Raise the Federal Minimum Wage (But Not Too Far)—Posner

Minimum-wage laws are a traditional bête noire of free-market economists because a government-mandated wage floor interferes with freedom of contract between employers and employees. Moreover, a law that increases wages is expected to reduce employment, because the marginal product of some workers, though equal to or above the free-market wage, may be below the minimum wage. 

Despite this, there is very little evidence that minimum wage laws have a significant disemployment effect. Studies have found, for example, that when one state raises its minimum wage, and an adjacent state does not, a comparison of employment in adjacent counties consisting of one in one state and one in the other state reveals no drop in employment in the county located in the state that increased its minimum wage. 

One reason the federal minimum wage seems not to have a significant disemployment effect is that it has been falling in real terms for many years. In current (2013) dollars it was $10.60 in 1968; today it is $7.25. That is a poverty-level wage, as it translates into an annual income (assuming a worker works 50 40-hour weeks in a year) of only $14,500. And I am not aware that the real (that is, inflation-adjusted) reduction in the minimum wage resulted in increased employment. 

With the federal minimum wage so low, it strains credulity to think that increasing it would cause significant disemployment (though this depends of course on how much it’s increased—I’ll come back to that critical issue shortly). Many persons who can’t command a wage higher than the federal minimum will prefer not to work, but instead to live on public benefits, engage in petty crime, switch to household work, engage in protracted search for better employment (and not work during the search), or even beg. An increase in the minimum wage will increase their incentive to seek productive work. In addition, forced to pay a higher wage, employers may invest more in their workers’ human capital—may give them better training, for example, to make them more productive and thus worth their higher wage to the employer. If the percentage increase in the minimum wage exceeds the percentage drop in employment that results from that increase, the aggregate income of persons at the bottom of the income distribution will rise, reducing inequality of income—a growing phenomenon, and serious social problem, in the United States. Notice too that to the extent that the minimum wage deflects workers to dependence on public benefits, or to crime, it imposes costs on the society at large that may offset the costs resulting from any disemployment caused by an increase in the mininum wage, provided that disemployment effect is modest. 

That proviso is critical, and a reminder that at some level an increase in the minimum wage is bound to produce significant disemployment effects, causing some businesses to shrink and others to automate. There is much talk about increasing the minimum wage to $10 or $13 an hour. It seems both imprudent and unnecessary to consider such steep, sudden jumps. I would favor increasing the federal minimum wage by 20 percent, to $8.70 an hour. That would yield a minimum-wage worker an annual income (assuming  he or she worked 2000 hours per year) of $17,400—still very modest; but if he disemployment effect proves to be slight, as I would guess it would be, a furher increase could be considered. At the very least, the 20 percent increase would yield valuable information on the elasticity of unemployment to changes in the minimum wage.

If the disemployment effect of a 20 percent increase in the federal minimum wage were slight, the redistributive effect of the increase would in my opinion justify it as a measure for reducing the growing inequality of income in the United States.

Comments

[Terry Bennett]

The minimum wage, to the extent that it exceeds the market wage, is a tax on those who buy labor. Apart from the noted theoretical disincentive upon the purchase of labor, is it fair to tax that behavior? An employer who pays less than a living wage is getting a resource for less than it costs to sustain that resource; on the other hand if the market price is interfered with, the cost to the employer may be higher than the value of the resource. If it costs $10 an hour to feed, clothe, and house a person, and he or she generates $8 in output and is paid $6, is the state subsidizing the employer or is the employer subsidizing the state?

The supposed horror of meritocratic capitalism is that if you give people freedom, some of them will exercise that freedom by pursuing, and often acquiring, great wealth. Income inequality is not a problem. The fact that some people are poor is a problem, but the fact that others are rich is not. If everyone were middle class, more people could afford Microsoft's products and Bill Gates would be even richer than he is. One person's efforts to create wealth do not somehow subtract from the wealth of someone who is or is not working to create other wealth.

The fundamental problem is none other than supply and demand. Lots of people want to acquire the American dream, and have nothing with which to buy it. They offer up their strong backs and weak minds in the market, in competition with the rest of the teeming horde, and there is far more supply than demand, driving the price of unskilled labor down, a lot.

I fully agree with Judge Posner that the practical effect of the 20% increase he proposes will be absorbed with some grousing and little other consequence. We can afford it. New Jersey has just voted to enshrine automatic increases in the minimum wage into our constitution. It sticks in my craw, but I have no plans to move. I just wish we'd call it what it is.

[Russnelson]

The difficulty of blithely waving one's hands at the "disemployment effect" is that you're talking about real people, who lose their real job, who really can't ever find a job again.

I cannot see any moral way to volunteer them to suffer that fate.

[jim kirby]

It seems to me that the curve of employment vs. minimum wage has to be monotonically descending with a flat horizontal stretch at the beginning, after which it descends rapidly all the way to $100/hr and beyond.

If so, raising the minimum wage will have negligible effect up to the knee, after which the effect will be ever more drastic.

If the knee in the curve is at $10/hr, a raise fromj$7.25 to $1.10 will have little effect, while a raise to $15 might have drastic effects.

So the pronouncements by economists that raising the minimum wage has no effect on employment might well be true now, whereas in 1968 a raise would have been devastating to employment.

Nobody knows where that knee is, of course, which makes the economic theory of minimum wage vs. employment just another one of many with a foundation in sand.

[Thomas Rekdal]

I will leave the empirical consequences of the minimum wage to economists. They never seem to reach any definitive conclusions and I am not convinced that they find other than what they were seeking to confirm what they already believe.

The moral aspects of this dispute are more interesting to me, and Terry Bennett has framed the question in exactly the right way. Insofar as the minimum wage requires employers to pay more for the labor they hire than its economic value to them, it is a discriminatory tax. Why should business owners who exploit, but did not create, the problem of underpaid workers be required to pay the costs of complying with someone else's ideals of social justice?

Judge Posner makes the interesting suggestion that a modestly higher minimum wage may induce more people to seek productive work (thus reducing our tax burden) and induce more employers to invest in their employees (thus making them more productive). Well, maybe. But this is surely a highly inefficient and unfair way to go about it. Employers who have not already thought of this strategy probably cannot be coerced into it.

Should we reduce homelessness by requiring existing homeowners to take them in without charge? After all, few homeowners will go broke as result of the imposition, and they may have an uplifting influence on the characters of their new residents. Are these considerations sufficient to outweigh the unfairness of singling out just one segment of the population for the imposition? Why does not the same logic apply to the minimum wage dispute?

[Terry Bennett]

Maybe there's another way to slice this. We're all familiar with the concept of dumping, the practice of selling a product for less than it costs to produce. Let's suppose it takes my $10/hour to "produce" a laborer, keep him fed and fit for work, etc., and he sells himself on the open market for $6. He's dumping labor, selling it at a price with which an honest laborer trying to support a family cannot compete. The minimum wage can thus be thought of as a restriction on the employee's anti-competitive behavior, not the employer's.

Building on that line of reasoning, there are people who don't cost $10/hour to sustain themselves because their sustenance is partially or wholly provided by their families. This is an oft-stated argument against the minimum wage - more than 50% of those who receive it are under age 25. Low-wage labor can be of individual and social value to those selling it, apart from consideration of the benefits to those buying it. How many college graduates had a first job flipping burgers or waitressing in a shore town for the summer? As the advocates rightly say, you can't raise a family on $7.25 an hour. As the detractors rightly say, most people earning minimum wage aren't trying to raise a family; they are trying to make a little pocket money, save for school, get some experience, contribute a little bit to help their parents, and maybe develop the discipline of getting up in the morning which will serve them in good stead in subsequent employment of higher responsibility and commensurate compensation. Some people even temporarily take jobs with no pay at all - internships - to obtain this benefit. So, the suddenly obvious fix is to exempt people under 25 from the minimum wage law, and almost everybody should be happy.

Of course this might entice employers to terminate workers approaching age 25, but most of these workers will self-terminate anyway, and look for something better once they finish college or mature to the point that they realize they want and need to be more productive and successful. Furthermore, if the rules are known going in, we will be encouraging a structure wherein workers will know they need to progress, i.e., to have a career instead of just a job. In time, most such unskilled work may be done by new workers, as it should be, and older workers with experience will be goaded to move into at least slightly more skilled positions warranting higher pay. I thus think any practical skewing effect will be minimal and manageable, and may even be beneficial.

[Dan Johnson]

One of the states should try partially replacing the minimum wage with a wage subsidy. It would basically work like the earned income tax credit, except it'd paid at regular pay periods (so it's a true replacement for the lost wages). The government would pay the subsidy electronically to the employer, and the employer would pay the employee in the normal way (by check or whatever).

I'd imagine the effects could be much more progressive. The subsidy would be means-tested, so the working poor would get the benefits, but not affluent teenagers who are just looking for spending money. Obviously, this would be a big windfall to employers, who are generally the constituency of Republicans, so in exchange liberals might get a bump in the income tax's higher brackets to pay for the program, along with a fairly generous subsidy.

[Ka Fai Ho]

The United States economy is still recovering now, minimum wage rate increase may slower the economic recovery, since the supply of labor exceed the demand for labor, unemployment rate will increase which the US government don't want to see.

In short run, unemployment rate rise, since the minimum wage raise the average cost of the firms, and the firms may shift their work to developing countries like China and India.

But in long run, unemployment rate will decrease, people are more willing to stay in the firm, and minimum wage also benefit to the unskilled workers. And which decrease in unemployment rate is good for the economy.

Government set up minimum wage is always trying to protect the workers, but not many countries doing good on that, since they may set to high or too low; the US economy are recovering now, so minimum wage will continuous to raise in the future.

[gotlift]

Lots of good articles on why not to raise the minimum wage substantially.

http://www.huffingtonpost.com/ben-powell/krugman-minimum-wage_b_4428174.html?ncid=txtlnkusaolp00000592

http://www.heritage.org/research/reports/2013/12/unprecedented-minimum-wage-hike-would-hurt-jobs-and-the-economy

http://www.forbes.com/sites/carriesheffield/2013/12/10/why-not-raise-the-minimum-wage-to-100-an-hour/?utm_source=alertsnewcomment&utm_medium=email&utm_campaign=20131212

[B Wilds]

If people were willing to work for a little less money, a great number of jobs would be created, these jobs are needed at a time that many Americans claim they have been looking for employment and will do almost anything for work. Unemployment remains high, yet the President wants to raise the minimum wage. So what gives? How do we reconcile these strange reports? This is my take on this phenomena, it could be called a "tale of two cultures." It could be that the crux of the employment problem, is cultural and structural in nature. It may be based on unrealistic expectations created over the last decade by our growing government centered economy. Government employees are often paid better then in the private sector because government does not need to make money to exist. The remainder of this post can be found below,

http://brucewilds.blogspot.com/2013/02/raising-minimum-wage-mistake.html

[Jack]

Jim K. Agreed! Govvie can't make everyone a $100/hour guy by fiat. But where is the sweet spot? A few years ago a study in OK (a generally low cost of living state) concluded that a min "living wage" inclusive of some amount of H/C was about $18, perhaps $20 today.

But were we to mandate a min wage close to that figure, I'd agree that we'd see negative changes in employment. (These may be good changes.... if they took place over time. Arguably we're greatly "over-retailed" and coffee kiosks are as numerous today as apple sellers in third world nations. We'd be better off with fewer marginally profitable retail operations "subsidized" by low wage retail clerks -- but not all of a sudden.)

So... the sweet spot would be that of shooting for that $15-$20 range target over some period of time..... 7 years?

One more on "inflation adjusting" a min wage? Suppose those of median income ($52,000 per household) had an automatic COLA adjustment for 5% inflation over a couple of years. That's $2,600 more each year. The same 5% increase for the $16,000 min wage guy is but $800 with the gap between, even median wages and min wage growing dramatically.

[Jack]

Ka you make some good points, but in the case of the min wage and many other lower wages, the "equilibrium" is not discovered as the wage is not tested in the market.

For example if I were to sell a used car, I might hope for "high bluebook" due to it being a nice car. But! if it's a time of year when cars don't sell well, or the market is stagnant due to too much unemployment, I'll have to lower my price to undercut some other seller's price. If I'm patient, I'll "discover" something very close to market price. If in a hurry, I'll have to take less than "market".

Today, NONE of this price discovery is taking place for low income unorganized labor. Instead we hear "What are "they" paying?" And what "they" are paying is what is comfortable (or mandated) for them.

As we've been discussing here, we, none of us, know just how far one could push the min wage before seeing substantial resistance to hiring. In another post here, I speculate on when Taco Bell would get rid of their "window guy".

What would a fast food spot grossing a couple million a year do w/o the window guy? Would they opt to do less biz by combining order taker and food handler? Would $11 be enough to trigger changes in staffing? I suspect the response would be between "not much" and nothing, but with lots of wailing and kvetching.

[Jack]

Dan J> Subsidizing low wages is one of the worst things we can do.. though we are already doing a LOT of it.

Sometimes, often really, one way to check an economic policy is to take it to the extreme. For example, suppose the government offered a 100% wage subsidy. What would happen is we'd ALL rush out to open retail shops, coffee kiosks and mechanic shops as fast as possible. If we got enough biz to pay the rent and utilities and a bit for the owner, we'd open yet more.

Dial it back to a 25% subsidy? 15%? and you get similar market distortions. So, Nope! one of the tasks and power of capitalism is that of EFFICIENTLY deploying capital and labor. The subsidy destroys that efficiency.

[Jack]

Terry: There have often been suggestions to pay teens a sub-min wage, but so far we've resisted it for a number of reasons.

Your proposal creates a profitable discount for the employer for hiring those under 25. You may be right that 50% are under 25 but that means the other 50 are over 25. Thus you'd tend to create a rush for the young-uns at the expense of those over 25 in a nation stuck with high unemployment rates.

Worse yet.... those under 25 aren't there to apprentice as burger flippers; they too need a wage to pursue their educations or just to eat and house themselves.

Wrong direction. What's left of America NEEDS higher wages at or near the bottom and middle, not lower.