Minimum Wage: Much ado about nothing?
It’s funny how your thinking changes as you get older. In my younger days, things like rent control and minimum wage were, to me, unquestionably good things. When the minimum wage went up, I got a raise. Rent control meant my top hat wearing capitalist landlord couldn’t just jack up my rent at the end of the year so he could afford a better brand of mustache wax.
As I got older and my salary was no longer a matter of a government mandate and seemed more directly related to my actual efforts and as my income rose and I could more easily absorb rent increases, I started to see the other side of these issues. I could take the long run view. In rent control, I could now see rents might go up but people would start building new units, better units, and eventually (probably) they would over supply the market. Landlords with 20-year-old properties wouldn’t be able to charge top dollar like they were able to in the Toronto rental market (mostly because before rent control was loosened in Ontario, no new units were coming online). In a market where old competes with new, landlords with older buildings would have to *gasp* lower their rents.
Anyway, this debate is not about rent control but about minimum wage. My point being, ultimately, your attitude towards the issue depends a lot upon your ability to suffer shorter term corrections for a longer term good.
If you got rid of rent control, new units are not going to come online right away and landlords probably will jack up prices for really crappy buildings. If the government did away with minimum wage tomorrow, there is no doubt some jobs would pay less. Would employers fall over themselves in a mad rush to slash the wages of their minimum wage earning employees? Well, I’ll assume most readers here are earning above the minimum wage. Your employer has the power to slash your wage at any time. But he doesn’t. Your willingness to keep on giving it your all would be irreparably damaged. And your boss knows it.
The first question we have to ask about minimum wage laws is do we really actually need them? What I mean by need, let me illuminate with an analogy. Imagine a city councilor in Columbus, Ohio arguing a law needs to be passed to make cannibalism illegal and we should devote resources to patrolling the streets for cannibals. The councilor points out the entirely true fact that over 500 people every year are killed and consumed by cannibals. Of course the problem is those 500 victims are all consumed by cannibals in Manitoba, a far off and alien land with social morals unlike anything people in Ohio could conceive of. (I apologize to our readers from Manitoba, this is all purely hypothetical.) Maybe a law against cannibals is needed in Manitoba and if eating people ever became fashionable in Ohio there is no question a law would be needed. But is one needed in the here and now?
Let’s consider Wal-Mart, which is thought of by many as an employer of last resort. But more importantly, Wal-Mart’s success is famously based on its ability to pinch dimes at every turn, to pay the barest minimum. And if Wal-Mart’s worst critics are to be believed, it forces suppliers to accept a profit so minimal as to be unethical. So, surely, Wal-Mart would be one employer that pays workers the bare, legal minimum? Well, no. According to Slate, in 2005 Wal-Mart paid its grunt workers on average $8.50 an hour, back when the Federal minimum wage was $5.15 an hour. In 2008, it appears to be $10.86 an hour. This is two bucks more an hour than some of the highest state minimum wages (for example $8 an hour in Illinois and $8.40 in Oregon). As the Slate article points out, the average wage figure can be skewed if you figure in what store managers, district managers, and the CEO all make. So I’m not sure if the $10 an hour figure reflects the grunt worker wage. I would assume the average grunt wage has gone up since 2005. Even if Wal-Mart froze wages half a decade ago, workers would still be earning more than the minimum wage in several states.
Both the articles I cite above are actually anti-Wal Mart pieces. One notes:
Wal-Mart offers poverty level wages. Using Wal-Mart’s figures, a “full-time” employee at 34 hours per week, making the Wal-Mart average wage of $10.86 per hour, will earn $19,200.48 per year. The federal government’s definition of poverty for a family of four in the contiguous United States is $21,200.
If both parents work (a common occurrence these days) and both work at Wal-Mart, the household would earn $38,400 a year, which puts them well above the poverty level. Has it ever been the case an unskilled retail job has allowed one income earner to support a non-working mate and two kids?
It would also appear the case that not many households feature two minimum wage workers. This study (from 2001) found that only 1.2% of minimum wage workers were the head of the household.
I’m getting a little side tracked but ultimately we have to question why Wal-Mart is, as a matter of policy, paying workers well over the legal minimum. It’s entirely possible there are good reasons for it. Let’s return to that question later.
A question you might be asking is “so what? Wal-Mart doesn’t employ every unskilled worker.” Sure it’s nice to know there’s a major retailer that hires unskilled labor and for whatever reason pays a couple bucks over higher state minimum wages. In other words, is Wal-Mart an exception or the norm? To answer, let’s look at some hard numbers. In states that don’t have a minimum wage higher than the Federal minimum wage, 96% of workers earn more than the Federal minimum wage. Of those 4% who are earning minimum wage, only about 20% are over aged 25. In Washington State, a state with traditionally a high minimum wage, less than 6% of workers earned less than $8 an hour in 2005.
For something that only affects 4-6% of the working population, are minimum wage laws much ado about nothing? And might they ultimately be a zero sum gain for the people we think we’re trying to better at the wave of a pen? It goes without saying that when costs increase, merchants pass the costs onto the consumer. One might entertain the possibility that minimum wage workers spend a disproportionate amount of their money on establishments that likewise pay their workers minimum wage. A minimum wage worker will eat at McDonald’s, he’ll shop at a dollar store, he’ll drink coffee at a donut shop. If all those businesses raise prices to account for the new minimum wage, the minimum wage worker isn’t really ahead of the game. He’s paid in $5 bills instead of $1 bills but he now hands over $5 bills for what he used to pay with $1 bills.
In France, there’s a large amount of youth unemployment. It’s been argued France’s labor laws, meant to “save” jobs, are to blame. The laws make it expensive to get rid of a worker. Hence, bad hiring decisions are costly. Hence, employers don’t want to take a chance on a worker without experience and a track record. Hence, young people find it hard to get their first job. At my current job, we let a recently hired sales guy go. He just wasn’t working out. Our software has a pretty high learning curve and we seemed to let him go just as he was finally “getting it”. It was a costly hire, ultimately, but if I know my boss, he probably brought the guy on under terms he brought me on: a slightly longer probationary period than is customary and at a lower wage during the probationary period.
Given minimum wage affects mostly people under the age of 25, I can’t help but think about what’s happening in France. If minimum wage was ramped up to some considerably higher “living wage” figure, bad hiring decisions are going to cost employers more. Employers will be more likely to seek only experienced workers in minimum wage position and this will naturally make it more difficult for first time job seekers looking for a minimum wage job.
Some states recognize this and allow for a lower training wage to be paid but usually only to those under age 20. However, a training wage is not considerably less than the minimum wage. A bad hire will still cost an employer nearly as much.
Arguing against the minimum wage, or at least raising it, is this odd area of economics that makes this counter intuitive claim that if you raise the cost of something, people tend to use less of it. Back when gas was north of $1.40 a liter here in Canada (over $5 a gallon) I was taking my car almost nowhere, much to the chagrin and bewilderment of my non-car driving friend Roseanne (who I’ve mentioned in previous postings: here, here, here). Roseanne, having last owned a car back when gas was 40 cents a liter ($1.52 a gallon), could never quite grasp why my willingness to drive her all over god’s creation seemed to have vanished in recent months.
Anyway, it makes sense people will try to do without. While McDonald’s might not reduce employment, this table reveals most firms in the USA have less than 10 people. Out of 5,885,784 firms in the USA (in 2004), a whopping 2,777,680 firms (about 47% of all firms that employ people) have 1-4 employees. Arguably small firms in the 1-4 range might be the kind of firms that hire on 1 or 2 workers at the minimum wage and if minimum wage went up, there is far more flexibility for the owner of the small firm to make adjustments. In other words, the owner would just man the cash, work longer shifts, get a daughter or son to earn some keep by working on the weekends, etc.
Another question is should the government be doing for the masses what the masses can do for themselves (that is set a new floor wage)? In many work environments, if employees are dissatisfied with wages, hours, and working conditions, they unionize. I will grant you unions are not without problems. As The Who sings, meet the new boss, same as the old boss. In place of the term “union” I prefer the notion “collective bargaining”. In principle, workers getting together and saying “we want x conditions met or we are going to withhold our labor” is a reasonable exercise of power and attainable in any industry or sector. The boss should have full and unimpeded rights to fire his employees and clear ‘em off the sidewalk and hire all new staff. However, a boss then has to consider the time and expense of not only hiring all new staff but also suffering a loss of customers as the new staff makes newbie mistakes the experienced staff wouldn’t.
Such collective bargaining can then raise wages of the non-unionized. In the auto industry you have the unionized Big Three and then you have the non-unionized Japanese and Korean car makers that have opened plants in the USA and Canada. It tends to be the case the unions in the Big Three set a wage and then the non-unionized Asian car markers set their wage in line. Sure it’s less, but it’s still more.
It’s also not particularly difficult for anyone to unionize these days. The big unions out there are happy to walk in, do the paper work, and practically make it a turnkey operation.
As Russ Roberts, host of the EconTalk podcast, notes in an LA Times article, despite the union option, fewer and fewer people are turning to unions. It suggests to him that market forces are working okay:
Ultimately, it is competition among employers that protects us from exploitation. Even those who would seem to be the most vulnerable — immigrants who struggle to speak English, for example — can earn much more than the minimum wage simply because of competition for their skills. Cleaning people routinely earn $20 an hour, more than most cities’ so-called living wage.
Look at workers’ share of the nation’s income. In 1950, employee compensation was 53% of gross domestic income. In 2005, that number was 57%. Somehow, as unions’ strength dwindled over the decades, employees’ share actually grew. And it’s a share of a dramatically larger pie, the result of the incredible economic boom of the last half a century.
As Roberts notes in the article, the ability of workers to be mobile is key. A worker at Wal-Mart with experience and a good track record will be a valuable hire at Costco (which makes it a point of pride that it pays even more than Wal-Mart). In the same way the government builds and maintains the roads so we can all be mobile and we can take advantage of the best price at Target on the other side of town and not have to trudge to the local mom ‘n’ pop, it seems to me the government should concentrate on laws that help with labor mobility. To use a hockey analogy (my attempt to win over readers in Manitoba who are still sore about the cannibal crack), the government should just be driving the Zamboni, smoothing out the ice so players can get from one end of the rink to the other with less friction. Governments should not conclude “well, the ice is getting bumpier and it’s taking players more time to get to the other side of the rink so let’s make the rink smaller!”
Contained within the minimum wage debate is what is probably the real debate: should the minimum wage be a minimum living wage? If the minimum wage was 50 cents an hour, there would be no debate about whether or not it should even exist. As the Wal-Mart articles I referenced above note, even though Wal-Mart pays way above the minimum wage, it is still below a theoretical poverty line. Although, according to wiki, the 2008 poverty line for one person is $10,400. Our single working at Wal-Mart for $19K is earning about 90% above the poverty line. Even if the person was working a 38 hour week, earning the current federal minimum wage of $6.55 an hour, that brings the person up to $12,942 a year. The single person is still above the poverty line. No one says being an unskilled, inexperienced worker is going to be easy, of course.
Can an economy not producing a sufficient number of living wage jobs be rescued by simply legislating such jobs into existence? It sounds to me if your economy has become a subsistence economy, you’ve got problems that run far, far deeper than an over supply of miserly employers that need their hand slapped with minimum wage legislation.
As I noted later, young people and non-household heads supplementing family income make up the bulk of minimum wage earners. If you could graduate from high school and take a minimum wage job that provides for a family of four, and this will always be guaranteed by the state, it seems to me the motivations for youth to pursue higher education are lessened. We’ve seen the effects of the government removing moral hazard from the banking sector. Imagine a math teacher not being able to raise the moral hazard of a pizza delivery job if you don’t pass Grade 13 Functions and Relations.
In pursuit of making sure the minimum wage always matches someone’s definition of a living wage, it sure sounds to me like we’re now taking a page out of the centrally planned economy playbook. I think any debate on the efficacy of a command economy ended around the time the Berlin Wall fell (1989), if not the day McDonald’s hoisted the Golden Arches over Moscow (1990). Hmmm. Wonder what a minimum wage McWorker in Russia makes. Anyone doubt the American minimum wage doesn’t look so minimum to Russians?
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– Karl Mamer
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