Who Benefits From Increasing the Minimum Wage?

June 9th, 2014 at 8:24 am

Over at the NYT’s Upshot section, with a cool graphic showing the progressivity of the policy.  The figure, which I haven’t seen elsewhere in this debate–and it’s a debate that’s been going on forever, so coming up with a new graphic that says something ain’t easy–shows economy-wide wage shares plotted against the shares of who benefits from the proposed increase to $10.10 (in three annual steps, and then indexed to inflation).

EG, summing the first two bars, households with incomes below $40K claim 18% of total earnings, but 55% of the benefits from the proposed increase.  As noted in the piece, no question that some of the benefits of the increase reach high-income households–11% goes to those with incomes>$100K.

That’s because, unlike safety net programs, receipt of the the minimum wage is not conditioned on income.  And that, in turn, as Heidi Shierholz and I argue in a forthcoming piece, is because it is a labor standard, deemed to be an important and necessary part of the landscape of labor markets in advanced economies across the globe.

Labor markets, like the broader economies in which they exist, are social and political constructs.  They operate as much by laws, rules, and standards as by supply and demand.  Laws against child labor, discrimination, overtime without extra pay, wage theft, and more are examples of hard fought standards that most Americans today recognize as integral to the functioning of labor markets.

minwg_incshares

 

Source: Upshot

As noted, most of these data were developed by David Cooper at EPI.  In that regard, some may find it comforting that he gets very similar results to the widely cited CBO report (see their table 2).   For example, CBO finds that 53% of affected workers work at least 35 hours/week; Cooper finds 54%.  CBO finds that 88%  of affected workers are 20+, the same as the share noted above.  Educational shares are also very similar.

Finally, be sure to gander upon this new table from Schmitt and Jones on the changing demographics of the low-wage workforce, underscoring many of the points I make in the Upshot piece:

sch_jones

 

Source: Schmitt and Jones

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17 comments in reply to "Who Benefits From Increasing the Minimum Wage?"

  1. Robert Buttons says:

    I looked at Cooper’s report and I can’t find where he accounts for the decreasing demand for labor under a higher minimum wage. If the laws of supply and demand don’t apply for minimum wage, why can’t we take the wage to infinity? If the wage increase is too small to affect demand, I would like the econometricians to tell me exactly where the inflection point is. In other words, at what wage levels do the laws of supply and demand kick in?


    • Larry Signor says:

      RB, You seem to have misread or misconstrued Jareds post…”Labor markets…operate as much by laws, rules, and standards as by supply and demand.” Nowhere does Jared say the labor market does not respond to supply and demand. A higher minimum wage, as he has noted, will produce some negative externalities at the margin, but many more workers will benefit than not.

      http://economix.blogs.nytimes.com/2014/02/18/the-impact-of-a-minimum-wage-increase/?_php=true&_type=blogs&_r=0

      Also, why assume a decreased demand for labor as opposed to some moderate inflation? More disposable income in consumers pockets would likely increase demand for product and labor encouraging increased business investment. They won’t just take the ball, quit and go home.


      • Robert Buttons says:

        I think you are talking around my points. To clarify:
        1. I can’t see where Cooper’s (unlike JB’s elegant economix article) model allowed for job losses as labor cost increases. Can you point it out for me?
        2. JB acknowledges a higher minimum will results in job losses, although his chart suggests the effect is very small. We know minimum wage increases can be catastrophic (see below). Is there an econometric model to show at exactly what wage rate MW becomes harmful?

        From the GAO (http://www.gao.gov/products/GAO-11-427)

        In American Samoa, [after an incremental MW wage increase of $1.50, up to the mainland’s $7.25] employment fell 19 percent from 2008 to 2009 and 14 percent from 2006 to 2009. [..]. GAO questionnaire responses show that tuna canning employment fell 55 percent from 2009 to 2010, reflecting the closure of one cannery and layoffs in the remaining cannery. Average inflation-adjusted earnings fell by 5 percent from 2008 to 2009 and by 11 percent from 2006 to 2009;

        On the new point you raise (“More disposable income in consumers pockets “), I can’t see how consumers will have more [real] disposable income in the setting of “moderate inflation”.


        • Larry Signor says:

          American Samoa has many more pressing economic problems than an increase in MW. The collapse of the pacific bluefin tuna is one, lack of an extended economic base is another, remote location yet another. I don’t see the relevance to a national MW increase. American Samoa is basically a subsidized American protectorate, intentionally so. (There was also this thing called the Great Recession).

          http://www.vox.com/2014/4/23/5637044/overfishing-has-driven-pacific-bluefin-tuna-numbers-down-96-percent

          A higher MW will increase disposable income immediately. Inflation takes time to catch up. The MW will, in any event, be tied to the PCE or some other inflation indicator, implying a one time elevation in demand that should be persistent.


          • Robert buttons says:

            Sorry. Even in the dismal science, we can’t just ignore inconvienent data points. Samoa was built on The tuna canneries, I have never seen Starkist Can O’Bluefin. There is copious documentation about Samoa’s MW destroying the canneries.


          • Djs04f says:

            Well thank God, tuna canning is not one of America’s primary sources of employment. Therefore, we can go ahead with raising the minimum wage.


          • Robert Buttons says:

            Djs, but Walmart is one of our primary sources of employment and I keep seeing their stores adding more and more self checkouts.


      • ThomasH says:

        Because the way moderate (infinitesimal, really) inflation would occur is from the (infinitesimally) lower output resulting from having to substitute machines and higher skilled workers for the low skilled workers it would not longer be profitable to hire. BTW he does not assume less demand for labor but a lower quantity demanded at the higher price.


    • dwb says:

      There is no labor supply-demand analysis in the EPI report. It’s just an analysis of who makes what and some hand waving that employers don’t adjust to keep costs down. Implicitly, I guess you could argue is that the analysis assumes employers have full pricing power and pass on the costs.

      Seattle just raised it to $15 (over 7 years I think). A machine to assemble burgers has already been invented. It’s only a matter of time before you see automated Starbucks and fast food places in Seattle.


    • cesium62 says:

      RB: Perhaps you could enlighten us as to what point laws of supply and demand kick in. We do know that my spending is your income, so that increasing incomes increases spending. And we know that in a slack labor market, increasing wages decreases spending on food stamps, the earned income tax credit, and unemployment insurance. We also know that increasing minimum wages to infinity immediately stands a good chance of shocking the system and that a more gradual approach might be better. We also haven’t seen the point, in the overall U.S. economy where increasing minimum wages causes a drop in demand for labor.

      Since no one is proposing to raise minimum wages to infinity or to raise minimum wages well beyond the levels they have been in the past, there is no reason to believe that we will reach a point where demand for labor will drop. Your question is an interesting theoretical question, but has no practical value at all.

      It would not be surprising to find a small country or territory that is not as closed of an economy as the U.S. as a whole is and so is more sensitive to minimum wage changes. The experience of a small economic unit should not be used as a model for an economy some 50,000 times larger.


  2. dwb says:

    It’s a shame economists are bad at economics these days. The market for low-skilled labor is pretty competitive, not like it was in the 1950s when a few big auto and steel companies dominated the economy. The assumed benefits of the minimum wage rest on the premise that the market for minimum wage is a monopsony.

    When you raise the fixed price of something, it’s only worthwhile to buy the higher grade good (“Alchian–Allen effect”). Who benefits: higher skilled more productive employees at the expense of lower skilled less productive employees. It’s not really surprising most people favor it, since most people make more than minimum wage and see themselves as having an advantage over people who do. Nor should employers care that much, since they can just reshuffle schedules among employees to contain labor costs. There is surely some cost to reshuffling, but its a one time cost.

    Who wins are the young people who can move faster and have more flexible schedules to pick up more hours. Who loses are the single parents – with inflexible schedules – who don’t have time to pick up new skills to justify their higher cost. And the unemployed. It makes it that much harder to justify hiring someone who has been out of work. We need to be making easier to get into the labor force and build skills, not harder.


    • Djs04f says:

      Somehow, having a higher minimum wage than the US hasn’t resulted in higher unemployment in Canada, Australia, Sweden, Norway, Finland, the Netherlands, Germany, Japan or many other developed countries. I wonder if that’s because there are many other factors that go into determining the unemployment rate beyond just the per hour cost of labor?


    • cesium62 says:

      Or, perhaps “most people” realize that people are not tractors or computers and should not be subject to the same “laws” of supply and demand that apply to commodities. Unless you’re advocating a return to slavery?

      The fact is that we are going to keep other humans in our society alive whether or not they can produce marketable output sufficiently large to justify their upkeep. If raising the minimum wage ensures the most productive people are employed and the least productive people are taken care of in some other fashion… that is not a bad thing.

      And, of course, the primary skill needed in a minimum wage job is showing up for work on time.


      • dwb says:

        “the primary skill needed in a minimum wage job is showing up for work on time.”

        Exactly. And also exactly why raising the min wage disadvantages single parents and working parents (in favor of young adults with more flexible schedules). Kids get sick, school dismissed late, after school activities, day care facilities charge fees for picking kids up late, etc. etc. There is a tradeoff between a flexible schedule and pay. For some people, giving up $1/hr, or $2000 full time per year pre-tax, is worth it so they do not have to pay day-care overtime charges etc.

        Unfortunately, you cannot repeal the laws of supply and demand any more than the law of gravity. It may not be “fair,” but its reality. Employers minimize costs and can substitute order-taking tablets, smart phone technology, and robots that make sandwiches.

        If you want employers to offer more money, you need to raise the demand for labor, and increase the value of labor, not merely raise the cost. It not as if there is nothing to do. There are plenty of vacant drug-infested houses to tear down in Baltimore, plenty of streets to be cleaned, plenty of things to do. The problem is not a lack of jobs. It’s that the jobs are too expensive to undertake because the cost of labor is too darn high and the regulations are a nightmare. These are all things that most of the 47% of men not in the labor force in Baltimore should be able to do, but aren’t. Instead, they turn to pharmaceutical distribution.


  3. rjs says:

    dont know if you know that the Upshot, and all of NYT’s opinion, has gone behind a paywall, at least for those of us who’ve already read 10 free krugjmans or other such in June…i have a temporary workaround, different brwosers, different IDs, but others may not, and there’s only so far that will go too…


  4. Fred Donaldson says:

    Nearly everyone seems to ignore that many other nations use a tiered system of minimum wage laws, such as 16-18, 18-21 and 21 and older. Lower minimums for teens makes sense and ends the corporate contention that teens shouldn’t earn, say $15 and hour for 40 hours work – also known as a living wage to support oneself as an adult.


  5. zapster says:

    Well, there is also the data point that states and cities with the highest minimum wages *also* have the highest rates of small-business formation. Since small business is the main driver of economic growth, I’d say that’s an extremely important reason in favor of higher minimum wages.


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