Should We Raise the Minimum Wage?

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It is no secret that the minimum wage is too low. It puts literally all families below the poverty level if one works less than 40 hours per week.

The US government poverty guidelines of the government follows – although depending on the interpretation of the specific agency and state – these numbers could be pretax or post-tax because the government guidelines do not specify:

Household Size Poverty threshold Hours needed to work to exceed Poverty threshold Obamacare Part time Max Income
1 $11,490 1532 $10,875
2 15,510 2139 10,875
3 19,530 3582 10,875
4 23,550 3248 10,875

Consider that 2000 hours are equal to a year working, and except for a single person on their own, this is not even close to a living wage for a family if there is only one bread winner. Now consider that most non-full time employment at retailers will likely fall to 1500 hours per year due to Obamacare.

Houston – we have a problem ….  The law of unintended consequences over health care have made the existing minimum wage which was already too low problematic even with subsidies. The political wheels are turning – bringing the attention of the pundits and dumbed down masses to a few major retailers who help their employees get government assistance.

Even the big gun – Nobel Laureat Paul Krugman opined this week:

Still, even if international competition isn’t an issue, can we really help workers simply by legislating a higher wage? Doesn’t that violate the law of supply and demand? Won’t the market gods smite us with their invisible hand? The answer is that we have a lot of evidence on what happens when you raise the minimum wage. And the evidence is overwhelmingly positive: hiking the minimum wage has little or no adverse effect on employment, while significantly increasing workers’ earnings.

If you have the time, you can scan the “lot of evidence” – and if you are not already too biased, you will realize the empirical evidence is fairly weak – but that does not diminish that families cannot live on minimum wage. One of the primary arguments is that minimum wage has not kept up to inflation – the answer depends on how you index minimum wage, and how you view the CPI – but this argument is weak also.

It seems like the minimum wage has kept up with inflation for most periods since 1955.  If the minimum wage was okay in 1955, should it not be okay today? Could the inflation index be flawed? Or is the current poverty level calculation flawed (too high)?

Note: If we picked a reference year between 1975 and 1980, minimum wage would have lagged inflation for much if the intervening time since.

Will increasing the minimum wage help? Like everything – there will be winners and losers. The losers will be the lower income families who are not benefited by the raise in the minimum wage – but will have to bear the higher costs which likely will be passed along.

Does this mean politicians should do nothing? Is it acceptable that income disparity continues to grow? Has the government shown they can manage the unintended consequences of their growing involvement in a languishing economy?

My concern about screwing with the minimum wage is with the laws of supply and demand – it is telling us that there are too many workers and not enough jobs. There is not a chance that increasing the minimum wage even begins to address this issue. Minimum wage is not a problem if there are more than one household worker. The real problem is not enough jobs being created in an economy which has been mismanaged for over ten years.

Do not take this post as suggesting that the minimum wage should not be studied and/or adjusted, but it is an argument that the minimum wage is not the core problem – and that any solution limited to simply adjusted minimum wage could lead further unintended consequences.

Other Economic News this Week:

The Econintersect economic forecast for December 2013 again improved. What this forecast cannot see is the real effect of austerity and Obamacare – but it does see that business is betting the effects on the economy will be minimal.

The ECRI WLI growth index value has been weakly in positive territory for over four months – but in a noticeable improvement trend. The index is indicating the economy six month from today will be slightly better than it is today.

Current ECRI WLI Growth Index

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Initial unemployment claims went from 316,000 (reported last week) to 298,000 this week. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate. The real gauge – the 4 week moving average – improved from 331,750 (reported last week) to 322,250. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.

Weekly Initial Unemployment Claims – 4 Week Average – Seasonally Adjusted – 2011 (red line), 2012 (green line), 2013 (blue line)

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Bankruptcies this Week: OCZ Technology Group

Data released this week which contained economically intuitive components (forward looking) were:

All other data released this week either does not have enough historical correlation to the economy to be considered intuitive, or is simply a coincident indicator to the economy.

Weekly Economic Release Scorecard:

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14 replies on “Should We Raise the Minimum Wage?”

  1. You contradict yourself when you first say that it is no secret that the minimum wage is too low and later say that simply adjusting the minimum wage might lead to unintended consequences. Those two statements are not mutually consistent. My take is that if there was no minimum wage, the overall wage rate would be higher. I think the minimum wage depresses wage rates as it serves as a signal as to what the wage rate for the lowest rung should be. Without that signal there might be more competition for labor and higher wages. I have observed price controls keeping prices higher than the market would otherwise set them again serving as a signal. It seems to me that this is a very complex subject.

  2. @SantaFeSteve 
    Good day.  the post was meant to show how complex this subject was. i think the post clearly shows a sole breadwinner will put a family below the poverty line. i do agree with your statement on price controls – but minimum was sets the lower boundary, whilst price controls generally set the upper boundary. Are the effects similar?
    finally, minimum wage only becomes a talking point when we discuss sole breadwinners. we are playing a dangerous game trying to override market forces by playing with minimum wage.

  3. The concept that a minimum wage would support a family is ludicrous. Why should the first job a person has be sufficient to support a family? My first job paid $0.50 an hour. I was not thinking that I was going to get married and have two kids working as a night watchman on a parking lot. If a minimum wage job could support a family, how would the rest of the economy work? In a way it is a contraction in terms. If the labor of an unskilled person produces that which is necessary to support a family then those who make 10 to 20 times that level of earnings would be bidding up the prices of what the family living off a single minimum wage earner would be receiving and thus be forced back into poverty.
    So to me the entire concept is silly. There is no way that the least skilled and least experienced worker can support a family and the rest of the economic system be in balance. So relating the minimum wage to the income necessary to support a family is a non-productive exercise IMO.
    Thus it is not at all clear that the minimum wage is too low. It may be clear that it has not kept up with inflation. But the value of first jobs may not have kept up with the average productivity of labor either. Perhaps government should stay out of the labor market. I certainly would never hire anyone if government is going to tell me what I have to pay them. There may be many who feel the same way and thus contribute to the shortage of jobs. It is a very complicated subject.

  4. You’re ignoring the input of government programs to the working poor – in effect a subsidy that enables employers to pay less.  Calculate the amount salaries would have to rise without those programs in place to make up the difference, and the charts will be meaningful then.

  5. Not sure I see all the posts.
    This is a great topic. unfortunately there is no easy answer. But it is a topic that clearly needs to be discussed.

  6. I have read many articles and seen much data related to minimum wage. One thing missing is the new reality vs years when the index vs infaltion appeared lower than now.  When i was growing up in the late sixties thru early 70’s teenagers and students had minimum wage jobs, in my friends and classmates families almost no-one had fathers earning minimum wage, occasionally mothers had a job at that level, but the MAIN EARNERS WERE NOT AT MINIMUM WAGE! 
    Min wage was historically a secondary income or entry level or student / teen wage, It is now becoming a larger part of primary income as the “good” jobs are diminishing, This is a huge economic problem, as a larger portion of the population has less spending potential.
    Before Clinton raised the min wage the conservatives sounded bells & alarms that it would create unemployment, this proved untrue, (refer to your unemployment charts in recent EconInt article) the economy infact improved as buying power improved.
    While a $15 min wage may be unrealistic a 10 to 20% increase would not be detrimental to the employment situation, but it would increase buying power.

  7. @Michael Weinert
     I think you are making some valid points. I am not sure that raising the minimum wage is the best solution but it is clear that we need a less skewed income distribution. 
    Personally I think the minimum wage contributes to keeping wage rates down. I think that if we had no minimum wage average wages would be higher and we would have higher employment and an overall more robust economy.
    I have real world experience with price controls which actually prevented prices from falling. So government controls do not always have the effect one might expect but can have perverse effects.

  8. @SantaFeSteve  @Michael Weinert I agree that if average wages were higher the economy would be more robust.  
    I have heard the theory that minimum wage contributes to keeping wage rates down for some time now. What is the basis of this theory? Is there data or some example of how minimum wage keeps average wages lower? I have never actually heard what supports this theory, it would be interesting.
    Price controls are not the answer either, but an interesting case is the Deregulation of airlines which had price controls, and only a few major carriers controlled most routes with no competitive pricing; Now as USAirways & American merge the same thing is being said that just a few airlines will have too much control of pricing and routes and minimal competition. Free market airline economy has come full circle in three decades back to the beginning. I didn’t intend to change the subject but this came to mind.

  9. Michael Weinert.
    Prices are set by supply and demand. Minimum wages convey information as to what a person should expect to earn and what an employer should expect to pay. Thus it signals the market in a way that keeps wages down.
    Plus it eliminates that one extra job that employers used to fill as more or less an apprentice position. Very often the apprentice would get their chance when someone left, was ill or did not perform. Now these people have to wait for boom times.
    So it is hard for the young to get jobs hence the very high level of unemployment of our youth. I see it as a crime against humanity.

  10. Michael.
    Monopolies are not good but two bankrupt airlines do not provide any service. One has to think about what prevents new competition. Competition is what keeps prices to that which equates the interests of buyers and sellers. If you interfere with competition you end up with distorted things happening like monopolies and unemployment. .

  11. @SantaFeSteve Steve
    An apprentice position implies training for a skilled position, skilled labor typically earns wages well beyond minimum. For example in a prior job I held, certified people with my experience level earned 3 to 4 times minimum wage, certified with minimal experience earned 2 to 2.5 times minimum, and non-certified trainees (apprentice) scale was about 1.5 times minimum. In skilled positions employers and employees expected pay to be well above minimum.  .
    However, here in Florida, the largest industry is the tourist industry. A majority of these jobs are minimum service jobs, plus management and commissioned sales jobs. The basically unskilled, minimum wage, service jobs do not require apprentice type training.
    The skilled job market is still low which helps creates the high youth unemployment you speak of, and an over-reliance on minimum wage jobs.
    This is going back to my original comments, while a doubling or large increase in minimum wage would likely have negative impact as predicted, these dire predictions seem to always precede smaller increases too. Historically incremental increases have not had negative impacts as in the Clinton min wage increase which was followed by a strong economy supported by jobs and GDP data.
    The increase in buying power of a 10 to 20% increase in min wage would have a greater positive impact given the greater reliance on the lower wages.
    Again, I have heard the theory that minimum wages keep wages down, however I have never seen stats or data, or real world examples which I can put my finger on that are actually supportive the theory. I have always heard strong sounding theory and logic to support theory.  
    My thirst for knowledge is what interests me about Econintersect as well as a relatively non-partison reporting format,   i wonder if  SantaFe Steve is Steve Hanson?

  12. @SantaFeSteve hi again Steve
    I also agree that monopolies are not good because they stifle competition. 
    Regarding the example of the merger of US Airways and American Airlines, they unquestionably provide a service, having come out of bankruptcy leaner the merger formed the largest airline in America, they are filling seats on flights to Europe, South America, up and down the East Coast, and going to coast to coast. These 2 and other airlines have emerged from bankruptcies with a leaned out business model. However, with the American merger  and the merger of airlines such as United & Continental,  and Delta & Northwest  that leaves very few players in the markets,  with just a couple large secondary airlines such as JetBlue and Southwest  which has  recently absorbed AirTran.  Economist’s predict that these smaller airlines will also be subject to continued to mergers, again diminishing competition and creating very few are airlines and somewhat monopolizing the routes that they serve.
    Another example is the cell phone communication industry.  Verizon sucked up Alltel as well as other small competing companies.   The Dept of Justice & FCC stopped AT&T from acquiring T Mobile in 2011, as the merged company would have been too large. Now, just this week Sprint has talked about possibly acquiring T Mobile in 2014 which will reduce the number of national cell companies to 3 monopolies.  The only thing that would prevent it would be DOJ and FCC action to stop the reduction of competition, or monopolization.
     These are the pure free market forces of capitalism that keep these mergers and acquisitions going, ironically this is eliminating the competition that keeps prices at the best interests of the buyers.
    Occasional government anti-trust interference has sometimes prevented the economic distortion created by the formation of monopolies.
    It’s not just Airlines & communications; large companies often swallow competition in mergers & acquisitions, such as banks and investment institutions forming financial companies that are “to big to fail”.
    It is somewhat apparent that the economy of scale is an overriding factor.  As competition puts pressure on a large company this tends to push the acquisitions and mergers.  The larger company can keep down small competitors with their inherit economy of scale, ie: walmart knocking smaller stores and chains out of business or pushing a merger between k-mart & sears.  
    Big Government regulation may not be the answer, but, I have cited solid examples of free market  forces driving competition down and creating monopolies and economic distortion.

  13. I got message in my email re Asian wages only being $200 a month but I can’t find his comment here to reply to so I will just say that anyone who things Asian wages are too low should open up a business in Asia and pay higher wages. Same holds for the U.S. buy a Subway franchise and pay your workers $25 an hour.
    LIberalism is about what the other person should do. Some employers pay above market wages and have access to the cream of the crop employees and benefit from doing so. Workers need to figure out how to increase their value to employers. There is always a choice of employers so find one that properly values your contribution.
    Since the World’s population is increasing clearly compensation levels allow for the replication and expansion of the species. Some may benefit more than others but the concept of there not being a living wage is shown to be a lie because people are living. Most want to live better. The challenge is to find someone who wishes to work harder so that you can live better.

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