The Great Wage Experiment of 2017 - The American Interest

$15 Minimum

The Great Wage Experiment of 2017

Even though the GOP gained power across the board in last November’s elections, the economic Left will start to enjoy the fruits of one major policy victory it secured over several years of hard-fought campaigning: A higher minimum wage. Starting this week, many states, including red-leaning ones, will begin phasing in the higher wage floors approved by voters and legislatures. Some of these are stand-alone increases, while others are a step on the way to a planned $15 minimum that will go into effect in several years. The Wall Street Journal reports:

Minimum wages will increase in 20 states at the start of the year, a shift that will lift pay for millions of individuals and shed light on a long-running debate about whether mandated pay increases at the bottom do more harm or good for workers. […]
Wages are also going up in many Republican-led states, where politicians have traditionally been skeptical of the benefits of minimum-wage increases. […]
Economists and policy makers are of two views on the costs and benefits of minimum-wage increases. While the policy puts more money in the pockets of low-wage workers, it also gives employers less incentive to add to their payrolls, leaving some workers behind.

We at TAI have been skeptical of excessive minimum wage increases—especially statewide increases to the $15 level, which threaten to severely restrict business growth in economically depressed areas with low costs of living and where $15 per hour exceeds the current median wage. There is ample evidence that even moderate minimum wage hikes have made hundreds of thousands of Americans unemployable; that effect is likely to be amplified if states follow the prescription of the “Fight for $15” movement and push the minimum wage to higher levels than have ever been tried in American history. More targeted measures like tax credits and vouchers seem like a more promising route for enhancing the income of low-wage workers without pushing millions of them onto the unemployment rolls.

At the same time, the minimum wage hikers have won fair and square, and the higher minimums are going into effect no matter what. One of the virtues of federalism is that it enables other states and localities that have not yet taken the $15 plunge to take note of economic and hiring patterns in places that have before making their decision. Economics is not an exact science, and it’s possible that pessimistic forecasts will be proven wrong. Here’s hoping that the higher wages deliver on their promise, and that the job destruction in America’s vulnerable regions is kept to a minimum.

Posted: 2017-01-02 12:46:37

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We can’t have a nation of $9 hr labor…it is ridiculous….
TheRadicalModerate

Having a minimum wage discussion in the absence of understanding the underlying goals of such a policy is silly, and will lead to measuring the wrong things. Labor policy for low-skill workers needs to answer the following questions:

1) Should the economy as a whole pay to ensure that low-skill laborers have more household income than the market-clearing price of their labor would imply?

2) Is increasing employment (and/or the number of hours worked) a goal?

3) Should the entity paying to increase household income be the employer, or the government?

4) How much are we willing to pay for all of this?

I’m going to assume that the answer to question #1 is “yes”. (If it’s “no”, then we’re done.)

Question #2 is probably the key. Minimum wages essentially prevent the market-clearing price for low-skill labor from being reached, which means that labor demand will get distorted in some way. We can have an argument about whether that demand distortion is large enough to create substantial unemployment, but it certainly isn’t going to increase employment. Meanwhile, allowing employers to pay the market-clearing price for labor absolutely results in more hours worked. It probably doesn’t do much for take-home pay, because the hourly wage will be lower. But more people wind up with jobs, and more employees work more hours.

If we think that creating better-paid employees, either in the same or lower quantities as the status quo, is more important than creating more employees, most likely at a lower wage, then the minimum wage is the way to go. But if we tend to the “more employees and more hours worked” position, then minimum wage is counterproductive.

Another property of the “more employees” approach: If we create more employees, we provide more opportunities for low-skill employees to learn and improve work habits. More of those employees are then likely to go on to become higher-skilled workers. So the “fewer employees at higher wages” approach omits an important social goal.

Question #3 is somewhat orthogonal to #2, but is also vitally important. Minimum wage assumes that the paying entity is the employer. Notice that when we coerce employers to pay above-market wages, we’re effectively selecting a specific group of employers (i.e., those who employ low-skill labor), to the exclusion of other types of employers (e.g. those who hire skilled or professional labor that already commands more than the minimum wage), and coercing only that group into paying for the whole undertaking. (Of course, they pass the price onto us consumers, but we’re just dumb sheep, right?)

The alternative to this would be to implement an enhanced/reformed version of EITC¹, which is paid for by everybody. The burden falls progressively on higher earners, just like every other government spending policy. But the only selection we’re making at the business level is one where we force more profitable businesses to pay more in tax than less profitable ones.

Note that EITC can accomplish two different things in the labor market:

a) It can act as a source of household income for low-paid employees.
b) It can act as a stimulus to job growth.

But it can only stimulate job growth in the absence of minimum wage, because otherwise labor demand doesn’t increase, because the market-clearing price can’t be reached. So if increasing the number of hours worked is a goal (question #2), then EITC is a clear winner.

But that brings us to question #4: how much does all of this cost, and are we willing to pay it? And again, there are radically different results, based on whether employers pay or whether we all pay, through taxes.

In a minimum wage regime, the costs are limited because employers reduce hiring to control labor costs. In a government EITC regime, the costs may turn out to be unlimited if the law is written wrong. If low-skill labor prices fall enough, then the demand on the EITC program becomes very large, which requires tax increases or deficit spending (guess which one), and things spin out of control. If we cap the amount we’re willing to spend on EITC, then we pretty much have to figure out how to allocate the money based on how many employees qualify for it.

The net effect of capping the EITC budget could be that there isn’t enough EITC subsidy to increase household incomes enough to be useful. If that’s the case, then maybe encouraging a smaller number of jobs at higher wages through minimum wage actually turns out to be preferable.

This isn’t an easy problem. The biggest problem with minimum wage is that it allows us to pretend that we’re doing something about the issue without being directly affected by it, which is untrue and likely feckless. The biggest problem with EITC is that it tempts us to underestimate the size of the shortfall, which may be equally feckless. But at least with EITC you can have the discussion about how much you’re willing to pay. With minimum wage, you can’t even ask the right questions.

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¹Paying EITC out once a year in a tax refund is insane. It requires extremely good money management skills to apply a single annual lump-sum payment to the cost of living for an entire year. Low-skill households are the least likely to possess those skills. This stuff has to be paid out over the course of the year if it’s to be even slightly effective. That ought to be a major part of any reform. It’s not easy, because pre-paying EITC is a recipe for overpaying it and not being able to recoup the overpayment at tax time. My favorite version of this is basing the payments on employer income coming into a monitored bank account, but isn’t problem-free, either.
- f1b0nacc1
  
  As I always expect from your posts, this is carefully thought out and intelligently presented.
  
  Let me offer a minor quibble however. In a minimum wage regime, employers (who will be the ones paying for this in the most immediate sense) have two responses, both of which are likely to be used. The first is simply to higher fewer individuals, while the second is to continue to higher the same number of individuals but to reduce the hours that they work. In the second case, employers can higher more workers and reduce hours (or accept lower margins, the latter being somewhat unlikely), but they can also higher fewer workers *and* reduce hours. This, like our first option (simply hiring fewer individuals outright) can be accomplished in many ways, but one of the more dangerous (for the low-skilled workers) is automation, something we are already beginning to see in some areas such as fast food. Barring some incredible (in both senses of the word) change in demand, we aren’t likely to see any improvement for lower-skilled workers as a group, though some subset of that group may enjoy some benefit from a higher minimum wage until their jobs are eliminated or reduced by other means. My point here is that any benefit (as a reply to your question #1) is likely to be temporary and ultimately it will rebound upon those that it is supposed to help, barring employers as a class suddenly deciding to emulate a latter day George Bailey.
  - TheRadicalModerate
    
    “In the second case, employers can higher more workers and reduce hours…”
    
    If you didn’t have the ACA requirement to provide health insurance for everybody who worked more than 30 hrs/wk, there’d be no incentive for employers to have more workers working fewer hours, ever. Hiring and firing is expensive, so you want to minimize the number of employees. ACA is a huge distortion on the labor market. Hopefully, that piece of it will be gone soon.
    
    Note also that there’s another knock-on effect of part-time work: When your part-timers have no job security and not enough income to really get ahead, they’re lousy employees, with high absenteeism. High absenteeism requires the part-timers to be on call for many more hours than they can actually work, which prevents them from getting another part-time jobs, which makes their position even more tenuous, which makes them even lousier employees. Lather, rinse, repeat. Full-time work has lots of second-order benefits.
    
    “Barring some incredible (in both senses of the word) change in demand,
    we aren’t likely to see any improvement for lower-skilled workers as a
    group…”
    
    I disagree with this. In the absence of any minimum wage, demand for labor would skyrocket, because the price of the labor would be lower than the extra folderol necessary to offshore production and (for quite some time), lower than the amortized cost of capitalization and operational costs for automation. It will absolutely be much cheaper labor, and it’s unlikely to provide some magical living wage, even if everybody’s working 40 hrs/wk.
    
    Eventually, automation will become so cheap that even a free human won’t be worth it. But that’s a ways away.
    
    Also, note that labor prices don’t just go into freefall when you remove the minimum wage. There’s the “supply” part of the equation, too. If it’s not worth working, people won’t, which reduces supply, which raises wages, and so on, until the labor market reaches equilibrium.
    
    I do worry that a generous EITC system would cause employers to discount wages even further, putting more and more of the burden of bringing low-skill households up to a decent standard of living on the government. Maybe the answer to that is to install a small minimum wage, but I don’t know how you’d do that and still be responsive to changes in the market. But it may not be necessary: in the end, if you get wages low enough, employers start paying efficiency wages (i.e., a wage premium to retain productive workers) so that the EITC gouging doesn’t get out of hand.
    
    We finally seem to have some evidence for just how bad unemployment is, both societally and for the individual. Subsidizing cheap labor with something like EITC seems like it might be an even better social/culture program that it would be as a pure welfare program, if it enables people to work a lot.
    - f1b0nacc1
      
      I agree with you completely regarding the labor market distortions of Obamacare. With the much desired departure of Obama very soon, let us hope that his namesake follows quickly.
      
      Regarding your comment on changes in the labor market vis a vis minimum wage, I think that perhaps we may be making the same argument. While I would eliminate the minimum wage altogether if I had my choice, my main point is that increasing it (which is what we are seeing here) is not going to have any positive impact on the overall status of low-skilled workers barring some utterly incredible change in the demand curve. I believe (if I am reading you right, and if I am not, please do correct me) you agree with this… The Left seems to believe that as you raise the minimum wage, you end up with a higher aggregate demand (better remunerated workers generate more demand) that offsets the higher costs, but since this isn’t likely to be a linear (or super-linear) relationship for low-skilled workers, I intuit this as just more ignorant nonsense from the Left. You are absolutely correct that most employers do NOT want too much turnover (turnover is extremely expensive to cope with), and thus even absent a minimum wage, you aren’t likely to see too much of a drop in wages offered.
      
      Where we *might* disagree is on the subject of hours. If you raise the minimum wage too much (and $15/hr is far far too much), it starts to become practical for employers to consider lowering hours, even with the knock-on effects of marginal workers. This is particularly true with low-skilled workers, where they tend to become interchangeable and thus easier to simply hire and fire at will. I don’t disagree that there are some costs associated with this (your overall point is quite solid), but if you lower the skill level enough, and raise the wage level enough, it becomes a pain employers can live with.
      
      Regarding automation, for very low-skilled positions, automation is becoming a practical option, especially with the current minimum wage uncertainty. Fast-food is the most obvious example of this, but much of the low-end retail sector is vulnerable, and we have already seen how it has entered warehouse employment. Yes, there are absolutely some unpleasant capital costs, but these are dropping VERY quickly, and the rising minimum wage (and associated mandated benefits, particularly in blue cities/states) are making these costs more and more acceptable. In the long run, you are correct that automation will price out even free labor, but that is quite a bit down the road, though I fear not as far down that road as many seem to believe.
      
      Your overall point regarding the destructive effects of unemployment is well taken, and we are in agreement. I am unclear as to what can be done, to me the problem is that most of the solutions all end up looking remarkably like a dole, and avoiding a dole is the whole point of the exercise…
LarryD

The true minimum wage is always zero. Every time the minimum wage has been increased, some of the lowest wage jobs just disappear. And costs go up (including taxes), thus the wage earners on the bottom get no benefit. The Unions do benefit, however, as the minimum wage prohibits minorities from under-cutting the union wage. Which is why the Unions pushed for the minimum wage to begin with.

Though $15/hr may be getting dangerously high, notice that the Union in some cities got exclusions for themselves (Yes, the $15/hr minimum won’t apply to Union workers), which means that the Unions think the minimum will be pricing a lot of labor out of the market.
- f1b0nacc1
  
  Union wages are often (formally or informally) tied to some percentage of the existing minimum wage, which is another reason that unions as a whole often prefer a higher minimum wage.
JR1123581321

The author keeps on implying that creating a permanent sub-class of unemployables is a bad thing. As progressives, including our very own Comrade FriendlyGoat, have explicitly stated, this is a goal in and of itself since it ensures that these people will vote the D no matter what. Liberals are unconcerned about the corrosive effects of dependency, as long as the dependents reliably show up and vote the D. This is a prism through which every policy created by the Left must be viewed as
Andrew Allison

Aren’t we over-thinking this? A private employer can’t pay more that the value produced and stay in business, ergo any artificially wage must, in end, be paid by somebody else.
- Jim__L
  
  Or be paid by nobody.
  - LarryD
    
    I.e., the job doesn’t get done, at least in that market. Ergo, the true minimum wage is always zero. Labor can be priced out of the market. Or the job can be automated away, same result. And automation is sticky, in the economists sense. Once the up front costs have been paid, an employer has very little reason to ever un-automate a job.
    - Jim__L
      
      I’ve seen automated fast-food cashier jobs swing from automated to un-automated again (the computers crashed too much), and self-checkouts at the grocery store are never as employee-free as intended.
      
      My own industry is among the very most automated — satellite communications. You simply don’t have employees in geostationary orbit, ever. Getting automation right is EXPENSIVE.
      
      Automation isn’t so much “sticky” as it is a Sunk Cost, one that people are reluctant to go back on until the capital investment has been paid off. But go back they do, if it turns out not to be so profitable as expected.
Disappeared4x

The Working Families Party grew out of the SEIU. The reason you hear “working families” so often: WFP IS “the Economic Left”. The Fight for $15 is from WFP/SEIU. They really do NOT care about any of the wonderful pro and con discussions here.

Best assessment of the WFP-SEIU to understand: “The Union That Rules New York: Powerful and well funded, 1199SEIU has unprecedented reach into city and state government.” Stephen Eide, Daniel DiSalvo Summer 2015
http://www.city-journal.org/html/union-rules-new-york-13736.html

Here is the background on the Fight for $15. “How New York’s “Fight for $15” Launched a Nationwide Movement” by: Fred McKissack Jr. 4.January.16 Co-authored by Center for Community Change Writing Fellow Wendi C. Thomas. Originally published in the American Prospect.

“…That first meeting [Sept 2012] gave rise to the Fight for $15 movement in New York City and became a blueprint for the campaign by that
name nationwide. …”

https://www.communitychange.org/how-new-yorks-fight-for-15-launched-a-nationwide-movement/
Rick Johnson

Minimum wage laws make it illegal for employers to employ someone at a wage they are prepared to work for. They cause unemployment for some of the most vunerable, such as the young, low skilled or those with poor language skills.
Anyone who claims to care for the vunerable and supports these pernicious laws should be ignored.
QET

If we assume that for each worker who keeps his job at the new minimum wage and therefore is grateful to the Left and will thus be its faithful vassal evermore, X workers (X > 0) will lose theirs and will therefore be hostile to the Left’s simple-minded supercilious economic diktats, then the net effect will be positive for the Right. So I will encourage the Left to keep following this road to electoral oblivion.