Tag Archives: minimum wage

Poor man’s game theory

Happy St. Patrick’s Day!  Due to the holiday, I am holding off revising a previous post for when I can give it a more thorough treatment, and will instead motivate that post with this one.  The report “Work vs. Welfare” from the Cato Institute tries to assert that the welfare system in the United States provide such lucrative benefits that there is a disincentive to work.  This couldn’t be more inaccurate.  After correcting some of the paper’s mistakes, it will be clear that the solution is not to cut welfare benefits, but raise the minimum wage.

The 2013 report inflates the figures as much as possible; every number is the maximum possible award for that program.  More over, it assumes that every program is qualified for.  I am not sure if such a person exists!  There is also no mention of the time limits on some of the benefits.  While SNAP (food stamps), and many of the other programs have no limits, the much-maligned TANF (cash assistance) is limited to 24 months consecutively, and a lifetime limit of 60 months.  This cash assistance can’t be a significant incentive not to work, as it truly is temporary (Thats what the “T” stands for!).  It is also questionable to consider Medicaid, since even if they where working they may still receive it. Also, no other measures of income (hourly wage, salary, ect.) include healthcare.

Adjusting for these values, we get a more accurate picture.  Using the same family of three used in the paper, and taking Michigan as an example, we see that the amount available to entice people away from work is 5868(TANF) + 8344(Housing) +980 (WIC) + 750(utility credits) =15,942.  The poverty level is 19530.  Adding back in the temporary cash benefits of $6,312 provides $22,254.  In actuality the Cato’s Institute’s typical welfare family is spending time falling in and out of poverty with the availability of their cash benefits, assuming of course they qualify for the maximum in every single program.

Breaking this down to hourly rates, we see that on cash assistance, working 40 hours a week (the national average is 34.2), and working every week in the year, the family make $10.70/hr, and when they are without the TANF money, the family makes $7.66/hr.  The minimum wage in Michigan at $7.40/hr.

The minimum wage is far to low in the United States.  While the above analysis shows that it is technically possible to beat the minimum wage with benefits, even at the maximum amount it is only by 16 cents an hour, which is not much of an incentive.  What it does show however is a drastic shortcoming in the minimum wage.  Franklin Roosevelt championed a minimum wage as a living wage, proclaiming “No Business which depends for existence on paying less than a living wage to its workers has any right to continue in this country.”  In my next post, I will consider the economic ramifications of a minimum wage that would ensure the average full-time working American at such a wage would exceed the poverty threshold.

Increase the minimum wage to preserve social mobility

Greg Mankiw’s post this past Thursday regarding the minimum wage begs for discussion.  Perhaps it is because the post is nothing more then two links.  The issue of raising the minimum wage however is not that simple. Those that support an increase point to all the people that it could help, and argue that it wouldn’t cause damage to the recovery and may even help it.  Those that oppose the increase marginalize the effect and worry about distortions of the labor market.  While there is research to support the case that no negative effects would come from the increase, I feel there is a stronger case to be made.  While many are troubled by income inequality, I feel that a certain amount of inequality is both good and necessary.  What is far more important is social mobility.  The Federal Government should increase the minimum wage in order to maintain the social mobility that is critical to the United States economy.

Increasing the minimum wage can increase social mobility directly.  There is a lot of research to support the claim that an increased minimum wage results in things like increased productivity, higher employee morale, and increases employee retention.  Happy employees that are more productive and work at a job longer don’t stay entry level for very long.  By increasing the minimum wage, you can increase the workers chance of gaining the skills they need to command a bigger wage.  More money also makes it easier for them to make the decisions needed to get out of poverty, as research shows that those living in poverty actually suffer cognitive impairment because of it.  A little bit more of a margin for error could be all someone needs to be able to consistently make the decisions necessary to improve their life.

The current federal minimum wage is at $7.25/hr.  $7.25/hr. is low, representing roughly $15,000 a year, which is barely more then the federal poverty level for an individual of $11,670, before taxes.  Increasing the minimum wage to the requested $10.10/hr. may prove to have too much opposition, as the Congressional Budget Office predicts that could cost up to a million jobs through 2016.  In order to expedite the process by removing such arguments against an increase, an increase to $9/hr. could be implemented.  As the CBO paper shows, this would result in far fewer predicted losses.  It would also raise the annual income to $18,720/year, which provides a little breathing room above the poverty level.  It should be noted that states would still be able to increase their minimum wage if they felt conditions warranted an increase.  For instance, San Francisco has a rate of $10.74 (and an unemployment rate of 4.8%, well below the national average).  This reflects both the higher cost of living in the city, as well as the lack of negative effects of increasing the minimum wage, despite serious income inequality.

The opponents of the increase are right about something though. Increasing the minimum wage will not fix is poverty.  But this shouldn’t be the revelation that the opposition makes it out to be.  If minimum wage laws fixed poverty, then why are we still dealing with it?  Poverty is a complex social issue that depends on more then just income.  Increased social mobility can aid in the fight against poverty, by making it easier to better oneself and rise out of poverty.

The minimum wage in 1960 was $1.60/hr.  Adjusted for inflation, today that is $10.56/hr.  Increasing the minimum wage, and the benefits that come with it like worker retention and increased productivity increase social mobility by creating paths out of poverty.  Even though you can’t make someone take such a path, it must be available to everyone.  To encourage this, the minimum wage should be increased to at least $9/hr. in order to preserve the social mobility that has been a hallmark of the United States since it was founded.

[Revised] Lies, Damned Lies, And The Wall Street Journal

I never, ever have seen media this way. It’s almost indescribable. Making up stories, refusing to run real stories. It’s making themselves look like utter fools. There’s no journalism, there is no media. There’s pure, full-fledged advocacy here. – Rush Limbaugh

I’ve joked about the WSJ misrepresenting facts that don’t suit its ideology in the past, but what they think they can get away with these days is simply not funny anymore. Let me present to you two recent examples of exceptionally poor journalism in the Journal. One is an article on CBO and the minimum wage, the other on the 2009 stimulus bill. I’ll take them in turns.

As you’ve probably noticed, CBO’s estimates regarding the impact of raising the minimum wage to $10.10 are making the rounds (even on our class blog). Here’s what the Journal has to say about this:

CBO estimated that President Obama’s latest proposal—$10.10 by 2016 from $7.25 today—could cost half a million Americans their jobs…

the CBO estimate [stated that] that 16.5 million workers would get a raise, and that some of those would therefore climb above the federal poverty line…

“many low-income workers are not members of low-income families”…

overall real income would rise by $2 billion,” says the CBO study. That’s out of an economy of $16 trillion…

President Obama is pitching a higher minimum wage as a matter of economic justice […] as the CBO report shows, for many of the poor it will merely push them out of the job market and even deeper into poverty. (emphasis added)

Sounds pretty bad, doesn’t it? The minimum wage will impoverish the United States! And that’s coming from a “Democratic-run budget shop” such as CBO! That’s one devastating report, huh?

Except that when you look at the actual CBO publication, you’ll notice that it’s not just about 500,000 people (potentially) losing their jobs. It’s also about 900,000 people being lifted above the poverty line on net (“some of those”, indeed). So CBO isn’t saying that raising the minimum wage is a crazy idea, and that liberals are really, really stupid for proposing it. It’s saying that there is a trade-off involved. It’s also saying that all told, the total number of people below the poverty line would decline!

All told, there are pros and cons to raising the minimum wage, and we could have a sensible debate about it. That is, if the WSJ wasn’t actively trying to only tell half the story. I’m just waiting for them to change their slogan to ‘fair and balanced‘.

The piece on the stimulus bill is right along the same lines (for a much better discussion than the Journal has to offer, I refer you to our class blog):

The $830 billion spending blowout was sold by the White House as a way to keep unemployment from rising above 8%. But […] 2009 marked the first of four straight years when unemployment averaged more than 8%…

The Obama White House had been egged on by liberal economists like Paul Krugman, who in November of 2008 recommended a stimulus of at least $600 billion…

Those stupid, stupid liberals again, getting their economics all wrong. Except that Krugman has said and continues to say that the stimulus should have been bigger. That’s what proposing a minimum means, you see!

Also, what’s this about 8% unemployment, and how it’s related to stimulus being a big, big failure? Let’s take a look:

This clearly shows that stimulus failed, right? If you can’t see it, you should stop questioning right-wing doctrines, you liberal ignoramus don’t worry: it’s not there. That graph shows no counterfactual whatsoever. There’s no way to infer from this what unemployment would have been like without the stimulus.

I think unemployment would’ve been much higher. I think so because there are models that predict this. I think so because there’s empirical evidence for it. But hey, estimating this stuff is difficult. If you’re using a different model, you might disagree. The Journal, however, simply claims that stimulus is nonsense without giving any justification whatsoever. That’s dishonest, cheap, and if you did it in a term paper, you’d get an F.

The Journal also criticizes that the stimulus money was spent on “stupid” things, such as education and studies about youth drug & alcohol abuse and college sex life. Feel free to form your own opinion about how stupid and pointless that was for a country that’s dealing with dismal PISA scores, 88,000 alcohol-related deaths per year and college rape on the rise.

But of all the nonsense expressed in those two articles, this takes the crown:

The failure of the stimulus was a failure of the neo-Keynesian belief that economies can be jolted into action by a wave of government spending. In fact, people are smart enough to realize that every dollar poured into the economy via government spending must eventually be taken out of the productive economy in the form of taxes. The way to jolt an economy to life and to sustain long-term growth is to create more incentives for people to work, save and invest. (emphasis added)

Not only is this a claim that Ricardian Equivalence is literally true, which is most certainly false. It’s also a claim that you want to encourage people to save more in a depressed economy, which is the complete opposite of what you should be doing (and would’ve cost you points on question nine of the midterm).

All this betrays a deep, deep ignorance of economic theory and evidence, and a lack of journalist ethics. Why are we reading the WSJ again?

CBO’s Ambiguous Minimum Wage Statistics

The Wall Street Journal, New York Times and Washington Post all reported about the CBO’s recent minimum wage report. There is one important piece of information to take away from it. If the government were to raise the minimum wage to $10.10, 16.5 million people, who work low-wage jobs will have better salaries, but 500,000 people will lose their jobs. Annie Lowrey of the Times mentions that it would bring 900,000 families out of poverty.

If one were to analyze these numbers, a few conclusions could be drawn. One of them being that millions of people will have better salaries to live off of. Another conclusion is that 900,000 families will be lifted out of poverty, but 500,000 people will lose their jobs. Let’s assume that the families of the 500,000 people, who would lose their jobs, would sink into poverty. Using simple math, we could conclude that 400,000 fewer families will be under the poverty line. That is the way I see it.

This can be construed in two ways. On one hand, it does seem that this raise in the minimum wage would save more people than it would hurt. It would also reduce poverty in the country. 400,000 fewer families could be saved from poverty. This could mean that consumption would be stimulated and the economy could recover at a better rate than it has recently.

On the other hand, 500,000 people will lose their jobs. This will add to the nation’s existing problem that is unemployment. This has been a problem since the recession, so about five and a half years. The unemployment rate could rise to a dangerous level. It would not be fair to the those 500,000 families who sink into poverty because their breadwinners lost their jobs. It would be reasonable to think that these families would view the results of this new wage to be unfair. Essentially, this could create a vicious cycle of poverty and unemployment. Some people could be saved with a higher wage, while others end up paying the price.

In my opinion, this raise in the wage seems like a bad idea. Although some families are saved, others end up suffering. There is a trade-off between poor families and families to be lifted out of poverty. A family that ends up experiencing negative effects of this wage will wonder something along the lines of “why me?” or “what did I do to deserve this?”. We cannot make people better off without making others worse off.

 

(Revised) The New Minimum Wage at $10.10 (!!)

President Obama signed an executive order on February 12 to pull up the  minimum wage for the federal government workers and contractors from $7.25 to $10.10 dollars. Despite some Republicans’ resistance over this issue for the concern that firms would be discouraged from hiring more workers, the wage indeed rose $2.85. Even at a first glance, we can see that this is a huge jump. Historically speaking in absolute terms, there has never been a increase in minimum wage more than one dollar. In relative terms, the increase we see today is 28% compared to previous increases that just lingers around 10% at most. (For more data on minimum wage see here)

Ever since the Fair Labor Standard Act of 1938, there has been gradual increase in minimum wage from $0.15 to today’s level. The natural course for scrutiny would of course be adjust these levels to inflation and see how much real wage workers earn. It turns out that real wage has been gradually decreasing into the mid-2000′s and after 2008 recession, there seems to be a little upward movement in the real wage (See graph below).

Screen Shot 2014-02-12 at 7.08.56 PM

 

As many economics theory points, the real measurements are the ones that really counts. In December of 2011 a Bloomberg article that included this graph stated

“Hardship is increasing for lower-income levels, and the minimum wage reflects those at the lower end of the payroll spectrum,” said Ellen Zentner, a senior economist at Nomura Securities International Inc. in New York. “With those meager wages in place, it makes it hard to imagine families doing with even less.”

A jobless rate that has exceeded 8 percent since February 2009, the longest stretch of such levels of unemployment since monthly records began in 1948, is one reason why workers have little leeway to press for higher wages. Adding in part-time workers who would prefer full-time jobs, and discouraged workers who would take a job if one were available, pushes the rate up to 15.6 percent as of November.

The unemployment rate as of January is at 6.6% and with the new rise in minimum wage, this may be some evidence that US economy is indeed recovering. According to the Department of Labor, more than half of the people who are affected by this minimum wage has annual income over $35,000. And the rippling effect that would raise the wage of current workers’ whose wage is higher than $10.10 may increase this magnitude.

My only worry is for those who are at the left most end of the income spectrum or the unemployed. I should probably acknowledge that massive lay-off due to higher cost of labor is not likely. However, the cost has indeed rose 28% for many employers. I am afraid that hiring may slow down a little bit. Also keep in mind that it is only with firms that have government contract that are required to pay higher wage, meaning firms that do not is not required to pay such amount. This would lead to minimum wage disparity until the nationwide minimum wage is established. Would this not discourage some workers who were already working getting paid the same, all the while the new job seekers in similar fields enjoying the new benefits of higher wage? I don’t have answers to all these questions for sure, but one thing that I should say is the real wage incline is what the US needed and it is starting out slowly with the first targeted batch of workers.

 

(Revised) Time to Raise the Minimum Wage

It has been over four years since the last time there was an increase in the hourly minimum wage for workers in the United States. And it now seems like the time has come for the government to raise this amount from the $7.25 at which it currently stands. President Barack Obama among others believes that a minimum wage increase up to about $10.10 per hour can have an effect of lifting a sizable group of low-income workers above the poverty line. “Americans overwhelmingly agree that no one who works full time should ever have to raise a family in poverty,” Mr. Obama said. I, of course, am on board with this sentiment, but in my opinion, this would not be the only beneficial result of raising the minimum wage. Raising the minimum wage to $10.10 would not only be helpful for the poor, but for the lower middle-class as well. Such an increase would not hurt anyone in terms of loss of employment, and would have significant earnings effects.

Starting from my first point though, “an hourly minimum of $10.10, for example, as Democrats have proposed, would reduce the number of people living in poverty by 4.6 million, according to widely accepted researchwithout requiring the government to tax, borrow or spend.” So clearly this minimum wage increase would benefit a substantial group of people and significantly change their lives. Moreover, evidence from over the years utilizing wage effects across states demonstrates that minimum wage increases do not result in job losses. This alone would be convincing enough for me to hop on board with this policy change. However, as I mentioned, there would be at least one other favorable outcome from a minimum wage increase. Overall, an increase from $7.25 to $10.10 could total in a $4.0 billion monthly benefits yield. And while only about 11% of these benefits would be received by the working poor, and 25% by the poor (or near-poor) families, 62% would be received by households with incomes over two times the poverty level, and 40% by those with incomes over 3 times the poverty level. There are certainly people who would use this to argue against a minimum wage raise because the benefits are not mainly reaped by the lowest-income workers (those who the policy is meant to help). However, I see this as an even more advantageous result of such a wage increase.

If raising the minimum wage at this point in time would help out the broader working class as well as those living in near-poverty (or poverty), then that is all the more reason to put this increase into effect. It is not like those households with incomes just over two or three times the poverty level are living a life of luxury. They are still not making a ton of money and could certainly use these potential benefits as well. Furthermore, going by the most significant economic benchmarks (purchasing power, wage growth, and productivity growth), the current $7.25 minimum is much too low and even the proposed $10.10 minimum is still not high enough. That being said, the increase to at least $10.10 is necessary, if not to an even higher minimum.

Looking at it from a purely economical point of view, the extra money that households with incomes below three times the poverty level (60% of the monthly benefits would be received by this group) receive is very likely to be spent, which is obviously a good thing for everyone involved. This group of people get to have a bit of extra spending money (whether immediate, or a portion for the future to be spent on things like a college education) and the economy benefits as a whole from the extra money being injected into it. Certainly, the debate over whether to raise the minimum wage is a nasty one with no clear cut answer, but I truly believe that these main effects of an increase are reason enough to do so; nobody gets hurt, and many people benefit. It will definitely be interesting to see how this unfolds in the near future.

The New Minimum Wage at $10.10 (!!)

President Obama signed an executive order today to pull up the federal minimum wage from $7.25 to $10.10 dollars. Despite some Republicans’ resistance over this issue for the concern that firms would be discouraged from hiring more workers, the nominal federal minimum wage indeed rose $2.85. Even at a first glance, we can see that this is a huge jump. Compared to previous minimum wage increases, in absolute terms, there has never been a increase in minimum wage more than one dollar. In relative terms, the increase we see today is 28% compared to previous increases that just lingers around 10% at most. (For more data on minimum wage see here)

Ever since the Fair Labor Standard Act of 1938, there has been gradual increase in minimum wage from $0.15 to today’s level. The natural course for scrutiny would of course be adjust these levels to inflation and see how much real wage workers earn. It turns out that real wage has been gradually decreasing into the mid-2000’s and after 2008 recession, there seems to be a little upward movement in the real wage (See graph below).

Screen Shot 2014-02-12 at 7.08.56 PM

 

Like we have discussed in class multiple times, the real measurements are the ones that counts. In December of 2011 a Bloomberg article that included this graph stated

“Hardship is increasing for lower-income levels, and the minimum wage reflects those at the lower end of the payroll spectrum,” said Ellen Zentner, a senior economist at Nomura Securities International Inc. in New York. “With those meager wages in place, it makes it hard to imagine families doing with even less.”

A jobless rate that has exceeded 8 percent since February 2009, the longest stretch of such levels of unemployment since monthly records began in 1948, is one reason why workers have little leeway to press for higher wages. Adding in part-time workers who would prefer full-time jobs, and discouraged workers who would take a job if one were available, pushes the rate up to 15.6 percent as of November.

The unemployment rate as of January is at 6.6% and with the new rise in minimum wage, this may be some evidence that US economy is indeed recovering. According to the Department of Labor, more than half of the people who are affected by this minimum wage has annual income over $35,000. And the rippling effect that would raise the wage of current workers’ whose wage is higher than $10.10 may be increase this magnitude.

There are some other concerns that this increase in wage will not do too much to improve the near poverty line workers. However, I believe that with the real wage in decline for such a long time, this is a bold move by the government to improve life style of many households in the left end of income distribution spectrum. I also think that having a strong middle class is just as important as eliminating poverty line for the reasons I have explained in my past blog post here. Anyhow, despite worries that employers may be discouraged, I believe this will also improve the economy with higher income resulting in higher spending, etc.

 

Is raising the minimum wage a good idea?

The president proposed to increase minimum wage in the New Year, he suggested to increase it from $7.25 to $10.10. Actually this is not the first time for him to make such a call. Last year Obama also called for increasing minimum wage from $7.25 to $9. The president also pointed that lift the minimum wage can help to accelerate low-income people out from poverty.

Actually this policy will hurt those the government initially intends to protect. The minimum wage is not the poor-saving tool, any kind of over use of it may bring in the opposite effects. Some people argues that increase the minimum wage will also boost the unemployment rate, others disagree with that. So let’s check it out:

Min Wage

From this we can see that from the year 1979 to 2009, the minimum wage was kind of proportional to the unemployment rate. Whenever the real minimum wage steps up, the unemployment rate soars high, even the real minimum wage showed this patterns, too. The intuition behind is simple, whenever the minimum wage raised, the costs for employer to employ also increased, so employers tend to hire less workers. Also employers’ expectation for the new workers’ skills raised, which means they want new workers to be as skillful as the employees with higher wages. Then employers will find less people who are qualified for their requirement, so the employment rate declines as a consequence.

Obama was wrong because his original intention is to help more people from poverty, let’s forget about whether earn $3 more per hour will really help poor people a lot. However, for me the unemployment problem is much more significant and urgent. Having a job with $1 per hour is much different from jobless, and have two person both get a job with $5 per hour is better than pay one with $10 per hour and leave the other unemployed.

What’s more, raise the minimum wage will produce another serious problem; hurt the young workers. “Increasing the minimum wage is effectively creating a uniform, government workforce; one level, one pay. As we close the gap between minimum wage and a firm’s starting wage, we lessen the ability to hire younger untrained talent” Just as Richard Duncan remarked, “When the minimum wage increases, we put more demands on the outcome and performance of the new emerging workforce. This leaves youth and the entry-level workforce less opportunity to enter.” More and more young workers will have less and less opportunities as minimum wage raises.

I also think that adjust minimum wage is the kind of affairs that shouldn’t be manipulated by the government too much. We all know the story that Henry Ford’s $5-a-day revolution. Companies do have the incentive to raise wages once it is needed by the market. It is true that minimum wage is a good method for human right protecting purposes, but if it leads to higher unemployment rate then I think it’s not worthy to do it.

What Unemployment Rate Doesn’t Say

Let’s assume that proposed minimum wage increase to $10.10 is signed. Then according to very basic upward sloping supply curve, we would expect more labor supply. That means, there would be more people entering to the labor force from the pool of discouraged workers. These entering people wouldn’t find a job quickly. Therefore, there will be some upward movement in unemployment rate.

The point of this post is that if the minimum wage indeed increases and the unemployment rate increases, that isn’t necessarily be a bad, and the increase in minimum wage shouldn’t be blamed as much. On the other hand, the increase in minimum wage could overturn discouraged workers into labor force, and I believe that is not a bad.

Of course, there might be a direct effect of the increase in minimum wage on unemployment because companies would have to fire some workers when the minimum wage increases (I believe that is what people who are against the minimum wage increase are saying). What I am suggesting is that let’s not fully blame an increase in minimum wage if there is to be higher unemployment rate after this change in wage.

This argument is just to show that any certain change in only unemployment rate doesn’t tell the whole story on whether the economy is performing well. If we look at the recent unemployment rate which came out on Friday morning, 6.6% of unemployment is a good news for the economy. As I said on higher minimum wage’s effect on labor force participation rate, this change in unemployment rate could be caused by people going out of or getting in the labor force. In December’s job report, the decrease in unemployment rate from 7% to 6.7% as the economy gained 75,000 more jobs was mostly due to the increased number of people dropping out of labor force.

Also, this one number called unemployment rate doesn’t tell us enough information because it is an aggregate rate over the U.S.. The WSJ article nicely sums up this point:

“We have multiple unemployment rates—by race, gender, geography and above all educational attainment. When people talk of an unemployment crisis, it would be more accurate to speak of an education crisis or a crisis of men whose skills are mismatched to today’s jobs. It would be more accurate to speak of a jobs crisis in specific regions of the country or for specific industries. Yet we maintain the collective fiction that one simple average accurately captures multiple realities.”

The WSJ article says that we have to consider the employment rate as we discuss economic condition. The recent job report shows another improvement in terms of increased employment-population ratio. The ratio increased to 58.8% in January, which is the highest level since August 2009, but it is well below pre-recession level of 63%.

As the unemployment rate goes down faster than expected, another news we are watching is whether the FED will increase its federal funds rate because of a decreasing unemployment rate.  The FED’s January meeting statement says:

The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

This policy of low interest rate as long as the numbers are within the range has been re-evaluated. The FED’s same statement reads:

The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.

What we can tell from this FED’s change in policy view is that the FED doesn’t give any meaning for the 6.5% of unemployment. Pointing out some number is just the FED’s way to increase their credibility and convince the public that it will maintain its low interest rate policy. The FED, seems like, didn’t expect the unemployment rate would fall down to this rate this quickly. It will be interesting to see what target rate the FED will choose if they continue the low interest rate policy even though the unemployment rate falls below 6.5%.

In conclusion, even though unemployment rate is one of the main economic data we look, it hides so much of what is happening in the economy. Therefore, we shouldn’t draw quick analyze from the rate.

(Revised) Raise the Minimum Wage

Recently, a movement to raise the federal minimum wage has gained some steam, with President Obama bringing the issue to national level by supported a vastly increased minimum wage and mulling executive action to raise the federal contractor minimum wage to $10.10.  Perhaps the most outspoken proponent of such an increase is Californian Ron Unz, who recently filed an initiative that would raise the minimum wage in California to $12.00 per hour by 2016.  In his 2012 piece for the New American Foundation, Unz details his case for raising the minimum wage.  In summary he writes:

Our government has sought to ensure a decent living for American workers through an enormous array of income subsidies, public benefits, training programs, and educational loans; at this point, many of these components have accumulated powerful and parasitic side-beneficiaries while leaving the working class behind.

Since this vast and leaky conglomeration has failed at its intended goal, perhaps we should just try raising wages instead.

One of the main criticisms of minimum wage is that it creates a price floor for jobs and thereby induces unemployment.  There are two very foundation reasons why this isn’t as bad as critics make it out to be.  First, in many sectors, a business can’t ship it’s jobs overseas to be done cheaper by foreign workers.  This is possible in the manufacturing sectors, but not in the service sector.  As Unz points out in his piece, the largest employment categories are service sector jobs like salespeople, fast food workers, childcare workers, home health aides and custodians.  In this sense, these jobs are “protected” and a necessary part of society; an increase in the minimum wage cannot wipe these jobs out altogether.

The second criticism against the claim that a higher minimum wage will create unemployment is that the evidence may not even point in that direction!  In a recent survey of studies on the effect of minimum wage increases on employment levels, “has found that raising the minimum wage does not result in job losses even during hard economic times”.  Perhaps more shockingly the researchers found, “the states in [their] simple analysis had job growth slightly above the national average”.

Another criticism of the a minimum wage increase is that small businesses and teenagers would be hit the hardest.  However, two thirds of minimum wage workers work for large corporations and 90% of minimum wage workers are 20 or older.  I will concede that certain businesses, most of them small, might be very adversely affect by a wage increase, but for most businesses, a one time price increase would offset the added costs.  For example, in order for Walmart to offset the costs of paying all their workers a twelve dollar wage, they would have to increase prices by just over 1%.

Even if one concedes that many people will lose jobs due to an increase in wages (which I don’t believe is true, as outlined above), there is perhaps a hidden solution.  There are about 11 million illegal immigrants in America, most of whom came to work, taking jobs other Americans are unwilling to take.  If wages were raised to $12, these jobs would be more appealing to legal immigrants and Americans, and instead of hiring more illegal immigrants, Americans would fill these positions.  This is all to say that even if a higher price floor on employment causes some Americans to lose their jobs, it will also incentivize working more, and thus people will be willing to take more jobs.

There are other benefits of an increase minimum wage as well. First, those making less income seem to be more likely to immediately spend that money, thereby pumping more money into the economy than the expected $150 billion dollars in wage increases due to fiscal multipliers.  These fiscal multipliers, along with slightly higher prices (resulting from businesses trying to offset costs) would lead to an increase of government revenue from state and federal sales taxes.  Thus, the whole economy would benefit at least indirectly from this proposal.

Second, raising the federal minimum wage takes some of the burden off of the government to provide for low income individuals and puts that burden onto firms instead.  Currently, the government helps subsidize low income individuals through a negative income tax (the EITC), food stamps, and other social programs.  By increasing the minimum wage firms themselves would have to pay  their employees a living wage instead of letting the government subsidize the employees.

Lastly, raising the minimum wage is simple.  People understand getting paid $12 for every hour they work much better than the labyrinthian federal aid system.  Instead of the government making up for people who don’t make enough, lets just give people enough in the first place.