Tuesday, November 14, 2006

Raise the minimum wage? Only if you have minimum intelligence.
TNNBG had a simple, straightforward post yesterday about the minimum wage. I didn't think much of it at the time. I'm against raising the minimum wage. I'm against a minimum wage of any kind, in fact. I know (on a basic level) the arguments against it, so I didn't click through to the Wall Street Journal article TNNBG linked to until I got curious today.

Read it. Especially read it if you support a higher minimum wage.

In particular (for those of you too lazy to click through), there is a fantastic illustration of how a minimum wage hurts the very people it is intended to help:

Classical economics teaches that for a given job, there is a market-clearing price--the price at which both someone is willing to do it and someone else is willing to pay them to do it. If you raise the legal minimum above that price, you may get more people willing to perform the job, but you'll probably also get less people (employers) willing to pay the new, higher price to get the job done.

To picture how this works, think about the grocery bagger in the supermarket, a classic low-wage service job. Supermarkets hire grocery baggers for the minimum wage, or close to it, because it's a perk that makes their customers' experience a bit nicer and helps move the lines along, possibly requiring fewer cashiers, who cost more to hire than grocery baggers.

Now, if you pass a law saying everyone, including grocery baggers, has to be paid $10 an hour, what happens? The supermarket probably hires fewer baggers, or has them work fewer hours. Perhaps they decide they only need baggers between 4 p.m. and 7 p.m. If you put the minimum wage up to $20 an hour, shoppers bag their own groceries. This is so clear that it's taken some time for the defenders of an ever-rising minimum wage to come up with an adequate theory to obscure it.
Take it a step further, now. Technological advances have created in recent years a new ability in stores of all kinds: self-checkout. These machines have cropped up everywhere of late. They began with credit card scanners being turned around on the customer, so that cashiers never handle the plastic. Now, more and more commonly, entire check-out aisles operate without a single cashier or bagger. Stores have implemented these systems sparingly thus far, and I can guess a few of the reasons.

First, they probably suffer a slight increase in theft, as it is easier to sneak products out without the watchful eyes of a cashier (or at least it seems easier, and therefore the dishonest are less likely to be deterred). This will likely never be fully overcome, as dishonest people will always try to take advantage of the system—though technology has also lent some advances in theft prevention as well.

Second, some people lack the technological sophistication to use the scanners, or disdain doing it themselves for one reason or another. This barrier is decreasing every day, as people become more and more technologically capable all the time.

Finally, there is a cost to replace functioning registers. I imagine, as well, that the self-checkout scanners are more expensive than the traditional models. The grocery store I frequent recently underwent a complete renovation, replacing all of the registers, and even with that, only about a quarter of them were converted into self-checkout aisles (probably for a combination of this last reason as well as the first two).

As I've said, reason one will always exist and reason two is taking care of itself—so only reason three remains as a true impediment to the new technology. With a raise in the minimum wage, however, the cost-benefit analysis involved changes significantly. As cashiers become more expensive, the benefits of having shoppers take care of that job themselves increase greatly over time. Now, instead of the cutback in cashier jobs that would stem naturally from the added expense for each, we're looking at the possibility of even more significant cuts because added savings can be realized. Where are unskilled workers and teenagers to find those low-wage jobs that are an underpinning of our economy?

Setting aside the grocery store analogy for a moment, let's consider the yard care market. Currently, nationwide (if anyone has a statistic handy, I'd love to cite it here), a significant portion of contracted yard work is handled by recent—and often illegal—immigrants. Some surely do better than minimum wage. A lot are definitely paid at that rate. Without a doubt, many make far less. So what will a minimum wage increase do to this market?

If it is enforced effectively (and what are the chances of that?), anyone making below the current minimum wage will be fired. Some portion of those at the current rate and below the new rate will be fired to cover the expense of raising wages for some of the others in this range. And those making above the new rate shouldn't expect raised wages any time soon.

Don't believe me? I pulled this off of Wikipedia:
For example, during the apartheid era in South Africa, white trade unions lobbied for the introduction of minimum wage laws so as to exclude black workers from the labor market. By preventing black workers from selling their labor for less than white workers, the black workers were prevented from competing for jobs held by whites.
So much for the altruism of paying a higher wage.

If it is not effectively enforced (the most likely scenario), then more workers will be hired under the table. Employers will be given a huge incentive to circumvent the wage laws by paying cheap labor off the books, as is already rampant in this industry nationwide. Those with scruples will be driven out of business, unable to compete with those who cheat the system, their jobs as well as those of their employees will effectively be lost to firms willing to break the law. Income taxes will certainly not be assessed on those paid under the table. Everybody loses.

Finally, this entire premise violates American ideals. At the debate between William Kristol and Katrina vanden Heuvel that I mentioned recently, the latter spoke in support of a higher minimum wage, and used a phrase that stuck with me. She said that "workers should be paid what they deserve."

Unfortunately, she contradicted herself. As described in the WSJ piece above, the market-clearing price is, by definition, what labor is worth—and therefore what workers deserve. By inflating wages above this number, we are violating the very principle she espouses. We are no longer paying workers what they deserve, but instead what some group of people (Congress) arbitrarily decides that they deserve.

The high school drop-out, too lazy to even get his GED, needs only to put in enough effort to find a dead-end job, and suddenly he deserves a minimum wage? While a hard-working individual from a poor background that precludes his attending college will have a significantly harder time finding that same dead-end job. If he does, his chances of advancing and getting periodic raises will have all but evaporated because, if he complains, his employer has that first guy to fall back on at the same rate.

Does that seem fair? Does that seem like the American system? I think not.

For one last point on this line of thinking, I turn again to the WSJ piece:
If you are a young black male, you are slightly more likely than the general population to be paid minimum wage, but you are almost 10 times more likely not to have a job at all. And if you're unemployed, raising the minimum wage not only doesn't help you find a job, it probably hurts.
In short, minimum wages restrict the ability for the lower classes to earn their way up the ladder and create for themselves and their children a better future.

Shame on Congress for even considering it. And shame on them for preparing to rubber stamp such a damaging idea.

For a lot more advanced economics on this than I can explain, click here.

And, by the way, the chart at the top of this post is a fairly simple illustration of the problem with a minimum wage. The center of the "X" is where supply and demand in the labor market meet at a natural equilibrium, on a graph of wage as a function of the number of workers. This is where we find the market-clearing price if the market is left alone. As you increase the wage, however, the demand for workers goes down, and excess supply (known as unemployment) is created.

It's very simple, really.


Dave Justus said...

I am very receptive to this theory, and I think it correct, but somewhat incomplete.

Raising the minimum wage has 3 effects. It increases unemployment, increases inflation, and decreases the share of profits that owners get in comparison to workers.

Depending what is happening in the economy, the proportion of each of those effects varies. It is of course the latter that proponents of the minimum wage like.

Also, for a modest increase, the effects of each of these are pretty minor.

Right now, we have low unemployment, low inflation, and a fairly high amount of profits going to owners as compared to workers (wage stagnation in a growing economy.) As such, if there ever was a time for an increased minimum wage, it is probably now and the unemployment and inflationary aspects of this change will be minimized.

That is not to say I support a minimum wage increase, I am far too much of a libertarian to go that far, but the doom and gloom of high unemployment and inflation is probably unwarrented.

Tanstaafl said...

Dave, while you may be partially right, I think you may overstate the share of profits idea.

First of all, workers do not receive a share of profits unless they have options or shares... making them owners. They receive a wage or a salary, which is a cost. It could be stated as a % of Revenue, but it would be very odd accounting to look at it as a % of Earnings (aka Profits).

Second, they are just as likely (as RFTR points out) to be replaced by capital investment in machinery as they are to become a bigger share of corporate spending.