Thursday, September 4, 2014

REPOST: should we raise the minimum wage?

Should we raise the minimum wage?

Mark Perry has a nice piece on proposals to raise the minimum wage from $7.50 to $10, a 38% increase.  He begins with research that finds an elasticity of demand between  -0.1 and -0.15 or a 2-3 percent reduction in employment from a 20 percent increase in the minimum wage.
Accordingly, a 38 percent increase in the minimum wage to $10 per hour would reduce teenage employment by between 3.8 and 5.7 percent.  And what would that mean for the number of jobs eliminated and the increase in the jobless rate?  
If the 38 percent increase in the minimum wage to $10 per hour had the minimum effect of reducing teenage employment by “only” 3.8 percent, that would put 171,000 currently-employed teenagers out of work and increase the teen jobless rate almost three full percentage points to 26.6 percent.  At the high end, a 5.7 percent reduction in teen employment would put almost one-quarter million teenagers out of work and drive the teenage jobless rate up to 28.1 percent, the highest rate in history. 

11 comments:

  1. How does this reconcile with the meta studies showing that the effect of minimum wage on unemployment is minimal to none?

    http://www.cepr.net/documents/publications/min-wage-2013-02.pdf

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  2. Teenage joblessness is a problem for the country, plain and simple. What do teenagers do that don’t have jobs, well first of all they have more time to spend with their friends and this can either lead to them getting in trouble or they spend time in places and do things that cost money. Without their own jobs they then ask their parents for money. While this might not seem like a big deal by asking their parents for money and not having jobs of their own they can’t learn the value of a $1. When you bust your butt hour after hour cleaning dishes, waiting tables, or other common teenage jobs you learn that maybe that $50 hooded sweatshirt isn’t worth the money because it took you a whole day to earn it after taxes. Another major issue in teenage joblessness is that they aren’t leaning valuable adult lessons such as being on time, completing your work, being in a good attitude, and how to work with others. They aren’t building a resume or references for future college internships and ultimately they aren’t learning the value of a good college education. If they never had to work that hard minimum wage job then they don’t know how to value a good job with good benefits that they had to earn through a college degree.

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  3. Anonymous - your "meta studies" article states exactly what Prof. Froeb is suggesting. Over-all unemployment may be only marginally effected. However, page 17 & 18 of your study articulate that "Youth" or perceived less valuable labor will be more effected. Which stands to reason... If an employer only values a teens hour at $6, but the minimum wage is now $10. The business owner will hire a more experienced employee and the less valued teen goes without. Net effect on over all unemployment isn't large, however, on the constituency of "youth" unemployment is very negative.

    More ideologically, I think many legislators don't understand that jobs are a bi-product of a successful business. Not the other way around.

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  4. If we make some assumptions, such as higher wage workers are better quality workers, as in better quality and volume of output, higher skill level and responsible (less call-ins, more on-time, and prepared for work), perhaps an 33% increase in minimum wage is not bad for business. If an employer is going to have higher quality and volume of production, maintaining sale can be achieved with less input (hours worked by employees). But if there is more money in the economy, there may be an increased in demand for products, so the employers well need to maintain staff levels to increase production to meet the higher demand. Unemployment is unchanged, GDP increases, employees standard of living in improved.
    Perhaps a two-tiered minimum wage system could be developed. Not based on skills, education or ability but based on age. Workers under 18 stay at $7.50, and at 18 you move up to $10.00. There will be no impact on employers willing to hire teenagers, and if they keep them on after they turn 18 they can give them more responsibility, and expect more out of them because of their training, experience, and commitment to the company

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    Replies
    1. John,

      I believe you raise an interesting idea of having a two-tiered minimum wage system, however I think having it on age basis is just a pure age discrimination issue. I think going the route of skill sets and experience would suffice. For the most part that would eliminate entry level teenagers making the same amount as those being in the industries for years. Then again, this is the general premises of most of the work force, however at least this will give some level of expectations that the salary brackets are different.
      A 38% increase is a large increase in one shot; this should be more of an incremental increase, so that business owners have the ability to adjust accordingly. Let’s face the facts a 38% increase in expense for S&W is a huge hit, that’s not including all the other items (taxes) that can potentially go along with that increase . This is a direct hit to the margins and for companies and the only way they can absorb it is passing it through a consumer. Just think of it this way, if you go to your favorite restaurant and the bill is normally $100, and then you go to dinner the following week and its $138. That may sit well with the average individual and could lead to purchases from the consumers.

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  5. The idea of increasing the minimum wage is a bad one for several reasons. Right now we are trying to create jobs in this country and have been slowly. This increase will not only cause existing businesses to think twice about hiring an additional worker but it will create hardships for those small businesses just trying to get started. It will deter small business from being successful and creating the jobs needed to aid in our economic recovery.
    In addition, how many teenagers really need to make $10 an hour? What they need is an opportunity for experience. Raising the minimum wage will remove many of these opportunities making it even harder for them to enter the job market at all. If an employer has to pay a higher wage they will want someone with more experience and knowledge, which will be impossible for new entrants to gain at this wage level.

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  6. Raising the minimum wage could pose bigger issues in the United States not only due to wanting to create additional jobs in this country but what about those small businesses that are trying to make ends meet and stay afloat. Some small businesses are already struggling due to the requirements with ObamaCare. Most businesses aren’t able to hire employees full time because they don’t have the funds to pay for the medical insurance. If minimum wage gets raised then I feel that there should be some sort of exemption for these hometown small businesses. I’m not sure how the government will handle that but the small businesses are creating jobs and keeping our communities alive so that should definitely be taken into consideration. Furthermore, the teenage population needs to work but don’t necessarily need to be earning $10 per hour. If more teenagers in this country would be responsible and get a job then there might be less juvenile delinquency in this country.

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  7. Interesting case study on two companies experience raising worker wages. I might sum it up as it's all about the execution and communication.

    https://www.linkedin.com/pulse/why-raising-employee-wages-sometimes-backfires-michael-wheeler?trk=eml-b2_content_ecosystem_digest-recommended_articles-295-null&midToken=AQFGQzlwLbyTJQ&fromEmail=fromEmail&ut=02Bj10X5dO4SU1

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  8. ESC, Managerial Economics, Fall 2015

    By raising the minimum wage, the article suggests that teen unemployment rate will increase as a consequence. As something becomes more expensive, increased hourly wage, the demand for that service, employee hours & benefits, will likely diminish as a consequence. This negative elastic relationship is highly typical amongst goods, products, and services becoming more expensive within the marketplace.

    For example, this could mean that larger employers such as McDonald’s may opt to eliminate cashiers in lieu of computer systems to take money from customers (hypothetical but plausible) or an array of other unknown consequences. I might also suggest that businesses are already looking for methodologies to control costs as well in the first place. Regardless, it is true that increasing minimum wage may have an effect on the teenage population but the National Employment Law Project suggests otherwise.

    This group of individuals has studied and continues to study the effect of increases in minimum wage within cities and areas that have took it upon themselves to increase the minimum wage (NELP, 2015). From their studies, raising the minimum wage has not affected employment rates or decreased them; however, it also does not say whether a specific subset population (i.e. teenagers) decreased their level of employment in those cities. That might be an interesting study or analysis to complete to see if increases in minimum wage translate to actuality.

    References

    Desilver, Drew. (2015). “5 Facts about the Minumum Wage”. Pew Research Center. http://www.pewresearch.org/fact-tank/2015/07/23/5-facts-about-the-minimum-wage/

    NELP. (2015). “City Minimum Wage Laws: Recent Trends and Economic Evidence”. National Employment Law Project. http://www.nelp.org/content/uploads/City-Minimum-Wage-Laws-Recent-Trends-Economic-Evidence.pdf

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  9. Raising the minimum wage at the cost of increasing unemployment substantially in the teenage population is a poor bargain. Job skills are vital for our youth and our country in the global marketplace of the twenty first century. Increasing employment among our entry level labor pool will decrease social ills that plague our society and drain our economy. Job skills teach responsibility. Raising the minimum wage, raises marginal costs for goods and services in the private sector, eclipsing marginal revenue for some businesses, forcing shutdown decisions. Rather than raising the minimum wage, we can rely on an efficient social safety net to provide food, healthcare, worker training, and basic education for our citizens in need.

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  10. Stan Fernandes
    ESC Managerial Economics Spring 2016
    January 31, 2016
    Mark Perry’s article about the effects of increasing the minimum wage on teenage unemployment argues that increasing the minimum wage would be “economic malpractice”. He uses the law of Supply and Demand to argue that as the cost of labor increases, the demand for the labor will decrease. The result: lower employment for minimum wage workers. However, I would argue that there are additional costs that Mr. Perry’s does not discuss.
    In a recent article on Forbes.com by Lloyd Corder, president of CorCom, Inc. and an adjunct professor at Carnegie Mellon University and the University of Pittsburgh, Mr. Corder describes the impact of a minimum wage hike on small businesses. Specifically, he compares the impact on franchisee vs non-franchisee small business. This distinction is being used by some state legislators to phase in the wage increase rather than using the number of employees as the determining factor. The assumption is that franchisee small businesses such as Starbucks or McDonalds franchises would be better positioned to implement the wage hike because of the external support they receive (marketing, advertising, supply chain, etc.) from the parent company.
    Corder’s research showed that franchisee small businesses were more likely to employ minimum wage workers (56% vs 38%), and so had a higher exposure to the risk of increased labor costs. The benefits of being a franchisee didn’t necessarily mitigate these risks because the franchise contracts and royalty fees paid to the parent company were locked in and not relative to the wages paid to the workers. In other words, when labor costs increase, the franchisees would be forced to increase prices, rather than renegotiate franchise contracts.
    The bottom line of this is that prices would increase proportionately along with the increase in minimum wages. Unfortunately, this would have a disproportionate effect on the minimum wage earners as their new (higher) wages would have less buying power. Rather than interfere in the labor markets, government would benefit from letting the free market set the labor rates and prices at the most efficient level.
    Reference:
    http://www.forbes.com/sites/realspin/2016/01/22/minimum-wage-hikes-affect-franchises-too/#7e3afa2d6bb5

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