Should Congress Raise the Federal Minimum Wage?--Posner

Increasing the federal minimum wage, currently $5.15 an hour, is a priority of the new Democratic Congress. Democratic leaders want to raise it by 40 percent, to $7.25 an hour. From an economic standpoint, even from an egalitarian standpoint, raising the minimum wage, especially by such a large amount (roughly 10 percent of the American workforce makes less than $7.25 an hour, which is double the percentage of the workforce that is paid the current minimum wage), would be a grave mistake. As a matter of economic theory, increasing the price of an input into production, such as labor, has two effects: an increase in the price of the product, because the producer's costs have risen (provided the increased input cost affects his competitors as well) and a reduction in the demand for the input, both because the higher price of the product reduces demand for it and because substitute inputs will now be more attractive. Any such substitution will be inefficient because it is motivated not by an increase in the real cost of labor but by a government-mandated increase in the price of the input, which has the same misallocative effect as monopoly pricing. If the input is labor, forcing employers to pay employees an above-market wage will result in (1) higher prices for the goods or services produced by the employers, which will have the same effect as a tax on the consumers of those goods or services, (2) higher wages for those minimum-wage employees whose employers decide to retain them and pay the mandated new wage, and (3) less employment of marginal workers, that is, of workers paid less than the imposed minimum. Any interference with the market-determined wage level is prima facie inefficient; and to the extent that marginal workers are poorer than workers unaffected by a minimum wage, and the consumers of goods and services produced by employers of marginal workers are also below average in income, a minimum-wage law is inegalitarian as well as inefficient. Its effect on income equality, however, depends not only on the relative incomes of the groups affected by the law but also on the balance between the effect on employment and the effect on the wages of those who are retained. The lower the percentage drop in employment relative to the size of the minimum wage, the less likely the net effect of the mininum-wage law will be to make marginal workers worse off. Some economists, notably David Card and Alan Krueger, deny that the minimum wage has any disemployment effect. See their book Myth and Measurement: The New Economics of the Minimum Wage (1995), but their work has been heavily criticized. See, e.g., David Neumark & William Wascher, "Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania: Comment," 90 Am. Econ. Rev. 1362 (2000), and Richard V. Burkhauser, Kenneth A. Couch & David C. Wittenburg, "A Reassessment of the New Economics of the Minimum Wage Literature with Monthly Data from the Current Population Survey," 18 J. Lab. Econ. 653 (2000). It is unlikely that a 40 percent increase in the minimum wage would have no effect on employment. Although working full time at $5.15 an hour yields an annual income (slightly more than $10,000) barely above the poverty line, most minimum-wage workers are part time, and for the majority of them their minimum-wage employment supplements an income derived from other sources. Examples of such workers are retirees living on social security or private pensions who want to get out of the house part of the day and earn some pin money, stay-at-home spouses who want to supplement their full-time spouse's earnings, teenagers working after school, and other students. An increase in the minimum wage--depending critically of course on how great the increase is--will provide a windfall to some minimum-wage workers, many of whom are not poor, and disemploy some others, also not poor. The effect on wage equality is likely to be slight, but consumer prices will be higher (which may reduce overall equality) and the efficiency with which goods and services are produced by low-wage workers will be reduced. As a means of raising people from poverty or near poverty, the minimum wage is distinctly inferior to the Earned Income Tax Credit, which compensates for low wages without interfering with the labor market. EITC is of course not devoid of allocative effect, because like any other government spending it is defrayed out of taxes; but it is probably a less inefficient tax than the minimum wage. And it is a more efficient device for spreading the wealth, since many, perhaps most, minimum-wage workers are not poor. So why are the Democrats pushing to increase the minimum wage rather than to make EITC more generous? Three reasons can be conjectured. First, unions, which are an important part of the Democratic Party's coalition, favor the minimum wage because it reduces competition from low-wage workers and thus enhances the unions' bargaining power and so their appeal to workers. This would not be as serious a problem for unions if minimum-wage workers were organized. But the fact that most minimum-wage workers are part time makes them uninterested in joining unions. Second, increasing the EITC would mean an increase in government spending and hence in pressure to increase taxes, and the Democrats wish to avoid being labeled tax-and-spend liberals. And third, genuinely poor people vote little. The number of nonpoor who would be benefited by an increase in the minimum wage, when combined with the number of nonpoor workers whose incomes will rise as a result of reducing competition from minimum-wage workers, probably exceeds the number of nonpoor who will be laid off as a result of an increase in the minimum wage. Teenagers, moreover, will be among the groups hardest hit, and most of them do not vote.

Comments

[Eddie]

Although working full time at $5.15 an hour yields an annual income (slightly more than $10,000) barely above the poverty line, most minimum-wage workers are part time, and for the majority of them their minimum-wage employment supplements an income derived from other sources.

I've heard conservatives say this over and over again, but I never hear anyone quote their source. Where exactly do you get this information? How am I supposed to know it's accurate? Please provide sources when spitting out random facts that support your position. I have serious doubts that what you said above is accurate at all...

[Daniel Luke]

What a laugh--hurting the poor by paying them more money! It's quite amazing that the rich have the gall to advance such preposterous arguments. Economics is not an exact science, and economists are frequently incorrect as one would expect. In fact there are few absolutes in economics--the judge merely expresses an opinion based on how he thinks thing will turn out for monied interests. If you're concrened about the investor class, the judge probably has a point. If your concerned about the common man, he definitley doesn't.

[andrew neave]

Firstly this talk about Teenagers is bunkum,, since when does the Us depend on teenagers to create wealth??? We should be talking more about Training teenagers Yes that dirty word Training, ---remember the 4 year Apprenticeship ???
Also on one hand its said that Unemployment has been brought down to low levels by this Administration, so these companies that lay people of because of the Raise in the Minimum wage, will have to pay Unemployment Benifit to these people wont they ????. For the life of me I cant see what aspiring companies will gain by taking this way forward
In my opinion all of the thoughts of the two bloggers on this site rely tottaly on "In reality" high Unemployment.
The thought of full employment is the worst situation of all for all employers, they want employers to have the right to instill fear into there workers that tommorow could be there last day of work, the prospect of workers turning down job offers because the Employer is not paying enough,to these Bloggers way of thinking is to horrid to contemplate.////

So let all these companies cut back on staff reducing there output ?? how will this help them prosper??? No this is a big bluff this theory.
Bearing in mind that $1000 dollars a month is about the average apartment rent, Is $7.50 an hour a huge amount of money to earn, do the maths??. Or dont you think having a place to live is a reasonable expectancy from a living wage.

In the year 2006, Slavery is not the way forward for the working man.

[M]

Incidentally, your preview feature seems to be broken; the formatting of previewed text differs from what actually appears in the post.

[Jack]

M when I saw ""Fully" 65% are women" I thought I'd better click! And there I was at the front door of Heritage Org where nothing trumps shilling for our now nationless corporate profits and their joy in seeing the wage race to the bottom.

Well, they DID do a fine job of reporting how "few" were actually at the federal minimum, but.... sorta left out that NY, MA, CA, FL, WA, IL, OR and a number of smaller states have min wages higher than the fed's $5.15

I wondered for a minute if having a Fed min wage worker at home might be a short cut to wealth seeing as the min wage household had an AVERAGE household income well above the $43k Median household income. But then I remembered that the AVERAGE per capita income (babies included) is also about $43,000 so the Average 4 person household would have over $170,000 so just a few of the above average households who had a member earning the min wage would bring up the Average household income substantially and then I suspect those min wage households making $50k have several wage earners.

The picture below (from US Census) showing some 38 million living below the poverty line of $10,000 with 45 million working folk lacking health insurance coverage isn't all that pretty for the "richest nation" and one where the average per capita income is higher than median household income.

Real median household income remained unchanged between 2002 and 2003 at $43,318, according to a report released today by the U.S. Census Bureau. At the same time, the nation’s official poverty rate rose from 12.1 percent in 2002 to 12.5 percent in 2003. The number of people with health insurance increased by 1.0 million to 243.3 million between 2002 and 2003, and the number without such coverage rose by 1.4 million to 45.0 million. The percentage of the nation’s population without coverage grew from 15.2 percent in 2002 to 15.6 percent in 2003.

Jack

[Eddie]

There are three other points that I think are worth consideration:

1) The point here isn't about job gains or losses about about the total amount of labor surplus generated by the increase in the minimum wage. If demand for labor is highly inelastic, then there will only be a small decrease in jobs resulting in a larger income pie for those at minimum wage. I, however, can't believe the that the price elasticity for this class of worker is anything but elastic (given the technological subsitutes for labor available) so an increase of 40% will most likely hit employers, and their employees, hard. A smaller increase in the minimum wage may allow for larger labor surplus vs. the status quo, but Dems don't seem to be heading that way.

2) EITC is a fantastic idea, but from experience, it is difficult to explain to those qualified for the credit that they need to act rationale and save the large tax refund to help them with daily living expenses over the next year. Are they uneducated or irrationale? No, they're human. I know a lot of people (myself included) who tend to make aspirational purchases when a huge sum of money given to me, and those receiving EITC are no different. At the very least, the minimum wage provides a way of distributing cash at increments over the year. Perhaps some sort of funding mechanism like that can be applied to EITC as well?

3) Despite my misgiving about the increase in min wage, there is a spillover benefit in crime reduction, particularly among young men. Crime occurs because the payout from committing crime minus the probability-adjusted cost of being caught is greater than the value of doing "honest" work. Minimum wage provides that value and may convince the marginal worker to engage in the organized economy vs. in a life of crime.

[Jack]

Eddie: points well worth consideration:

There are three other points that I think are worth consideration:

1) The point here isn't about job gains or losses about about the total amount of labor surplus generated by the increase in the minimum wage. If demand for labor is highly inelastic, then there will only be a small decrease in jobs resulting in a larger income pie for those at minimum wage. I, however, can't believe the that the price elasticity for this class of worker is anything but elastic (given the technological subsitutes for labor available) so an increase of 40% will most likely hit employers, and their employees, hard. A smaller increase in the minimum wage may allow for larger labor surplus vs. the status quo, but Dems don't seem to be heading that way.

......... One thing IS sure that small, predictable annual increases would be far better than letting things get out of kilter for a decade and then trying to "fix it" in a short time.

........ as for swapping grunt labor for machinery and tech it seems that our ONLY true wealth creation comes from increasing the productivity of our workers. Thus.... I see that insisting on the capitalist honesty of a min wage being fairly close to a LIVING wage as having the additional benefit of spurring productivity increases as well.

.......One can quickly see that the lower the min wage is allowed to fall or the more that the employer can shift their labor costs to taxpayers the LESS incentive they'll have to invest in productivity.

.......There IS some elasticity at the bottom, as McD's is already experimenting with using off site call centers to take drive up orders and I suspect to soon hear "Supersize that?" in crisply spoken Indian English. On the other hand how expensive would be a machine to man their counters? or to mop their floors? And lastly? Are any jobs that are truly "worth" only one third of a living wage (estimated by a recent study as $17/hr) worthy of being done by an employee at all?

2) EITC is a fantastic idea, but from experience, it is difficult to explain to those qualified for the credit that they need to act rationale and save the large tax refund to help them with daily living expenses over the next year. Are they uneducated or irrationale? No, they're human. I know a lot of people (myself included) who tend to make aspirational purchases when a huge sum of money given to me, and those receiving EITC are no different. At the very least, the minimum wage provides a way of distributing cash at increments over the year. Perhaps some sort of funding mechanism like that can be applied to EITC as well?

......... EITC a "fantastic idea??" It's really a very crude response acknowledging a couple of major flaws in the capitalist model: This animal came in response to trying to lure folks on welfare to instead work 40 hrs per week for wages that were little better than welfare. Were the min wage at LEAST as high as today's min wage plus the government subsidy the incentive to the worker would be the same. With the added benefit of the employer acknowledging the truer cost of labor he'd use it more efficiently and may well invest in productivity increasing tech and machinery. To which I say GREAT! Having lived through decades of irrational fears that "computers would take all of our jobs" and there is a tremendous demand building for taking care of aging baby boomers.

3) Despite my misgiving about the increase in min wage, there is a spillover benefit in crime reduction, particularly among young men. Crime occurs because the payout from committing crime minus the probability-adjusted cost of being caught is greater than the value of doing "honest" work. Minimum wage provides that value and may convince the marginal worker to engage in the organized economy vs. in a life of crime.

........ agreed. And actually worse than the rational "this is better than that" choice that most of us make every day, as today's min wage is but one third what it costs to live even a minimum existence, that it is instead a survival choice of "making it" or not. As mentioned when a min wage is but a third of a living wage, someone, somewhere WILL have to make up most of the difference. Is it the taxpayer? Those paying increased medical premiums? and/or those who are the victims of crime? Or...... for honest capitalists? The employer who most directly benefits from the employees labor? Did I leave out any options?

Jack

[Jack]

Eddie: points well worth consideration:

There are three other points that I think are worth consideration:

1) The point here isn't about job gains or losses about about the total amount of labor surplus generated by the increase in the minimum wage. If demand for labor is highly inelastic, then there will only be a small decrease in jobs resulting in a larger income pie for those at minimum wage. I, however, can't believe the that the price elasticity for this class of worker is anything but elastic (given the technological subsitutes for labor available) so an increase of 40% will most likely hit employers, and their employees, hard. A smaller increase in the minimum wage may allow for larger labor surplus vs. the status quo, but Dems don't seem to be heading that way.

......... One thing IS sure that small, predictable annual increases would be far better than letting things get out of kilter for a decade and then trying to "fix it" in a short time.

........ as for swapping grunt labor for machinery and tech it seems that our ONLY true wealth creation comes from increasing the productivity of our workers. Thus.... I see that insisting on the capitalist honesty of a min wage being fairly close to a LIVING wage as having the additional benefit of spurring productivity increases as well.

.......One can quickly see that the lower the min wage is allowed to fall or the more that the employer can shift their labor costs to taxpayers the LESS incentive they'll have to invest in productivity.

.......There IS some elasticity at the bottom, as McD's is already experimenting with using off site call centers to take drive up orders and I suspect to soon hear "Supersize that?" in crisply spoken Indian English. On the other hand how expensive would be a machine to man their counters? or to mop their floors? And lastly? Are any jobs that are truly "worth" only one third of a living wage (estimated by a recent study as $17/hr) worthy of being done by an employee at all?

2) EITC is a fantastic idea, but from experience, it is difficult to explain to those qualified for the credit that they need to act rationale and save the large tax refund to help them with daily living expenses over the next year. Are they uneducated or irrationale? No, they're human. I know a lot of people (myself included) who tend to make aspirational purchases when a huge sum of money given to me, and those receiving EITC are no different. At the very least, the minimum wage provides a way of distributing cash at increments over the year. Perhaps some sort of funding mechanism like that can be applied to EITC as well?

......... EITC a "fantastic idea??" It's really a very crude response acknowledging a couple of major flaws in the capitalist model: This animal came in response to trying to lure folks on welfare to instead work 40 hrs per week for wages that were little better than welfare. Were the min wage at LEAST as high as today's min wage plus the government subsidy the incentive to the worker would be the same. With the added benefit of the employer acknowledging the truer cost of labor he'd use it more efficiently and may well invest in productivity increasing tech and machinery. To which I say GREAT! Having lived through decades of irrational fears that "computers would take all of our jobs" and there is a tremendous demand building for taking care of aging baby boomers.

3) Despite my misgiving about the increase in min wage, there is a spillover benefit in crime reduction, particularly among young men. Crime occurs because the payout from committing crime minus the probability-adjusted cost of being caught is greater than the value of doing "honest" work. Minimum wage provides that value and may convince the marginal worker to engage in the organized economy vs. in a life of crime.

........ agreed. And actually worse than the rational "this is better than that" choice that most of us make every day, as today's min wage is but one third what it costs to live even a minimum existence, that it is instead a survival choice of "making it" or not. As mentioned when a min wage is but a third of a living wage, someone, somewhere WILL have to make up most of the difference. Is it the taxpayer? Those paying increased medical premiums? and/or those who are the victims of crime? Or...... for honest capitalists? The employer who most directly benefits from the employees labor? Did I leave out any options?

Jack

[Anonymous]

Eddie: points well worth consideration:

There are three other points that I think are worth consideration:

1) The point here isn't about job gains or losses about about the total amount of labor surplus generated by the increase in the minimum wage. If demand for labor is highly inelastic, then there will only be a small decrease in jobs resulting in a larger income pie for those at minimum wage. I, however, can't believe the that the price elasticity for this class of worker is anything but elastic (given the technological subsitutes for labor available) so an increase of 40% will most likely hit employers, and their employees, hard. A smaller increase in the minimum wage may allow for larger labor surplus vs. the status quo, but Dems don't seem to be heading that way.

......... One thing IS sure that small, predictable annual increases would be far better than letting things get out of kilter for a decade and then trying to "fix it" in a short time.

........ as for swapping grunt labor for machinery and tech it seems that our ONLY true wealth creation comes from increasing the productivity of our workers. Thus.... I see that insisting on the capitalist honesty of a min wage being fairly close to a LIVING wage as having the additional benefit of spurring productivity increases as well.

.......One can quickly see that the lower the min wage is allowed to fall or the more that the employer can shift their labor costs to taxpayers the LESS incentive they'll have to invest in productivity.

.......There IS some elasticity at the bottom, as McD's is already experimenting with using off site call centers to take drive up orders and I suspect to soon hear "Supersize that?" in crisply spoken Indian English. On the other hand how expensive would be a machine to man their counters? or to mop their floors? And lastly? Are any jobs that are truly "worth" only one third of a living wage (estimated by a recent study as $17/hr) worthy of being done by an employee at all?

2) EITC is a fantastic idea, but from experience, it is difficult to explain to those qualified for the credit that they need to act rationale and save the large tax refund to help them with daily living expenses over the next year. Are they uneducated or irrationale? No, they're human. I know a lot of people (myself included) who tend to make aspirational purchases when a huge sum of money given to me, and those receiving EITC are no different. At the very least, the minimum wage provides a way of distributing cash at increments over the year. Perhaps some sort of funding mechanism like that can be applied to EITC as well?

......... EITC a "fantastic idea??" It's really a very crude response acknowledging a couple of major flaws in the capitalist model: This animal came in response to trying to lure folks on welfare to instead work 40 hrs per week for wages that were little better than welfare. Were the min wage at LEAST as high as today's min wage plus the government subsidy the incentive to the worker would be the same. With the added benefit of the employer acknowledging the truer cost of labor he'd use it more efficiently and may well invest in productivity increasing tech and machinery. To which I say GREAT! Having lived through decades of irrational fears that "computers would take all of our jobs" and there is a tremendous demand building for taking care of aging baby boomers.

3) Despite my misgiving about the increase in min wage, there is a spillover benefit in crime reduction, particularly among young men. Crime occurs because the payout from committing crime minus the probability-adjusted cost of being caught is greater than the value of doing "honest" work. Minimum wage provides that value and may convince the marginal worker to engage in the organized economy vs. in a life of crime.

........ agreed. And actually worse than the rational "this is better than that" choice that most of us make every day, as today's min wage is but one third what it costs to live even a minimum existence, that it is instead a survival choice of "making it" or not. As mentioned when a min wage is but a third of a living wage, someone, somewhere WILL have to make up most of the difference. Is it the taxpayer? Those paying increased medical premiums? and/or those who are the victims of crime? Or...... for honest capitalists? The employer who most directly benefits from the employees labor? Did I leave out any options?

Jack

[Anonymous]

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