Minimum wage

“”The Republicans believe in the minimum wage — the more the minimum, the better.

— Harry S. Truman, 33rd President of the United States

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The minimum wage is a legally-mandated lower limit on (usually hourly) pay rates, the effects of which are the subject of some controversy.

Academic bitch-fighting

Current minimum wage around the world. If dark blue, you're probably living in a country with a minimum wage near or above $10+ an hour.

Introductory microeconomics would suggest that the setting of a price floor would prevent an equilibrium between price and quantity from being reached, thereby creating a surplus of the resource or product in question. However, if the labor market is, as sometimes theorized, a monopsonistic oligopoly, the market for labor fails, as firms under-pay workers (due to the transaction costs in switching jobs). As such, depending on the level, a minimum wage might actually decrease unemployment.

Empirical evidence is mixed. Card and Krueger found that a wage increase in New Jersey increased employment in New Jersey fast food restaurants along the border of Pennsylvania (where the introductory treatment would have expected employment losses). David Neumark and William Wascher's claim that they found "[statistically] insignificant—although almost always negative" employment effects from the same hike was quickly rebutted by Card and Krueger who pointed out Neumark & Wascher used data from the restaurant industry-funded organization Employment Policies Institute while Card and Krueger used the less biased administrative UI records.

Moreover various subsequent studies have supported the findings of Card and Krueger. The 2004 study “The Effect of Minimum Wage on Prices” found that rather than cutting workers that a raising of prices occurred but which raise was very modest: "For example, a 10% increase in the minimum wage would increase food prices by no more than 4% and overall prices by no more than 0.4%, significantly less than the minimum-wage increase." Arindrajit Dube, T. William Lester and Michael Reich's 2010 study published in Review of Economics and Statistics found “strong earnings effects and no employment effects of minimum-wage increases.” In 2012 David Lee Emmanuel Saez's published “Optimal Minimum Wage Policy in Competitive Labor Markets,” in Journal of Public Economics concluded “The minimum wage is a useful tool if the government values redistribution toward low wage workers, and this remains true in the presence of optimal nonlinear taxes/transfers.” David Neumark, writing in the Federal Reserve Bank of San francisco's Economic letter, concluded that the combination of federal minimum wages and state minimum wages in the U.S. reduces employment by 100,000 to 200,000 jobs.

Myth and Measurement: The New Economics of the Minimum Wage suggested publisher bias favoring studies that showed adverse effects. Doucouliago and Stanley also raised this and stated "Even under generous assumptions about what might constitute 'best practice' in this area of research, little or no evidence of an adverse employment effect remains in the empirical research record, once the effects of publication selection are removed." They also stated "First, minimum wages may simply have no effect on employment... Second, minimum wage effects might exist, but they may be too difficult to detect and/or are very small." Other studies say that there were variables unrelated to the minimum wage that could account for any downturn in employment.

The November 2011 Hirsch, Kaufman, Zelenska paper "Minimum Wage Channels of Adjustment" found no "significant effect of the minimum wage increases on employment or hours over the years [studied]" and in December 2013 an updated version of this paper was printed stated "We find, in line with other industry-specific studies, that the measured employment and hours impacts are highly variable across establishments and in many or most cases not statistically distinguishable from zero." and concluded "Our suggestive evidence of a nonlinear employment effect, with employment and hours increases in response to small wage increases and declines with respect to large increases, better matches a monopsony than competitive model."

In February 2013 John Schmitt published "Why Does the Minimum Wage Have No Discernible Effect on Employment?" via the Center for Economic and Policy Research stated "Economists have conducted hundreds of studies of the employment impact of the minimum wage. Summarizing those studies is a daunting task, but two recent meta-studies analyzing the research conducted since the early 1990s concludes that the minimum wage has little or no discernible effect on the employment prospects of low-wage workers. The most likely reason for this outcome is that the cost shock of the minimum wage is small relative to most firms' overall costs and only modest relative to the wages paid to low-wage workers. In the traditional discussion of the minimum wage, economists have focused on how these costs affect employment outcomes, but employers have many other channels of adjustment."

A 2013 U.C. Berkeley and the University of Illinois at Urbana-Champaign study, “Fast Food, Poverty Wages: The Public Cost of Low-wage Jobs in the Fast-Food Industry,” found "Families of fast-food workers are twice as likely to use public programs", "Only a minority of workers in the fast-food industry receive health care coverage" and "Between 2007 and 2011, the total state and federal cost of providing public assistance to the families of fast-food workers is nearly $7 billion per year. More than half the costs, $3.9 billion a year, were due to participation in Medicaid and the Children’s Health Insurance Program (CHIP). SNAP benefits came to $1.04 billion a year and the EITC support cost $1.91 billion."

A 2017 Harvard Business study, "Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit," by Dara Lee Luca of Mathmatica Policy Research and Michael Luca of Harvard Business School found: "Our point estimates suggest that a one dollar increase in the minimum wage leads to a 14 percent increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating), but has no discernible impact for a 5-star restaurant (on a 1 to 5 star scale)." This has led to some conservative commentators arguing that this proves raising the minimum wage is causing higher unemployment . However, the Luca's survey did not actually attempt to study the overall impact of the minimum wage increases on unemployment, and the author of the study Micheal Luca himself hypothesizes that the failure of some restaurants may increase sales in remaining restaurants, causing more people to become employed to meet increased demand at these remaining restaurants. This could offset the unemployment caused by the worse restaurants failing, though Luca says more research needs to be done on this particular impact. . This brings up another valid point on the minimum wage. If you as an employer aren't paying your employees enough money to live on, and your business is still on pins and needles or is getting poor reviews, maybe there's something wrong with your own business model. Sure, the minimum wage increases costs to businesses, and they have to deal with those increased costs, but there are other reasons why a business could be failing. For example, a business could have low sales because they exist in an oversaturated market, or a poor location with low traffic, or they might not be investing enough into advertising, or they might not have the niche market they once had anymore as competition has introduced products that compete with theirs, or maybe their food's quality needs to be improved. On the cost side, they could be facing high rent costs, high food costs, or high franchisee costs if they're a franchisee. There are any number of reasons as to why a business is failing that might have nothing to do with the cost of labor. Again, yes, the government does have SOME impact on the costs of doing business such as food safety standards and minimum wages, among other things, but business owners have to take SOME responsibility for running a bad business, that's all.

Arguments against a minimum wage

Price/wage spiral

One argument against minimum wage is that businesses will try to keep profit margins fixed, and attempt to raise prices to transfer the cost increases to the consumer. Since the workers are usually some of the consumers, at some point the minimum wage will be raised to match the increased cost of living. Then the prices of products and services will again be raised to preserve the profit margins, producing a vicious cycle.

In reality, this doesn't always occur because there is a limit on the ability for businesses to raise prices, mostly due to competition from places that have a different minimum wage. Also, since training a person to do any job costs money, reducing turnover is another option other than the standard cut hours/jobs or raise prices argument generally presented. In fact, a University of Washington survey seemed to prove that prices don't rise in tandem with a minimum wage increase.

Another flaw in this argument is the fact that both corporate profits and CEO salaries have increased to insane levels. According to personal finance journalist Diana Hembree on Forbes:

In the 1950s, a typical CEO made 20 times the salary of his or her average worker. Last year [2017], CEO pay at an S&P 500 Index firm soared to an average of 361 times more than the average rank-and-file worker, or pay of $13,940,000 a year, according to an AFL-CIO’s Executive Paywatch news release today.

Despite increasing protests from unions and consumer groups, the average CEO pay climbed 6% last year [2017]. Meanwhile, the average production worker earned just $38,613, according to Executive Paywatch.

That is a staggering 1808% increase. To put that in prospective: In the 1950s, the federal minimum wage went from US$0.75 to US$1.00 and the highest, in modern dollars, was in 1968 at US$1.60, which is US$11.74 in 2020 (far short of the actual US$7.25). No matter how you slice it, it is obvious that not only have wages not kept with inflation, but the money the companies made is going into the CEO's pockets rather than the workers'.

Note these are averages; the individual percentages of CEO to the average worker for specific companies is even more insane. The Securities and Exchange Commission (SEC) passed new rules that all public companies will be required to disclose the ratio of CEO pay to median worker pay beginning in 2017 giving a better insight to just what that ratio is.

Another issue is when you compare what is supposed to be the exact same good around the world, this claim doesn't hold up either. In Australia, a Big Mac is around AU$5.19 while the minimum wage is roughly AU$19.00 (about 27.3% of the salary corresponds to a Big Mac). In the United States, that exact same Big Mac is US$4.93 while the national minimum wage is US$7.25 (about 68% of the wage for a Big Mac), more than 3 times greater when the national minimum wage is used as the baseline. In fact, only Switzerland, Sweden, and Norway have a worse ratio than the United States.

Automation

A common argument is that if you raise wages too much, potential employers will automate everything. This ignores that the upfront cost of automation is expensive and generally takes several years of operation to pay for itself.

Automation is an example of substitution: as labour gets more expensive, firms substitute capital in place of labour. This substitution, however, increases worker productivity in the aggregate, as the remaining workers using the new capital have a higher marginal product of labour; overall productivity of the economy improves. Given that economists have identified the use of very cheap labour in the Third World as a possible reason for American productivity stagnation, a raise in American minimum wages can actually be a benefit to the productivity of the entire economy - and thus improve the economy's growth rate.

Restaurants are especially iffy, as according to researchers at Cornell University and Michigan State University restaurants are, generally, worse than the average: "After the first year 27% of restaurant startups failed; after three years, 50% of those restaurants were no longer in business; and after five years 60% had gone south."^{[better source needed]} Compare that to the averages for all business: 25% for year 1, 36% for year 2, and 44% for 3 years with year 4 ranging from a low of 44% to 63% based on business type with services at 45% failure rate.

There is also conflicting information from companies themselves about the effect of automation on employment. For example, in 2011 McDonald's Europe expects kiosks to increase jobs. Yet, in 2016, Carl Jr.'s CEO says he's investing in machines because the government is making it difficult to afford employees. The average minimum for Europe in 2016 was over €8 per hour which, in 2016, was US$1.13 for every €1 or in total US$9.04. So, who actually knows what they are talking about because they both can't be right?

United States

The current federal minimum wage in the U.S. is US$7.25 per hour (effective since 2009), though it is higher in certain jurisdictions. In particular, as of 2015, the minimum wage in Seattle, Washington, is US$15 per hour. Minimum wages in the U.S. have never been sufficient to raise a family out of poverty, if only one member of the family works. The minimum wage has varied from a maximum of 90% of the poverty level in 1968 (US$10.50/hr in 2013 US dollars) and has averaged two thirds of the poverty level since 1959, when the poverty level was established.

Washington, a real world example

In 1998, Washington state passed a measure that raised the state’s minimum wage to above the Federal and linked it to the cost of living. As of 2014, the state has shown a 21 percent increase in restaurant and bar payrolls and with a current rate of growth more than double (0.8 vs 0.3 percent) that of the nation as a whole and has been below US poverty level for 7 years. There has been no detectable decrease in employment over that 15-year time period.

Minimum wage via collective bargaining

As you can see in the above map, Scandinavia, Italy, Switzerland, Austria and Iceland don't have a nationwide minimum wage, and instead set it in a social corporatist tradition. This has a benefit in that wages can be fine-tuned to maintain the competitive advantage of certain industries, but requires that business and union associations sit down in the first place.

Germany is currently experiencing that problem, with reports that some workers are living on wages as low as €2 due to a side-effect of recent labour reforms. In 2013, a grand coalition between Angela Merkel and the Social Democrats began to address it, and economists were yelling at each other again about what the hell to do, until a minimum wage of €8.50 was introduced in 2014.

Quotes

“”The most perfect political community must be amongst those who are in the middle rank, and those states are best instituted wherein these are a larger and more respectable part, if possible, than both the other; or, if that cannot be, at least than either of them separate.

—Aristotle

“”Our inequality materializes our upper class, vulgarizes our middle class, brutalizes our lower class.

—Matthew Arnold

“”The prince should try to prevent too great an inequality of wealth

—Erasmus, (Dutch scholar, 1465-1536) quoted in Main Currents of Western Thought Yale University Press pg 160

“”A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation.

—Adam Smith, March 9, 1776, An Inquiry into the Nature and Causes of the Wealth of Nations

“”I am conscious that an equal division of property is impracticable. But the consequences of this enormous inequality producing so much misery to the bulk of mankind, legislators cannot invent too many devices for subdividing property, only taking care to let their subdivisions go hand in hand with the natural affections of the human mind. Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise. Whenever there is in any country, uncultivated lands and unemployed poor, it is clear that the laws of property have been so far extended as to violate natural right. The earth is given as a common stock for man to labor and live on.

—Thomas Jefferson, Letter to James Madison, October 28, 1785

“”To secure to each labourer the whole product of his labour, or as nearly as possible, is a most worthy object of any good government.

—Abraham Lincoln 1847

“”Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.

—Abraham Lincoln December 3, 1861 State of the Union Address

“”No man can be a good citizen unless he has a wage more than sufficient to cover the bare cost of living, and hours of labor short enough so that after his day’s work is done he will have time and energy to bear his share in the management of the community, to help in carrying the general load. We keep countless men from being good citizens by the conditions of life with which we surround them. We need comprehensive workmen’s compensation acts, both state and national laws to regulate child labor and work for women, and, especially, we need in our common schools not merely education in book learning, but also practical training for daily life and work.

—President Theodore Roosevelt, “The New Nationalism" speech 1910

“”We stand for a living wage. Wages are subnormal if they fail to provide a living for those who devote their time and energy to industrial occupations. The monetary equivalent of a living wage varies according to local conditions, but must include enough to secure the elements of a normal standard of living--a standard high enough to make morality possible, to provide for education and recreation, to care for immature members of the family, to maintain the family during periods of sickness, and to permit of reasonable saving for old age.

—President Theodore Roosevelt, August 1912

“”No business which depends for existence on paying less than living wages to its workers has any right to continue in this country. By living wages, I mean more than a bare subsistence level — I mean the wages of a decent living.

—Franklin D. Roosevelt, 1933, Statement on National Industrial Recovery Act

“”Except perhaps for the Social Security Act, it is the most far-reaching, the most far-sighted program for the benefit of workers ever adopted here or in any other country. Without question it starts us toward a better standard of living and increases purchasing power to buy the products of farm and factory.

—Franklin D. Roosevelt, June 24, 1938, Radio Address of the President

“”And make no mistake, even for the best-off in society, profound inequality has a heavy economic price. It fuels the crime that is a burden on everyone, while the dependency and deprivation it creates limits the economy’s potential.

—Gary Duncan, Scotsman, February 15, 1999

More information

• Robert Reich Destroys Minimum Wage Myths
• Nick Hauer, “Beware fellow plutocrats, the pitchforks are coming", TED (conference) (August 2014)