Republican leaders are saying that raising the minimum wage to keep up with inflation leads to massive layoffs. We’ve raised the minimum wage before — seventeen times so far — so I figured it should be easy enough to check out the history. So here’s a graph of monthly unemployment rates from January 1948—December 2005 with an indicator for every time that the minimum wage was raised.
Seven times unemployment drops afterwards, seven times it goes up, and three times it has no clear or immediate effect. There’s certainly no clear correlation. Of course, that’s pretending that there are only two economic variables at play, which is obviously not so.
Minimum wage data from the Department of Labor. Unemployment rate data from The DoL Bureau of Labor Statistics.
Well, of course, when unemployment goes up after a minimum wage increase, it’s due to the negative effects of the wage increase, but that when unemployment goes down afterwards, it’s only because it takes a bit of time for the levels to respond.
Okay, I’ll stop being snarky now.
The city of Santa Monica, California. Passed a regulation requiring a living wage of “10.00/hour” for all businesses operating in their city. (Yes cities in california do actually have some autonomy, unlike Virginia). The end result was that no businesses closed or shut down because they had to pay a higher wage. It was a moot issue then and as it is now.
And I’m not entirely ready to let democrats off the hook on this issue either, I don’t think they’ve exactly stepped up to the plate on this issue when they could’ve. But I’ll also ad a pre-emptive caveat that I’m not as informed as I should be regarding democrats and the minimum wage.
Congress should simply make the minimum wage adjust yearly with inflation. This would settle the matter once and for all and expose anyone in opposition as simply in favor of under paying the poorest segment of society.
Or, make the minimum wage tied directly to Congressional raises.
Tied to inflation might be a good solution, but first there needs to be steps taken to restore minimum wage to its prior levels, when it had a much higher value. For example, the minimum wage of the late 1960’s had a contemporary value of over $9 an hour.
Interestingly, if you assume the Dems are the party of minimum wage increases, the only states to go against their 2004 Presidential preference on that issue are Florida, New Hampshire, Michigan and Alaska.
Both parties oversimplify this issue. Generally a rise in the minimum wage doesn’t result in layoffs, but it raises unemployment in that fewer workers are hired than would have been in the absence of the raise. Also, since the raise increases the costs of doing business, fewer businesses will open relative to the status quo ante.
These effects tend to be small where the minimum wage is small — like the US. After a certain threshold (what the threshold is for a specific country varies) there are dramatic and lasting unemployment effects. There are plenty of peer-reviewed studies confirming this relationship.
Massive layoffs? Which Republican leaders are claiming there will be massive layoffs?
Look, the theoretical case that increasing the price of something will lead to less being purchased is bulletproof — it’s the basis of the whole field of economics — but it’s a bit hard to disaggregate effects in the real world.
The question that ‘serious people’ will ask is how much unemployment it will cause. I tend to doubt that a modest raise from current levels will lead to much unemployment, but it will certainly cause some. (leaving aside the other objections to the MW, both moral and economic) The question the undecideds are probably asking is, fundamentally, if reducing the choices available to other people will make the undecideds happier about the outcomes.
When I was researching past minimum wage increases, the opening paragraph from one article from the WSJ (“New Minimum Wage Makes Few Waves,” 11/20/1996) stood out for me:
Of course, that’s a decade old. Though Republicans have certainly predicted bad effects on employment as a result of raising the minimum wage this time around (if there’s been any other reason cited for the opposition, I haven’t seen it), I haven’t looked for or seen the specific phrase “massive layoffs” in use by any Republicans.
But you assume that’s what they’re arguing anyway? Note, first, that, e.g., cutting hours is cutting the demand for labor.
Second, let me point out that empirical research into the effects of a MW change is exceedingly difficult or impossible — the demand for labor is inelastic over the short run — and that most of the studies done on this have been done with regards to relatively small increases in the MW — not ~40% increases.
The consensus is not that a hike in the MW will result in ‘mass layoffs’ or even major unemployment increases. The argument is that there is a negative effect on employment and that it hits the neediest the hardest, since those with the least skills are most likely to be priced out of the market. (note: even Paul Krugman has noted that there’s an employment effect, though at current MW rates, it’s small…and that “raising minimum wages is at best a crude and double-edged strategy”)
BTW, Richard Posner has a good (and recent) blog entry on the matter here from an economics perspective.
Waldo:
Wages — particularly lower-income wages — are a trailing economic indicator (an oxymoron). What that means is that lower-income wages tend to go up AFTER the rest of the economy has picked up. Here’s what happens at the beginning of an upturn in the economy (at least for the manufacturing sector — it’s much the same in the service sector, but I am trying to illustrate, not give a dissertation). Typically in a downturn, sales have dropped, so inventory has built up, so manufacturing workers and non-management folks have been laid off. There is less competition for workers, so manufacturing wages stagnate or decline. Corporate profits have dropped as inventory has built up and sales have dropped off, but that means that millionaires have gotten less rich — not that they have lost their jobs. When manufacturing inventory begins to shrink, eventually companies start to make more product. But they do so at first by having their workers work some overtime, then they cautiously start to hire back people. Only when the supply of workers who are looking for work is small will wages begin to rise. Only then will a rise in the minimum wage be an issue; when the economy is in the tank, people are more worried about having a job — any job — and the argument about a minimum wage increase causing employers not to hire has at least a little force. But when the economy is going strong, employers don’t mind paying a bit more for their work force.
The conclusion — there is not only no empirical correlation observed between raises in the minimum wage and increased unemployment, but there is also no theoretical reason why, at least in the short-term world of the business cycle, it should be so.
Your post and graph caused me to go look at the Consumer Price Index over the past 36 years — the amount of time that I have been in the work force. What we find is that since the 1968 raise in the minimum wage to $1.50 an hour (my first job), the cost of living is now 5.93 times higher. It has gone up at an annualized, compounded rate of 4.71%. Every year. If the minimum wage had kept pace, it would be $9.03 an hour. And you know, that is darn close to the numbers that we use for a “living wage.” So a “living wage” is really nothing more than an updated minimum wage.
It is often the last stat to go up. So if lower-income wages go up — whether or not accompanied by a minimum wage increase — it is sometimes
Raising the minimum wage puts more money into the pockets of the poor, where the money multiplier effect is strongest. Every dollar paid to a poor person gets spent. Period. If corporate profits have to drop to raise income of the poorest quartile of society, the economy is in far better shape. Demand for regular, every-day goods goes up; restaurants and barber shops do better.
And let’s not forget that when demand for regular every-day goods goes up, it means that regular every-day people are living more comfortable lives.
Finally, from the Posner blog post:
If people on the poorer end of the spectrum can afford to live longer-term than just from paycheck to paycheck, if they can go to the grocery store instead of feeding their kids Funyuns, if they can work fewer jobs and spend time with their kids, if they can own a house instead of renting, if they can stay in one house for more than a year at a time and neighborhoods can become communities, if their children can study instead of getting a job, the world is a better place in ways beyond the scope of economics.
I looked at minimum wage a few weeks back. I’m convinced that because the pool of workers earning minimum wage is so small, an increase will have little effect on the overall job market.
Minimum wage is the latest political football. We need to adjust it to the amount necessary to bring it in line with the appropriate purchasing power (somewhere around $9) and then have it adjust annually for inflation.
However, I believe we need to have a two-tiered minimum wage. There needs to be a training wage which is lower for younger workers. While I have no doubt that some of the younger workers are working simply to help make ends meet for their families, I believe the larger number of them are working to buy gas and iPods.
Vivian — a few responses to your post.
1. You are right that the number of people who are actually being paid the minimum wage is not such a large number that this one change would lift many people out of poverty. But if the floor of the elevator moves up, something that is 4 feet above the floor moves up as well. Employers who pay $1.00 an hour more than the minimum wage now would likely pay $1.00 more than the minimum wage if the minimum wage rises.
2. On the question of the two-tiered minimum wage:
a. You create an additional incentive for those hiring entry-level people to hire younger workers, putting less young workers at a competitive disadvantage. If you are a 28-year-old mom trying to re-enter the work force, with few skills but a big need, and the local McDonalds can hire an 18-year-old for $7.00 an hour but would have to pay you $9.00, who are they going to hire?
b. If you call it a “training” wage, you create an incentive to hire folks only for the “training” period and then let them go. That would make no sense for a job with a long period of “training” needed, but if an 18-year-old is being hired for a job flipping burgers, where the “training” period is maybe two days tops, the employer gets a windfall by hiring a teenager after that teenager has learned the job and before the teenager has to be paid a full-time wage.
c. When my teenagers work, they aren’t working for an iPod; they’re working for their room and board at college.
Overall, a two-tiered wage scheme introduces even more economic inefficiencies than does the minimum wage itself. It creates incentives to do things that may not otherwise make economic sense. Unlike some free-market economists who want no such incentives or disincentives, I don’t have a hissy fit about such inefficiencies — sometimes the inefficiencies are themselves a good idea. We just need to think about those inefficiencies, to be sure that we really want them. There could be legitimate policy reasons why you would WANT to develop a system that encourages hiring teenagers but puts older workers at a disadvantage, but I can’t offhand think of one that I think is appropriate in the present circumstances.
Lloyd
1. I’d like to see some studies that indicate an increase in the minimum wage results in increases further up the chain. I did not run across such a claim in my research for the post I did.
2. I think I was pretty clear that a two-tiered approach would create some issues, not the least of which is the potential displacement of older workers. I even suggested that perhaps a tax credit would be appropriate – akin to that given to employers for tipped employees. We already have a two-tiered system – one for tipped employees and one for others. Only seven states require the full minimum wage for tipped employees; all the others allow $2.13 an hour. And looking at the stats, the tipped workers is a fairly large percentage of the minimum wage or less crowd.
I was under the impression that investing is a greater money multiplier than spending by a household. The utility of the services/products purchased by businesses is higher because of the greater (on average) pragmatism (take a look at the mortgage situation and the savings rate in the U.S. for only a single illustration of the utter financial stupidity of many U.S. households) of their decision making. This leads to a more efficient use of resources and greater gains for the economy as whole.
When you add the fact that we aren’t talking about households as a whole, but rather poor households, which are poor for the most part because of poor money management, that statement of poor households’ efficiency and/or money multiplying effect looks even more tenuous.
Please note that I am well aware that some people are poor because they are in a situation that is beyond their control or ability to extricate themselves. However, I have found that the vast majority are there as a simple result of the bad choices they have made in life. I have hung out with drug dealers and the poorest of the poor from El Salvador to Waynesboro, VA to the West Bank and Gaza Strip. I have many friends that are poor by U.S. standards. I have to cringe when I hear about the financial decisions they make. I try to help them out as much as I can, but they prefer to “buy now and pay later”. And, boy, do they pay.
I am an 18 year old self-taught (I haven’t gone beyond grade 12) computer programmer who is not making very much (less than the “poverty level” for a family) at all by computer programming standards. Nevertheless, I already have a mutual fund nest egg (derived entirely from my earned income; no handouts from parents) that is 4/5 of the median household net worth in the U.S. I have the advantage of living with my parents, but most 18 year olds do. I graduated from HS (with honors) two years early and have been working for two years. I have never smoked a cigarette, done drugs, or had a taste of alcohol. I don’t plan to.
Doing the right thing, morally and financially, will reap great rewards for anyone who tries it.
But, Hans, weren’t you home schooled? Us home schoolers have the advantage of being able to work a great deal more than our public/private school brethren. Also, I suspect that you are able to make do without a car (as I was), something that few suburban teenagers who desire a job are able to manage, thanks to poor urban planning.
And, of course, you enjoy the financial advantage of not having been through college, which is an expensive endeavor. Tuition at Virginia Tech — which doesn’t include housing, food, clothing, transportation, health insurance, etc. — runs $8,341/year. If you want a meal plan and a dorm room, that’ll be another $6,776/year. If you’re in that dorm room for two years, and you feed and house yourself for the same amount for the next two years, that’ll set you back $60,468 just for tuition, housing and food. Let’s not forget those other previously-named costs, along with textbooks — those are a killer. If you’re lucky you’ll escape for less than $80,000. So if you’ve got $44,000 saved up (or 4/5 of the median household net worth, as of 2000), you’ll graduate a mere $36,000 in debt.
It’s great to save money for college — I’m awfully glad I did — but don’t fool yourself into thinking that’ll serve as a nest egg beyond school. Though it’ll take a huge bite out of those college loans, you’ll have used up that money just as you’re writing that first tuition check for your junior year.
Thanks for the advice, (I’m not saying that sarcastically at all.) but actually I’m not planning to go to college at this point. I plan to start a series of online businesses (yes, they actually have a viable business model) and continue my job as IT Manager. I absolutely adore learning, but in this case I don’t think it’s worth the (actual and opportunity) costs to pursue a formalized education. I can learn so much more (especially practical stuff) on my own. I am already a fairly competent Linux server admin and can write fairly good PHP, CSS, Visual Basic/VBScript, JavaScript, and of course HTML. One of my first loves, however, is databases; I cut my teeth on complex SQL queries and I love it! I have also been pursuing some self-taught, advanced (beyond HS) math and physics. A friend of mine has a huge collection of college lectures (by top professors) on CD (ripped to MP3) which he lets me borrow. The Teaching Company is the name of the producer of these.
But anyway… Sorry about getting so OT… I’d be interested to hear your opinion, Waldo, whether businesses or households are better “money multipliers” or “trickledown effect-ers”.
Well then, Hans, you should get a kick out of this. :)
I really don’t know — my knowledge of economics leaves me in no position to argue any particular position on that front. I’ve owned businesses and run household finances, and my track record on multiplying money isn’t so hot. :)
Just to quibble a ways back…
Mr. Henke wrote: “Look, the theoretical case that increasing the price of something will lead to less being purchased is bulletproof — it’s the basis of the whole field of economics — but it’s a bit hard to disaggregate effects in the real world.”
That theoretical case is far from bulletproof. One of the many bullets that will pierce right through the theoretical case is that price-setting will disrupt that “perfect-market” relationship.
In the American economy, and especially the lower reaches of the wage market, 1) there are far more employees than employers, 2) organized labor is very, very weak, 3) the employers have access to much greater information, 4) the employees have a very, very low threat value, 5) the laws tend to favor employers, etc., etc. Many American employers have a significant amount of price-setting power.
The case is even stronger in local situations. Think UVa does not have some price-setting power?
Another theoretical basis of the field of economics is that price-setters will restrict supply in order to increase the price. That is, a monopolist of job-opportunities will hire fewer people in order to hold wages down. In that case, going strictly by “pure” economic theory, a higher minimum wage would mean MORE JOBS!
(I’m sure I’ve made this argument before; indeed, I tried to make this argument in the course of an independent study years back on the Charlottesville minimum wage scene, but was rebuffed by cohorts wanting a more activist approach.)
I think a more useful study would be the minimum wage vs. social security revenue. Social security taxes are flat on all paid work up to a certain level, then zero. Thus, it measures quite well the income of the people who may be laid off or work less because of a minimum wage hike.
As for the economics of the situation, everyone should read “The Wealth of Nations” before even trying to discuss wages for unskilled labor.
Sweet!
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Tennessean: Sorry, but you’re not making any sense to this stupid fella…
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Jack: Amen! Wealth of Nations is a truly awesome book!