The Job-Killing Impact of Minimum Wage Laws
CARPE DIEM
Professor Mark J. Perry's Blog for Economics and Finance
Wednesday, June 16, 2010
About Me
- Name: Mark J. Perry
- Location: Washington, D.C., United States
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
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21 Comments:
i'm not in favor of minimum wage laws.
however, you're trying to make something out of nothing here.
in inflation adjusted terms, the minimum wage is little changed in the past 30 years and, more importantly, the number of workers at or below minimum wage continues to decline. its now at a new low of around 1%.
see chart from econweekly.com
as the fellow in the video states: " . . . the minimum wage doesn't destroy jobs . . . when the minimum wage is less than the market rate for entry level jobs. "
The minimum wage is below levels of the 1960s, when adjusted for inflation.
After a half-century of increased worker output per hour, and higher per capita incomes, the minimum wage worker is actually less well off than 50 years ago.
Okay guys, how many minimum wage jobs are there in America and what's the average age of a minimum wage worker? Test at 8.
Beautiful high school economics theory.
But why can you never find the evidence in the data?
He claims that the recent minimum wage hike costs teenagers their jobs.
But from 2007 to 2009 -- when the minimum wage hike he cited happened --teenage minimum wage employment rose from 373,000 to 818,000, a 119% gain.
The data directly contradicts his claims.
Spencer, a gain in jobs from 373m to 818m does not equal 119%. What is the source of your information?
Okay guys, how many minimum wage jobs are there in America and what's the average age of a minimum wage worker? Test at 8.
I'm a little early for class. The data is here.
Carpe Diem's favourite state "big hat, no cattle" Texas has the highest percentage of minimum wage hourly workers in the labor force.
Test at 8:30. What percent is it?
"teenage minimum wage employment rose from 373,000 to 818,000, a 119% gain."
Is this really meaningful? How many were making $7.25/hr or less before the increase in min wage? Did that number of teenage workers increase or decrease?
If minimum wage was raised to $19/hr half of the workforce would be minimum wage workers. One hell of an increase from the current number.
Quote from bobbie: "in inflation adjusted terms, the minimum wage is little changed in the past 30 years and, more importantly, the number of workers at or below minimum wage continues to decline."
It has nothing to do with inflation. It has to do with the productivity of the worker in the market for labor. When the supply of labor increases, the more productive workers will take the jobs of the less productive workers (or employers will replace less productive workers with capital, i.e., machines). The only competitive edge a less productive worker has is that they are willing to work for less money that the more productive worker (or the cost of capital). The minimum wage law makes it illegal for the less productive worker to compete.
Quote from spencer: "The data directly contradicts his claims."
No, it simply shows that economic effects are not instantaneous and that costs (e.g., labor) are not the only factors influencing profit and loss.
The angry keynesian whines: "But why can you never find the evidence in the data?"...
Maybe because you refuse to look for it...
From the March 5 edition of the WSJ: The Lost Wages of Youth
Try a dose of the following by David Neumark and William L. Wascher: Minimum Wages and Employment
Yes, juandos, let's follow Neumark & Wascher.
Say 100 teenagers are in the labor force. 85 are employed, 15 are unemployed.
The hourly minimum wage is increased from $6.55 to $7.25.
Now only 82 teenagers are employed and 18 teenagers are unemployed. That's Neumark & Wascher, right?
The aggregate hourly pay @ $6.55 is $556.75; the aggregate hourly pay @ $7.25 is $594.50.
Teenagers have a high marginal propensity of consumption. The income effect (100 teenagers have an extra $37.75 in their pocket) dominates the employment effect(3 teenagers lost employment).
I will guess that those 3 additional teenagers are high-school dropouts, female, work in the leisure & hospitality industry, were formerly part time (10-14 hours per week) employees and live in "right to work" states.
Here is my source and some other analysis of the minimum wage.
http://www.angrybearblog.com/2010/03/teen-unemployment-and-minimum-wage.html
What I see is all of you making up data and arguing theoretical points and that includes Neumark & Wascher.
When you actually have some data showing that the minimum wage actually makes low wage employees worse off I'll pay some attention to your theory. it is not that I do not know your theories. It is just that the data just constantly contradicts your theory.
Let me take this in another direction.
What I think the minimum wage actually does is transfer income and/or wealth from small businesses to low wage employees.
But because that argument will not go anywhere politically the opponents of the minimum wage have come up with this silly theory that the minimum wage hurts the recipients of the higher wages.
Why don't you try making a realistic argument that the minimum wage harms small businessmen. That is a group that is given a great deal of favorable political treatment and making this argument might actually do more to limit the minimum wage than your silly thesis that it harms the people that are getting paid more.
Spencer
geoih said:
It has nothing to do with inflation.
i said:
*more importantly*, the number of workers at or below minimum wage continues to decline. its now at a new low of around 1%.
as the fellow in the video states: " . . . the minimum wage doesn't destroy jobs . . . when the minimum wage is less than the market rate for entry level jobs. "
The lost jobs from minimum wages are not in the data because no one reports the jobs that are lost over time or don't exist due to the minimum wage. Also the federal minimum wage is lower than some state minimum wages so for example no one in California should be making the federal minimum wage. (Why doesn't the BLS track those making the over riding minimum rather than the federal?) In many other states it was only recently that the federal rate went above or matched the state minimum. If we've increased to 4.9% at or below minimum, and unemployment at recent highs, isn't that saying the minimum is causing some job killing?
Technology substitutes for labor as wages increase. In many cases, the labor is even shifted to the customers. In my lifetime, gas stations went from full service to self service to get rid of the employees pumping gas. Department stores went from having lots of people on the floor, to now mainly people at the check out. 100 years ago almost everything you bought was pulled off the shelf or out of a bulk container by a clerk. Now you do it yourself. Grocery stores and Home Depot even have self service check out where one employee can cover several machines and customers bag their own items.
When I was a kid, almost every check out had a bagger and they even put the bags into your car and took the cart away.
My first job was in a restaurant. When I started in high school almost everything was made from scratch - sauces, dressings, even cuts of meat. By the time I graduated college, almost everything was being bought pre-made and the cook staff was cut about in half. Opening shift was started later in the morning as there was less stuff to do. The food cost increased, but the labor savings more than made up for it. The minimum wage went up 27% in that period. As the second biggest cost after food, a 27% increase would have wiped out profits.
A side effect of minimum wage increases is that co-worker wages often have to be increased as well. Anyone who's been given a raise from minimum wage doesn't want to just be making minimum after an increase. Wage differentials matter to employees. Since they're the ones you want to keep, often their wages have to be increased above minimum wage so they don't start looking around.
Those cook jobs and some other cuts in the front line staff at that old job just went away. For integrity sake, the government should track those after each increase just as they're tracking jobs saved or created now.
Go to third world countries and the department stores, movie theaters, construction sites will all seem over staffed. That's because they have jobs that no longer exist here. I've seen 3 or 4 people to show people to their seats at a movie theater even during a weekday. The fast food places have people on the floor cleaning up tables. In the US, normally one of the cashiers will zip out and do that once in a while, with the expectation that the customers do most of the cleanup.
The lost jobs are by definition not high value jobs (or employers would keep them) but they could employ people who just aren't competent or capable enough for minimum wage jobs. Or in times like now, people could do jobs that are worth something, just not valuable enough while economic activity is reduced.
So you want to go back to the standards of living we had years ago or copy labor practices in countries that have much lower standards of ling than the US.
So you think we can work our way to widespread prosperity by making our individual workers poorer.
LOL.
And do not tell me you do not believe this because it is what you are arguing.
Anon @ 2:57 said: "For integrity sake, the government should track those after each increase just as they're tracking jobs saved or created now."
That might be a good government job for some of those who get displaced.
You're kidding about the tracking "jobs saved or created", right?
There is no counting involved. Politicos just spout large numbers, then we all feel much better.
Hmmm... I also seldom see the words "government" and "integrity" in the same sentence these days.
Quote from bobbie: "*more importantly*, the number of workers at or below minimum wage continues to decline. its now at a new low of around 1%."
What about the 10% of people unemployed, or the 20% of young people unemployed, a number that has continued to rise since the raising of the minimum wage? Did you think we would forget about that? (Plus, how can somebody be employed below the minimum wage?)
A more likely conclusion would be that there are fewer people employed at the minimum wage because they're unemployed.
Sadly anon @ 6/17/2010 10:03 AM can't follow Neumark & Wascher so he makes it up as he goes along...
What's even funnier is that said anon goes back to the angry keynesian's blog site for more flawed info...
Don't let the historical facts get in the way of your desire to spend someone else's money though...
Anon @ 10:03 (Spencer?)said:
"The aggregate hourly pay @ $6.55 is $556.75; the aggregate hourly pay @ $7.25 is $594.50.
Teenagers have a high marginal propensity of consumption. The income effect (100 teenagers have an extra $37.75 in their pocket) dominates the employment effect(3 teenagers lost employment)."
No doubt about it, in your example, as long as 77 or more teenagers remain employed, the net effect is positive. I'm sure the 3 who lost jobs are excited for their peers.
Did you mean to say "(82 teenagers now have an extra $37.75 in their pocket)"?
Immediately several questions come to mind:
Where did that $37.75 come from? Higher prices perhaps? If so, as you assume that teenagers have a high marginal propensity to consume, will their windfall disappear as soon as it appears, leaving them no better off?
How about the rest of us consumers? We are now worse off.
If not higher prices, from where, then; lower company profit? Lower earnings to stockholder?
If so, what about those unseen and unquantifiable future jobs that won't be created?
Will all of us pay more in some form to help support those 3 who are now unemployed?
The point taken from your example seems to be that an increase in minimum wage was a good thing, but I'm not so sure. Other than a little redistribution of income to some who may or may not be better off, the effect for everyone else appears to be negative.
@ Anon 3:08. I assume you're referring to my 2:57 post about lost jobs due to the minimum wage.
First, the discussion is on whether minimum wage laws cause jobs losses or not. You're discussing a different topic.
Second, do you really believe the government picking a figure improves the standard of living? So when I drive from California with the higher minimum wage, should I see a lower standard of living among minimum wage workers as I drive through other states?
If there's a tie between the level of the minimum wage and the standard of living, why don't countries around the world just raise the minimum wage and help all their people's standard of living? It's because it doesn't work that way.
How did Germany get to be the largest economy in Europe without a minimum wage? Why do so many foreigners flock to Singapore if they have no minimum wage?
Obviously those making minimum wage do better if it goes up, but only if they get to keep their jobs. I've seen several instances first hand where the bottom of the workforce gets lopped off before the minimum wage was going to increase. Some of those I doubt ever worked again for various reasons - intellect, personality, age.
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