Minimum wage

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The Republicans believe in the minimum wage — the more the minimum, the better.
— Harry S. Truman
The dismal "science"

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The effects of the minimum wage, a legally-mandated lower limit on (usually hourly) pay rates, are the subject of some controversy.

Contents

[edit] Academic bitch-fighting

Current minimum wage around the world. If dark blue, you're probably living in a country with a minimum wage near or above $10+ an hour.

Introductory microeconomics would suggest that the setting of a price floor would prevent an equilibrium between price and quantity from being reached, thereby creating a surplus of the resource or product in question. However, if the labor market is, as sometimes theorized,[1] a monopsonistic oligopoly, the market for labor fails, as firms under-pay workers (due to the transaction costs in switching jobs). As such, depending on the level, a minimum wage might actually decrease unemployment.

Empirical evidence is mixed. Card and Krueger found that a wage increase in New Jersey increased employment in New Jersey fast food restaurants along the border of Pennsylvania (where the introductory treatment would have expected employment losses).[2] It should be said that David Neumark and William Wascher's claim that they found "[statistically] insignificant—although almost always negative" employment effects from the same hike.[3] was quickly rebutted by Card and Krueger who pointed outed Neumark & Wascher used data from the restaurant industry-funded organization Employment Policies Institute while Card and Krueger used the less biased administrative UI records.[4] But, Card, Krueger are also rebutted by the research of Neumark that uses more accurate data, not like that of Card, Krueger that uses phone interview method, which can cause uncentainty in data analysis.

Myth and Measurement: The New Economics of the Minimum Wage suggested publisher bias favoring studies that showed negative results. Doucouliago and Stanley also raised this and stated "Even under generous assumptions about what might constitute 'best practice' in this area of research, little or no evidence of an adverse employment effect remains in the empirical research record, once the effects of publication selection are removed."[5] They also stated "First, minimum wages may simply have no effect on employment... Second, minimum wage effects might exist, but they may be too difficult to detect and/or are very small." Other studies[6][7] say that there were variables unrelated to minimum wage that could account for any downturn in employment.

The November 2011 Hirsch, Kaufman, Zelenska paper "Minimum Wage Channels of Adjustment" found no "significant effect of the minimum wage increases on employment or hours over the years [studied]". In February 2013 John Schmitt published "Why Does the Minimum Wage Have No Discernible Effect on Employment?" via the Center for Economic and Policy Research stated "Economists have conducted hundreds of studies of the employment impact of the minimum wage. Summarizing those studies is a daunting task, but two recent meta-studies analyzing the research conducted since the early 1990s concludes that the minimum wage has little or no discernible effect on the employment prospects of low-wage workers. The most likely reason for this outcome is that the cost shock of the minimum wage is small relative to most firms' overall costs and only modest relative to the wages paid to low-wage workers. In the traditional discussion of the minimum wage, economists have focused on how these costs affect employment outcomes, but employers have many other channels of adjustment."

[edit] Price/wage spiral

One argument against minimum wage is that businesses will try to keep profit margins fixed, and attempt to raise prices to transfer the cost increases to the consumer. Since the workers are (some of) the consumers, at some point the minimum wage will be raised to match the increased cost of living. Then the prices of products and services will again be raised to preserve the profit margins, producing a vicious cycle. In reality this doesn't always occur because there is a limit on the ability for the business to raise prices, mostly due to competition from places that have a different minimum wage level.

[edit] Washington - the real world example

In 1998 Washington state passed a measure that raised the state’s minimum wage to above the Federal and linked it to the cost of living. As of 2014 the state has shown a 21 percent increase in restaurant and bar payrolls and with a current rate of growth more than double (0.8 vs 0.3 percent) that of the nation as a whole and has been below US poverty level for 7 years.[8] There has been no detectable decrease in employment over that 15 year time period.

[edit] United States

The current federal minimum wage in the U.S. is $7.25 per hour,[9] though it is higher certain jurisdictions. In particular, as of 2015, the minimum wage in Seattle, Washington, is $15 per hour. Minimum wages in the U.S. have never been sufficient to raise a family out of poverty, if only one member of the family works. The minimum wage has varied from a maximum of 90% of the poverty level in 1968 ($10.50/hr in 2013 dollars) and has averaged two thirds of the poverty level since 1959, when the poverty level was established.[10]

[edit] Minimum wage via collective bargaining

As you can see in the above map, Scandinavia, Germany, Italy, Switzerland, Austria and Iceland don't have a nationwide minimum wage, and instead set it in a social corporatist tradition. This has a benefit in that wages can be fined-tuned to maintain the competitive advantage of certain industries, but requires that business and union associations sit down in the first place.[11]

Germany is currently experiencing that problem, with reports that some workers are living on wages as low as €2 due to a side-effect of recent labour reforms. In 2013, a grand coalition between Angela Merkel and the Social Democrats will begin to the address it, and economists are yelling at each other again about what the hell to do.[12]

[edit] Quotes

A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation.
Adam Smith, March 9, 1776, An Inquiry into the Nature and Causes of the Wealth of Nations
We stand for a living wage. Wages are subnormal if they fail to provide a living for those who devote their time and energy to industrial occupations. The monetary equivalent of a living wage varies according to local conditions, but must include enough to secure the elements of a normal standard of living--a standard high enough to make morality possible, to provide for education and recreation, to care for immature members of the family, to maintain the family during periods of sickness, and to permit of reasonable saving for old age.
—President Theodore Roosevelt, August 1912
No business which depends for existence on paying less than living wages to its workers has any right to continue in this country. By living wages, I mean more than a bare subsistence level — I mean the wages of a decent living.
Franklin D. Roosevelt, 1933, Statement on National Industrial Recovery Act
Except perhaps for the Social Security Act, it is the most far-reaching, the most far-sighted program for the benefit of workers ever adopted here or in any other country. Without question it starts us toward a better standard of living and increases purchasing power to buy the products of farm and factory.
—Franklin D. Roosevelt, June 24, 1938 Radio Address of the President

All these statements dispute the claim that the minimum wage is a starting wage, or for students, or whatever other nonsense people arguing against an increase use. FDR's second statement is supported by unbiased research.[citation needed]

[edit] Footnotes

  1. Oligopsony appears to occur mostly in certain agricultural markets such as tomatoes, tobacco, and cocoa. Economists note that oligopsony is "scarcely mentioned" by industrial organization economists because "they don't think it's very important" and "don't believe it presents any unique modeling issues relative to seller market power" (Rogers, Richard T. and Sexton, Richard J., Assessing the Importance of Oligopsony Power in Agricultural Markets, Am. J. Agr. Econ. (1994) 76 (5): 1143-1150. doi: 10.2307/1243407); and that "One of the most difficult problems facing economists is to determine from market data whether or not market power is being exercised" (Richard E. Just and Wen S. Chern, Tomatoes, Technology, and Oligopsony, The Bell Journal of Economics, Vol. 11, No. 2 (Autumn, 1980), pp. 584-602). Since oligopsony is all about a few buyers exercising market power, if it is difficult to tell whether market power is being exercised, then it is difficult to determine oligopsony's existence and influence, and thus the idea that it is "widely held" that the labor market is an oligopsony is dubious.
  2. David Card and Alan B. Krueger, "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," American Economic Review, Volume 84, no. 4 (September 1994), pp. 774-775.
  3. Neumark & Wascher, (2000) "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment" American Economic Review, Volume 90 No. 5.
  4. Card and Krueger (2000) "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Reply" American Economic Review, Volume 90 No. 5. pg 1397-1420
  5. Hristos Doucouliagos & T. D. Stanley, 2009. "Publication Selection Bias in Minimum-Wage Research? A Meta-Regression Analysis," British Journal of Industrial Relations, London School of Economics, vol. 47(2), pages 406-428, 06.
  6. Dube, Lester, and Reich (2010) "Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties" The Review of Economics and Statistics, November 2010, 92(4): 945–964
  7. Allegretto, Dube, and Reich (2011) "Do Minimum Wages Really Reduce Teen Employment? Accounting for Heterogeneity and Selectivity in State Panel Data," Industrial Relations, Vol. 50, No. 2 pg 205-240
  8. Stilwell, Victoria; Peter Robison; and William Selway (Mar 7, 2014) "Highest Minimum-Wage State Washington Beats U.S. in Job Creation" Bloomberg
  9. http://www.dol.gov/whd/minimumwage.htm
  10. http://oregonstate.edu/instruct/anth484/minwage.html/
  11. In, say, Denmark, this isn't even a problem as the average minimum wage can be as high as $19.
  12. Economists warn on minimum wage before German coalition talks, Reuters (Both sides probably have their merits in this case - you don't want a huge shock to the sector of the country that used to be East Germany, but two euros an hour isn't very helpful either.)
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