Minimum Wage
People who clamor for a raise in minimum wage fall into two camps: those who lack a fundamental grasp of macro economics, and those who understand the subject very, very well but seek to buy votes by capitalizing on others’ ignorance.
If I own a retail shop, my purpose for existence is to earn a profit and support myself financially. If I don’t buy things for one price and sell at a markup, I might as well close up and do something else. Thus, when I open such a shop, I calculate the fixed and variable costs of selling products in the marketplace, set the prices, and sell the items (or services).
When the government forces me to pay my hourly employees a dollar more per hour, I sit back down, refigure my employee costs (part of the variable costs), and refigure my retail prices. More importantly, so does EVERY OTHER BUSINESS who hires hourly employees.
The result is that my hourly employees must pay higher prices at every place they buy goods or services in order to offset the higher variable costs that every other business owner has newly calculated. When they buy groceries, gasoline, haircuts, school supplies, clothing, and toiletries, it all cost a bit more after the legislation. And that’s actually the best-case scenario; it’s possible that a business owner may decide to operate on fewer employees because of the new law and thus initiate layoffs.
So, raising minimum wage will actually cause Jane Wageworker either to pay higher prices all over town to make up for her higher wage, or to lose her job completely.
I am aware of the argument made by some liberals that “some businesses will just settle for less profit and absorb the loss.” This argument ignores the years of historical evidence that shows the path our economy takes when such legislation is passed. Businesses either raise prices or lay off employees. Taking less profit defeats the purpose of opening up shop in the first place—a purpose that will be the last casualty of any government decision.
If I own a retail shop, my purpose for existence is to earn a profit and support myself financially. If I don’t buy things for one price and sell at a markup, I might as well close up and do something else. Thus, when I open such a shop, I calculate the fixed and variable costs of selling products in the marketplace, set the prices, and sell the items (or services).
When the government forces me to pay my hourly employees a dollar more per hour, I sit back down, refigure my employee costs (part of the variable costs), and refigure my retail prices. More importantly, so does EVERY OTHER BUSINESS who hires hourly employees.
The result is that my hourly employees must pay higher prices at every place they buy goods or services in order to offset the higher variable costs that every other business owner has newly calculated. When they buy groceries, gasoline, haircuts, school supplies, clothing, and toiletries, it all cost a bit more after the legislation. And that’s actually the best-case scenario; it’s possible that a business owner may decide to operate on fewer employees because of the new law and thus initiate layoffs.
So, raising minimum wage will actually cause Jane Wageworker either to pay higher prices all over town to make up for her higher wage, or to lose her job completely.
I am aware of the argument made by some liberals that “some businesses will just settle for less profit and absorb the loss.” This argument ignores the years of historical evidence that shows the path our economy takes when such legislation is passed. Businesses either raise prices or lay off employees. Taking less profit defeats the purpose of opening up shop in the first place—a purpose that will be the last casualty of any government decision.
posted by Cole @ 6:35 AM
4 Comments:
At 7:38 PM,
Anonymous said…
You state that on the Federal Minimum Wage (FMW) issue there are ,”…two camps: those who lack a fundamental grasp of macro economics, and those who understand the subject very, very well but seek to buy votes by capitalizing on others’ ignorance.” You are right about the first part of you statement. You do. “lack a fundamental grasp of macro economics.”
A recent and widely reported study by Card and Krueger, indicates that modest increases of the minimum wage by states of one to two dollars has little or no effect on the economy or unemployment rates. The researchers did find a negative impact in unemployment rates of teens. They attributed a slight increase in unemployment rates of teens to an increase in the states’ minimum wage increase. However, for the period that was studied there was an overall increase in the unemployment rates of teens.
In states that have higher than federally mandated wages, teenage unemployment rates rose about 3.4% unlike states that only observe the Federal Minimum Wage (FMW). Those states teen unemployment rates rose about 4.2%. To be sure there was a slight impact on teens but the impact was not what those who oppose FMW increase expected. Adults did far better with either a neutral or small negative impact of about 0.1% increase in unemployment rates.
At the end of your hypothetical one dollar an hour increase of the minimum wage you state, “So, raising minimum wage will actually cause Jane Wageworker either to pay higher prices all over town to make up for her higher wage, or to lose her job completely.” The FMW has not been raised in nine years but your “Jane Wageworker”, is paying higher prices in gas, food, housing, etc. It may be naïve of me, but please tell me that you are not saying that the cost of living, especially gas prices, are attributed to wage hikes that are nine years old.
I am interested in your following citation: I am aware of the argument made by some liberals that “some businesses will just settle for less profit and absorb the loss.”. I would like to know to whom you are attributing the quote. In the sentence that followed you state that, “This argument ignores the years of historical evidence that shows the path our economy takes when such legislation is passed. Businesses either raise prices or lay off employees.” The historical evidence actually shows the opposite.
In your opening you wrote that, “… those who understand the subject very, very well but seek to buy votes by capitalizing on others’ ignorance.”, is true. It is unfortunate that those who oppose the FMW increase tend to be, “capitalizing on others’ ignorance.”
By the way, I really liked listening to you guys at San Antonio’s Folklife Festival. I can’t wait to see you all at Longhorn Caverns.
At 8:09 PM,
Cole said…
First of all, Stephen, THANK YOU for reading and commenting on my blog. It’s just this type of dialogue I was hoping to solicit.
Unfortunately for your claims, you selected Card and Krueger’s 1995 Myth and Measurement: The New Economics of the Minimum Wage, a book whose main arguments have either been categorically proven wrong or summarily dismissed by other noted economists since it was written (see, for example, http://www.cato.org/pubs/regulation/reg18n1c.html). You will undoubtedly find supporters as well, but I am not persuaded by Carl and Krueger.
However, I must say that your other arguments hold no water either, especially when you indirectly argue that since minimum wage has not been raised in nine years but we still have high gas prices today, my arguments are invalid. That simply doesn’t work.
You criticize me for not citing a particular liberal who argues that most employers would simply accept less profit than reduce staff or raise prices. Well, I did not intend to represent a published article or book with that statement, just the political liberals who have spoken to me. I was not trying to misrepresent this blog as always proceeding from published data.
At 7:52 AM,
laura g said…
in nonprofit social services, i primarily encounter people who lack a fundamental grasp of macro economics - camp #1. i often hear service providers holler for higher minimum wage as if it is the solitary solution to their clients' problems. sure, the client needs to be making more money. but raising minimum wage isn't the best way to make that happen.
At 7:59 PM,
Anonymous said…
On the whole, I'm with Professor Bennett here. The actual economic impact he describes - in general terms - is in fact what occurs. After wage increases, Employers either cut jobs to retain profits or simply refigure prices to accomplish the same thing. The end result is that corporate America shifts the burden; it doesn't shoulder it. Some businesses may do otherwise (good for them), but most will not.
It's a valid argument to point out that a minimum wage increase hasn't occured in nearly a decade. This is a problem. Inflation alone would nearly consume the value of today's wage compared with that of 9 years ago. Morally, that's hard to justify, especially when executive compensation has more than kept up with inflation. Nonetheless, that can't account for the unavoidable economic consequences of a wage increase. The devil - I would think - is in the details here, which seems to be beyond the scope of this blog (and my knowledge of econimics). Nonetheless, I bet even the most educated economists disagree a/b the issue, some on one side and some on another. Sigh.
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