The Job-Killing Impact of Minimum Wage Laws II
Bottom Line: As much as politicians and other advocates of the minimum wage might pretend otherwise, the laws of supply and demand (like the law of gravity) are NOT optional.
CARPE DIEM
Professor Mark J. Perry's Blog for Economics and Finance
Friday, June 18, 2010
Bottom Line: As much as politicians and other advocates of the minimum wage might pretend otherwise, the laws of supply and demand (like the law of gravity) are NOT optional.
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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36 Comments:
is it possible that teenage unemployment always rises faster than the general rate during recessions?
according to a a 2009 paper by Bell and Blanchflower (page 17) :
Recently OECD (2008a) confirmed . . [that] "Youth unemployment rates are more sensitive to business-cycle conditions than the
adult unemployment rate . . . " .
Why can't the minimum wage be floating. In periods of high unemployment some type of wage commission could just adjust it according to demand and supply for labor.
The failure to enforce our immigration laws causes much more teenage unemployment than the minimum wage. Here in California fast food places often have a Spanish language version of their employment application.
Don’t sweat the small stuff
One of the mistakes of the Roosevelt New Deal was to establish a minimum wage that was too high for market conditions. The high wage required by government limited the number of jobs. The error was soon realized but what to do about it was a problem. Democrats wanted to be regarded as protecting the poor but needed to lower the minimum wage to do that. They turned to friendly economists to fix the problem. What they suggested was to continue to have a minimum wage but set it as near as possible to market value of unskilled labor. That gave them the best of both worlds. They had a minimum wage that they could brag about but it would do little damage to the economy.
Since then both Republicans and Democrats have used the minimum wage as a political football. Democrats tell workers to vote for them or risk losing the minimum wage. Republicans tell small business to vote for them or the minimum wage will go up. Meanwhile the minimum wage has little impact on anything.
While Republicans controlled Congress the minimum wage should have become obsolete with market forces pushing wages above the set rate. Instead Republicans shot themselves in the foot. They pushed wages down by giving small business illegal alien labor and in the process reinforced the worker’s desire to have it.
The current minimum wage so too close to the market rate to create a significant number of jobs if it is lowered or eliminated. Don’t sweat the small stuff.
"The laws of supply and demand (like the law of gravity) are NOT optional."
One of the laws is "the higher the price, the higher the quantity supplied."
The minimum wage has little or no effect on employment, because:
1. A higher minimum wage will attract better workers.
2. Better workers will add greater value to the firm.
3. Greater value will make the firm more competitive.
4. A more competitive firm can increase its market share leading to more employment.
A higher wage, more competitive, higher quality market can increase in size.
Peak, you said:
"The laws of supply and demand (like the law of gravity) are NOT optional."
No argument there.
"One of the laws is "the higher the price, the higher the quantity supplied."
No argument there either; if there is a shortage, buyers must bid more to encourage sellers to produce a higher quantity.
If there was a shortage of teenage labor, then buyers - employers - would indeed have to raise the price offered to encourage an increase in the supply, but this isn't currently the case.
There is, I believe, currently a 33% SURPLUS of teenage labor, so I would expect the sellers - teenage workers - to offer their labor at a lower price to encourage an increase in demand.
The minimum wage, in this case, is an artificial price floor that keeps sellers from offering their labor at a lower price, thereby ensuring a continued surplus of teen labor.
My definition of an unemployed teenager is one who isn't working, but wants to. One who chooses to spend their days playing video games or hanging out with BFFs instead of working, is not unemployed.
this is only true to the extent that these jobs were minimum wage anyway.
while i absolutely agree that if price goes up, demand goes down, raising the minimum price of something the sells for $5 to $4 will have little effect.
if we look at the chart closely, i have to say, it does not appear to back up the claims made if you look at the cut points for wage increase.
the hike in 2007 had no obvious short term effect on teen unemployment. this seems to argue that they were already being paid more than the minimum wage anyhow.
the hikes in 2008 and 2009 came during increases in unemployment that were already underway and did not appear to change their slope.
that said, such changes are broadcast ahead of time, so it is quite possible that the first part of those increases was caused by anticipation of the price increase.
does anyone have the dates on which the increases were announced as opposed to when they took effect?
that would be an interesting thing to lay over the chart.
also:
peak-
much of what you say about higher quality workers is true, but 2 things to consider:
1. these are teens. for the most part, they do not have a great deal of work skills yet.
2. if you fix prices, it creates rationing, in this case of jobs. sure, more labor might be attracted, but inability to reduce price in response to a glut of workers means they all have to compete for fewer jobs at the equilibrium that presides at the higher price and therefore, more will be unemployed as they cannot drive more job creation by lowering wages.
Look at who's been getting whatever jobs have been available -- it's been the 55+ cohort, likely a result of the crappy economy and our crappy demographics. Kids are being kept out of the workforce by their parents and grandparents. I will have a post addressing this issue going up soon at The Big Picture.
Peak Trader's argument, which is a common one in the minimum wage debate, amounts to saying that employers are idiots and thank god the government is there to force them to manage their firms better.
Quote from PeakTrader: "1. A higher minimum wage will attract better workers.
2. Better workers will add greater value to the firm.
3. Greater value will make the firm more competitive.
4. A more competitive firm can increase its market share leading to more employment."
But that doesn't change the productivity of the worker or the job. A $100 an hour shit shoveler is still only shoveling shit.
You can't legislate productivity any more than you can legislate anti-gravity.
I'm willing to bet Walmart paid a higher minimum wage than Kmart before Kmart declared bankruptcy.
Firms, industries, and markets are made up of people (from the highest paid to the lowest paid workers).
A rock bottom wage will attract rock bottom workers. I'm sure most people here have a reservation wage.
Here are some posts about Kmart in Jobvent:
From Ohio — 09/21/2009
Let's see, where do I start...This place SUCKS.
Pay: Minimum wage, even though I've gotten two raises since I started. A .25 raise after the first three months, and then a .10 raise yearly. But now Kmart is on a pay freeze, so I didn't get my last raise. I've been there 2 years.
Respect: The company does not give a shit about their employees. The managers only like you if you kiss their asses and work as their slaves doing all the stuff that they don't want to do.
Location: Not in the greatest area, and across the street from a Wal-Mart Supercenter. We get all of the people who think Wal-Mart is too "complicated".
Work Environment: I cannot even describe in words how...unbelieveable the work environment is here. It's atrocious.
Benefits: None. I only work part-time, so I'm not even eligible. And only a few full-timers are eligible.
This job has turned my life upside down, and has changed me as a person. After working here so long, I've gotten depressed. I dread going to work.
kellie919 — Oct. 18, 2009
Oh my god! I COMPLETLY understand everything you are saying. I also have worked at Kmart for 2 1/2 years....
Consider the words of wisdom from Dr. Walter Williams (March of '05): Minimum Wage, Maximum Folly
The idea that minimum wage legislation is an anti-poverty tool is simply sheer nonsense. Were it an anti-poverty weapon, we might save loads of foreign aid expenditures simply by advising legislators in the world's poorest countries, such as Haiti, Bangladesh and Ethiopia, to legislate higher minimum wages...
The minimum wage is not the point.
The point is that the young person has a job and a start.The actual wage earned doesn't matter to young people because they are still financially dependent on their parents anyway but the prestige of having a job does.
It is important not to be seen as useless at this young age by your friends and family so if the amount was reduced even for the first 6 months maybe a few more could be placed into the workforce.
Another way to counter the effects of a high minimum wage would be to subsidize every young unemployed worker [into a job] by say $2 per hour for the first 6 months instead of paying unemployment at a higher rate so the gov would actually save.
Lastly teenagers aren't voters so if you abuse their employment rights it doesn't matter because they can't retaliate at the ballot box but if you keep an older worker in a job you capture their vote.
PeakTrader said:
Here are some posts about Kmart in Jobvent:
From Ohio — 09/21/2009
"Let's see, where do I start...This place SUCKS.
Pay: Minimum wage, even though I've gotten two raises since I started. A .25 raise after the first three months, and then a .10 raise yearly. But now Kmart is on a pay freeze, so I didn't get my last raise. I've been there 2 years.
...across the street from a Wal-Mart Supercenter.
Work Environment: I cannot even describe in words how...unbelieveable the work environment is here. It's atrocious.
This job has turned my life upside down, and has changed me as a person. After working here so long, I've gotten depressed. I dread going to work."
Do you suppose this person's attitude has anything to do with the their lack of advancement? They seem to feel they are entitled to a raise for some reason.
As it's possible that Wal-Mart pays more than Kmart, one has to wonder what has kept someone working at a job they hate, when a Wal-mart is right across the street? Maybe attitude is involved here too.
I understand most Wal-mart "associates" are pretty happy with the company, and feel fairly treated. Witness the continued failure of attempts at unionization.
It doesn't sound like federal minimum wage is at issue here.
Ron, who knows? Maybe there's a waiting list or backlog of hundreds or thousands of teenagers willing to work at Walmart for $9.50 an hour, who refuse to work at Kmart for $7.25 an hour.
Putting Kmart out of business (again) may increase teenage employment, because Walmart will take up the slack and expand revenues at a faster rate.
RON H:
The obvious answer is Kay-markt should be taken over and recycled into a new management and future.
Hence``HINT`` to Wall-Marte have you any spare cash for a takeover?
I understand most Wal-mart "associates" are pretty happy with the company, and feel fairly treated.
Except that it's the same happiness you find in a Potemkin village. Happy for the crowd, but
Witness the continued failure of attempts at unionization.
Thank Bentonville's thugs-on-a-jet for that, not happiness. Thugs that unfortunately need a humbling, perhaps the same way as Sam Walton.
A rock bottom wage will attract rock bottom workers. I'm sure most people here have a reservation wage.
Indeed.
However, there are people who don't mind forcing the unemployed to go below it.
It seems ok to force them, but it's a cardinal sin of the highest to force a business. That inconsistency is a problem.
While Republicans controlled Congress the minimum wage should have become obsolete with market forces pushing wages above the set rate.
Their natural thing would be to shove it down to subsistence wage and recreate the bad parts of company towns.
Instead Republicans shot themselves in the foot. They pushed wages down by giving small business illegal alien labor and in the process reinforced the worker’s desire to have it.
Well, they were more interested in killing a union versus truly solving an economic problem. Giving them economic freedom would not give them political revenge. Looking away while the illegals do the lower-level work(while complaining about illegals yet doing nothing) gives them political revenge.
"Ron, who knows? Maybe there's a waiting list or backlog of hundreds or thousands of teenagers willing to work at Walmart for $9.50 an hour, who refuse to work at Kmart for $7.25 an hour.
Could be, Peak, as this story indicates there are typically many times as many applicants as jobs for a new Walmart store.
I wouldn't count those you suggest won't work at $7.25 as unemployed.
grant, other than both being large discounters, I believe that Walmart & Kmart have different business models. I don't think Walmart would be interested in a takeover.
Oh seth, you continue to spout drivel. Wipe that off your chin, would you?
"Thank Bentonville's thugs-on-a-jet for that, not happiness. Thugs that unfortunately need a humbling, perhaps the same way as Sam Walton.
You mean a planeload of thugs flies out & beats up union organizers? Is it these guys? Ooops!! Wrong guys! these are UNION thugs.
Sam Walton has been humbled by death. How do you recommend humbling the Bentonville thugs? The same way?
"A rock bottom wage will attract rock bottom workers. I'm sure most people here have a reservation wage."
Indeed.
You know all about reservation wages, don't you Seth. Newsflash! Yours is too high.
"However, there are people who don't mind forcing the unemployed to go below it.
That's nonsense, and you are living proof of that. No one has been able to force you, have they?
"Except that it's the same happiness you find in a Potemkin village. Happy for the crowd, but"...
Hmmm, you know this how? Something credible to back that statement up that we can link to?
I mean you make it sound like Walmart shanghaied people at gun point and made them work at the stores...
BTW that whole 'Potemkin village' thingie just might be questionable...
"However, there are people who don't mind forcing the unemployed to go below it"...
Who's forcing anyone to work?
I don't mind if the purposefully unemployed starve to death on the streets due to their sloth and inability to make better life choices...
Again with the inane comments sethstorm: "It seems ok to force them, but it's a cardinal sin of the highest to force a business"...
O.K. who's forcing who sethstorm?
Is this more evidence of your tenuous grip on reality rearing its ugly head again?
According to the BLS there are jobs needing filling and they all aren't in retail sales...
I agree with Bobble. In recessions, the unemployment rate rises faster for teenagers than older workers.
Also, employers are more willing to hire older workers (e.g. the 55-64 age group, which is the second most productive group) than younger workers (e.g. the 16-24 age group, which is the least productive group), particularly when employers know it'll be a slow recovery.
Unemployment Statistics on Older Americans by the Urban Institute shows in May 2010, the unemployment rate for men 55-64 was 7.7% and for women was 6.0%.
So, rather than a "job-killing impact," increases in the minimum wage may have a productivity-enhancing impact.
If there's a productivity-enhancing impact of higher legislated minimum wages, then why stop at $7.25 per hour? Wouldn't $17.25 be even better? Or $72.50 per hour?
Dr Perry, if someone has a reservation wage of $10 (whether they're 18 or 58), there's no need to pay them more.
Perhaps, Congress should raise the minimum wage to $10. Afterall, it's raising the cost of almost everything else :)
Also, perhaps, if workers were paid a subsistence wage, there would be less need for government intervention.
"Also, perhaps, if workers were paid a subsistence wage, there would be less need for government intervention."
Peak, there is no need. You said so yourself.
"...if someone has a reservation wage of $10 (whether they're 18 or 58), there's no need to pay them more.
By the way, when something is said often enough, we get so used to it that it requires no thought, and we just accept it.
But I still choke on the phrase "need for government intervention".
You mean a planeload of thugs flies out & beats up union organizers? Is it these guys?
No, I mean the folks that usually come up after their union trouble help line gets called.
Not the SEIU. They're more political machine than union.
That's nonsense, and you are living proof of that. No one has been able to force you, have they?
Not yet, this time around.
I mean you make it sound like Walmart shanghaied people at gun point and made them work at the stores...
Their first impression of the store is far different than the one they have further in. They're only keeping it out of survival, not because they are a glutton for pain.
I don't mind if the purposefully unemployed starve to death on the streets due to their sloth and inability to make better life choices...
Most likely they won't. However, it is no less a force to survive.
You know all about reservation wages, don't you Seth. Newsflash! Yours is too high.
I would want to differ. For me, a 50% pay cut would be illegal to put things in perspective. 10% would be huge. Either of them would put me deeper in "hired for a pulse and lack of negotiation ability" territory.
The unemployment office has yet to have actually spoken to me in the entire 1 1/2 years of it. But then if your layoff isn't PR friendly, they really won't do anything other than check your sheet. If it is, they'll get every single star in line to resettle you.
While retraining might sound like a nice action, it fails on the larger scale. It ignores the lack of work while expecting you to make up for the lack of work.
Never mind how much heaven and earth is moved for government contractors and the already-employed for relevant and effective training.
According to the BLS there are jobs needing filling and they all aren't in retail sales...
Yes, I see that huge bump in the South.
Would only move to the South if a legitimate, long-term, non-contract offer was made. Not going to waste my time if someone's going to just waste mine.
Otherwise, let me know when you see high enough rates that cover more than a few positions across normally-offshored sectors across all regions. On a non-temporary basis.
sethstorm
The unemployment rate is 20% not 90% so a man of your talents can handle that easily.
The unemployment rate is 20% not 90% so a man of your talents can handle that easily.
However, the way that those cuts are made, is by offloading negative parts of the risk onto me.
I take the cut without knowing if I will make that up somehow. The business side of it will try to make my position overly disposable. At that point, they have a default contempt for *anyone* in that position, not just me. That is something that is being asked of me that is by no means willing.
How am I supposed to take what they don't want to take in terms of a sacrifice(just because the business side can offload it)?
All of this, even if I did nothing to slight them.
sethstorm says: "Their first impression of the store is far different than the one they have further in. They're only keeping it out of survival, not because they are a glutton for pain"...
Thanks again for showing that people are continuing to make stupid life choices...
"Not going to waste my time if someone's going to just waste mine"...
What gives you the impression that your time is worth anything at all?
This is the question we all need to ask ourselves if we're in the pool of people looking for work, right?
What skill sets to we bring to a job site that are worth paying for?
Just because one draws breath is no reason that one should have that so called, 'living wage' or whatever...
Apparently sethstorm you're having a very hard time understanding and accepting what Peak Trader said in his comment: "The laws of supply and demand (like the law of gravity) are NOT optional"...
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