Minimum Wages and Work

The minimum wage went up to $7.25 an hour on July 24th as the last of a three year planned increase passed by Congress. The increase is $.70 an hour over the minimum in 2008, a 10.7 percent increase. Since inflation is reported at 3.8 percent for the year the buying power of the minimum wage went up for 2009.

Despite three years of increase, the Federal minimum wage has a history of falling buying power. During the years 1997 to 2007 the federal minimum wage was frozen at $5.15 per hour. Even with annual inflation in the one to three percent range the minimum wage lost 25 percent of its buying power. A wage of $5.15 an hour in 2007 would only buy what $3.99 would buy in 1997.

The Bureau of Labor Statistics publishes wage ranges by occupation as part of its occupational employment survey. The median wage is often quoted in the popular press but there are wage ranges published that include the 10th, 25th, 75th and 90th percentile wages by occupation. For example, the 2008 data show 3.5 million employed nationwide as cashiers with a 10th percentile wage of $6.88. That means that 10 percent, or 350 thousand jobs, can be expected to have wages equal to or less than $6.88 an hour.

The 2008 data show cashier and 30 other occupations with 18 million jobs that have 10th percentile wages of $7.25 or less, which means 1.8 million of the total can expect a boost in pay. It is a $1,456.00 annual increase over the old minimum for a full time job, but still only $15,080 a year and barely half of a self supporting wage.

Business tends to oppose any increase in the minimum wage and economists predict in sinister tones that higher minimum wages lead to falling employment, hurting those who expect to be helped. However, the tendency to use less labor at higher wages is universal and not confined to just minimum wage jobs.

For example, the Bureau of Labor Statistics reports managerial jobs in decline with a drop from just over 8 million in 1999 to barely 6 million in 2008. Engineering managers are down by nearly 70 thousand as median wages went steadily up reaching $115,000 in 2008.

Economizing on high paid engineering managers puts engineers in surplus as long as we expect former engineering managers to be looking for engineering work in occupations related to engineering. Most engineering specialties like civil engineering and mechanical engineering have median wages in the mid $70’s. Engineering technician jobs have median wages in the $40’s.

Civil and mechanical engineering jobs are up with some of the unemployed engineering managers adding to the supply of labor, but we can’t be sure who got the engineering jobs. If it is former engineering managers it will certainly mean a pay cut for them.

It could be an engineer who was working as a lower paid engineering technician. If that is the case it will mean a pay raise for them, but it could also be a college graduate in engineering who had been working in a minimum wage job. If that is the case it will mean a pay raise for them.

During the years from 2006 to the present when the minimum wage jumped by $2.10 an hour, jobs as fast food cooks dropped from over 600 thousand to 559 thousand. Maybe that is due to the higher minimum wage, but during the same period there were other labor markets where a surplus of labor kept wages lower and helped expand employment, but in wage ranges well above the minimum.

Economists tend to ignore what is happening in high wage job markets when they predict changes for markets with the lowest wage. A higher minimum wage can eliminate low wage jobs, but that does not relegate the people who had them to endless unemployment, nor prevent them from getting higher wage jobs. That is because changes in job markets create surplus labor in many occupations in other wage ranges, both high and low.

Families are a second wage issue that economists tend to ignore. Economists act as though individuals make independent decisions when it is time to enter the labor force and become part of the labor supply. Yet a majority of Americans live in families and make job decisions that depend on their spouse and the circumstance of other family members.

Suppose the mister in the Smith family has a job as a tool and die maker working in manufacturing and his wife works part time in retail. Tool and die maker is one of America’s better paid production occupations with a median wage reported at $22.32 an hour or $46,430 a year for 2008, and a 90th percentile wage of $34.76 an hour or $72,300 a year. Together they might earn $60 to $80 thousand dollars.

The Bureau of Labor Statistics reports jobs as tool and die maker in decline every year since the late 1990’s. With a broad base of manufacturing also in decline it is easy to imagine a layoff for Mr. Smith. Economists argue and predict people will work less at lower wages and work more at higher wages so unless Mr. Smith can find work at his tool and die maker wage economists expect him to work less after a layoff than before.

Economists do not base their predictions on interviews, observation or data. Instead they rely on conjecture about preferences. Leisure they argue is valuable and will be traded for work in the personal preferences of individuals. Therefore, at higher wages leisure is more expensive because it means giving up those higher wages, and people with standard preferences want less of what is more expensive. Conversely, at lower wages leisure is less expensive because it means giving up lower wages, and people will want more leisure because it’s less expensive.

Those less devoted to the economist’s way think the Smith’s will do whatever they can to pay the bills and maintain their economic status. Mr. Smith will take a job in maintenance or construction or whatever he can find at lower wages if necessary, and a second job working evenings or weekends. Mrs. Smith will work more hours in retail. Together the Smith’s work more hours at lower wages to keep up, just as they might work less if their wage was higher. People like the Smiths assure that lower wages add to the surplus of labor.

It is easy to understand the business opposition to the minimum wage: it converts profits to costs at $1,456 dollars per full time minimum wage employee. The economist’s opposition to a higher minimum wage is different; they argue that forcing up wages is bad for labor by reducing jobs and raising unemployment as more people look for work at the higher wage.

Economists ignore the two possibilities mentioned above: that those who lose low wage jobs can find surplus markets and other jobs at higher wages and that families work more at lower wages. If either is true then economists are giving bad advice.

This July 24th Secretary of Labor Hilda L. Solis announced “This administration is committed to improving the lives of working families across the nation, and the increase in the minimum wage is another important step in the right direction. This well-deserved increase will help workers better provide for their families in the face of today's economic challenges.”

Politicians often exaggerate the significance of what they do and it does sound like high praise for a wage of $7.25 an hour. It is not enough increase to be the important step she says, but it is in the right direction.