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I was at dinner the other day with a friend who asked me to explain why economists seem to be so split on the advisability of raising the minimum wage.

I was at dinner the other day with a friend who asked me to explain why economists seem to be so split on the advisability of raising the minimum wage.  On one side are microeconomists who think it will destroy jobs, and on the other side are those who don’t agree.  The second group’s position is not very well laid out in public discourse, but it is pretty straightforward.  
My reply to my friend was that the difference lay in the basic model being used by each group of economists.  Traditional microeconomic theory uses the basic model of supply and demand that is taught in every undergraduate economics class.  For any normal good in a competitive market, which is assumed to include the market for labor, a higher price (or wage) reduces demand for the good while increasing supply.  So raising the minimum wage (presumably above the market-clearing level set by the forces of the free market) would lower the demand for labor and result in loss of jobs and an increase in the unemployment rate as more job seekers enter the market.
Another version of this story is more supply-side-oriented.  It argues that raising the minimum wage would increase the average costs of production by raising the cost of a key input – labor.  This would especially affect small, labor-intensive businesses that operate at the margin of profitability (think McDonalds).  Unable to pay the higher wage and remain profitable, and unable to raise prices due to intense competition, they would go out of business and the jobs that they represented would disappear.  
On the other side of the minimum wage debate are economists who tend to adopt a macro-economic approach.  In this model, raising the minimum wage has the effect of stimulating the demand by workers for goods and services that they previously found unaffordable.  In this approach, an increase in the minimum wage is a bit like a tax cut for low income people, putting more money in their pocket that is then spent in the economy.  It reminds me of the idea espoused by Henry Ford, who wanted his workers to make enough that they could afford to buy his cars, because he recognized the links between wages paid and consumption of goods.

This school also criticizes the microeconomics group for its assumption that labor markets are workably competitive, or that prevailing wages are set purely by competitive forces.  The high cost of searching for and acquiring a new job creates stickiness in labor markets and confers market power on employers that is more aligned with assumptions in conventional macroeconomic models than conventional microeconomic models.
What do the data say?  In general, the reason that this is a war of theories is that the data show very little impact on jobs arising from differences in minimum wages. http://www.social-europe.eu/...  It is at this point that the debate shifts from the effect of the minimum wage on overall employment to one that addresses the differential impact on lower-skilled workers.  In this view, the microeconomists argue that a higher wage will drive employers to hire higher skilled workers, whose productivity warrants the higher level of pay.  The claim is that this will squeeze out of the labor market the low-skilled and less experienced workers, especially the young and uneducated.  While this argument is theoretically valid, again, empirical studies find only negligible effects.  (http://truth-out.org/...)
In sum, the data do not support the view that raising the minimum wage will cause devastating impacts on jobs or on the low skilled workers.  Rather it appears that the main impact is to increase spending and economic activity.  

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Comment Preferences

  •  This just isn't a very good argument. (1+ / 0-)
    Recommended by:
    Odysseus
    It is at this point that the debate shifts from the effect of the minimum wage on overall employment to one that addresses the differential impact on lower-skilled workers.  In this view, the microeconomists argue that a higher wage will drive employers to hire higher skilled workers, whose productivity warrants the higher level of pay.  The claim is that this will squeeze out of the labor market the low-skilled and less experienced workers, especially the young and uneducated.  While this argument is theoretically valid, again, empirical studies find only negligible effects.
    In sum, the data do not support the view that raising the minimum wage will cause devastating impacts on jobs or on the low skilled workers.
    Arguing you're simply ineffective instead of outright destructive is still losing the argument.
    Rather it appears that the main impact is to increase spending and economic activity.  
    This would be far more interesting.  Could you link some studies showing this?

    Could you also explain why forced mispricing of labor would result in a more efficient market?

    •  Please define (0+ / 0-)

      "efficient market"

      "this level of stupid snark should be upgraded"

      by Chuckling Quietly to Myself on Wed Jun 25, 2014 at 01:53:24 PM PDT

      [ Parent ]

    •  Part of the problem (1+ / 0-)
      Recommended by:
      RMForbes

      is that the argument assumes its conclusion.

      " The claim is that this will squeeze out of the labor market the low-skilled and less experienced workers, especially the young and uneducated. "

      The argument above this one said that raising the minimum wage does not reduce employment.

      "In general, the reason that this is a war of theories is that the data show very little impact on jobs arising from differences in minimum wages. http://www.social-europe.eu/.... "

      So how are these low skilled and low experience people "squeezed?"  By assuming beforehand that employment will be reduced.

      "...we live in the best most expensive third world country." "If only the NEA could figure out all they have to do is define the ignorance of the next generation as a WMD..." ---Stolen from posts on Daily Kos

      by jestbill on Wed Jun 25, 2014 at 02:27:08 PM PDT

      [ Parent ]

  •  Harry Truman (3+ / 0-)

    Harry Truman famously asked for a one-handed economist.

    Most every economist discusses things as on-the-one-hand this, on-the-other-hand that.

    Statistics and perspective are not always as clear cut as we would like them to be.  On-the-one hand discusses what happens on one side of an economists graph point, on-the-other-hand discusses what happens on the other side of the same economists graph point.

    You've laid out the appropriate arguments, with a few  exceptions - the most glaring is why have a minimum wage at all?  Because we are allegedly a moral society.

    Free-markets are not as fair as many who live by this mantra would have us believe.  Alan Greenspan tried to teach us that markets are self-correcting.  He ate his words and apologized after the market dislocations that caused the Great Bush Recession.  Free-markets are untenable for a moral society.

    So the real question/answer should be - what is a living wage?  Any able-bodied person willing to work, let's say, 40 hours a week should be at the baseline of poverty.  This way, taxpayers would stop subsidizing WalMart (and other low wage corporations) from having their profits subsidized by food stamp and welfare payments…..because we are a moral society.

    The minimum wage should be the wage that keeps a person/family out of poverty and raised accordingly.

    There are plenty of studies to support the notion that raising the minimum wage does next to nothing to adversely affect employment statistics.  And you aptly pointed out, the money from minimum wage workers flows back into the economy quickly enough to ultimately lower the rate of unemployment.

    In other words, raising the minimum wage may have a short-term effect of increasing unemployment, but the long-term benefits are far more advantageous at lowering the rate of poverty and government transfer payments that increase the deficit.

    More specifically, 'full employment' and a rising minimum wage need not be mutually exclusive.

    •  Food, labor and money. (2+ / 0-)
      Recommended by:
      psyched, Odysseus

      They are all fake commodities.  They are parts of the  economy  but you don't have a society without dealing with them properly.

      Claiming that labor must obey the "law" of supply and demand is fine (relatively harmless) in good times.  It allows people to live according to some simple rules regarding how much work they must do in order to live in harmony with their neighbors.

      In bad times, the fiction breaks down.  People will eat and people will live in housing or they will make other people's lives miserable too.  I'm talking French revolution here.

      The idea of a moral society is a fiction designed to foresee and avoid that conflict.  It is a more realistic fiction than the one that tells people to accept that they are not important enough to be allowed to eat.

      "...we live in the best most expensive third world country." "If only the NEA could figure out all they have to do is define the ignorance of the next generation as a WMD..." ---Stolen from posts on Daily Kos

      by jestbill on Wed Jun 25, 2014 at 02:45:59 PM PDT

      [ Parent ]

      •  You've contradicted yourself, and (0+ / 0-)

        You've both contradicted yourself and underlined my point.

        In bad times, the fiction breaks down.  People will eat and people will live in housing or they will make other people's lives miserable too.  
        You also said:
        The idea of a moral society is a fiction designed to foresee and avoid that conflict.  
        If people eat and have a place to live in both good and bad times, then that shows a moral society, not fiction.

        Suggesting that food and housing will be gained by a revolution is far from where we are or where we are headed as a society.

        Outlays for food stamps and welfare have increased.  These numbers more than doubled under President Bush and have increased by the same volume during the Obama term.  The sin has been income inequality.

        Before our society can change behavior, we must first be aware of the problem.  

        When even the CEO of Goldman Sachs can admit that income inequality is problematic, then the necessary awareness is occurring.

        Also, ObamaCare was a step in the same direction - the poor won the right to more affordable healthcare, the middle-class won the right to keep their children covered to age 26, the right to no longer be declined because of preexisting conditions, and the right to not be subjected to a cap on benefits received, etc. - and wealthy people are paying for these rights.

        There is work to be done to reduce the poverty in our communities.  There is work to do feeding the hungry.  But suggesting that we have arrived at or will be arriving at a point of, "Let them eat cake," is absurd.  The people voted for a democratic Congress and a President in 2008 and ObamaCare was accomplished.  Had our economy not been so damaged, more could have been done.

        It will not take a revolution to change the tax code and/or minimum wage standards that create inequality, it will take people showing up on election day and voting in their own best interests to make these changes.  Suggesting otherwise is immoral.

        •  Did you miss the word "miserable?" (0+ / 0-)
          If people eat and have a place to live in both good and bad times, then that shows a moral society, not fiction.
          If they do, that shows that society has not yet broken down.  You may believe that that signifies a moral society or not.  Reality does not care about your beliefs.

          What you seem to have missed is that it does not matter what the economic ideal is at the time, it does not matter what is the moral attitude at the time, people will eat--good times and bad--or else.  

          The fiction that is a "moral society" gives us a talking point.  It allows us to work together to "foresee and avoid" the conflict that is inevitable if we do not act to foresee and avoid it.

          I did in fact NOT suggest that we are at the point of revolution.  The outcome, if we continue on the path of an automatic, self-regulating economy--pretending that wages and food really obey some putative law, will be to make ourselves very miserable.

          The rest of your post is not in reply or even relevant to what I said.

          "...we live in the best most expensive third world country." "If only the NEA could figure out all they have to do is define the ignorance of the next generation as a WMD..." ---Stolen from posts on Daily Kos

          by jestbill on Thu Jun 26, 2014 at 01:46:15 PM PDT

          [ Parent ]

  •  Don't understand some of the arguments. (1+ / 0-)
    Recommended by:
    UberFubarius

    "Unable to pay the higher wage and remain profitable, and unable to raise prices due to intense competition"

    The competition is going to have the same increase in labor cost, so inability to raise pricing due to increased labor cost should be considered a moot point.

    ...this will squeeze out of the labor market the low-skilled and less experienced workers...

    Minimum wage positions aren't generally high-skill jobs in the first place and experienced and skilled workers will look for other, higher-paying employment and only take the McJobs if nothing else is available.

    "Believe nothing, no matter where you read it or who has said it, even if I have said it, unless it agrees with your own reason and your own common sense."

    by grape crush on Wed Jun 25, 2014 at 01:58:07 PM PDT

    •  grape crush - just to take fast food as an example (0+ / 0-)

      We don't know what the microeconomics are for each fast food restaurant, either a local mom and pop, or a franchisee of a national brand. Some fast food restaurants may be able to pass through higher prices to customers, and others may not. Those who can't may not have large enough profit margins to absorb the labor cost increases and could go out of business. What sellers of fast food have found is that demand for their products is highly elastic and that they may not have much pricing flexibility. We have seen the proliferation of "Dollar" and "Value" menus. There isn't much profit margin in those food items.  

      "let's talk about that" uid 92953

      by VClib on Wed Jun 25, 2014 at 02:35:14 PM PDT

      [ Parent ]

      •  Disagree. (0+ / 0-)

        "We have seen the proliferation of "Dollar" and "Value" menus."

        I've seen that the prices on those items have gone up from what they originally were.

        "Some fast food restaurants may be able to pass through higher prices to customers, and others may not."

        And that's different from the current state of things how, exactly?

        "Believe nothing, no matter where you read it or who has said it, even if I have said it, unless it agrees with your own reason and your own common sense."

        by grape crush on Wed Jun 25, 2014 at 03:55:31 PM PDT

        [ Parent ]

        •  The current state of things has kept labor costs (0+ / 0-)

          stable for a long time. A dramatic increase in the minimum wage would be a very big change from the status quo.

          "let's talk about that" uid 92953

          by VClib on Wed Jun 25, 2014 at 04:36:55 PM PDT

          [ Parent ]

          •  That's not answering the question. (2+ / 0-)
            Recommended by:
            Odysseus, Calamity Jean

            Labor isn't the only cost - there's materials, rent, etc. Food prices in particular have increased recently, representing a change...have you seen beef prices lately? Restaurants unable to pass through higher prices go out of business, regardless of the source of the increase. That's the status quo.

            If a company can only stay in business by impoverishing the people that keep it functioning, then I'm not too sad to see it go.

            "Believe nothing, no matter where you read it or who has said it, even if I have said it, unless it agrees with your own reason and your own common sense."

            by grape crush on Wed Jun 25, 2014 at 06:31:38 PM PDT

            [ Parent ]

          •  The current state of things has kept labor costs (0+ / 0-)

            highly depressed, not stable. Productivity has greatly increased, and so have profits, but wages have not.

            The objection to raising the minimum wage is the fear that it will reduce profits, not employment. Claims of concern for workers is just concern trolling and crocodile tears.

            The theory of competitive markets shows that competing over price, quality, and service must reduce profits to levels consistent with marginal productivity in the long run, eliminating those excess profits known in the profession as "economic rents". So big business has set itself to make sure that markets are not competitive, and that we never get to the long run, by constantly demanding economic and financial favors from government, and refusing to allow government to do anything of any value to anybody else.

            All for ourselves, and nothing for anybody else, seems, in every age of the world, to have been the vile maxim of the masters of mankind.
            Adam Smith, Wealth of Nations

            Wealth, to Smith, was not money but the ability to produce what is most needed, and get it to those who need it, preferably as a fair exchange for their labor, but by other means whenever necessary.

            Back off, man. I'm a logician.—GOPBusters™

            by Mokurai on Thu Jun 26, 2014 at 12:51:06 AM PDT

            [ Parent ]

            •  We don't know how dramatic increases in the (0+ / 0-)

              minimum wage will impact the market for low skilled workers and the enterprises that employ them. It looks as though we will have some real life data to analyze as some cities pass much higher than present minimum wage legislation.

              "let's talk about that" uid 92953

              by VClib on Thu Jun 26, 2014 at 06:02:40 AM PDT

              [ Parent ]

  •  Multiplier effect - marginal propensity to (2+ / 0-)
    Recommended by:
    MarEng, Calamity Jean

    consume.

    People on very low wages will spend every extra dollar they earn, and this will unleash a multiplier effect on the economy.

    Giving money to the very rich has the opposite effect - they don't spend it, and rarely invest it in real activities.

    The downside of increasing the minimum wage is an uptick in inflation - which hurts those who are sitting on piles of cash, and reduces the debts of those who have nothing. Too fucking bad for the oligarchs.

    I wish I didn't know now what I didn't know then.

    by peterfallow on Wed Jun 25, 2014 at 02:00:48 PM PDT

    •  One caveat. (0+ / 0-)

      Minimum wage must be able to track with inflation, else inflation impacts the poor/middle class more. The very wealthy can alleviate the impact of inflation by transferring their "wealth" into different currency or tangible assets (such as land).

  •  DocM - good diary and I think outlines the two (1+ / 0-)
    Recommended by:
    OrganicChemist

    views on this issue. I think one more issue that needs discussion is that nearly all the data on the economic impact of increases in the minimum wage are for increases that were modest, typically 5-15% increases for a few years. There is very little data on how increases of 40-60% will impact local employment, and the overall local economy. I hope that in the cities who are the early adopters of the significantly higher minimum wage efforts, there is good baseline data being collected. That will allow economists to do good analysis of the impacts a year or two from now.  

    "let's talk about that" uid 92953

    by VClib on Wed Jun 25, 2014 at 02:27:16 PM PDT

    •  For the Seattle "experiment"... (1+ / 0-)
      Recommended by:
      VClib

      I will be especially interested to see if any "border" effect develops. Will there be lower prices and a booming business develop just outside the reach of the new mandated wages? Will there be a loss of certain types of establishments that can't absorb the higher costs or raise their prices? Will Seattle become a testbed for various new fast food technologies (such as self serve and self payment stations)? In a way, I wish that the Seattle law would have been absolute and fast. That way the shock to the marketplace would have made for definitive answers as to what really does happen when  these larger mandated wage hikes are implemented. When they are stretched out with various loopholes, it makes it possible for all kinds of arguments about how the various observed outcomes can't really be blamed on  the new mandates.

  •  You give economists too much credit: (1+ / 0-)
    Recommended by:
    Samulayo

    Evidence and data don't matter much to them.

    Mainstream economists mainly devote themselves to developing theories that ingratiate them with the rich and powerful.

  •  For a practical example (1+ / 0-)
    Recommended by:
    kurt

    of how increased labor costs will really affect the pricing and profitability of a McDonalds (and likely other traditionally low-wage jobs), see what's occurring in North Dakota in the Bakken Shale area:

    http://nbr.com/...

    The unemployment rate is so low that traditionally low wage employers like McDonalds have no choice but to pay up to twice the minimum wage for an entry level position.  Yet new service industry businesses keep popping up in the area like weeds due to demand.

    Their prices are somewhat higher than usual, but the cost of a Big Mac on their menus has most certainly not "doubled" as many supply siders rhetorically claim they would if labor costs doubled.

    Clearly these businesses can remain profitable paying higher wages to entry level employees with only slight increases in cost - and this is a perfect example of that.  Same deal with Walmart wages:

    http://www.aei-ideas.org/...

    $17/hour for a cashier?  According to Walmart PR, shouldn't that bankrupt them?

    Of course, conservatives like to point to this as a reason why a minimum wage doesn't make sense and market forces themselves can and will prop up wages, however, having less than 1% unemployment is an oddity that won't be recreated nationwide - and they seem to ignore this.  What cannot be ignored is that these businesses are finding ways to profit just fine even though they have to pay what are very high wages for low skill jobs by splitting the difference between increasing prices and accepting a lower profit margin - just as we've told them businesses would end up doing if they had to pay a higher minwage all along.  The conservatives that authored the articles conveniently ignore that fact.  Bottom line - the price increases needed to cover the increased cost of labor do not reflect the boogieman stories of the cost of goods doubling or tripling.

    Yes, it's an oddity, and yes, there are plenty of ways that those against a higher minwage can attempt to twist what's going on there, but at the end of the day, companies are still profitable, still expanding there, and still paying people far more money for low skill jobs without their predicted hypothetical doubling/tripling/quadrupling of costs.  It's not a perfect example, but it covers the basis of how minwage increases work in reality:  if there is demand, employers will create jobs regardless of the cost of labor, and if employers have to pay more, the doom and gloom about product costs don't come to fruition.

    "There was no such thing as a "wealthy" hunter-gatherer. It is the creation of human society that has allowed the wealthy to become wealthy. As such, they have an obligation to pay a bit more to sustain that society than the not-so-wealthy." - Me

    by Darth Stateworker on Wed Jun 25, 2014 at 04:46:39 PM PDT

  •  Several important points. (0+ / 0-)
    • Advocates of a higher minimum wage generally concede there are negative factors that accumulate as the minimum is raised in terms of higher unemployment, new entrants to the workforce with limited skills having great difficulty getting entry level jobs and inflation, that is why there are no "serious" economists advocating $100/hr min wage or higher.  Moderate increases can be beneficial, while large increases can do more harm than good.
    • The US does not have a geographically uniform market for employees and cost of living varies greatly.  The cost of living in Manhattan in New York City is 2.5 times the cost of Tulsa, OK (see http://money.cnn.com/... ).  From a standard of living perspective, to match a $10/hr standard of living in Tulsa, one would need $25/hr in Manhattan.  Because the cost of living varies so much, defining a national minimum wage makes no sense, because the number selected will be either too high or too low for nearly every city and state in the country.  $15/hr is too low for New York City, while it is also too high for Tulsa.

      In my view a far better policy would be for the Federal government's BLS (Bureau of Labor Statistics) to publish recommended minimum wages based upon relative  local cost of living compared to the lost cost city in the US and the national minimum wage, where the national minimum wage is set to reflect the lowest cost of living city in the country.  Pres Obama could do this without the need for Congress to act.  It would then be up to states and local government to set the minimum wage to reflect this recommendation.

    • Another way to think about the right level for minimum wage is setting it relative to the median wage for a given geography (local markets, not national).  Right now nationally in the US, minimum wage is about 38% of the median wage, which is one of the lowest for developed countries.  In contrast the UK is 47% (with a lower rate for young employees) and appears to be a reasonable level.  At the other extreme is France having a minimum wage at 60% of median - which helps cause the 26% unemployment rate for people in their 20s.

      see http://www.economist.com/...  

    The most important way to protect the environment is not to have more than one child.

    by nextstep on Wed Jun 25, 2014 at 07:13:39 PM PDT

  •  You can't change just one thing (0+ / 0-)

    Change anything and there will be several other changes.  Some min wage workers will lose their jobs.  Some marginal businesses will fail and close.  Many min wage workers with more money in their pay packets will spend it in their neighborhoods helping things there.  Walmart will make more money, as will the neighborhood stores that adapt to their higher cost of labor.

  •  Mean estimate is 10.10= lose 500,000 jobs (0+ / 0-)

    The Congressional Budget Office looked at all the studies on the issue (though I believe limited to the United States) and concluded that there was a 2/3 chance that raising the minimum wage to 10.10 would cost between 0 and 1,000,000 jobs (with a mean of 500,000).  There was a 1 in 6 chance that it would cost even more jobs and and a 1 in 6 chance that it would actually create jobs.

    •  Merely aggregating studies without considering (0+ / 0-)

      their value tells you nothing. I used to do market analysis, and I can tell you that most projections and most models are garbage. Far too many are "dry-labbed" to get a predetermined result. Far too few are given any empirical, fact-based tests. Far too few are even based on recorded historical facts.

      With rare exceptions, in the field of economics the inmates have always been in charge of the asylum, going back to the earliest historical records. Debasing and devaluing currencies to pay off national debts more cheaply and gain other financial advantages has been the fallback policy of Princes and Presidents from before Alexander the Great to after Ronald Reagan.

      Back off, man. I'm a logician.—GOPBusters™

      by Mokurai on Thu Jun 26, 2014 at 01:04:21 AM PDT

      [ Parent ]

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