The non-madness of the minimum wage

August 3rd, 2015 at 1:31 pm

[jointly written with Ben Spielberg]

The “Fight for $15”—a nationwide movement to raise the minimum wage to $15 per hour—has taken a lot of “incoming” from critics. Today, it’s Bob Samuelson’s turn, who under a column titled “minimum wage madness” argues that a substantial minimum wage increase would cause “job losses [to] mount” and constitute an economic “blunder.”

The critics, including Samuelson, make one important point. Should the nation adopt a $15 minimum wage tomorrow, the share of workers affected in places with relatively low wages would be far larger than under any other historical increase. This scenario would increase the chances of unintended consequences, like loss of jobs or hours of work, for those affected by the policy.

But as far as we can see, no one is proposing $15 tomorrow. All the proposals we know of phase in gradually over the course of numerous years. For example, the $12 minimum wage proposal Samuelson cites reaches that level in 2020, after which it is indexed to the median wage. To be fair, it’s of course the case that larger increases reach more workers, and that both $12 and especially $15 would affect larger shares than many prior increases. But that also depends on the length of their phase-ins and the characteristics of the labor market in the place where the increase is to take place, criteria that critics typically ignore.

Though the proposal for the $12 federal minimum (the Raise the Wage Act) has been endorsed by President Obama and there are prominent advocates for a national minimum of $15 (e.g., presidential candidate Bernie Sanders), the vast majority of the action is at the sub-national level.  Cities like Seattle and San Francisco, with relatively high wages and prices, are slowly phasing in their increases.  San Francisco, with a minimum wage currently at $12.25 an hour, won’t get to $15 until July 1, 2018, and Seattle, currently at $11, won’t reach $15 until January 2019.  The $15 minimums in Los Angeles and DC (if adopted) won’t be fully phased-in until 2020, providing businesses with some time to adjust and, because of wage growth between now and then, affecting a smaller share of workers than if the increase were to go into effect today.

Samuelson’s analysis is also one-sided. He cites potential job losses; he ignores the much larger number of wage gainers. For example, Samuelson cites a widely-discussed Congressional Budget Office analysis of the prospective impacts of raising the minimum wage to $10.10 by 2016. He notes that CBO estimated that 500,000 workers would lose or not get jobs without mentioning CBO’s finding – in the same report – that 24.5 million would get raises (16.5 million directly and 8 million indirectly).

In fact, here’s a useful rule of thumb when evaluating the arguments of minimum wage critics – when someone, as Samuelson did today, emphasizes job loss possibilities while ignoring the often much larger beneficiary side of the equation, you know they’re trying to mislead. We should by no means write off potential negatives. But we cannot begin to understand what’s going on with the national movement if we ignore the positives—millions of people rationally support large increases because they expect to gain from them.

That’s rationality, not “madness.”

In this regard, analysts for and against increases in the minimum wage must consider the policy from the perspective of low-wage workers. Specifically, how do the risks of unintended consequences compare to the risks of continuing to earn poverty-level wages? Or, put differently, does the potential gain from increased wages make it worth venturing into territory, like a $15 wage floor, that is outside the sample of the moderate increases that have prevailed thus far?

In fact, there are two main reasons why low-wage workers may rationally support even large increases in the minimum wage. First, even the most pessimistic employment estimates from the literature tend to imply disemployment effects that rise more slowly than minimum wage increases. Thus, even if they buy conservative job-loss estimates, low-wage workers may well conclude that they’re more likely to come out ahead with a higher minimum wage. Second, they may also recognize that even if they do lose work and could possibly face a longer job search, a minimum wage increase would mean they could eventually expect a higher-quality job.

The bottom line: low-wage workers around the country have sparked a movement for large minimum wage increases for a reason.  And their proposed increases are phased in gradually over several years.  It might behoove some of those commenting from the sidelines to stop calling them crazy and start entertaining the idea that they might actually know what they’re doing.

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11 comments in reply to "The non-madness of the minimum wage"

  1. Jill SH says:

    Madness, certainly not.

    But my usual plaint: $12, or even $15, is not a LIVING wage. So before any kind of indexing, let’s make sure we’re at that level, ie, no one working full time should be in poverty. So $15 min wage in 4-5 years may need to be higher. Because politically, once it’s indexed, it will never be raised again.

    As for another counter argument to the “job losses” spin, just think how many fewer people might need food stamps, or other government supports. And some extra cash collected for FICA! Besides, we know that millions of workers WILL have more cash to spend; some workers MAY lose jobs/employment for some period of time.

    The big cash is in the corporate profits. Raising wages (minimum and more) is one way to pry the cash out of them. (Unions used to do this.) Then the government won’t have to do so much safety-net-wise. There’s more wins in this scenario than not.

    But first, minimum wage must equal living wage.

  2. Counterintuition says:

    I think there are some advocates of a $15 national minimum wage, but I think they’re using it as a political argument assuming that any law that is passed will be a compromise.

    It will be interesting to see the data when it comes in on the cities that have raised it to $15. They might see an improved economy simply because minimum wage workers in those cities are needed for basic services but cannot afford to live there. They will probably get better services and better retention.

    The best option for minimum wage workers in those cities with such high living expenses is to move somewhere else. If only they could afford a bus ticket or be flown in for an interview at the McDonalds in a lower-cost city.

  3. Bruce Webb says:

    Yes! In the past I have blogged this as the “Jimmy the Stockroom Boy Fallacy”.

    If the firm has 100 workers all of whose wages would be increased by a new minimum wage but the result was that poor Jimmy the Stockroom Boy loses his job, this is not a reason for the other 99 workers to forego their raise because “Poor Jimmy”. For one thing they will have enough extra cash to give Jimmy a nice going away party, for another when Jimmy does get a new job he will be getting paid the new higher minimum.

    Only if the new increase actually increases overall unemployment do you begin to make a case and even then as our host points out there are positive offsets due to the new spending by the 99.

    But rather than actually calculate all this out in terms of overall labor share we are asked to simply see it as a morality play, I mean everybody likes Jimmy and nobody wants him to be let go! On the other hand if the powers that be had found a way to switch the stockroom over to JIT deliveries from Staples and thereby save themselves the cost of Jimmy’s job they wouldn’t blink for a second. Utility of the firm is a moral good, just maximizing returns like any good capitalist manager. No omelets without broken eggs, amirite? But employees maximizing THEIR own returns at the expense of that same job cut? “Oh Poor Jimmy. And OVER THERE It’s Halley’s Comet!!”

  4. D. C. Sessions says:

    For example, the $12 minimum wage proposal Samuelson cites reaches that level in 2020, after which it is indexed to the median wage.

    And why not to the mean per capita income? If you want to put the brakes on inequality, here’s a tool ready to hand.

  5. jonny bakho says:

    Good arguments.
    Good Comment: What Bruce said.
    Everyone should understand Samuelson’s values. He is pretty transparent. Samuelson promotes and defends the economic interests of conservative business. Samuelson dismisses and disdains the great unwashed general public. Samuelson always argues for business interests against the interests of workers and the average citizen. If you are looking for policies that make life better for American workers, Samuelson is not worth reading. If you are looking for a target who shamelessly defends and promotes the interests of selfish, greedy, wealthy elites, Samuelson is the perfect foil.

  6. urban legend says:

    Things the naysayers always ignore:

    1. Few if any businesses experience a competitive disadvantage; the change affects their competitors, too, and most who are actually competing with each other will tend to make the same kind of use of low-wage workers;
    2. Those living at minimum wage have established patterns of expenditure on necessities; therefore, the wage increase makes a dramatic increase in discretionary income, so the demand effects are multiplied.
    3. Low income people will spend almost all the increase in the U.S.A., in contrast to wealthier people who will jump at scheduling another trip to Europe. Sure, some will go to Chinese-manufactured goods at Walmart, but a lot will also go to extra meals at places that employ people like them;
    4. The national minimum wage is now so low that going to $15 dollars an hour is still a fairly low minimum in real terms historically.
    5. Economists like to think in terms of timeless principles that make the subject of economics more like physics. But economics is more complex than physics in many ways, and these things are not timeless. What is right now under present circumstances may not be right later when things are different. Going to a $15 minimum now, in a time when the existing minimum is scandalously low historically, profits and executive compensation are extremely high and the economy suffers from insufficient demand because the majority of people do not have enough money to spend, does not mean it would be painless immediately thereafter to jump the minimum to $30 per hour.

  7. M. S. Robertson says:

    If the “beneficiary side of the equation” is so much larger, why not $25 or $50 an hour?

    • Counterintuition says:

      There’s a limit. What is the average wage per person In the most productive society?

      Last I looks it was about $25 per hour. I might be a bit lower or higher.

      What if everyone was average? There’d be no reason to strive for better. There would be no reason to go to school.

      The differentials of capitalism are essential, and I think almost everyone agrees with this. There has to be an incentive to strive for more.

      However, it has gotten out of hand. First of all, there’s no longer any reasonable expectation that higher education will be met with higher wages, and second, there’s no loyalty remaining. We’re all on our own, and that doesn’t protect us.

      Our society is toxic in my opinion. Toxic. I don’t know a single person that believes it is working properly. That is a sign of trouble.

  8. Counterintuition says:

    I suppose I didn’t explain my idea clearly on this so I’ll spell it out.

    There are outlines like Puerto Rico that would suffer more than others from a rapid increase in the minimum wage.

    The answer is to write into the bill that the outliers phase it in more gradually than the rest of the nation. But you should provide the same benefit to them as other citizens.

    So you raise the minimum wage nationally on a phased schedule. But you phase it in more slowly in isolated places like puerto rico. But you give them the same national benefit of the higher wage on the same schedule as the rest of the country.

    The easiest way to do this is to offer an EITC benefit to those workers that makes their wages equivalent to those in the mainland on the schedule that is determined by the mainland. You phase it in more slowly in these isolated areas through an initial EITC benefit that phases out over time.

    The point is that we shouldn’t allow the worst situations dictate the policy. Phase in a higher minimum wage over 5 years in the mainland, and phase it in at the same rate in outliers. Just provide a subsidy over perhaps 15 years to make it more economically feasible for them.

    What I’m saying is that we shouldn’t allow the outliers to determine the mainline and mainland rate of adjustment. Provide an smooth adjustment over a larger length of time for the outliers through EITC.

    Does this make sense?

  9. Counterintuition says:

    So under this plan, workers everywhere would see the same rise in wages. In some outliers, that wage increase would be created through EITC.

    So Purteo Rico would have a minimum wage lower than the nation for the next 15 years, but the EITC would make it even. It provides time for adjustment, as societies demand.

  10. Counterintuition says:

    So specifically, the wage in these outliers would be lower than the nation for a long time, but subsidies would make up the difference and be phased out.