On Raising the Federal Minimum Wage--BECKER

An increase in the minimum wage has several distinctive negative effects on the economy. While the wages of some low skilled workers would improve, it would reduce employment opportunities for teenagers and other lower skilled workers. They are pushed either into unemployment or the underground economy. A bigger minimum also raises prices of fast foods and other goods produced with large inputs of unskilled labor. Workers who receive on the job training must accept lower wages in return. A higher floor on wages prevents the wages of lower skilled workers from being reduced much, and hence discourages firms from providing much training to these employees. A rise in the minimum wage increases the demand for workers with greater skills because it reduces competition from low-skilled workers. This is an important reason why unions have always been strong supporters of high minimum wages because these reduce the competition faced by union members from the largely non-union workers who receive low wages. Most knowledgeable supporters of a higher minimum wage do not believe it is an effective way to reduce the poverty rate. Poorer workers who are lucky enough to retain their jobs at a higher wage obviously do better, but the poorer workers who are priced out of the above ground economy are made worse off. Moreover, many of those who receive higher wages are not poor, but are teenagers and other secondary workers in middle class and rather rich families. Poor families are also disproportionately hurt by the rise in the cost of fast foods and other goods produced with the higher priced low-skilled labor since these families spend a relatively large fraction of their incomes on such goods. A recent petition by over 600 economists, including 5 Nobel Laureates in Economics, advocated a phased-in rise in the federal minimum wage to a much higher $7.25 per hour from the present $5.15 per hour. This petition received much attention, and the number of economists signing is impressive (and depressing). Still, the American Economic Association has over 20,000 members, and I suspect that a clear majority of these members would have refused to sign that petition if they had been asked. They believe, as I do, that the negative effects of a higher minimum wage would outweigh any positive effects. That is one reason I would surmise why only a fraction of the 35 living economists who received the Nobel Prize signed on to the petition--I believe all were asked to sign. Controversy remains in the United States (and elsewhere) over the effects of the minimum wage mainly because past changes in the U.S. minimum wage have usually been too small to have large and easily detectable general effects on employment and unemployment. The effects of an increase to $7.25 per hour in the federal minimum wage that many Democrats in Congress are proposing would be large enough to be easily seen in the data. It would be a nice experiment from a strictly scientific point of view, for it would help resolve the controversy over whether the effects of large increases in the minimum wage would be clearly visible in data on employment, training, and some prices. Presumably, even the economists and others who are proposing this much higher minimum must believe that at some point a still higher minimum would cause too much harm. Otherwise, why not propose $10 or $15 per hour, or an even higher figure? I am confident that for this and other reasons, the actual immediate increase in the federal minimum wage is likely to be significantly lower than $2.10 per hour. A number of countries, including France, have already initiated this experiment, for the ratio of the minimum wage to the average wage in these countries is much higher than in the United States. The effects of the French minimum have been carefully studied by two excellent economists, Guy Laroque and Bernard Salanie, in a series of articles, such as " Labor Market Institutions and Employment in France," Journal of Applied Econometrics, 2002. They find that the relatively high minimum in France explains a significant part of the low employment rate of married women in France. Salanie has also argued that the high French minimum wage is important in explaining the dismal employment prospects of young persons in France, and the huge unemployment rate of Muslim youths there, estimated to be about 40 per cent.

Comments

[B. Meehan]

Hello,
Both Posner and Becker demonstrate the amoral reasoning in their position and as well the validity of the comment by an economist "a worker spends what he gets while a capitalist gets what he spends".
Recently a news item stated that capitalist Barry Diller for FY 2005 "earned" $486 million (!)while the share price did not increase for the company. It is always true that capitalists believe competition is for the worker and not them and socialism is good for the capitalist but not the worker. Economists do not have the common sense to know what is good for the economy.

[Grumpy Old Man]

It's hard to argue with you technically.

However, I would surmise that the effect on employment is not that great at the levels the m.w. has historically been raised.

To the extent unemployment does result, there are more customers for the welfare system. Tax and tax and tax. Spend and spend and spend. Elect and elect and elect.

Remind me. Why exactly do we want to spread democracy?

[S. Zhou]

A question On "A higher floor on wages prevents the wages of lower skilled workers from being reduced much, and hence discourages firms from providing much training to these employees."

Shouldn't profit-optimizing firms have just as much economic incentives to provide training to these employess so that higher productivity can be realized? If realized, potentially few employees could be hired and few turnovers would occurs, thus effectively reducing production costs related with labor hiring and retention. I don't see why the "game" could not be played out this way, if you look at the increased training to the existing US-based white-collar workers after a decade of white-collar work outsourcing or offshoring.

[S. Zhou]

Hypothetically, what would be the impact of reducing the floor price of the mimimum wage?

Would you expect a decrease in final product price? I am afraid that the firms would find the price redution less attractive in attracting more customers and would decide to reap the windfall to the firms themselves.

And, would you also expect an increase in hiring? If the question to this one is NO, could I make a reasonable guess that an increase within some careful limit would probably not result in an decrease in hiring.

[R. Luck]

In response to B. Meehan's complaint regarding an individual's $486 million income: I believe you present another excellent argument for the Earned Income Tax Credit approach rather than the minimum wage approach. A few dollars increase in a minimum wage is barely felt by that high earning individual, but a family-owned small business already barely solvent will certainly feel the effects and be much more likely to fire workers or close down entirely. Use of the EITC forces your super-rich individual to bear some of the burden of wealth redistribution and lessens the burden on the small business which actually employs low-wage workers.

[spencer]

The correlation between real restaurant prices and the minimum wage is 0.1.

So the thesis that increases in the minimum wage leads to higher prices still seems to be a theory in search of any evidence to support it.

[Dave]

Opponents of a rise in the minimum wage always conveniently ignore a painfully obvious issue: If the minimum wage is unchanged, and there is inflation (even low inflation), the wages of the lowest paid workers in society are declining. We can get into side arguments about who receives the minimum wage (heads of households vs. part-time student workers), but let's assume (even though it's not true) that minimum wage workers are only well-off part-time student workers parking cars. Posner and Becker and their ilk need to answer this fundamental question: Why, in a just and prosperous society with positive economic growth and productivity growth, should a valet car parker (or other minimum wage worker) be earning less in real terms than someone in the same job five years ago? Or ten years ago? Economic arguments against a rise in the minimum wage like to speculate about the effects an increase might have on other economic indicators. You'll notice they never say why it's a good thing that the real rate of pay for low-wage jobs is (without a minimum wage increase) is in perpetual decline. (You'll notice also that the Beckers and Posners in arguments on this topic never apply the same market logic to executive pay that they apply to low-wage worker pay, but that's another story.)

[Ben]

S. Zhou,

I suspect most economists, including Becker and Posner, believe that reducing the minimum wage will both decrease prices and increase employment. Indeed, I believe that most economists think the minimum wage should be zero.

This addresses Dave's comment as well, since zero adjusted for inflation is still zero.

[ben]

Ummm... spencer, doesn't 0.1 correlation support what Becker is saying? You wouldn't expect a large correlation since minimum wage labor is only one factor into restaurant production. But you would expect something positive in a competitive market.

[HispanicPundit]

There are other aspects of the minimum wage that are forgotten, specifically from a low-income minority perspective, those are,

1. The minimum wage harms the least productive most

We can argue forever about how much of a raise in the minimum wage will unemploy how many people, but what we all must agree on is that a raise in the minimum wage - in as much as unemployment is created - will fall disproportionately harder on the least skilled. For example, if you had to lay someone off, with all things being equal would you rather lay off someone with or without a high school diploma? With or without the ability to speak english? With or without a criminal record?

Of course this is the opposite for the more skilled employees, for example, those upper middle class students working part time paying their way through college. In addition to having mommy and daddy pay most of their bills, they are more secure in their job than the low skilled high school drop out trying to start anew.

2. The minimum wage harms poor areas over rich areas

I grew up in Compton, California, an area known for poverty and crime, and the city is literally filled with empty lots. Lots where businesses closed down and none opened. While this is due to many other factors as well, a minimum wage law robs businesses of the option of using the price system to recover some of their costs in opening up a business in an area with high poverty and crime. What results is less businesses open there than otherwise would.

Compton politicians keep talking about bringing jobs to the ghetto, but then turn around and support legislation that reduces just that. Of course rich, low crime neighbhorhoods like San Franciso benefit from such legislation...is it any wonder the Nancy Pelosi types are the strongest supporters of the minimum wage? Care for the poor...PLEASE.

3. The minimum wage makes it easier to discriminate

By taking away employees primary bargaining tool, the minimum wage reduces the cost for racists who would enforce their racist views. For example, had there been no minimum wage, if an owner of a restaurant wished to hire only white employees, he would have to pay his employees more to get the same productivity as he would get from, say, newly arrived legal immigrants. However, since this cost him more, this decision of his directly punishes him in the pocket book - a strong incentive to reduce his racist policies. But with a minimum wage law, his costs are reduced and the remaining cost is spread out to his competitors, thus reducing his pocket book cost and also reducing the competitive edge others had over him. All in all harming minorities, and especially low income minorities.

For these reasons and others, I despise the minimum wage - I believe it to be anti-poor, racist, unethical and economically unsound. Few legislations cause as much damage to poor people, poor areas, minorities and less educated citizens, as much as the minimum wage. The primary reason it is pursued despite this is because of politics, pure and simple.

[Mathis]

I think there is strong argument for a minimum wage that is ignored by the comments in this blog. The minimum wage is a statement by society that, given our overall wealth level, there should be no jobs in this country that do not at least have a marginal product equal to the minimum wage. Now, if one believes that productivity is intrinsic to a person, i.e. that there is a fixed demand for labor schedule, that makes little sense. However, if labor and capital are scarce resources and are complementary in production, i.e. better workers make capital more productive and vice-versa, there is no obvious way to decide what the "intrinsic" marginal product or appropriate market wage is. Nash-bargaining in search models or matching models such Sattinger (1979) are attempts to resolve this problem. To illustrate this reasoning think of the large wage increases that Mexican immigrants experience when they work in the US rather than Mexico. These are very hard to reconcile with the idea of an intrinsic productivity which is central to most arguments against the minimum wage (and I think they pose a fascinating challenge for economists to explain).

So what do I think could happen in response to the minimum wage? As Posner suggests there will be allocative effects, but they may be desirable. Workers may respond by acquiring more human capital, which in turn is justified by increased investment in physical capital. Similarly, firms may respond by investing in more physical capital and better technology. Clearly, from an individual perspective this is suboptimal (otherwise it would have happened earlier), but from a social perspective it may be desirable. It may not be a Pareto improvement (even though it could be), but it may increase social welfare. For these effects to occur requires both time and will depend crucially on the ability of entrepreneurs to respond. We suspect that the US is better than France at creating new, higher productivity jobs and so a minimum wage here may be far more beneficial than it is in France. This is not to say there are potentially no adverse effects of a minimum wage, but there also potential benefits and I believe it is hence very reasonable to support minimum wage legislation without being a accused of trying to rent seek.

[Mathis]

I think there is strong argument for a minimum wage that is ignored by the comments in this blog. The minimum wage is a statement by society that, given our overall wealth level, there should be no jobs in this country that do not at least have a marginal product equal to the minimum wage. Now, if one believes that productivity is intrinsic to a person, i.e. that there is a fixed demand for labor schedule, that makes little sense. However, if labor and capital are scarce resources and are complementary in production, i.e. better workers make capital more productive and vice-versa, there is no obvious way to decide what the "intrinsic" marginal product or appropriate market wage is. Nash-bargaining in search models or matching models such Sattinger (1979) are attempts to resolve this problem. To illustrate this reasoning think of the large wage increases that Mexican immigrants experience when they work in the US rather than Mexico. These are very hard to reconcile with the idea of an intrinsic productivity which is central to most arguments against the minimum wage (and I think they pose a fascinating challenge for economists to explain).

So what do I think could happen in response to the minimum wage? As Posner suggests there will be allocative effects, but they may be desirable. Workers may respond by acquiring more human capital, which in turn is justified by increased investment in physical capital. Similarly, firms may respond by investing in more physical capital and better technology. Clearly, from an individual perspective this is suboptimal (otherwise it would have happened earlier), but from a social perspective it may be desirable. It may not be a Pareto improvement (even though it could be), but it may increase social welfare. For these effects to occur requires both time and will depend crucially on the ability of entrepreneurs to respond. We suspect that the US is better than France at creating new, higher productivity jobs and so a minimum wage here may be far more beneficial than it is in France. This is not to say there are potentially no adverse effects of a minimum wage, but there also potential benefits and I believe it is hence very reasonable to support minimum wage legislation without being a accused of trying to rent seek.

[Karen]

I am concerned that a raise in the minimum wage encourages more students to work more hours. As a mother, I believe that high school and college age youths generally should be focusing their time and effort on their education. An increase in the minimum wage will increase the hours they work. I base this on my training in Economics from Wharton (many, many years ago) and my current experience as the mother of a teenager (which only seems like many, many years). Students may very well be more attractive employees than non-students -- ergo the number of jobs/employees does not go down as there are more available employees, and unemployment may not go up, as more workers become discouraged. What no one seems to care about is an increase in minimum wage will reduce education levels, especially for children in lower and middle class households.

[JB Clark]

Mathis,

The fact that labor and capital raise each other's marginal products in no way makes it impossible to determine the marginal product of each. You would do well to read more price theory and less game theory on this point.

Your position that the minimum wage can be justified by the fact that "society" prefers it is remarkable for both its questionable premise about the existence of a social-choice mechanism and its utterly circular reasoning.

[ben]

Mathis

Even if capital and labor were complementary, this isn't an argument for government intervention. My understanding of the data is that low skilled labor and capital are actually substitutes anyway.

Firms face the following problem when hiring their next worker: will the additional production from this worker exceed the age I will pay him? Its not necessarily a straightforward question, but firms that get it wrong will go out of business anyway (or make corrections on the way). But the bottom line is that the marginal productivity of labor is detectable, whether by direct measurement or indirectly through market selection.

So what do I think could happen in response to the minimum wage? ... Workers may respond by acquiring more human capital

No, they won't, since minimum wage lowers the marginal return on investment in capital.

You posit a disconnection between private and social incentives i.e. externalities - what is the source of this externality?

[jeff]

many of the comments that are advocating a rise in the minimum wage are ignoring that wages are best set by a market. if the market for valets is higher than the current minimum, the market demand and supply forces should push wages higher.

most if not all of the minimum wage jobs in this country are low skilled jobs that require little training or education. many restaurants pay minimum wage while they train employees, and find out if the employee will work out, only to raise their wages once they become fully qualified for the job.

raising the minimum wage will hurt precisely the population that the advocates want to help-lower income, low skilled, uneducated workers. the minimum wage rise will price them out of the market so that they will have to resort to not working, or a cash wage that brings them into the black market economy.

raising the min wage will also incite more illegal immigration, as higher mandatory wages will increase foreign demand, and also should increase the wages paid by the underground economy.

raising the min wage also will increase all labor costs-since hourly workers that make more than the minimum will want an increase in their pay to keep pace.

it's a bad idea that should be scrapped. purely symbolic-but he symbolism will hurt the overall working environment.

[Ron]

B. Meehan:

Is it amoral for the state to coerce the capitalist to pay their labor a certain rate?

[Elliott]

Responding directly to Becker's reference to the French economists, who "find that the relatively high minimum in France explains a significant part of the low employment rate of married women in France," I would ask: have you considered the possibility that a lower employment rate among women as a result of a higher minimum means that fewer mothers have to work in order to bring in a sufficient family income? Perhaps France's "relatively high minimum" allows individuals to earn enough money to allow one parent to stay home with children, keeping them away from the "underground economy," instilling values, etc.?

[ben]

Elliot

The people you are talking about - men fortunate enough to win or keep their jobs at a minimum wage, who's partner is having children - are almost certainly a small minority, so small that there is no justification for imposing it on the rest.

Those not fortunate enough to keep their jobs will, presumably, be more likely to move to the underground economy. I'm not sure you're considering the full set of effects of a minimum wage.

[Ray DeGennaro]

As economists, we can celebrate the minimum wages passed by individuals states in the last election. First, while these are almost certainly harmful, reasonable people on both sides of the argument will agree that a minimum in Massachusetts shouldn't necessarily be the same as the one in Arkansas. Second, labor and capital can more easily adjust to the wage differentials -- moving across a state line to escape the harmful effect of the minimum (or, if you prefer, to capture the benefits of the minimum) is easier than moving out of the country. Third, it's more in tune with democracy. If your state wants a minimum wage, then at least it doesn't hurt me as much as a federal minimum. If my state doesn't want one, then your state can still reap perceived benefits if it wants. And fourth, think of the data we can collect!

[Elliott]

How many people are already participating in the underground economy as a supplement to their aboveground jobs because their aboveground employer does not pay them sufficiently? I would like to see states take the minimum wage more seriously, and keep it out of federal legislation, but perhaps a motion towards raising the federal minimum wage slightly could force more debate among state legislators. $7.25? I think not. $5.50? Why not.

[General Alcibialdes]

Dear Prof. Becker,

Thank you for thoughts. I would like you to comment on the effect of raising the minimum wage at the same time that we are trying to reform immigration. We are telling employers of low skilled workers to stop hiring illegal immigrants, but at the same time we are adding significantly to their incentive to do so. I'm suprised nobody has brought this up.
regards,
Alcibialdes

[Joel Pinheiro]

The objection that small increases in the minimum wage have no noticeable impact is self-defeating.

A higher minimum wage has one of two possible outcomes: it is either high enough that people who would otherwise find a job will not, or it is so low that no-one will be unemployed because of it (if the minimum wage was set to 1 cent/decade this would certainly be the case).

A small increase on the legal minimum will not make many more people unemployed, but will also be of little help to those who benefit from it.

The essence of the problem is the same, though: a number of mutually beneficial transactions was prohibited from taking place. People were necessarily harmed by it.

There is absolutely no reason why one should defend a minimum wage, and many for rejecting such an irrational law, which seeks to impose higher incomes through sheer political will.

[Ed Heath]

My understanding is that at least some studies do not show an unemloyment effect so much as an effect on future hiring of low wage workers in relation to increases in the Minimum Wage. Which is still a pretty negative policy income.
But I wonder, how should we see the increase in dispoable income caused by an increase in the Minimum wage? After all, I believe lower income workers spend most of their income, and it is not unreasonable to think they spend much of it at businesses where other minimum wage workers work. So at least some of the negative effect caused by the new higher wages should be offset, right?

[Jack]

A letter signed by 650 U.S. economists, including five past presidents of the American Economics Association and six Nobel laureates, argued that increases in the minimum wage have had little or no effect on employment, and that boosting the minimum wage would actually have a positive effect not just on workers and the labor market but on the overall economy.

And...... for those professing to believe in capitalist principles if the employer does not pay something roughly akin to a living wage.... WHO should make up the difference?? Today.... it's Voila!! you and me..... taxpayers! In the form of EITC, food stamps, low income housing subsidies, and having NO help from them in paying for schools, police, or bombs.

In order for capitalism to work and direct scarce resources to those most efficient users and producers it is THEY who must pay the operational costs of not only their delivery vehicles and plant but the human capital employed.

Both Posner and Becker's essays are nothing but right wing corporate ideology and foggy mutterings indicating they've never opened an econ text. Jack