Tag Archives: minimum wage

Revisiting Minimum Wage Debate

Not long ago, I wrote about minimum rate debate in my blog post, Expensive tool: Minimum Wage to Meet the Targeted U.S. Inflation, I recognized that the title of the blog was misleading readers. What I intended to deliver was increasing minimum wage is not a good solution or rather insignificant solution for helping U.S. inflation rate to rise in the long term. However, I believe that raising minimum raise will have a definite impact on raising inflation on a longer term. In my previous blog post, I have illustrated why increase in minimum wage will push up the price level, thus Consumer Price Index (CPI) will also doubtlessly go up. Today, I would like to reiterate an important point made by Michael Saltsman, who was an undergraduate student in our school. Michael wrote, Why Subway Doesn’t Serve a $14 Reuben Sandwich inside of WSJ and made a distinct point that is worth mentioning for the last class blog post.

According to the article, Costco, Michigan-based deli Zingerman’s , and East Coast burger chain Shake Shack  were recognized during the White House’s minimum-wage promotional tour. Michael then, argues these stores should be used as the well representative cases why the president’s plan to raise the minimum is not a good idea or promptly meets the wall of reality. For example, Costco can “afford” to pay a higher minimum wage to their employers because

“Costco charges its customers as much as $110 a year for the privilege of shopping at the store. That’s a $2 billion-per-year luxury no grocer or restaurant enjoys. As a result, the warehouse retailer rakes in what amounts to a more than $10,000 profit per employee, according to data from business research company Hoovers. A casual dining restaurant, on the other hand, earns a roughly $2,000 profit per employee, which explains why most businesses aren’t following the president’s “just be more like Costco” advice

For small business, not like a Michigan-based deli Zingerman’s where president stopped during his visit to our campus last month, it is also very hard to afford higher minimum wage without losing their customers. I will present the same examples which Michael used in his opinion page. Imagine you have to pay $14 for the subway foot-long sandwich, of course the assuming that quality of sandwich is directly related with the cost, or pay $14 for a Double Quarter Pounder at the McDonald. I cannot count how many meals I have to skip in order to meet my budget constrain during my academic year. The point is that in order for the owner of subway to pay their employees the higher minimum wages of $11.50 like Costco or Zingerman’s, the food price have to be as least twice expensive than the current price, otherwise business has loses customers and its competiveness against other business. When government forces higher minimum wage law, either the quality of food has to go down in order to compensate the higher wage, or person like me, have to skip a few meals because it is just too expensive. Thus, personally I prefer that minimum wage stays the same or just gets raised within the range of 5% to 10%. Otherwise, we are going to see more negative side effects.

P.S. This is the last blog post for the course. I would like to thank our classmates for the comments on my blogs, and our GSI, Ryoko Sato for reading all of the blog posts.

How to cut the costs of a higher minimum wage

Robert Stack is the president of a non-profit called Community Options, which aids the disabled in finding housing. Most of his revenue comes from Medicaid payments. In an article in the Wall Street Journal, he claims that a minimum rate hike would be devastating for his organization:

If President Obama’s advocacy for increasing the minimum wage succeeds, without a calibrated increase in Medicaid rates, we would be forced to shut down in most of the states where we pay $8 an hour. Why? Because the increase would add $3.1 million to our costs. […] Even if my executive staff works for free, that would still not cover the cost. We’d have to pull out of states like Texas, Kentucky, Tennessee, New Mexico and South Carolina, and we’d never open in Mississippi, where we know that our organization’s services are much needed. Other states in which we operate, such as New York, New Jersey and Pennsylvania, will see services compromised, as there are caregivers we now employ who will gravitate toward other industries, like food and hotels, where the pay will be higher.

Okay, obviously it is tough to judge the validity of testimonials like this. Any organization with low-wage employees have an incentive to, if not lie, exaggerate the harm that would be done to them if the minimum wage were increased. And let’s be real — is his organization really going to have a worker shortage because workers will gravitate elsewhere? If that isn’t happening now, why on earth would it happen if the minimum wage increases? Moreover, even places that pay low wages do not really struggle to find employees. There is always someone looking for a job.

That said, this article made me wonder if the non-profit industry would indeed be most hard-hit by an increase in the minimum wage. If an organization truly makes no profit, then any increase in cost would have to somehow translate to a decrease in services.

However, I believe there is a solution to this problem (or at least a way to lessen the pain that it may cause). As it turns out, most of the people that earn the minimum wage do not live in poverty; in fact, 63% of those who earn the minimum wage are second or third earners in households who’s income is more than three times the poverty income. It seems to me that a way to majorly cut the costs of a minimum wage increase would be to only offer it to those who really need. Indeed, it would not be all that difficult for an employers to acquire income tax paperwork from anyone who wished to receive the higher wage. Of course, to prevent hiring discrimination, employers would have to wait until after they have hired a person to determine if they are eligible for the higher wage.

Actually, something like this already happens in Michigan; if you’re under a certain age, you only have to be paid a fraction of the minimum wage the adults get. So it must be feasible legislation.

I won’t try to claim here exactly who should be eligible for a higher minimum wage, but it’s something to think about.

Post-Recession Trend in Household Income

Despite the improving economy since the recession of 2008-2009 and although household income has begun to recover, the median household income in the United States still remains about 6% below the level that it was at when the recession began. As you can see from the graph generated using FRED, since the end of the recession, real household income has declined for nearly all population groups.

FRED

That is, for all but the most highly educated and affluent Americans, incomes have stagnated. In fact, the figures reveal that the income of the median American household today, adjusted for inflation, is no higher than it was for the equivalent household in the late 1980s. At the end of 2007, the real median household income was nearly $54,000. Five years later, in 2012, it was now just over $51,000.

Since the recession ended in 2009, those that have experienced income gains are almost entirely the top percent of earners. Those at the bottom percentage, on the other hand, have been affected by factors such as high rates of unemployment and nonexistent wage growth; thus seeing a decline in their household income. If minimum wage were to increase, this could help out households with lower incomes, especially those that are below the median.

An increase in minimum wages would also lead to an increase in purchasing power for these middle class and lower class households. While a little income inequality could be a good thing, too much income inequality does not allow for the middle class to get anywhere, no matter how hard they work. This can contribute to the slow recovery of the economy in that there is not enough purchasing power in the middle class and thus not enough demand for the goods and services available. So, if productivity rises and wages do not, we have an oversupply and the economy can’t function.

Not only did we see a drop in household income, but the share of people living in poverty hit 15.1%, the highest level since 1993, and a staggering 2.6 million more people moved into poverty, the most since Census began keeping track in 1959. Just think about all the high school graduates who were looking to go straight into the workforce or even college graduates looking for their first full-time job. The poverty level would even be higher if so many 20-30 year olds were not living at home with their parents. “It’s premature to say this is a permanent change, however,” says economist Michael Pakko. “We’re still dealing with a severe recession and a slow recovery.”

Minimum Wage Impact

This isn’t my first blog post about minimum wage, however with the debate continuing on in Washington I think it is important to come back to the topic and look at it from new angles.

Personally, I think minimum wage should be raised from its current level of $7.25. I don’t have an opinion on how high it should go I just believe it is to low currently. I also am very aware of the economic impact that raising the national minimum wage could have and in previous blogs have claimed that test markets could help fully understand the impact of increasing minimum wage.

In the Wall Street Journal I recently found an article on the impacts of increasing minimum wages in individual counties. Its clear that theres not one change resulting from the increase in minimum wage. Consequences vary from county to county, and differ from business to business. Some of the changes were to the product side of the business, while other changes impacted the human capital aspect. Some businesses surveyed said they had to cut back on hours they assigned employees while others said they closed marginal stores to compensate the raise. Other impacts included using less shortening in the fryer at White Castle, and cleaning the drive through lanes less often to make up for increased wages.

The US hasn’t risen the national minimum wage since July of 2009, when it was raised to its current rate of $7.25. Today law makers are arguing weather or not to raise it 40% up to $10.10. The raise will most likely reduce US employment by 500,000 jobs, however it will take an estimated 900,000 people out of poverty.

In my opinion the law makers should agree on the raise of minimum wage. Convincing anyone that a law resulting in 500,000 people losing their jobs can never be a good thing. And normally I am not one to argue a case of the ends justifying the means, however I think this is a unique situation. Since the beginning of 2014, the US has reported about 500,000 new jobs, or a number equal to that of what we expect to lose with a wage raise. A 3 month set back in the employment sector will likely set back the overall economy, however with its current state I don’t think the set back will outweigh the potential growth. My other reason for being in favor of the raise is peoples ability to adapt. Businesses already found ways to compensate for the wage raises by increasing menu prices and altering ingredients. After an overall wage increase they will adapt and move on. You may find lower quality products, or longer lines for service, however if you are willing to pay a premium you will be able to find products that are still at a higher grade.

Minimum wage vs Unemployment: A Historical Approach

As President Obama continues his cross-country tour encouraging a raise in minimum wage, there is a lot of speculation as to how the change would affect the minimum wage in America. Of course, where better to look than history to see how increases in minimum wage have affected the short-term unemployment rate in America.

The below graph shows FRED data on the civilian unemployment rate across time, along with data points I’ve added to show where the minimum wage was increased by more than 10%. The proposed increase to $10.10 from the current rate of $7.25 would be the second largest change in history, compared to an 88% change in 1950 (the 1950 increase took the wage from $0.40/hour to $0.75/hour).  More detailed information on other wage increases can be found in the table I’ve created.

FRED_unemployment

So what have we seen from rate hikes in the past? There are a couple important trends to consider. First, there has been a much more noticeable increase in unemployment for recent minimum wage increases. Since 1990, 5/6 (83%) of rate increases have resulted in a short-term increase in unemployment rate. In addition, all five were prior to or during a recession – a bad sign for those in favor of increasing the rate once again. Oddly enough, the other big rate increase, the aforementioned 88% hike in 1950, actually was turning a huge decline in unemployment. The wage increase’s timing significantly helped, as it was during a cyclical boom following the late 1940s recession.

The big question mark from this data is how today’s mark compares to a wage in the cents. Is data from the 1950s relevant for today? While history’s tales often tell true, it is always hard to justify comparing what seem like apples to oranges. When considering the trends mentioned above since 1990, it may be safer to take the successful increases of the 1950s with a grain of salt.

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However, while similar increases have seemed to spark or worsen recession periods in the past quarter of the century, trials seem to tell another story. The Wall Street Journal reported today that the city of San Jose hasn’t experienced job loss after moving the minimum from $8 to $10. After the announcement that the wage would move, there was a sharp reaction resulting in many layoffs. However, once the change went through, things quickly leveled out and there was a similar reaction in the positive direction. While it is dangerous to take this small sample too seriously, it could provide evidence that minimum wage workers are going to be needed, even at higher salaries.

The Congressional Budget Office has estimated that while there will be approximately 500,000 finding themselves without a job, the wage increase will bring almost a million out of poverty in the United States. But before we make one of, if not the most, drastic change in minimum wage in history based on economic models, it is important to view the negative consequences that have been so frequent in the recent past.

Expensive tool: Minimum Wage to Meet the Targeted U.S. Inflation

On April 8th, WSJ posted a nice article, As Wage Debate Rages, Some Have Made the Shift, about recent debate about minimum wage debates.  According to the Merriam-Webster’s online dictionary, minimum wage is defined as following:

An amount of money that is the least amount of money per hour that workers must be paid according to the law

And the law says “the federal minimum wage provisions are contained in the Fair Labor Standards Acts (FLSA). The federal minimum wage is $ 7.25 per hour effective July 24, 2009. Many states also have minimum wage laws. Some state laws provide greater employee protections; employers must comply with both”

I assume that most of people who read this blog post are aware of the common argument in support of the minimum as well as the other side of arguments. However, I would like to reiterate one main point from each sides of argument. For the supporter’s side, they want to make sure the people who sit at the lower level of socio-economic standing to have some purchasing power to live healthier life. On the other hand, the other side argues that minimum wage law hurts those same people, because the market adjusts to the increases fairly quickly and it returns back to us as the increase in the real price tags. Today, I am not trying to pick a side but to mention the fact that it is expensive tool, (not recommended), which Fed can use when it needs of meeting their inflation target. In U.S., inflation has been hovered bellowed 2% mark. Fed wants to meet their goal of 2% inflation target while holding Federal fund rates close to zero. Because, this way, Fed can achieve their goal of stimulating economy more effectively than 1% inflation rate considering the Zero Lower Bound problem. However, I do not recommend that use minimum wage increase to meet their goal. I am not saying Fed wants to do so, yet you never know why things are happening in real life. Thus first, here are some of examples from the article, why raise in minimum wage pushes up the inflation rate.

Here is some of testimony which WSJ interviewed:

“Our business is a penny business,” he said. Overcoming higher labor costs “ultimately comes down to pricing.”Last year he raised prices 5% across all his restaurants, which span Fresno to the Bay Area, and said consumers haven’t flinched. Due to those price increases, he said, profits haven’t been hit by San Francisco’s escalating minimum wage.

Another saying that

Patrick Renna, CEO of boloco, a 22-unit burrito chain based in Boston, pays starting workers $9 an hour. State lawmakers are considering raising the minimum wage to as much as $11 an hour from $8 an hour. To offset labor costs, he has raised prices three times since 2010.

I presented cases in which price level gets increased to point out the cost of products often adjust to upward in order to offset the increase in wage cost. In addition, it seems from the article that rises in minimum wage made many workers happier, because of increase in wage. Trade off to gain higher inflation rate and save thousands of people out of poverty seems bit expensive to me, Congressional Budget Office estimated that raising the minimum wage to $10.10 an hour would reduce U.S. employment by 500,000 but lift 900,000 Americans out of poverty” Now we can hope that government use this force of inflation push wisely and create better jobs for 500,000 people whom lost their job due to the minimum wage increase.

President Obama comes to town

The big news in Ann Arbor today is the Presidential entourage that can be found on Hoover Street, the site of the Intramural Sports Building where President Barack Obama is speaking about his proposed increase in the federal minimum wage. The President’s proposal is to increase wages to $10.10 across the country in order to increase the ability for families to escape poverty. The jump is significant – a 39% increase from the current rate – and could drastically change the scope of the job market.

I have written a few posts about this proposed increase in wage (you can find the most recent one here). However, rather than continuing to examine the President’s plan, I want to offer a new resolution to the issue. First, it is important to realize that the United States is a vast and diverse country. Trying to pinpoint a single fair living wage for those in Manhattan and those in rural Iowa is impossible. Simply look at the cost of living map below to realize how a single wage point wouldn’t make sense.

uscostofliving

So if $10.10 across the board isn’t the answer, what is? There is a definite need, at least in the majority of areas in the U.S., to increase the minimum wage. It’s simply not feasible to live working 40 hours a week at a weekly gross income of $290. To some extent, the current system is performing as it should. 13 states voted to increase their wages at the start of 2014. However, a solution is needed to solve the urban vs rural disparity. One reasonable answer is to leave it in the hands of the local city governments. If the city of Ann Arbor and its residents determine that a $10 wage is right for the community, it makes sense to change it. In the meantime, the neighboring city of Ypsilanti, where costs of living are lower, could go on offering wages at an $8 level. This allows the natural supply and demand forces of each individual market to work and find the equilibrium price point.

In a complex United States economy, it simply isn’t possible to solve problems with a “one-size-fits-all” solution. It is important that our government allows the system to work, and for local issues to be solved with localized solutions. While our President’s efforts to help bring struggling families above the poverty line is valiant, the true solution is to encourage cities to find the wage that is right for them and give them the tools to do so.

Mankiw: The Scientist is also the Philosopher

In his New York Times post today, Harvard economics professor Gregory Mankiw wrote that the “dirty little secret” of economics is that policy recommendations nearly always include political viewpoints as well as economic analysis. While this should come as no surprise to Michigan economics students, it does present a serious discussion of how economic data is presented.

Mankiw brings up the Democratic position as being for societal good. Decisions are made that may not be beneficial for all, but can help a majority. To demonstrate this, he gives two moving examples.

“Imagine that you are on a bridge and see a runaway trolley car below you, hurtling toward three children playing on the tracks. A fat man is standing next to you. You can push him off the bridge and into the path of the trolley, killing him but saving the children. What do you do?”
– Mankiw (2014)

In this scenario, with relatively clear protagonists (innocent children) and what Mankiw paints as an antagonist (a fat man – note that including the description of being fat does nothing but decrease the value Mankiw wants to portray on this man’s life), Mankiw argues that many wouldn’t hesitate to save the children. However, he gives a second example that makes the decision cloudier.

You are a doctor with four dying patients. One needs a new liver, one needs a new heart, and two need a new kidney. A perfectly healthy patient walks into your office for his annual checkup. Are you still willing to pursue the utilitarian course of action? – Mankiw (2014)

In this second example, Mankiw argues that it is harder to make the decision to sacrifice one person’s life for others due to his natural rights. So how can we translate these sensitive personal decisions into a person’s economic beliefs? Mankiw references the Affordable Care Act, which ended many people’s perfectly good health insurance plans in order to make insurance available for others. For some, especially in rural areas, insurance costs have increased by more than 100%. Small businesses have had to significantly add to their expenses by offering insurance to their full-time workers. Overall, the question for what to look at comes back to whether the ACA was a utilitarian decision – helping Americans get access to previously inaccessible coverage – or unfair to people perfectly happy with their coverage.

With so much data, it is more important than ever to understand the motives behind the numbers. Has the data been “cooked” to fit the argument? One example that I believe is a perfect example is the argument for increasing the minimum wage. Even in our class blog, articles have been posted which reference data supporting both sides. My own prior post references that a raise to $10.10 would reduce the quantity of low-wage jobs by 16%. This recent revised post, on the other hand, argues that the same increase wouldn’t reduce the amount of jobs available. In both cases, Mankiw is spot on when he stresses the importance of understanding the purpose of the data before interpreting the results.

Undermining the Fed Through Minimum Wage

While reading The Wall Street Journal yesterday, I actually laughed at the content of one particular article.  The title was both intriguing and promising: “Just One Large City Saw Unemployment Rise From Last Year.”  Upon opening the article, I saw the graph shown below, with the title “Not Always Hot in Cleveland.”  As a Michigan fan, I laughed – just another reason why Ohio is an awful place.

Screen shot 2014-03-22 at 11.34.11 AM

But while my biases made this article funny, the content of the article was actually quite inspiring.  On a national scale, unemployment fell over 1% from January 2013 to January 2014.  And in bustling metropolitan areas like Charlotte, unemployment dropped by more than 2.5%.  This data seems to suggest that while the Fed’s easy money policy has been slow, it is indeed working.  Slowly but surely Bernanke, and now Yellen, are pulling America out of its hole.

Unfortunately, I believe the federal government is on track to undermine all the hard work that the Federal Reserve has put in since 2008.  By raising minimum wage to $10.10 from its current rate of $7.25, the federal government will likely slam the brakes on the Fed’s steady progress.  A recent survey by Express Employment professionals shows that of the businesses currently paying minimum wage, more than 50% would slow hiring in the event of a minimum wage hike.  Furthermore, 38% of these businesses would lay off currently employed workers.  According to the Congressional Budget Office, the proposed $2.85 minimum wage hike will cost the United States 500,000 jobs by Q3 2013.  At a time when employment is really starting to recover (except for in Cleveland), I am fearful that an increase in minimum wage will cause the economy to stagnate, thereby undoing the Fed’s hard work.

Screen shot 2014-03-22 at 11.34.24 AM

It is true that the Congressional Budget Office also predicts that an increase in minimum wage will help pull 900,000 Americans out of poverty by boosting income levels.  And certainly, reducing poverty is an extremely important goal.  However, I believe there are alternative ways to address income inequality that are less likely to undermine the stimulus enacted by the Federal Reserve.

I have already written numerous posts on addressing income inequality, and what I believe is a more important issue – income mobility.  (See “Using Skilled-Trade and Manufacturing to Rebuild the Middle Class,” “Drill Baby Drill: Addressing Income Mobility With Energy Production,” “Forget Minimum Wage – Let’s Talk about Wage Subsidies,” and “How New Immigration Policy Can Save America’s Economy“)

The majority of these posts focus on increasing the economic mobility of the poor so that they can have access to higher paying jobs.  I believe this type of policy is significantly better for the US economy because it avoids the level of deadweight loss that raising minimum wage will have.  Indeed, a boost to minimum wage is very similar to a tax, and the policies proposed in the articles above behave much more like subsidies.  While it is true that a subsidy, by definition, will cost the federal government more money than a tax, it is also true that a subsidy results in significantly less deadweight loss.  And at a time when the economy is just beginning to see the light of day, leaving any economic value on the table seems like a terrible idea to me.  For this reason, I strongly oppose raising minimum wage, at least currently, as doing so will undermine the efforts of the Fed, cause stagnation in employment rates, and hinder this country’s economic recovery.

The minimum wage can have major effects (revised)

Minimum-Wage-kitty-520x292

Last time I wrote about how in reality, the minimum wage in America is so low that it can’t even get the average person working full time earning it out of poverty.  It is low enough that some think it may be acting as a barrier to social mobility, a defining trait of the United States.  By considering what has happened in the past after wage increases, it will be clear that the only negative effects of increasing the minimum wage is on measurements of poverty.

While It seems obvious that increasing the minimum wage would decrease poverty (the wages increased, not the poverty level), there are those that argue it will have a negligible affect, since many poverty stricken people don’t work for the minimum wage.  Even though the increase can’t end poverty, as we will see, it can have an effect on it, and can therefore be an effective tool for addressing it.  Economic theory also predicts that with an increase in the price of labor the demand for labor would decrease, resulting in lost jobs.  This notion is not consistent with past results of minimum wage increases.

First, Consider Washington, the state with the highest minimum wage in the country at $9.32/hr., with future increases tied to the consumer price index.  Surely such an extreme example should support the assertion that increasing the minimum wage results in lost jobs.  In the 16 years since the law went into effect, Washington has been above the national average with respect to job growth.

Perhaps Washington was a fluke.  An even more extreme example can be found in San Francisco, which has gone to an inflation adjusting $10.74/hr., the highest minimum in the country at any level.  In addition it has laws requiring paid sick leave and health care spending.  What it doesn’t have is the predicted job loss. This can be seen in the following graph, which tracks the effect on the San Francisco restaurant industry, which employs the largest amount of minimum wage employees.

2023116010_t670As can be seen, it tracks the surrounding counties quite well, showing no large deviation, except perhaps a small increase of hiring after the addition of paid sick leave. Since San Francisco’s minimum wage laws don’t bind the surrounding counties, it is clear that the increased minimum wage, along with other benefits, have not resulted in job losses.  If two of the most extreme cases of minimum wage increases have not resulted in less jobs, there is little support to think that lesser hourly rates would result in any significant losses.

There are less surprising results for the economy, government spending, and businesses.  In this letter from the Chicago FED the effects of a $1.75 hike in the minimum wage are analyzed.  It finds that such an increase could lead to an increase in aggregate household spending, even after accounting for spending that was lost to increased costs.  Additional research also estimates that an increase in the minimum wage could result in a decrease in government spending for the SNP program (food stamps).   A growing collection of research shows that businesses that pay a higher wages receive less theft, higher productivity, and increased worker retention.

Having seen that increasing the minimum wage won’t harm society, we consider the economic outcomes of the workers themselves.  Research by Dube provides insight into how such increases have affected workers in the past.  Tracking the effects of the minimum wage on the distribution of family income from 1990 to 2012, he finds that the coefficient on the elasticity of the poverty rate is a statistically significant -.24.  Also statistically significant (at the 1% level) is the -.32 and -.96 coefficients on the poverty gap and gap squared terms, measures of how poor the poorest families are.  This provides evidence that “…minimum wage increases do not reduce poverty by merely pushing some families above the poverty line, but rather by increasing incomes substantially and further below the poverty line.”  More concisely, increasing the minimum wage decreases the portion of the population in poverty, as well as the depth of poverty.

Increasing the minimum wage is one of the most effective tools the federal government has to fight poverty.  The minimum wage should be increased to at least the same $10.10 an hour earned by federal contractors.  Past experience has shown that this will not result in the job loss that is threatened by businesses.  It is time for the United States to take the steps needed to guarantee that a full time worker makes a wage they can live on.