Saturday, January 10, 2009

How Minimum Wage Caused 200 Jobs to Evaporate

ST. LOUIS POST-DISPATCH -- A young St. Louis mother who hand-painted barrettes to tame her daughter's unruly locks, turned the hair accessories into a $6 million dollar business (WeeOnes.com) that sold 2 million hairbows in 2007 and employed 250 workers in Missouri. It's a success story that could only happen in America, right?

MP: Yes, it's a perfect example of starting a business from nothing, and "living the American Dream," except that in October, the company told workers they were closing the plant in Missouri and contracting the work out to a factory in Mexico. One of the main reasons?

High and rising labor costs, primarily from the 37% increase in Missouri's minimum wage from $5.15 per hour in 2006 to $7.05 starting January 1, 2009 (see chart above), which contributed significantly to losses for the company over the last few years. The market for their products is so competitive that the company couldn't increase the price of the bows to offset the higher labor costs without losing sales, so the company was forced to move production to Mexico, and now more than 200 Missouri jobs have evaporated - largely thanks to the minimum wage.

Bottom Line: The workers of Missouri need jobs in today's tough economy more than they need the "compassion" of their state legislators. Unfortunately, for purely political reasons (not economic reasons), Missouri's elected officials have priced some of its unskilled workers right out of the labor market into the unemployment line, and helped ship jobs to Mexico, all because of their "compassionate" annual increases in the minimum wage (now mandated in Missouri).

Question: Which option is better for the Wee Ones workers: Continued employment at $5.15 per hour, or being now unemployed at $0.00 per hour? I bet if they had a choice, they'd take the first option. Unfortunately, that would be illegal.

HT: Kevin Murphy

34 Comments:

At 1/10/2009 10:54 PM, Blogger @sethstorm said...


Which is better for the Wee Ones workers: continued employment at $5.15 per hour or unemployment at $0.00 per hour?

Neither.

Consider a tax for third world and NAFTA origin goods that makes it inpalatable to use anything but US labor.

QED.

 
At 1/10/2009 11:39 PM, Anonymous t jefferson said...

Hell I will work for $5.10 an hour. I can live on that if I work two jobs at 80 hours a week. I am
currently paying one employer just so I can learn the job (Pope's Plant Farms). A lot of these people don't speak English but pointing at a shovel and a pile of dirt works.

 
At 1/11/2009 12:01 AM, Anonymous Anonymous said...

Isn't the concept of price floors a pretty basic in a principles of microeconomics class? Maybe some politicians should go back to school and learn something for once.

 
At 1/11/2009 12:29 AM, Blogger Milena said...

I think a better explanation is that the barrette lady is evil, and doesn't care about people. Doesn't that make more sense?

In fact, she should be forced to keep her business in the US, and pay her workers more than she can afford until they near bankruptcy so she can be eligible for a bailout. As anyone who has taken an economics class knows, the government will step in just in the nick of time.

 
At 1/11/2009 1:04 AM, Anonymous t jefferson said...

Here is the economics I understand.
Pay workers a livable wage and that money will trickle up to the Job Creators that Bush gave tax cuts to for eight years. We have had thirty years of supply side and it doesn't work ten years or more of free trade and we don't make as much stuff as we used to. The wage race to the bottom makes the $2.00 shirt seem cheap but the consumers only has a dollar. The only new small business start ups are selling apples, cleaning windshields, and solicting money for a fictitious chairitable organization

 
At 1/11/2009 1:26 AM, Blogger B-Daddy said...

Professor,
Thanks for another great post. My condolences on the number of economically illiterate commenters.

Those who would start a new round of tariff increases should consider the detrimental impact on the world economy of the Smoot-Hawley tariffs in the 1930s and the fact that exports to Canada and Mexico have increased under NAFTA.

Further, if an employer offers a wage of $5.00 an hour and some person thinks that's reasonable, why is that the business of anyone else?

 
At 1/11/2009 1:48 AM, Blogger bobble said...

so true that the wages in the united states are now set by the wages in mexico (china, india, vietnam,etc).

now, i don't say that anything can be done about that. but it's a rather chilling message to the united states workers: get ready to work at third world wages.

 
At 1/11/2009 2:30 AM, Blogger wcw said...

Our host is a practitioner and surely knows what the literature says.

The literature indicates that minimum-wage laws do not have the microeconomics-101 effect (see, for example, the canonical study from Card and Krueger, 1994).

His motivation for misleading his audience is left as an exercise for the reader. Perhaps it shares something with that of someone, himself apparently ignorant of the literature, calling those who know it "economically illiterate."

Glass houses, you benighted lackwits.

 
At 1/11/2009 2:58 AM, Anonymous poo said...

I'll give you a free market in labor if you'll give me a free market in housing.

Until then, I'm willing to take my chances with the minimum wage.

20 percent of the minimum wage employees where I work have college degrees.

Not our fault if teenagers aren't as productive.

 
At 1/11/2009 3:37 AM, Anonymous poor boomer said...

How's this for a minimum wage proposal? (I'm not sure whether I've trotted it out here before, but I'd like some critique.)

Create a "two-tiered" sort of minimum wage. The higher wage, which would be somewhat analogous to what advocates call a "living wage," might be called a "target" wage.

The lower wage would be the de facto minimum wage.

Initial starting points for the purpose of example might be $4 minimum (which employers would like) and $8 target wage. (A target of more than 200 percent of the minimum wage would invite fraudulent collusion to receive unearned subsidies.)

The target wage would replace the EITC, but workers would be held to the same eligibility standards for age, income, and household size. (i.e. teens as well as secondary earners in high-income families not eligible for target wage)

Employers could pay any wage at or above the new (lower) minimum wage. This should be favorable to both teens and employers.

Eligible workers filing tax returns (similar to EITC) and earning a wage below the target wage would receive a subsidy equal to one-half the difference between the target wage and their actual wage.

e.g. an eligible worker earning $6 per hour would receive a subsidy of $1 per hour. (($8 -$6) / 2 = $1).

Unlike the EITC, my proposed wage wubsidy would reward only paid work, and incentivize only additional work effort.

(The EITC has perverse income ranges where it punishes additional work effort and incentivizes decreased work effort, e.g. a childless adult earning minimum wage maximizes his EITC at a half-time work effort; his EITC is phased out as he works more hours and/or earns a higher wage.)

Obviously, this subsidy has a cost. Is that cost greater than the current cost of EITC? I don't know, I'm not a number cruncher.

But this proposal is good for teens and for employers, and is better than the EITC in providing exactly the right incentives to work more and to earn a higher wage.

I think it would be worthwhile for some number cruncher(s) to take a crack at it.

 
At 1/11/2009 7:45 AM, Blogger Bruce Hall said...

Most economists argue both ways: people should be free to work for whatever wages they can get; jobs that pay low wages are not worth having and it is more "efficient" to "overseas" them so that more "meaningful" work can be done.

Good theory in these times.

 
At 1/11/2009 8:53 AM, Anonymous Anonymous said...

So states all around the country have been raising minimum wages over the last 3 or 4 years... Not just Missouri. Is there any correlation in the data between a state's unemployment and its increased minimum wage?

 
At 1/11/2009 9:41 AM, Blogger Ironman said...

Anonymous asked:

"So states all around the country have been raising minimum wages over the last 3 or 4 years... Not just Missouri. Is there any correlation in the data between a state's unemployment and its increased minimum wage?"

Unemployment rates aren't the best measure of the negative effect of minimum wage hikes. The reason why is because you can't be unemployed from a job that never existed in the first place (the unemployment rate only counts people who were previously employed). A minimum wage set too high can prevent jobs even from even existing, as the story from Missouri demonstrates.

A better measure is the count of the number of employed individuals over time. Here's an example that I'll be writing a post around tomorrow:

Between January 2007 and December 2007, despite a growing economy throughout the year, the number of employed individuals between the ages of 16 and 19 dropped by over 400,000. This age group is relevant since they accounted for more than 25% of the total number of people earning the minimum wage in the U.S. in 2007.

Keep in mind that the economy grew throughout 2007 (it peaked in December 2007 - this is confirmed by the NBER's recent statement that December 2007 marked the peak of the previous period of economic expansion, which they use to mark the beginning the current recession). The number of employed individuals for all other age groups increased throughout the year, peaking in November 2007 (for total employment) and in December 2007 (for non-farm payroll employment).

So why were teenagers the only ones with a net decrease in the number of employed individuals? The answer: because of the combination of state and federal minimum wage hikes that occurred during the year.

There's a pretty strong correlation between the decline in the number of employed teens and various milestones for increasing the federal minimum wage in 2007. The job losses really began in earnest in January 2007 when the House passed its bill hiking the minimum wage, which continued on a steady basis through when the President signed it into law. There's a really big wallop in the month following when the wage hike officially took effect (the first increase from $5.15 to $5.85 took effect on 24 July 2007).

All the more remarkable since the economy was in its second quarter of growing at a 4.8% clip at the time. Even though it rebounded a bit in the next couple of months, it fell back to those low levels by the end of the year. The teen employment numbers have generally been downhill since.

 
At 1/11/2009 10:04 AM, Anonymous t jefferson said...

B-Daddy
Thats fine that you don't want any more tarrifs,But what about the other countries thst have tarrifs. Like Korea that can can import to us thousands of cars a year but we only export hundreds or China that has content laws on anything assembled there. We don't need free trade we need fair trade, we don't need minimum wage we need a livable wage, National health care not emergency room care that everbody has to pay for.

 
At 1/11/2009 2:47 PM, Anonymous Anonymous said...

Anonymous said:

" So states all around the country have been raising minimum wages over the last 3 or 4 years... Not just Missouri. Is there any correlation in the data between a state's unemployment and its increased minimum wage?"


Good question. And I have a guess - not quite a hypothesis - based on personal experience - that in states with higher-than-federal minimum wages, teens are displaced from employment by college graduates.

 
At 1/11/2009 2:51 PM, Anonymous poor boomer said...

Ironman said:

"So why were teenagers the only ones with a net decrease in the number of employed individuals? The answer: because of the combination of state and federal minimum wage hikes that occurred during the year."


Face it, minimum wage isn't just for teens anymore!

Not our fault if teens aren't as productive as college graduates.

 
At 1/11/2009 2:56 PM, Anonymous poor boomer said...

Question:

A minimum wage that is static in nominal terms is declining in real terms.

For all those years preceding the recent minimum wage increases - during which the nominally static minimum wage decreased approx 25 percent in real terms - how much did minimum wage employment increase?

Some people complain when jobs are lost due to minwage increases, but I heard nary a peep from those people all the years the real minwage was declining and employment was increasing.

 
At 1/11/2009 2:59 PM, Blogger Jason Gillman said...

Michigan jumped more than a point in unemployment in 2008 due to the disappearance of "seasonal" jobs which was the result of an arbitrary minimum increase signed by Granholm to sate the union lobby.

College Kids had to start competing for the technical jobs, because the smaller enterprises made the decision to hire one or two less to keep the books in check.

ANY minimum wage law or artificial controls by government are immoral and wrong, and further result in more damage to the intended recipients of governments stated goals.

 
At 1/11/2009 3:10 PM, Blogger @sethstorm said...


Most economists argue both ways: people should be free to work for whatever wages they can get; jobs that pay low wages are not worth having and it is more "efficient" to "overseas" them so that more "meaningful" work can be done.

The more reason to shut the exits.


Those who would start a new round of tariff increases should consider the detrimental impact on the world economy of the Smoot-Hawley tariffs in the 1930s and the fact that exports to Canada and Mexico have increased under NAFTA.

...exports of jobs, with imports of low-quality items.

Block the exits and they won't have a chance to make that junk.


Further, if an employer offers a wage of $5.00 an hour and some person thinks that's reasonable, why is that the business of anyone else?

That is how slave labor gets started, and that is why it is the business of someone else.

 
At 1/11/2009 4:06 PM, Anonymous poor boomer said...

B-Daddy said:

"Further, if an employer offers a wage of $5.00 an hour and some person thinks that's reasonable, why is that the business of anyone else?"


If a developer or landlord wants to offer inferior housing affordable to someone earning $5.00 per hour, and some person thinks that's reasonable, why is that the business of anyone else?

 
At 1/12/2009 1:05 AM, Blogger B-Daddy said...

In response to fair vs. free trade, consider this intellectual exercise. What if an American company found a cure for leukemia and a Chinese company found a cure for AIDS. Further, the protectionist policies of China prevented the import of the leukemia cure, but Americans were free to import the AIDS cure, which country would be better off?
Further, NAFTA is in fact both free and fair trade, or at least as close as we can get in this imperfect world. Surely we can agree that the economic dislocations that would be caused by scrapping NAFTA would be bad for all the countries involved. Raising tariffs in the 1930s certainly seemed to prolong the depression (see the wiki link), so why the eagerness to repeat that mistake?

With regards to the minimum wage, this country had no such laws until the 1930s and seemed none the worse for it. It certainly was not the cause of slavery. The strongest proponents of minimum wages have been unions, because a minimum wage strengthens their bargaining position.

 
At 1/12/2009 7:59 AM, Anonymous poor boomer said...

B-Daddy said...

Well he totally blew off my question!

 
At 1/12/2009 9:38 AM, Anonymous Cromagnum said...

I think we need a boost in productivity. This causes more $$$ at the bottom line of a business, and therefore more $ for wages. It worked in the 1990's.

One way to improve net productivity is to introduce low scale easy program robotics into manual labor. Could we make easy-program robotics available for a lot of small businesses?

SeePg 2 of this article
http://www.xconomy.com/boston/2008/09/02/irobot-co-founder-brooks-leaves-to-launch-new-robotics-firm-aiming-to-revitalize-us-workforce/

Here is the "money quote":
Around 1980, computers were these huge, mysterious machines kept in special rooms, he explained. “Office workers ‘used’ computers by poring through fan-folded printouts of sales and stock reports. If they wanted a different analysis than what was delivered they had to defer to systems analysts, programmers, punch-card operators, and computer operators. They didn’t have direct control.”
The PC, of course, changed all that, especially with the rise of spreadsheets and other software programs that automated many office tasks and turned them from onerous to routine. Office workers, said Brooks, “became their own automation engineers, and they increased their own productivity.”
In looking at the robotics world today, Brooks noted that robots are pretty much where computers were back around 1980. Industrial robots—a space not occupied by iRobot, which makes consumer and military robots—take on many dangerous tasks in factories and other operations. But it takes automation engineers months to program them for new tasks.
Brooks was out to change that paradigm—both in factories and smaller, Mom-and-Pop operations. “My use case is a bakery in Cambridge, three or four people,” he told me. “They go on the web, click, click, click, they order a robot for 2000 bucks.” Then, when the robot arrives, “they don’t read a manual, because no one reads a manual.” Yet, he said, by employing a combination of natural language and physical demonstration of the job at hand, the bakery workers could program their new robot to tackle basic, rote tasks that previously had to be done by them manually. “They won’t even think of it as programming,” he said.
By thus empowering American workers and boosting their productivity, Brooks said that robots could make U.S.-based manufacturing a viable alternative to outsourcing in many circumstances. “This can be a force for evolving in a different direction from the way we have been heading the last 50 years,” he said. “That’s my plan.”

 
At 1/12/2009 9:59 AM, Anonymous t jefferson said...

B-Daddy
An American nuclear power plant depends on German supplier Siemans for its turbine generators. The plant is shut down for a planned outage to replace one turbine. Political problems in Europe prevent the delivery of the turbine. How long do you think that outage will last?

 
At 1/12/2009 10:33 AM, Blogger 1 said...

"Consider a tax for third world and NAFTA origin goods that makes it inpalatable to use anything but US labor"...

Hmmm, how about an oxygen tax on socialist liberals instead?

"Here is the economics I understand.
Pay workers a livable wage and that money will trickle up to the Job Creators that Bush gave tax cuts to for eight years. We have had thirty years of supply side and it doesn't work ten years or more of free trade and we don't make as much stuff as we used to
"...

Hmmm, what planet is this happening on?

On this planet if you have a skill that's in demand then you need not worry about the minimum wage UNLESS you live in a country run by a socialist/communist dictator...

"The literature indicates that minimum-wage laws do not have the microeconomics-101 effect (see, for example, the canonical study from Card and Krueger, 1994)"...

Let me guess wcw, you are referencing this bit of staggeringly silly leftist misdirection: Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania, right?

From April of '96 by Reed Garfield: Raising the Minimum Wage: The Illusion of Compassion

 
At 1/12/2009 3:21 PM, Blogger Kevin Murphy said...

I have just one correction to Professor Perry's remarks - it wasn't the legislature, but the voters in Missouri, along with voters in Arizona, Colorado, Montana, Nevada and Ohio who overwhelmingly voted in 2006 to both raise the minimum wage and index it to inflation.

It's just such a feel good idea - look at me, I just gave a lot poor people a raise - that people don't stop to consider the consequences. If you raise the price for a commodity, people buy less of it.

 
At 1/12/2009 7:26 PM, Anonymous poor boomer said...

1 said:

"Hmmm, how about an oxygen tax on socialist liberals instead?"


The devil is in the details. How you gonna write that?

 
At 1/12/2009 7:30 PM, Anonymous poor boomer said...

Kevin Murphy said:

". If you raise the price for a commodity, people buy less of it."


In a ceteris paribus world, yes.

But conditions change. The minimum wage has goine up, yet, but McDonald's - the shining star of minimum wage employers - is enjoying boom times.

People should be buying fewer Big Macs, right?

 
At 1/12/2009 9:24 PM, Blogger Craig said...

"That is how slave labor gets started, and that is why it is the business of someone else."

Thanks for the history lesson. And here all these years i thought slavery was forced -- now I find out that it was voluntary but just didn't pay much.

 
At 1/13/2009 6:25 AM, Blogger Thatcher's Child said...

Fascinating that regardless of how sensible the content of an article, your comments show that most people are too stupid to understand!

Get rid of the minimum wage. If this is going to reduce your wage - spend some of your free time reading a book and upgrading your skills.

This will make you more valuable, and you will soon be earning a higher wage.

Eventually, jobs which were so simple that minimum wage applied to them, will disappear because they are not cost effective.

This is called progress.

Roll on the robot who can stop the jobs going abroad by making their products too expensive!

This is progress too.

 
At 1/13/2009 9:24 AM, Blogger Kevin Murphy said...

poor boomer

Did the price of McDonalds go up?

What happend last year when the price of gas went up? People bought less of it. What happens when the price of food goes up? People buy less of it.

What happens when the price of minimum wage labor in the US goes up? People buy less of it.

Back to McDonalds - what is happening to cause tyhe "boom times" for McDonalds? The company itself says the increase in the US is do to its push on breakfast. It's no secret that people are cutting back these days, and so one way to do that is to shift from medium priced restaurants to cheap ones (i.e. MacDonalds).

For retail, it's easy to adjust hours to match changes - in a factory, its more all or nothing. First the operator tries to cut back in other areas to make up for the increase in labor cost, and then either labor is substituted for (i.e. automation) or production is moved to a lower labor cost location.

Maybe I need to legnthen the statement for you: If the price of a commodity goes up, people buy less of it than they would if it hadn't increased. IOW, not absolute, but relative.

And also employers are paying for output, and if they can pay somebody twice as much to produce three times as much, they'll buy more expensive labor because it increases productivity. Just as they'll pay somebody half as much if they produce more than half as much.

 
At 1/13/2009 10:38 AM, Anonymous t jefferson said...

Thatcher's Child
Try reading War On The Middle Class, Lou Dobbs. I just finished it.

 
At 1/13/2009 8:36 PM, Blogger wcw said...

'1' (oh, you sad little man), you are even stupider than I thought before. And that was pretty freaking dumb. Lord, you're an idiot. I can barely express it.

Try this: what do one and one make?

 
At 1/18/2009 4:52 PM, Blogger kate said...

I'm shocked that this accessories company is leaving the U.S. to avoid paying decent wages here. Sure, it's better to make something rather than nothing, but leaving these workers in the lurch is tragic!

 

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