Posted on 9/9/2004, 9:39:12 AM by Cincinatus' Wife
Presidential candidate John Kerry has called for an increase in the minimum wage from its present $5.15 level to $7 per hour. President Bush has said that he would support an increase in the minimum wage, though no specific increase is given, and with the provision that states are given the opportunity to opt out of the program. The current minimum wage, according to Sen. Kerry, is “lower in value than it’s been at any time since 1949.... That’s unacceptable.”
But is it? The answer to this question depends on the winners and the losers, and the amount of the gains and losses that accompany a higher minimum wage.
Sen. Kerry’s proposal falls in line with the shock-effect theory for minimum wage. Proponents of shock effect believe that by paying above-market wage rates, employers will see an increase in labor productivity, a reduction in absenteeism and a lower turnover rate, factors that are believed to increase the efficiency of the firm and lead to an overall reduction in costs despite the higher wage rates.
Most studies, however, find that increases in the minimum wage multiply the level of unemployment for teenagers, the group affected most because it represents the greatest share of workers who are employed at minimum wage levels. One of the reasons that young workers work is to gain general job skills: responsibility, being on time, learning to work with others and dealing with the public. As they gain experience and skills, they move on to better-paying jobs.
If teenage unemployment rises, those workers who are most in need of work in order to gain experience and skills are deprived of the opportunity to improve their skill set, increase their productivity and enhance their future earning capabilities.
Proponents of increasing the minimum wage also argue that raising the income levels of the working poor and reducing the level of poverty in the United States is an equally important benefit. If the hourly wage is increased, goes the argument, then workers must receive higher incomes, reducing the number of people below the poverty line. This is true, but only if the number of hours worked does not change.
But this poverty-fighting argument has its skeptics. Empirical work from the 1990s found that less than 25 percent of minimum wage earners lived in households that fell below the poverty line. Furthermore, less than 20 percent of the earnings from the increase in the minimum wage went to those families living under the poverty line.
One explanation for this phenomenon is that many of the minimum-wage earners, mostly teenagers, are either secondary or tertiary wage earners in the family. Many teens view their incomes as extra spending money for themselves, not as contributions to the income of the family. Another study from 1999 noted a reduction in poverty rates for teenagers and junior high school dropouts for the 1990s minimum wage increase, but found no such relationship for the higher minimum wage of the 1980s.
The Bush proposal, meanwhile, follows what is commonly referred to as the orthodox method, and would most likely result in a smaller increase in teenage unemployment. The orthodox method considers the minimum wage as a price floor. For a price floor to be effective, the price must be set above the market-determined wage. Theory tells us that when the price is set above the market wage, a surplus develops. In the labor market, this translates into an increase in unemployment.
So which proposal would be most beneficial to the U.S. economy? In my view, the orthodox approach carries the day. Using estimates from a 2001 study by Kenneth A. Couch and David C. Wittenburg which were published in Southern Economic Journal, the Kerry proposal would increase teenage unemployment somewhere between 7.2 percent and 21.6 percent. This conclusion assumes that all other factors, such as the general state of the economy, remain unchanged. The Bush proposal would, most likely, result in a smaller increase in teenage unemployment.
If unemployment rises, then those affected will have greater difficulty in gaining general labor force skills that would enhance their earnings capabilities. Society would be a big loser as well because those workers are deprived of the opportunity to gain productivity-enhancing skills.
While society may be a superficial winner from an increase in the minimum wage by having more people above the poverty line, perhaps we should be asking if there are more effective ways to reduce the incidence of poverty in the United States.
Dr. Hughes is an associate professor of economics and business at Converse College in Spartanburg.
Kerry's camp is WRONG, WRONG, WRONG. ...we're still 1 million jobs short.
***But private sector jobs don't include government jobs, it pointed out, and government jobs have continued to grow. Unemployment peaked at 6.4 percent under President Bush, which is about the average jobless rate over three decades. Now it's down to 5.4 percent.
If you count payroll jobs, you can accurately say the nation has lost about 1.2 million jobs. But that number doesn't include the people not on payrolls, such as the self-employed, business owners, farmers and many more.
The household survey counts all jobs. The survey shows 1.8 million more jobs were created since March 2001.*** Source
Over the long haul, everybody loses when the minimum wage is hiked.
Short-term, high school and college kids get a few bucks more at their McJobs and it puts unions in better position to bargin.
Immediate job cuts from small businesses.
Long-term, more outsourcing union jobs overseas.
If you raise the minimum wage but refuse to cut the tax rate, those increased salaries will go to the government more than they will the workers.
Higher salaries also mean higher production costs which means inflated prices for consumers. Again, if you are pushed into a higher tax bracket and you pay a higher price for goods and services, you have not "earned" more buying power with your salary.
Why am I not surprised...
Back in my minimum wage days, I found employers routinely gave small raises every few months to good performers (because, let's face it, finding people who will perform well at a minimum wage job isn't easy). I worked in a library when they hiked the minimum wage once, and my boss apologized that he couldn't give me a raise because I was over the minimum already and he was forced to give all the underperformers raises.
Unintended consequences: rewarding America's worst performers at the expense of their betters.
Living in the Latte capital of the known universe there was a cartoon about this issue. I've said it before. It shows a woman ordering a latte, and commenting to the server,
"I guess you like the new $9 minimum wage!"
The server gets a weird look on her face and says "I'll be layed off tomorrow, cuz they can't afford me. That'll $10 for your latte."
Nuff said.
DK
Bingo! 15% of $7 is more than 15% of $5.50 per hour.
This might even solve the social security problem were it not for the fact that there will be fewer minimum wage jobs if this passes.
I predict the major effect will be to force employers to pay more workers "off the books".
I would argue that most who are working for minimum wage are largely exempt from most payroll taxes.
But, ask the guy at the margin who loses his job if there are no unintended consequences. Increasing the minimum wage is a lose/lose except for the politician buying votes with other people's money.
Hey, if raising the minimum wage by $1.85 an hour has no negative consequences, why don't we just raise it to 20 dollars an hour?
Rewarding the over-performers is ultimately the best way to motivate staff, but unfortunately many bosses prefer to concentrate on keeping the wage bill stapled down.
Sometimes the larger corporations need a kick up the backside to prevent them genuinely exploiting the workforce.
It's not all bad news though. A slight rise in minimum wages, which is what both candidates are proposing, does have the benefit of putting more money in people's pockets and thus boosting business across the country.
Big business will suiffer from large wage rises, but it will suffer even more if the populace can't afford to buy anything.
If teenage unemployment rises, those workers who are most in need of work in order to gain experience and skills are deprived of the opportunity to improve their skill set, increase their productivity and enhance their future earning capabilities.
- Money is information. You can tell that by the way it is mostly conveyed on paper, or electronically. Money is information you can literally "take to the bank."
- Entry-level jobs teach entry-level (e.g., young) people that they don't want to remain entry-level people.
- Entry-level jobs teach entry-level people how to not be entry-level people.
- Preventing someone from learning is censorship.
- Hardly anyone remains at entry level for very long. Tying the whole economy to what seems like it might help winos is scarcely the way to run a railroad.
And it's not white upper middle class teenagers that get impacted the most. Inner city kids (black/hispanic) get hit the hardest. The minimum wage is racist.
The trouble is even more than the few who will actually be laid off. The real problem is the many who will never be hired - and not know why.
There's the problem, right there: no minimum, nothing to staple down. Market forces adjust pay to actual value. It's really a maximum wage peg.
Goodness, no they don't! The "kick up the backside" is that their competition is hiring, too. This is especially true of minimum wage jobs. Does Burger King suck as an employer? Try Dunkin Donuts!
It's not all bad news though. A slight rise in minimum wages, which is what both candidates are proposing, does have the benefit of putting more money in people's pockets and thus boosting business across the country.
Having more money that is worth less is no benefit to anyone. When you raise the minimum wage, you raise the price of...well, everything.
Perhaps a Federal Bureau of Means-Testing for Wage Rates. You get paid what you need, as determined by a local board (decentralization is important...all they need is the federal guidelines) made up of psychologists, doctors, activists and other really smart people who care. Who knows: mebbe I don't need a boat. And we could norm internationally, with the UN's help. No more outsourcing bennies! Oh! What a happy world!
In my experience of minimum wage jobs (thanks to my student days this is extensive!) the only competitive behaviour between the McJobs firms is who can keep their wages lowest, not who can get the best staff. We're talking about burger flipping, not brain surgery, so I don't think the staff retention arguement holds that much weight.
And I disagree with your nod to hyper-inflation as well, I'm afraid. The money isn't being created from thin air here. It's only worth less when there is more in the economy as a whole, not when it's slightly redistributed.
Surely the aim of a healthy, capitalist economy is to keep people spending, and not to keep them scrimping?
Yo! That's WHACK!
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