Saturday, May 11, 2013

The $9.00 an hour minimum

The Obama Administration recently proposed an increase in the minimum wage to $9.00 an hour. The current minimum continues at $7.25 an hour where it has been since July 24th 2009, the date of the last of three planned increases passed by Congress. The proposed increase is a little over 24 percent over the three years from 2009 to 2012, more than inflation but still hardly a self supporting wage.

At $9.00 an hour per full time employee the increase converts $3,640 [$1.75 x 2,080] of profit to cost per full time minimum wage employee. To employers of low wage jobs like ushers, lobby attendants, ticket takers, shampooers, or child care workers higher wage costs bring pressure to experiment with higher prices, and fewer work hours or jobs. Raising prices might raise revenue and restore profits as long as sales don’t fall by much. Otherwise cutting jobs or hours in response to a higher minimum wage should help restore profits.

Since everyone agrees higher wages do pressure employers to cut work hours or jobs for employees paid below the minimum wage that part makes for easy agreement. However, it represents a small part of the minimum wage debate, unless economists and their business clients expect job losers to disappear, never to work again.

In their book Minimum Wages economists David Neumark and William L. Wascher write on page 116, “. . . as we emphasized earlier in this chapter the potential for minimum wage increases to affect wages higher in the wage distribution is also important in assessing the effects of minimum wage policy.” (1)

When the minimum wage jumped by $2.10 an hour from 2006 to 2009, jobs as fast food cooks dropped from 612 thousand to 539 thousand. (2) During the same period there were other jobs as cashiers, retail salespersons, rental and counter clerks and others with wage ranges above the minimum. An increase in applications for these other jobs quite likely holds down wages as economists like to predict from any increase in supply, but in wage ranges above the minimum. As people find other jobs in other industries and occupations the higher minimum wage can work to increase employment at higher wages.

In spite of their conclusions, Neumark and Wascher “. . . find it very difficult to see good economic rationale for continuing to seek a higher minimum wage.” In this they are like all economists who have been reciting conclusions like that for decades. Telling people they are worse off with a higher wage makes it necessary to quickly convince the public that jobs will be lost.

Neumark and Wascher and other economists try to convince people by theorizing in the specialized terminology of the economics fraternity. At page 254 they write “In the model, an increase in the nominal wage that raises the wage rate of unskilled labor not only induces substitution of skilled for unskilled labor, it also leads to substitution of unionized skilled labor for non-unionized skilled labor because the union sector expands and the nonunion sector contracts.” Their predictions come without mention of occupations like cashier, clerk or fast food cook and lead to conclusions applied to generic markets of products and jobs. The authors might recognize the millions of opportunities to move from low wage to higher wage employment by looking at wage distributions by occupation reported by the U. S. Bureau of Labor Statistics in their Occupational Employment Survey.

Business predictably opposes a higher minimum wage year after year. For individual business a higher minimum wage always converts profits to costs, even though the economy needs people with income to put back in the spending stream. Economists repeatedly offer theoretical support as though they are paid spokesmen or women.

Telling people they are better off with lower wages remains a tough sell among wage earners. The continued popularity of a higher minimum wage suggests there are many that work for wages who understand employers and employees have opposite economic interests. Employees outnumber employers by enough to expect a raise, but politics is a messy business. Will Congress go with the numbers?

[1] David Neumark and William L. Wascher, Minimum Wages, (Cambridge, MA: The MIT Press, 2008), 295 pages.

[2] U. S. Bureau of Labor Statistics, Occupational Employment Survey


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