Month: November 2006

by hilzoy

In my last minimum wage post, the discussion veered off onto several related points: (1) who would an increase in the minimum wage actually affect? and second, to what extent can the poverty of minimum wage workers be ameliorated by their taking sensible measures like getting a rice cooker or moving in with roommates? (To be fair, discussion of this second point started out as a discussion of Barbara Ehrenreich’s Nickled and Dimed, and it wasn’t always clear where discussion of Ehrenreich in particluar left off and discussion of poverty in general began. But statements like “I don’t see any reason to deform public policy so that Ehrenreich and people like her can avoid doing perfectly normal things” at least suggested that it was meant to have some broader application. In what follows, I’ll be responding to a hypothetical person who did suggest this, and who should not be assumed to be identical with the actual Sebastian.)

As to the first question: the Economic Policy Institute has calculated the characteristics of people whose wages would go up as a result of the minimum wage, either because they are presently making less than $7.25/hour or because of spillover effects:

“An estimated 14.9 million workers (11% of the workforce) would benefit from an increase in the federal minimum wage to $7.25 by 2008. Of these workers, 6.6 million would be directly affected and 8.3 million would indirectly receive raises due to the spillover effect of a minimum wage increase. Of the total affected workers, 80% are adults and 59% are women. Over half (54%) work full time and another third (30%) work between 20 and 34 hours per week. More than one-quarter (26%) of the workers who would benefit from an increase to $7.25 are parents of children under age 18, including 1,395,000 single parents. The average minimum wage worker brings home over half (58%) of his or her family’s weekly earnings.”

Moreover:

“Among families with children and a low-wage worker affected by a minimum wage increase to $7.25, the affected worker contributes, on average, over half (59%) of the family’s earnings. Forty-six percent of such workers actually contribute 100% of their family’s earnings.”

And:

“The federal Earned Income Tax Credit (EITC) combined with the minimum wage helps to reduce poverty, but the EITC is not a replacement for a minimum wage increase. For example, in 1997, a single mother of two children working 40 hours per week year-round at the minimum wage would have earned $9,893 (after Social Security and Medicare taxes) and would have been eligible for the maximum EITC of $3,656, which would have put her family income at $13,549, a mere 5% above the 1997 poverty threshold of $12,931 for a family of three. But because the minimum wage has not kept up with increases in the cost of living since 1997, the same family is now below the poverty line. In 2005, a single mother with two children would have combined earnings and EITC of $14,177, or 11% below the 2005 poverty threshold of $15,735 for a family of three.”

Now, on to the rice cookers.

Read more

by hilzoy

Since the Democrats are talking about raising the minimum wage, I thought it might be a good time to round up some good discussions of the question: does raising the minimum wage cause employment to fall? As far as I can tell, everyone agrees that, other things equal (and assuming that demand is not perfectly inelastic), when you raise the cost of something, demand for that something tends to decline, and thus that raising the minimum wage should have some negative effect on employment. As far as I can tell, no one disputes that; and so when people argue about the effects of the minimum wage, it’s generally not helpful to point out that raising the price of something obviously causes demand for that something to drop. As an a priori argument about what happens when other things are equal, it’s true, and no one I’ve been able to find seriously disputes it.

The argument for the claim that the minimum wage does not cause employment to fall grants this basic point, but goes on to say: in the actual world, other things are not equal, and so we need to ask: does raising the minimum wage by the kinds of amounts people normally propose have other effects on employment that tend to counterbalance or even outweigh this negative effect? If it does, then arguing that since (other things equal) raising prices tends to lower demand, raising the minimum wage must reduce employment would be exactly like arguing that since, other things equal, cutting someone open with a knife tends to make that person less healthy, surgery can never improve your health. As I can attest, having an appendectomy does have negative consequences for your health. I was laid up for ten days after mine. But someone who kept pointing to the fact that opening someone’s abdomen up with a knife necessarily harms that person would be missing the point of appendectomies, namely: that those negative effects are vastly outweighed by the benefits of not having your appendix rupture and kill you. Same here.

Whether or not raising the minimum wage does have effects that outweigh its costs is, of course, an empirical question. Luckily, Kash Monsour has assembled some of it in a series of posts. He explains his starting point at the outset; I think it’s exactly the right one:

“When I started my graduate studies in economics, I was perfectly accepting of the classical economic analysis that illustrates why a minimum wage should cause low-income people to lose jobs. But by the time that I had finished grad school, I had learned that there are economic theories that lead to different conclusions, and I felt that I had seen enough evidence to call into question the classical prediction of the effects of raising the minimum wage. Since then, the additional evidence that I’ve seen has tended to generally confirm that minimum wage laws only have a very small negative impact (or very possibly no impact at all) on employment.

This is a subject on which I have tried to let the empirical evidence guide my opinion. And personally, I’m persuaded that the benefits of a higher minimum wage for low-income individuals (and the distribution of income more generally) outweigh any possible negative employment effects.”

He then presents some of that empirical evidence, which I’ll summarize below the fold (with helpful graphs, which I copied from him.) If you prefer arguments from authority to annoying graphs, you could just read this statement (pdf), signed by 650 economists, including five Nobel laureates.

Read more