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Let's clear up the minimum wage nonsense


Posted: Oct 27, 2014

By "clear up", I mean "to the extent possible".  I've spent two weeks "in the stacks", reviewing more than 2 dozen of the more recent economic analyses on the subject of the minimum wage, from sources that are considered reasonably objective.  For the most part, I focused on studies published by the NBER.  Of course, there's never any absolute assurance of objectivity, but peer review offers some reason to hope for it.

They don't call economics "the dismal science" for nothing.  Each of the papers I reviewed was lengthy and couched in technical language - not only the language of economics, but also of statistics, probability and sociology.  Fortunately, my background in research enabled me to penetrate the fog sufficiently to see at least the larger gorillas in the mist.

If you're busy, the bottom line is this:  The minimum wage, and in particular increases to the minimum wage, has effects which are, very clearly, both beneficial and detrimental to both the poverty level and employment.  ANY POLITICIAN OF ANY STRIPE (or anyone in the media, your friends, people on this forum, etc.) who presents simplistic assertions ON EITHER SIDE OF THE QUESTION IS, DE FACTO, MISLEADING YOU. 

The longer version, if you're still reading, is this:

1.  Increases in the minimum wage probably have very little impact on the overall employment level compared to much more powerful and broader forces, such as the general state of the economy (i.e., whether expanding or contracting).  It's very common to see graphs comparing the unemployment level to levels of the minimum wage, in which both rise together - inviting you to conclude that they are correlated.  But when you add a third variable, the level of overall economic activity (expansion/recession) you can see the relative insignificance of minimum wage increases compared to broad economic forces that logic dictates would be much more important in determining employment levels.

2.  Increases in the minimum wage DO lift some over the poverty line, BUT also knock others who were above the poverty line back down below it.  These opposite effects are so nearly equal that the difference between them is "statistically insignificant".  In fact, increases in the minimum wage appear to amount more to income redistribution AMONG THE LOWER-INCOME CLASSES than between high-income and low-income earners.

3.  While increases in the minimum wage do not significantly impact the overall employment level compared to other factors, they DO substantially adversely impact employment DYNAMICS, which means the creation of new jobs and/or destruction of existing jobs.  What's more, this negative effect is more pronounced in low-wage, low-skill job sectors.

4.  Like it or not, businesses tend to adapt to increases in the minimum wage in ways that protect their profits.  This can take a number of different forms, including raising prices, cutting labor hours, reducing benefits, increasing demands on the existing work force, and investing in automation.  There's no need to get into the ethics of this because the argument can be made that it is the obligation of the business to remain in business and it has to remain profitable to do so.   The point is, ALL OF THESE ADAPTIVE MEASURES HAVE AN ADVERSE IMPACT ON SOMEONE OTHER THAN THE BUSINESS ITSELF OR ITS OWNERS. 

5.  Far more threatening to the poverty/employment questions is the advancing onslaught of automation - which tends to impact low-skill labor positions first, but with developments in artificial intelligence is being felt in a number of skilled fields as well.

The extended bottom line, for me, is that I am now completely agnostic when it comes to the minimum wage.  Arguments or positions on either side of the question will not in any way impact my vote when it comes to this specific policy issue.   For me, the minimum wage has become a moot point.  For every positive effect it may have, there is an adverse effect, and/or it has so little impact (e.g. on employment levels) that it doesn't need mention at all.  

Minimum wage is, and alway has been, since its inception, a weak weapon against poverty and/or unemployment.  I don't want to hear any more politicians arguing either way on the subject.  Instead, it's become crystal clear to me that we need policies and measures that increase the inherent (economic) value of people in the workplace - by making people themselves worth more by reason of their abilities, skills, knowledge and creativity, which drives the supply/demand curve in a direction that results in higher employment and better compensation. 

I won't bore you with all the references I've researched, but here are a couple you can look over:

http://econweb.tamu.edu/jmeer/Meer_West_Minimum_Wage.pdf (an NBER paper but they wanted $5 so I found it elsewhere online).

http://www.nber.org/papers/w6127.pdf

Vote for candidates who want to invest in people and to make people more desirable in the workplace.  The minimum wage - meh.  It's just a straw man for both sides of the aisle to kick around.

 

 

;

I really like this post! - Very informative

[ In Reply To ..]
I'm going to copy this and save it for future reference. You went to a lot of work to explain the minimum wage issue in laymen's terms. Thank you!

I disagree. The minimum wage is NOT a strawman argument. It's a real issue that affects - real people. - sm

[ In Reply To ..]
Notwithstanding your research of past performance etc., the current minimum wage is NOT keeping up with inflation while employers' profits are soaring and the CEOs and upper managements' wages are rising ever higher. Therefore, the gap between the haves and the have nots in the country continues to widen and grow.

The minimum wage issue is a very real issue that needs to be addressed for our country. The minimum wage in this country has failed to keep up with inflation while CEOs and big corporations reap the profits of Americans' hard work. Many of our citizens therefore have to rely on our government to supplement their wages while corporate America pockets the profits. Our government is being called upon to fill the shortfalls that our employers will not pay. Big business in this country encourages their employees to turn to our state and federal government to in effect pay the wages that many employers refuse to pay willingly. If employers will not willingly pay a livable wage whereby our citizens do not need to turn to government, then our politicians need to seek to remedy this situation on our behalf.

The minimum wage issue is NOT a strawman argument by politicians; it is a very real issue that affects real people. Politicians are merely representatives of the people. The people who work 40 hours a week in this country should not make wages under poverty level that require our government to supplement our wages and in effect give a handout to big corporations while their profits are soaring and continue to balloon the inequality gap. As long as conservatives block passage of legislation to raise the minimum wage, our citizens should vote for politicians who will represent the very real people who are affected by this very real issue.

What makes it a straw man is that it affects people differently - some for the better, some for the worse.

[ In Reply To ..]
Let me guess - you didn't read my post very carefully. You can't care about the people that are boosted over the poverty line without caring about the equal number of people who are knocked back down below it. You can't care about unemployment without caring about the adverse impact on new job creation. You can't care about better wages without caring about the defensive measures that businesses take (raising prices, cutting hours, etc.) in response to an increase in the MW.

In short, there is NO COHERENT POLICY POSITION POSSIBLE when it comes to the minimum wage - it's the classical Hobson's choice, in fact.

Forget about the MW arguments on ALL sides and look for candidates who support measures that will improve the worker's position in the marketplace. Let's invest in our workforce.

Not the OP but I'm amazed at the number - Trigger Happy

[ In Reply To ..]
of dislikes for this!! Thank you for sharing OP! Your original post was very interesting and very accurate, IMO! You follow-up comment was just as good. Bravo to you!

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