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Minimum wage madness

11. March 2006 • David Boyle
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Outracing the Democrat-supported ballot initiative to raise the Mitten minimum wage, the Republican-controlled Senate passes a bill themselves to raise it instead .
“Surprise”!!

Thoughts?
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The Republicans who control the Michigan legislature are “low-wage conservatives” who, in general, are NOT in favor of a higher minimum wage. But they are apparently afraid of seeing the proposal on the ballot in November, since it would (1) help turn out Democratic voters, and (2) embarrass Republican candidates who would be forced to explain why they didn’t support it.

Another possibility is that the legislature’s version lacks the inflation adjustment built into the petition proposal. Rather than risk that the future minimum wage would keep up with inflation, perhaps they decided to accept an increase now and hope that will hold off the initiative.

As to the inevitable economic argument that raising the minimum wage will cause jobs to be lost at that level: the demand for low wage workers is inelastic. Cutting the minimum wage in half would NOT double the number of minwage jobs; doubling it would not cut the number of jobs in half. Much less, indeed, in both directions.

That means an increase in the minimum wage increases the collective income of people in the lowest stratum of employment. Within broad limits, that is a good thing to do.

—Lawrence Kestenbaum Mar. 11 '06 - 10:38AM #
The Republican legislation calls for stepwise increases to $7.40/hr by July 2008; the Democratic proposal calls for increases up to approximately $8.00 by 2010. (The exact increase under the Democratic plan depends on the rate of inflation, thus the approximation.)

I would bet that the Republicans are anticipating an anti-Bush backlash during the upcoming election cycle, and are deperate to limit the damage. One way to do that would be to pre-empt proposals that could increase voter turnout by Democrats, as Larry suggested.

I should think, though, that most voters would be smart enough to see the Democratic proposal as the better deal.

—Joseph j7uy5 Mar. 11 '06 - 07:34PM #
As to the inevitable economic argument that raising the minimum wage will cause jobs to be lost at that level: the demand for low wage workers is inelastic.

Well, yes, cutting the minimum wage to $.50/hour would drop the number of minimum wage jobs to virtually zero (since almost nobody would work for that). And doubling it would obviously increase the number of people at minimum wage because it would include most of the workers currently earning between the old and new minimums (less those who jobs disappeared). So trivially speaking, cutting the minimum wage would reduce the number of people at that exact level and doubling the wage would increase the number at minimum wage (and tripling it would increase that number even more). In fact, if you truly believe demand is inelastic why not triple the minimum wage? Or quadruple it?

But is demand really inelastic? I don’t think so. If you raise the cost of eating in restaurants, people will eat at home more often. And they’ll eat more often at restaurants without wait staff. Maybe the practice of customers ordering at the register and retrieving their own dinners will gradually work its way ‘up the food chain’ to nicer places. (For a given dinner, would you rather pay 25% more to be waited on, or 25% less and carry your own dinner?)

If you raise the cost of staffing retail shops, people will order more online. Big box stores (with relatively low staffing levels) will gain even more business at the expense of small stores (with relatively high staffing levels). The costs of movie theaters and video stores will go up. Netfix’s costs won’t. New and used record store costs will go up. Those of iTunes and Ebay won’t. For any given category of business, things will shift against those who use low-skill, low-cost labor and in favor of those businesses that run without it. And businesses that do use low-skill labor will figure out how to use less of it. Hotels and motels hire people near minimum wage. Could you be happy with hotels that didn’t make your bed and change your towels every day? I could (to be honest, I’d prefer not having maids messing around in my room during my stay). Not nearly as many housekeepers would be needed that way.

I would also argue that sophisticated, efficient retail chains will gain at the expense of unsophisticated, less-efficient local businesses. Obviously, that process has been underway for a while, but a higher minimum wage has the potential to exacerbate it. Walmart (which already pays above the new minimum wage) won’t be affected. But local shops (many of which do have min wage employees) trying to hang on in competition with Walmart? Not so good. Who is more affected by a min wage change—Home Depot? Or small-town hardware stores and lumber yards? Clearly the latter—Home Depot already pays above the new minimum.

For demand to be truly inelastic, you’d have to have a business where the number of low-cost employees cannot be reduced (say by greater use of automation or customer self-service) and where there are no ways to provide the same good or service in a different, non-labor intensive way. To be honest, I’m having a hard time thinking of any good examples.

On the other hand, for much of the state (and Ann Arbor in particular), the good news is that this will have little or no effect since the de facto minimum wage is already at the new levels. But in less affluent areas in the state, I suspect there will be real negative effects.

—mw Mar. 11 '06 - 08:14PM #
“But in less affluent areas in the state, I suspect there will be real negative effects.”

But would it really? In many of these areas, you have a limited labor market due to the nature of the area (rural area or urban areas where the labor pool is limited by transportation issues, etc.). Also, those areas don’t attract the major corporate chain stores (outside of Wal-Mart and Meijer) so you don’t run into the process of corporate efficiency undercutting the locals – everyone is local. I think you’ve made some good points but I’m not sure the impact would necessarily fall out the way that you predict.

—John Q. Mar. 11 '06 - 10:20PM #
mw – I think you’re overstating conditions at some of the big boxes. I’ve definitely seen data saying that the average hourly wage at WalMart is above the proposed new minimum (if only slightly), but, unless you’ve got a source to back it up, I don’t think you can say that all WalMart employees make over the proposed new minimum wage. (Especially not the ones who are employed illegally and not even being paid the old minimum wage (yeah, yeah, not WalMart employees, “contractors”) or who are pressured to work off the clock…)

While you’re correct, in my opinion, that demand for minimum wage jobs is not completely inelastic, I’m inclined to believe Larry and say it’s probably not nearly 1 to 1.

—TPM Mar. 11 '06 - 11:06PM #
Hmmm, perhaps some explanation of demand elasticity is in order.

If a fixed amount of money is going to be spent on a certain good, regardless of price, then the demand is neither elastic nor inelastic. Doubling the price would halve the number of units sold, and vice versa, leaving the total sales as a constant.

Demand is said to be elastic when it responds strongly to changes in price, so that cutting the price means not only that more units are sold, but that the total sales dollars actually increase. Similarly, if the price were to increase, the total amount of money spent on the good would fall, if demand were elastic.

If demand is inelastic, that means the number of units sold doesn’t change as much when the price changes. The number of units demanded is not a constant, but it changes only slowly with changes in price.

The classic example of inelastic demand is table salt. A typical household is not going to buy twice as much table salt because the price dropped in half.

I suppose in theory demand would be “perfectly” inelastic if the demand wasn’t affected at all by changes in price, in other words, that the quantity demanded is an absolute constant. I certainly did not say that the demand for low wage workers is “perfectly” inelastic.

What I am saying is that an increase in the minimum wage will probably cause some drop in demand (i.e., some jobs will disappear), but that all the rest will see wage increases. The total value of the wage increases is greater than the value of the lost jobs. (Much greater, I think, but the precise measure is an empirical question.)

Or to put it differently: many people would get a raise; a few would lose their jobs. I leave aside the obvious fact, from all the “help wanted” signs in restaurants, that there is not a surplus of workers at that level, so cutting the number of jobs at the margin isn’t likely to leave too many people without employment.

I also said, within limits. Raising the minimum wage to some unreasonable number like $100 per hour would cause severe dislocations. To return to the classic inelastic demand example, if the price of table salt were to approach the price of gold, you’d see a lot of people stop using it.

—Larry Kestenbaum Mar. 12 '06 - 12:10AM #
While you’re correct, in my opinion, that demand for minimum wage jobs is not completely inelastic, I’m inclined to believe Larry and say it’s probably not nearly 1 to 1

Oh, in the short term and for small increases, I’m sure it’s less than 1. It takes time for business practices to change, for investments in automation to be budgeted, planned, and implemented, for marginal small businesses relying on minimum wage workers to run out of money and throw in the towel.

What I’m saying is that legally banning low-wage, low-skill jobs will have effects on the way our economy and our culture works, and not all positive ones. This has been kicking around for a while and is pretty interesting (ignore the political comments and just consider the particular case):

http://www.coyoteblog.com/coyote_blog/2005/03/case_studies_on.html

How unusual is this situation? In detail, it’s quite unusual. But in general, not at all—many seniors, I believe, are interested in something flexible, pleasant and interesting to do and could use a little extra money.

The higher the minimum wage, the less possibility of jobs that are part hobby/part job or part volunteer/part job or part learning experience/part job or part adventure/part job. You’ll legally be able to do something as a volunteer/hobbyist/student for $0/hr or as a paid worker for $8/hr, but nothing in between. I’m afraid it will make it much more difficult for low productivity (but not self-supporting) classes of people (teenagers, retirees, disabled adults) to find work at all (except completely unpaid volunteer work). These are people who will not show up as officially ‘unemployed’, but they won’t have work that they otherwise would have. Likewise, I’m afraid it will make small, inefficient, quirky, mom-and-pop ventures less likely to survive (except for one-person operations—presumeably you’ll still be allowed to pay yourself less than minimum wage…)

—mw Mar. 12 '06 - 12:14AM #
At the risk of becoming really tiresome, I should mention the reason why the demand for minwage workers is inelastic: businesses which employ them have other costs. A 25% increase in the cost of labor does not equate to a 25% increase in the cost of a restaurant sandwich.

Also, because minwage workers individually have little investment in a particular job and turn over frequently, running a businesses with minwage workers requires a lot of hiring and training and supervision by much more highly paid people. The wage itself is just a portion of the cost of employing minwage workers, let alone of the total product.

—Larry Kestenbaum Mar. 12 '06 - 12:20AM #
Would it make sense if this were a gift to the Democrats in exchange for future cooperation with eliminating the SBT?

—Young Urban Amateur Mar. 12 '06 - 01:33AM #
At the risk of becoming really tiresome, I should mention the reason why the demand for minwage workers is inelastic: businesses which employ them have other costs. A 25% increase in the cost of labor does not equate to a 25% increase in the cost of a restaurant sandwich.

Yes, cleary. But the overall cost of a being served by a waiter adds about 25% to the cost of the meal. Could be closer to 30% (20% tip, 5-10% paid wages). That ‘proper’ restaurants have waiters at the table is a social custom that could change should the cost become high enough (after all, people don’t seem to mind fetching their own food at Sunday brunches even at expensive restaurants). At one time, proper supermarkets had a checkout clerk and bagger at every register.

Also, because minwage workers individually have little investment in a particular job and turn over frequently, running a businesses with minwage workers requires a lot of hiring and training and supervision by much more highly paid people.

Yes, often that is true, and when it is, businesses often figure out by themselves that they are better off paying more for better, more productive, more reliable staff (say, full time adults rather than part-time teenagers). But forcing businesses to make that choice (fewer, higher productivity workers instead of more, lower productivity workers) is part of the problem—pricing relatively unproductive or unreliable teenagers out of the market. At $5 it may be worth putting up with teenage nonsense—employees who start goofing off when nobody’s looking or call in ‘sick’ on Saturday night to go party—but at $8, less so.

And sometimes minimum wage workers have excellent work habits and low turnover—as in the campground case. As it happens, my parents used to employ dozens of such employees. They were middle-aged women looking for something to do as much as they were extra money. The job (selling clothing to other middle-aged women—often their friends and acquaintances) was respectable, flexible, pleasant, sociable, low-stress, and they liked the employee discount and getting first crack at every season’s new merchandise. Turnover was extremely low. In some sense they weren’t actually min wage employees because, as in the campground case, the non-monetary benefits were worth more than a better paying job without those benefits. Higher minimum wage laws don’t allow employees to make tradeoffs like that and take non-monetary benefits into account.

—mw Mar. 12 '06 - 02:25AM #
A low minimum wage. For the children. And women.

—Dale Mar. 12 '06 - 07:04AM #
A low minimum wage. For the children. And women.

Sigh.

We don’t have any trouble imagining that high rents work against the survival of quirky, local, ‘inefficient’ businesses—that is a frequent concern here. Why should it be hard to imagine that labor costs can have similar (and additive) effects? Or why should we doubt that there are rather a lot of people who would like a job that isn’t intended to be their main source of income and who would be happy to accept a lower rate of pay in exchange for pleasant, relaxed, flexible, part-time work (who, in fact, will choose not work at all rather than do less pleasant, higher pressure, full-time work)?

Do you never worry about unintended adverse consequences of well-meaning policies? Many Ann Arborites have come to realize that years of development-unfriendly policies have helped raise housing costs and contributed to pushing moderate income people out of the community. Ooops. Could there be no adverse, unintended consequences of wage policies?

Would you support exceptions to the minimum wage for retireees? Dependent teens? The disabled? Or coming at it from the other direction, would you support exceptions for small, owner-operated businesses? How about an appeal process for businesses that provided significant non-economic benefits to employees in addition to paid wages (as in the Coyote blog campground situation)? Or do you think a no-exceptions, one-size-fits-all minimum wage is necessary?

—mw Mar. 12 '06 - 06:36PM #
By keeping the minimum wage at the same dollar figure for years, we have cut its purchasing power to about the lowest level ever, no?

In this case, the unintended adverse consequence of a well-meaning business-friendly policy has been that many millions of hard working people are struggling just to get by—and it’s getting harder every year.

I’m not opposed in principle to exceptions for special circumstances, but any such provisions need to be carefully limited to minimize abuse.

The original minimum wage had a well-intentioned exception for farmers, with the result that vast numbers of farm workers lived in brutal peonage. Not just a wage issue, obviously, but the exemption from labor laws across the board left them almost no protection.

—Larry Kestenbaum Mar. 12 '06 - 09:49PM #
By keeping the minimum wage at the same dollar figure for years, we have cut its purchasing power to about the lowest level ever, no?

Ever? No:

[min wage history]

In this case, the unintended adverse consequence of a well-meaning business-friendly policy has been that many millions of hard working people are struggling just to get by—and it’s getting harder every year.

But that’s not the case, wages have not declined year-after-year (in real dollars) in lockstep with the minimum wage. Instead, fewer and fewer low-skill workers are paid at minimum wage (the number I’ve seen is that just 3% of hourly workers are paid the min wage). And low minimum wages are not friendly to business in general. At current (and proposed) levels, they are irrelevant to most kinds of businesses. And within the categories of business that do hire low-skilled workers, higher minimum wages are friendlier to businesses who reduce or eliminate low-skill employment through automation, foreign out-sourcing, customer self-service, use of the internet, and/or skilled corporate ‘bean counters’. And higher minimum wages are unfriendly to millions of workers who have low productivity because of inexperience and immaturity, or age, or disability, or who want to trade off wages against other non-monetary benefits of a job. Those low-skill employees who actually are struggling to support themselves on minimum wage jobs (and cannot qualify for anything that pays more) would be better served by keeping their jobs and seeing an expansion in the EITC than in risking have their jobs disappear (eventually, not immediately).

But the case for higher minimum wages is simple and visceral, and the positive effects are immediate and obvious (as long as the increase isn’t so large or sudden that job losses happen right away). The case against higher minimum wages is subtle, and the unintended negative effects are longer term and harder to connect to changes in the minimum wage (see, http://www.marginalrevolution.com/marginalrevolution/2004/09/minimum_wage_ef.html for example). Obviously, it’s going to happen one way or the other (or both).

I’m not opposed in principle to exceptions for special circumstances, but any such provisions need to be carefully limited to minimize abuse.

Are there any exceptions allowed for in either of the Michigan min wage proposals comparable to those in the federal min wage?

http://www.dol.gov/esa/minwage/q-a.htm

—mw Mar. 13 '06 - 05:45PM #
Okay, so it’s not the lowest level ever. Just the lowest level in more than half a century.

Agreed that in the long run, a higher minimum wage will mean that some tasks done by minwage workers eventually/gradually get automated. But that’s a good thing. In the long term, the number of low skill workers is on the decline.

—Larry Kestenbaum Mar. 13 '06 - 06:41PM #
Two things you guys need to look at—
The important number is not the total amount of workers making minimum wage, but rather the total number of workers making less than the proposed new minimum wage. If you look at that number, the proportiton of the workforce jumps from 3% to somewhere around 15%.

Secondly, the debate is centering around types of workers. 70% of minimum-wage workers are adults and 40% are the sole breadwinners for their families. The debate should not be about the “poor” (as in “woe is me”) teenagers who may or may not be priced out of the market, but the actually poor working families who are struggling to pay rent.

In reference to the exemptions, the ballot proposal specifically removed exemptions for the disabled. This is at the request of disability rights groups. Similar to Larry’s example of well-intenioned exemptions for farm workers creating “peonage,” there’s actually a large and under-reported problem of “disabled sweatshops.” The scam works thusly—unscrupulous businesspeople agree to hire disabled people for less than minimum wage, or they take them on as home health care wards. They then find some rote task that occurs too infrequently to automate, but is simple enough for many disabled (mentally and physically) to handle. Examples include putting new labels on mislabled merchandise or tearing up irregularly shaped cardboard for recycling. These folks are then worked into the ground for 1-2 or dollars an hour with no oversight or state protections. That’s why the exemption was removed.

Lastly, I’ll allow that high rents have had negative impacts on downtown development. However, high rents are not analogous to higher minimum wages.
1- Depending on the type of business, but generally in retail and food service, rents are a much higher proportion of the production cost than labor.
2- the renter receives no economic benefit in return for paying higher rent. employers receive greater productivity/hour, and lower turnover, recruitment, supvervison and training costs in exchange for higher minimum wages. this somewhat offsets, if not makes up for, the increased wages.
3- there are few economic benefits for the local community when rents are high. the only person who benefits is the landlord. when rich people get richer, they tend to spend the surplus on luxury goods (vacations to bimini, yachts, german cars) that are not produced locally. when low-wage workers get a raise, they tend to spend all of it immediately, and in the local community. therefore the local economy benefits from increased minimum wages while the biminese economy benefits from increased rents.

—bates Mar. 13 '06 - 09:34PM #
I very much agree with almost all of bates’ comment, but I don’t think rent is really a higher cost (let alone “much” higher) than labor in retail and food service.

—Larry Kestenbaum Mar. 13 '06 - 10:38PM #
Larry Kestenbaum: Agreed that in the long run, a higher minimum wage will mean that some tasks done by minwage workers eventually/gradually get automated. But that’s a good thing. In the long term, the number of low skill workers is on the decline.

Is it a good thing? Always? When parking lot attendents are replaced by automated gate machines? When record store clerks (and record stores) are replaced by electronic downloads? When big-box stores with skeleton staffs replace small local stores?

bates: Secondly, the debate is centering around types of workers. 70% of minimum-wage workers are adults and 40% are the sole breadwinners for their families. The debate should not be about the “poor” (as in “woe is me”) teenagers who may or may not be priced out of the market, but the actually poor working families who are struggling to pay rent.

Fine. But there are a couple of problems with that. The first is that there seems to be evidence that high min wages states that have lower teenage labor participation also have lower labor participation by workers in their late 20’s—in other words, workers who don’t get started in the world of work as teens have more trouble later.

The more worrying problem problem is that those relative few workers who are sole breadwinners working at min wage are vulnerable when businesses are forced to shift to paying more and demanding more productivity in exchange. These workers may get a temporary raise followed by long-term unemployment as automation, outsourcing, customer self-service, ecommerce, etc are substituted for low skill labor that is no longer so inexpensive as it was. It’s not a purely an abstract worry for me. I have a mildly disabled sister who works at near minimum wage. She’s slow moving and gets flustered very easily under pressure. I’m afraid a high minimum wage wouldn’t result in a raise for her, but unemployment (if not immediately, then eventually). An increase in the EITC would be great for her—an increase in the minimum wage could be a disaster (she doesn’t live in Michigan, but minimum wages are scheduled to increase in her state too).

The scam works thusly—unscrupulous businesspeople agree to hire disabled people for less than minimum wage, or they take them on as home health care wards. They then find some rote task that occurs too infrequently to automate, but is simple enough for many disabled (mentally and physically) to handle. Examples include putting new labels on mislabled merchandise or tearing up irregularly shaped cardboard for recycling. These folks are then worked into the ground for 1-2 or dollars an hour with no oversight or state protections. That’s why the exemption was removed.

My sister washes dishes and does some food preparation (when it’s not too busy and confusing). Instead of being ‘worked into the ground’ like that, she could go back on disability. But her job gives her something to do, the dignity of supporting herself, and the opportunity to be out in the world and work in a team with other people. Without that, she’d be an overweight cat-lady in a trailer watching T.V. all day. And I’m not kidding.

—mw Mar. 14 '06 - 12:17AM #
Freep, Dems, labor drop minimum wage petition drive ,

“Sponsors are pulling the plug on a petition drive to raise Michigan’s minimum wage, as Gov. Jennifer Granholm prepares to sign into law Tuesday an even higher minimum wage than the campaign sought.

A campaign to raise the minimum wage from $5.15 an hour up to $6.85 an hour is no longer needed, now that the Republican-controlled Legislature approved a $6.95 an hour base wage – 10 cents higher – said John Freeman, director of the Michigan needs a Raise petition drive.

...

Unlike the Legislature’s approved bill, the ballot proposal would have locked the minimum wage into the state constitution with an annual cost-of-living increase.

“We achieved our goal of getting a significant increase in the minimum wage,” Freeman said. “We think it makes sense to stop the campaign and accept credit.

“Even though we’re not entirely happy with the Republican bill, it’s a significant improvement over current law.”

...

The ballot issue, however, would have raised the base wage for tip employees to $4.30 an hour, no matter how much they earned in tips. Thus, they could have earned more money under the ballot proposal.

Many political experts said the ballot issue campaign had been an attempt to boost Democratic turnout for the November election, when voters choose a governor, U.S. senator, attorney general and secretary of state.

...“Certainly those who were behind the petition drive were instrumental in persuading state lawmakers to move forward in increasing the minimum wage, and they can take great pride in that,” said Liz Boyd, spokesperson for Granholm.

...

Freeman said the campaign group will watch the Legislature to assure that it doesn’t attempt to rescind the higher minimum wage after the November elections.”

—David Boyle Mar. 25 '06 - 08:14AM #
Freep, Granholm signs law increasing minimum wage,

“Gov. Jennifer Granholm signed into law a higher minimum wage this morning, calling it a victory for workers and a boost to Michigan’s economy.

The law lifts the minimum wage from the current $5.15 an hour to $6.95 an hour on Oct. 1. The hourly base wage will then rise to $7.15 in July 2007 and $7.40 in July 2008.

“Forget about George Mason, this is the Cinderella story this year,” Granholm said of the new law, referring to George Mason University, whose team is an unlikely contender in the NCAA basketball tournament’s Final Four.

...“Today is a tremendous victory for our working families and all of Michigan,” Granholm told a gathering of assembly of Democratic lawmakers, union leaders and advocates.

“It is a victory for hundreds of thousands of citizens in our state who pay the rent and who fill up their tanks and who put food on the table for their kids at $5.15 an hour. Not anymore.

“Today, Michigan, you are getting a raise, and it’s about time.”

Granholm and union leaders present said the higher minimum wage would help the state’s economy because low-income workers spend virtually all their paychecks on subsistence – money that goes directly to stores and services. ...”

—David Boyle Mar. 29 '06 - 02:36AM #

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