Friday, July 24, 2009

Downward Sloping Demand for Unskilled Workers: Employers WILL Respond to Minimum Wage Hikes

Today the federally-mandated minimum wage increases to $7.25 per hour, a 10.7% increase from the previous $6.55 per hour. What effect will the higher wage have on employment and compensation for unskilled workers? That's a controversial issue.

About a year ago,
Angry Bear wrote: We have a long record to compare the teenage unemployment rate and the minimum wage (see graph above). If you look at the two series you see a very inconsistent record. Sometimes a rise in the minimum wage is followed by a drop in the teenage unemployment rate and sometimes it is followed by a rise in the teenage unemployment rate. Essentially, the correlation between the teenage unemployment rate and changes in the minimum wage is zero, strongly implying that there is no causal relationship.

MP: Let's assume that there is no correlation between: a) changes in the minimum wage and b) the teenage unemployment rate. That is not the same thing as saying that "the minimum wage has no negative effect on teenage employment." Here's why:

Even if the same number of teenage and unskilled workers are employed after a hike in the minimum wage, reflected in NO change in the teen jobless rate (and this is probably not accurate), there are many other adjustments that employers could and will make to offset the monetary increase in hourly labor costs:

1. Fewer Hours - unskilled workers might still be employed, but at a reduced number of hours (the BLS counts workers as "employed" even if they work 1 hour per week, so reduced hours wouldn't show up in unemployment rates). Full-time workers now become part-time workers. Overtime hours could be eliminated. Full-time restaurant workers now are forced to work a split-shift (e.g. 11 a.m. - 2 p.m. and 5 p.m. - 8 p.m.). Therefore, we would expect a negative relationship between increases in the minimum wage and HOURS WORKED, even if there was no change in either employment levels or the unemployment rate for unskilled workers.

2. Reduced Benefits - employers can easily adjust "total compensation" for unskilled workers and offset higher monetary wages by: a) no longer providing free or discount uniforms and forcing employees to now pay for uniforms, b) no longer providing free or discount food at restaurants, c) reducing or eliminating "employee discounts" on the employer's merchandise, d) eliminating paid holidays, e) eliminating scholarship programs, f) eliminating group discounts available through large companies like McDonald's, g) eliminating employer sponsored or subsidized health care benefits, h) eliminating bonuses, i) eliminating company-sponsored holiday parties, etc.

For example, see the list of benefits here for hourly McDonald's workers in Canada (I couldn't find a comparable list for the U.S., but I assume the benefits would be pretty similar here), and you'll see that there are at least ten non-monetary benefits offered to even unskilled minimum wage workers at McDonald's that could be adjusted in the face of higher monetary wage costs resulting from legislated minimum wage increases.

Bottom Line: Demand curves slope downward, and the market for unskilled workers is no exception. Employers WILL respond to increases in the minimum wage, in many ways that will NOT show up in the teenage unemployment rate, but still to the DISADVANTAGE of unskilled workers. The most likely outcome from an increase in the minimum wage to $7.25 per hour will probably be some combination of both increased unemployment for unskilled workers and reductions in compensation.

As Jeff Jacoby reminds us:

The laws of supply and demand are not optional. They weren’t enacted by Congress and Congress can’t override them. Minimum-wage laws don’t make low- and unskilled Americans more productive, more experienced, or more desirable. They merely make them more expensive - and more likely, therefore, to be unemployed.


24 Comments:

At 7/24/2009 9:32 AM, Blogger Ironman said...

If anyone's up for the challenge, here's a tool that will put you in the shoes of a small business owner having to cope with an increase in the minimum wage.

Also, McDonalds, Burger King and other fast food franchises aren't the best example of minimum wage employers for weighing the impact of changes in the minimum wage on employment levels. While these businesses hire teens at the prevailing minimum wage where they do business, they do not rely upon low wages for their competitive advantages - they're effectively insulated to a large degree from the impact of mandated minimum wage hikes.

In case you're wondering what those competitive advantages are, it's found in their distribution systems and in their development and use of automation technology, which greatly reduces the amount of labor they need compared to their much smaller competitors.

As a result, these large companies will often support minimum wage increases because they distress their smaller competition, which results in their gaining more market share and higher profits. Just like Wal-Mart does.

 
At 7/24/2009 10:49 AM, Blogger 1 said...

One has to remember that the 'Angry Bear' is an avowed socialist regardless of the banner on his blog site...

The Heritage Foundation has the following dated July 23: Postpone Minimum Wage Increase until Low-skilled Unemployment Falls

In that piece they reference the following by David Neumark and William L. Wascher: Minimum Wages and Employment (Foundations and Trends in Microeconomics - Vol. 3, No 1–2 (2007) 1–182)...

In the abstract the two gents had the following: 'Our review indicates that there is a wide range of existing estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage. However, the oft-stated assertion that recent research fails to support the conclusion that the minimum wage reduces employment of low-skilled workers is clearly incorrect. A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries.'...

Do we as a nation have to continue electing people to Congress that have keep reinventing the bad wheel?

 
At 7/24/2009 11:54 AM, Anonymous Anonymous said...

It would be nice to see that chart using real minimum wage.

 
At 7/24/2009 12:17 PM, Blogger 1 said...

"It would be nice to see that chart using real minimum wage"...

O.K., that's a good idea once YOU have credibly defined the so called, 'real minimum wage'...

What's stopping you from cranking out that chart?

Will ObamaCare drive up unemployment?

From the Heritage Foundation: Employer Health Care Mandates: Taxing Low-Income Workers to Pay for Health Care

 
At 7/24/2009 12:32 PM, Anonymous Anonymous said...

Nice of you to quote Angry Bear.

But if you are going to disagree at least make some attempt to show that the facts cited there are wrong.

It is a fact that the correlation between the teen unemployment rate and the minimum wage is near zero.

And it is standard economic analysis that a correlation of near zero implies no causal relationship.

Yet you keep insisting to the contrary.

 
At 7/24/2009 12:49 PM, Blogger 1 said...

anon @ 12:32 PM says: "It is a fact that the correlation between the teen unemployment rate and the minimum wage is near zero"...

Does repeating a lie more often somehow make the lie morph into a fact?

Consider reading Frédéric Bastiat's broken window fallacy...

 
At 7/24/2009 1:49 PM, Blogger PeakTrader said...

The economic literature shows a rise in the minimum wage has little or no effect on employment.

One problem with the analysis is it's light on the supply side. Raising the minimum wage from $6.55 to $7.25 can either make no difference in employment when reservation wages are higher, or if it does make a difference, it may reduce overtime.

Regarding the Card-Krueger study (where a rise in the minimum wage has a small positive effect on employment), fast food jobs cannot be offshored or shifted to other states. So, a rise in the minimum wage has a powerful impact on the fast food industry. Also, a telephone survey (in Card-Krueger) can be more insightful than data sets.

 
At 7/24/2009 1:50 PM, Blogger Robert Miller said...

This comment has been removed by the author.

 
At 7/24/2009 1:59 PM, Anonymous 2 said...

rates of incarceration

Bingo! Incarceration rates rose in the 1990s due to Three Strikes Laws. This was also responsible for the reduced crime rates. Higher incarceration reduced the number of unemployed teens in the labor force.

The economy was also growing in the late 1980's and mid 1990s which overrides the effect of minimum wage. We had generally lower unemployment.

Draw trend lines to take the volatility out of that graph. The only periods where the unemployment rate doesn't follow rises in minimum wage are the late 1980s and mid 1990s when there was strong economic growth.

 
At 7/24/2009 2:08 PM, Anonymous Anonymous said...

Robert Miller - How is equilibrium wage measured?

Based on what you have just summarized, do politicians simply raise minimum wage (but at a slower pace than inflation & growth in equilibrium wages) in an attempt to appease constituents?

 
At 7/24/2009 2:31 PM, Blogger PeakTrader said...

Also, I may add, even if the rise in the minimum wage reduces employment, the increase in wages may exceed the losses in employment, and therefore have a stimulative effect on the economy (low wage earners have a high MPC).

 
At 7/24/2009 2:53 PM, Anonymous Anonymous said...

PeakTrader, your last comment sounds appealing on paper....not unlike how appealing and attractive the math and assumptions behind AAA rated CDOs appeared five yrs ago.

You maybe can get that math to work out on paper, but it doesn't make a whole lot of sense when you when I try to think about it intuitively... Government raises a wage artificially, unemployment goes up, but consumption goes up because of high MPC for those who still have job and as a result economic growth increases? Is that what you are saying? That sounds like a shell game...

Unless the workers are more productive or are given more capital, I'm having a tough time making the leap from your last comment...

 
At 7/24/2009 3:10 PM, Blogger PeakTrader said...

Anonymous, I stated above, a rise in the minimum wage has little or no effect on employment. However, if it has a negative effect, the laid-off workers would receive unemployment benefits, while the employed workers received higher wages. So, raising the minimum wage would have a stimulative effect on economic growth.

 
At 7/24/2009 3:33 PM, Blogger Rdan said...

Oh good grief Mark. Two things:

http://politicalcalculations.blogspot.com/2006/06/disappearing-minimum-wage-worker.html

and

http://worthwhile.typepad.com/worthwhile_canadian_initi/2006/11/when_the_minimu.html

Use thought instead of appeal to your base.

 
At 7/24/2009 4:01 PM, Anonymous Anonymous said...

I fired 5 of my unskilled teenage workers today and hired 1 skilled 30-year-old. The remaining workers are going to have to do the work of the net 4 employees I lost.

This is all so I can keep taking home my modest $42,000 salary that I pay myself so that I can pay my house payment and my car payment.

Thanks Congress!

 
At 7/24/2009 5:12 PM, Anonymous m.jed said...

Regarding the "lack of correlation" cited at Angry Bear, my comment was as follows:

regarding [Angry Bear's] regression - a few questions - did you correct for autocorrelation, because when I've run the regressions without correcting the coefficient on minimum wage is smaller vs. with correcting through autoregression (or Cochrane-Occult).

My regression, which also adds the dependent variable of [Unemployment of those Over 25] uses Unemployment Rates, not absolute number of unemployed, and the nominal value of the minimum wage attributed to the month in which it was increased, regardless of the day of that month. Below I have substituted "^" where "less than signs" had appeared to avoid html issues. When running the Cochrane-Occult excluding a constant I get:

Model 1: Cochrane-Orcutt estimates using the 724 observations 1948:02-2008:05
Dependent variable: Teen_Unemp

VARIABLE______COEFFICIENT_____STDERROR______T STAT______P-VALUE

Over_25_Unemp_____1.20318_____0.171057_____7.034_____^0.00001 ***
Min_Wage_____1.12929_____0.542886_____2.080_____0.03786 **

Statistics based on the rho-differenced data:

Sum of squared residuals = 556.164
Standard error of residuals = 0.877673
Unadjusted R-squared = 0.929166
Adjusted R-squared = 0.929068
F-statistic (2, 722) = 28.4872 (p-value ^0.00001)
Durbin-Watson statistic = 2.80435
First-order autocorrelation coeff. = -0.419163

 
At 7/24/2009 5:20 PM, Blogger 1 said...

"The economic literature shows a rise in the minimum wage has little or no effect on employment."...

Hey Peak you forgot to mention on which planet this bizzare situation has taken place...

On planet earth the facts don't bear you out...

 
At 7/24/2009 5:27 PM, Blogger 1 said...

"Also, I may add, even if the rise in the minimum wage reduces employment, the increase in wages may exceed the losses in employment, and therefore have a stimulative effect on the economy (low wage earners have a high MPC)."...

I'm thinking that if Walter Williams heard this he'd pulling his hair out in disgust...

 
At 7/24/2009 7:24 PM, Blogger QT said...

Walt,

Funny, Mayor Daley seems to be saying the same thing...and Dennis Gannon, president of the Federation of Organized Labor is threatening to reintroduce big box minimum wage legislation.

Are you suggesting that Dennis and friends do not oppose Walmart? Where are your links to small business groups in Chicago opposing Walmart? Saying it don't make it so.

 
At 7/24/2009 7:36 PM, Blogger gator80 said...

A real example. I used to work for a company that owned a chain of fast-food restaurants. As wages increased they found a way to centralize certain tasks to reduce headcount. Salads had been prepared at each restaurant - cutting lettuce, etc. That task was centralized and then the salad was distributed to the restaurants. As a result, hours are reduced at each restaurant. Basic economics, basic business.

 
At 7/24/2009 9:53 PM, Anonymous Anonymous said...

As wages rise firms will look to substitute machines for labor as the math starts to tilt in favor of the machines.

My local Home Depot now has six self checkout machines manned by a single employee. My local supermarket has 4 or 5 self checkout lanes also manned by a single employee. I expect this trend to accelerate as wages rise.

This would have happened anyway but wage increases will make it happen faster. Now of course there will be more skilled labor needed to design, build and fix the machines but the unskilled will be hurt.

 
At 7/25/2009 5:40 AM, Anonymous Anonymous said...

On planet earth the facts don't bear you out...

Doucouliagos & Stanley
come to a different conclusion than Neumark & Wascher.

From their abstract:

The minimum-wage effects literature is contaminated by publication selection bias, which we estimate to be slightly larger than the average reported minimum-wage effect. Once this publication selection is corrected, little or no evidence of a negative association between minimum wages and employment remains.

So do reside on planet pluto, juandos?

 
At 7/25/2009 7:11 AM, Blogger 1 said...

Australia?!?! LOL! Good find!

Thanks for that...

BTW your T.D. Stanley smacks of being a Keynesian/socialist...

The use of meta-regression analysis by these two gives one the impression that they're desperately cherry picking their data to bolster their preconceived notions in spite of the law of supply and demand...


Sorry, try again but with something a little more credibility...

 
At 7/25/2009 12:54 PM, Blogger 1 said...

Art Carden is assistant professor of economics and business at Rhodes College in Memphis, Tennessee writes (courtesy of the Mies Institute): However, there are additional, hidden costs of these interventions, which are more difficult to detect but perhaps more insidious. For example, one effect of a minimum wage is to reduce the availability of on-the-job training, since more resources are required simply to hire and retain a workforce. And further interventions in the labor market (for example, safety regulations and payroll taxes) make it still more costly to employ labor. These burdens together reduce a firm's willingness to hire laborers and — in the long run — must reduce the number of opportunities for those laborers to acquire valuable job skills. Far from increasing opportunities for the working poor, a minimum wage actually restricts their mobility.

 

Post a Comment

Links to this post:

Create a Link

<< Home