution but regardless, if wages are set artificially above value it is a bad idea.

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    • Chad says:

      Median is better than mean because of skew in income distribution but regardless, if wages are set artificially above value it is a bad idea.

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  7. nobody.really says:

    What purpose does the minimum wage serve, and is the policy well designed to promote that purpose?

    Hypothesis 1: The minimum wage is a welfare program designed to transfer wealth to people at the low end of the income spectrum, much like the Earned Income Tax Credit. But if society wants people to have greater remuneration, shouldn’t society pay for it – rather than lumping the cost onto private employers? In short, under this hypothesis, the Earned Income Tax Credit seems like a better policy than the minimum wage. (EITC also avoids the disincentive to hire created by the minimum wage.)

    Hypothesis 2: The minimum wage is not only a welfare program designed for the benefit of low-wage earners; it is also a tax on their cheapskate employers that are wrongfully extracting the benefit of people’s labor without paying a fair price. This rationale fits the policy better, but is based on quite arguable premises. Law firms may also exploit young lawyers, paying them at a rate that would never enable the lawyers to pay off the cost of their educations – even as the firms pay more than minimum wage. Similarly, grad schools typically pay grad student teaching assistants serf-wages relative to the value the students provide, yet the schools generally do not run afoul of the minimum wage laws (although some may!). Urban employers may well pay people wages that barely permit people to cover the cost of urban living expenses, even though these wages may exceed the minimum wage. Yet minimum wage laws impinge primarily on employers in lower-skilled (fast food) and/or marginally productive (recycling sorting) industries. It is unclear that these employers are uniquely culpable.

    I prefer to let labor markets operate as efficiently as possible – and to make any socially-desired adjustments afterwards.

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    • Seminymous Coward says:

      I don’t particularly disagree with your overall point, but I feel compelled to note that the government is also bound by minimum wage laws, so all of society pays for the minimum wage, not just private employers.

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      • TexCIS says:

        Increasing the minimum wage for government employees just increases the cost of government . . . who pays for government? Taxpayers . . . private citizens and private businesses. Without the private sector generating wealth to tax, there would be no government payroll at all.

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      • Seminymous Coward says:

        “Taxpayers” is a synonym for “society” unless you really want to argue the few cases of people so poor or incapacitated as to never even pay sales tax. I’m just saying that the costs aren’t borne solely by private employers as he claimed; by your own admission, private citizens who are not employers also pay those costs.

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    • Scott says:

      Hypothesis #3: The minimum wage is a political tool to lure young and naive (potential) voters to support liberal agendas and candidates.

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    • nobody.really says:

      Matthew Yglesias cites Paul Krugman offering some additional hypotheses for why politicians propose a minimum wage: http://www.slate.com/blogs/moneybox/2013/02/14/krugman_minimum_wage_1998_column_took_a_skeptical_look_at_minimum_wage_hikes.html?wpisrc=obinsite

      Hypothesis 4: We want to help poor people, and would love to pass an increase in the Earned Income Tax Credit — but we know Congress won’t pass any welfare-type law that increases government outlays. Increasing the minimum wage is the only welfare-type law we can pass because the costs are hidden.

      Hypothesis 5: We have turned “work” and “earnings” into fetishes, and turned “government handouts” into a boogieman. Thus we prefer raising the minimum wage over other forms of wealth transfer, even transfers that might produce similar results more efficiently, because we have a deep-seated need to be able to say that the people who receive the benefits of the policy “earned it.”

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    • samiam says:

      Nailed it.

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  8. J296 says:

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    • Jon says:

      Exactly – the people on the lowest of wages could only survive with help from benefits, and therefore the lowest paid workers are in effect subsidized by the government. Upping the minimum wage forces them to pay something closer to their truer cost.

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      • TexCIS says:

        The majority of minimum wage jobs are in fast food. Who buys fast food, the wealthy or the poor? Higher minimum wage = higher fast food costs . . . and higher costs for any product selling on low margins – which tend to be necessities, not luxuries. Higher minimum wage hurts more poor consumers than poor workers.

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    • Enter your name... says:

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      • TexCIS says:

        Hum . . . employers should pay people based on need? By that logic, the single, uneducated person with 5 kids needs more money than the single childless person with an MBA . Let’s just pay people more because they “need” it. Why go to college? Why work hard?

        Those teenagers and job hoppers are getting a 24% raise! When was the last time YOU got a 24% raise, for doing nothing extra to earn it? (75% of those getting minimum wage are juveniles or young adults living at home.)

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      • Enter your name... says:

        Tex, it’s not exactly because “they ‘need’ it”. It is more precisely because the rest of us shouldn’t have to pay for the basic needs of someone who is working full time—even if that person is only 18 years old and even if that person dropped out of high school. If they don’t “work hard”, then you can fire them. If they do the work, then their full-time work and full-time pay should not result in a welfare recipient.

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    • James says:

      “No one can survive off $7.25 an hour…”

      Err… Why not, exactly? That’s $290/week for a 40-hour week. Leave out my mortgage payment &c (’cause I could go back to living out of my car, or even out of a backpack, if I had to), and that’s well under what I spend on non-luxuries.

      I think you’re confusing “survive” with “live a comfortable low-middle class American lifestyle”.

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      • Caleb B says:

        @James

        Exactly! Where does it say in the Constitution that every citizen has the right to only work 40hrs a week and live comfortably? Has no one in the history of time ever heard of a second job?!?

        Maybe unskilled labor should have studied harder in school.

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      • Seminymous Coward says:

        Even in the Southern United States, backpacks don’t stay very warm in the winter.

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      • Enter your name... says:

        And backpacks so rarely contain sewer systems, which means that a rejection of shelter is not just a risk of you dying from exposure, but also a public health problem.

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      • James says:

        You know, you’re perfectly right that life below the bottom rung of the economic ladder is often neither easy nor comfortable. (Been there, done that, but couldn’t afford the t-shirt.) The point is that one can, with effort & some ingenuity, catch hold of that bottom rung and start climbing.

        Seems that what you’re proposing is to raise that bottom rung even higher, so it’ll be out of reach of anyone who doesn’t have the resources of a middle-class family to boost them on to the first step. So what exactly do you propose for the rest of us, that we depend on the charity of our fellow humans? The supply of that is far less than the demand, especially if we discount “charity” of the sort that’s aimed at gaining new converts to religion. Or should we just crawl into a corner somewhere, and quietly starve?

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