Thursday, February 13, 2014

White House Needs a Better Case for Raising the Minimum Wage

During this year's State of the Union Address, Obama once again pushed for an increase in the federal minimum wage increase. Yesterday, the White House published The Economic Case for Minimum Wage on its blog. This might not be the $15 minimum wage that fast-food workers for, or the $20 minimum wage the Occupy Wall Street protesters wanted, but the $10.10 minimum wage Obama is advocating for still has its unintended consequences. What makes the White House analysis on minimum wage problematic?

The economic analysts over at the White House start out by pointing out that in inflation-adjusted dollars, the minimum wage is lower than what it was back in the 1970s (see chart below), although using the Consumer Price Index as a basis for inflation adjustment comes with its biases.

The article also brings up the fact that compared to other developed nations, the minimum wage in America is low. 

None of this answers whether there should be a minimum wage or even if the current minimum wage is too low or too high. To help answer those points, the White House makes some arguments in both its blog article and its fact sheet, all of which I find to be either erroneous or misleading:
  1. The minimum wage increase would benefit 28 million individuals. The Council of Economic Advisers (CEA) over at the White House would like to think that about 19 million individuals would directly benefit from a minimum wage increase to $10.10, and that an additional 8 million would indirectly benefit from the altered wage structure. Although they don't give details as to how they arrived at these numbers or adequately elaborate on how the minimum wage hike would benefit the recipients, they still hint at using Census data to arrive at their conclusion. If I went through sector-by-sector data from the Bureau of Labor Statistics to aggregate all the data, I might reach the 19 million that the CEA is referencing. For argument's sake, let's aggregate the labor market into a 19 million employee labor market. Also, let's conservatively say that the minimum wage increase would only decrease this market by two percent because in spite of what they think over at the CEA, the minimum wage is still a government-mandated price floor on unskilled and low-skilled labor that has adverse effects (there was a time when even liberal economist/pundit Paul Krugman believed that). With that minimum wage increase, it would still increase unemployment by nearly 400,000 people, and that doesn't even get into deadweight welfare loss! I'll continue in the subsequent points, but it's hard to criticize the CEA when they're being so vague on the concept of benefit or who exactly it benefits.  
  2. Raising the minimum wage will make sure no family of four with a full-time worker has to raise their children in poverty. I have to wonder what individuals are doing procreating if they can't afford to raise the child to begin with. That notwithstanding, minimum wages laws create net unemployment (Neumark and Wascher, 2008), so while some might receive a marginally better wage, there will be others who lose their job and find it that much harder to find work experience that will advance their career, which makes the White House's claim unbelievable. Since the cost of minimum wage is concentrated on the employer, this also has to take into consideration the other clever ways that employers will compensate for the wage increase, including cutting hours, cutting benefits, or increasing the price of the good or service, the latter of which can increase inflationary pressures. Minimum wage laws do nothing to reduce poverty (Sabia and Burkhauser, 2010; Sabia and Nielsen, 2012), and as a matter of fact, they very well might increase poverty (Neumark and Wascher, 2005). To claim that a minimum wage hike is the silver bullet of poverty issues is a stretch, to say the least.
  3. The minimum wage increase will help increase worker productivity. The premise behind this argument is that an increased wage would incentivize employees to work harder. Normally, this argument makes sense to me because people are much more likely to respond to incentives. However, I would postulate that the incentive effect carries much more weight with skilled labor than it does with low-skilled labor. Why? Because being unskilled or low-skilled labor, one has not developed the knowledge, experience, or skills to increase productivity at a rate that would noticeably exceed the rate of the wage increase, which looks to be the case (Feldstein, 2008). There is also the matter of labor-labor substitution. Minimum wage is not the only imposition on an employer. There is also the matter of health care, regulations, and other benefits, all of which impose extra costs on hiring labor. If push comes to shove, the employer is going to most probably retain the more productive employee while cutting hours or employment of the less productive employee. Once again, if the goal is to help those in need, a minimum wage hike has a funny way of showing it.
  4. The minimum wage raise will mean a reduced turnover rate and reduced absenteeism. Aside from productivity, the other supposed benefits are that a) one will be less likely to leave their current place of employment because the wage is more "livable," and b) the increased wage will incentivize individuals to show up to work more often. As for the turnover rate, there are companies, such as Costco, Trader Joe's, and Amazon, who have realized the benefit of providing employees with a high enough wage to incentivize their employees to stay. If the idea is that blatantly obvious, then there is no need for a government mandate to enforce it because it would happen naturally. However, some employers might view the turnover rate as only one cost amongst many to consider, and quite frankly, that should be the employer's call to make. Plus, the lower turnover rate might have something to do with the fact that employers are disincentivized to hire more workers precisely because of the minimum wage hike (Neumark and Wascher, 2008; Meer and West, 2013). With regards to absenteeism, a higher wage might not do the trick (Bucila and Simon, 2009). 
  5. Across the country, America's saying it's time to raise the minimum wage. Honestly, who cares? Most economists think it's a bad idea, and that would have something to do with the fact that one who thinks it is a good idea is looking at the benefits without bothering to wonder how it affects labor markets (Wilson, 2012). After all, it shouldn't be all that hard to believe that minimum wage is going to cost somebody at some point. Rather than helping low-skilled workers, all the minimum wage does is make it more difficult for those with the least amount of skills more difficult to acquire the skills to move up in the world. If we want to help the poor, instead of advancing a policy that keeps low-skilled labor poor, let's discuss policies that can actually help the poor.

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