A $15 minimum wage? Thinking through the consequences

Last updated on: September 10, 2013 at 7:00 pm by Jane the Actuary

A $15 minimum wage? Thinking through the consequences 2013-09-10T19:00:00-06:00 Jane the Actuary

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Look, I’m not an economist. I don’t even play one on TV. But I wanted to set down my 2 cents on the whole “raise the minimum wage” project, to try to work a few things out in my head, as a sort of rough draft.

Near as I can figure, the pro-minimum wage hike contingent has two main arguments:

1) a minimum wage hike won’t do any harm because increases in the wage will increase worker productivity, and

2) to the extent that a minimum wage hike may threaten to be inflationary or impact a company’s bottom line, they can always fund it by taking pay away from the CEO and the other overpaid top executives.

As to the first, they cite a couple cherry-picked studies indicating that, when a state raised its minimum wage, it didn’t affect unemployment. Now, I’ll readily admit that I don’t have the time to read through the studies in depth, figure out whether these are legitimate or whether there are other issues that mask an unemployment effect, and lay out my analysis. It seems likely that, if unemployment in a given time period and labor market was low, and the market wage for unskilled labor was already above the minimum wage, so that relatively few people received the minimum wage, it would have a modest impact.

In a “typical” economic environment, the argument that higher minimum wages produce greater unemployment goes like this: a certain number of employees are doing manual tasks that could be automated, and if the minimum wage rises too much, then the employer will invest in automation equipment. Another contingent are doing tasks which are somewhat optional — tasks which provide a higher level of service to the customer but aren’t so valued as to be worth a higher cost. And another group of workers are doing work which, at a higher pay rate, the customer will decline entirely — a maid or lawn-mowing service, for instance.

So I suppose here, too, if many of these low-value, labor-intensive services had already been pared down in a given area, there might not be that much to give. Consider the disappearance of the full-service gas station. (Well, nearly so — New Jersey and Oregon still require gas stations to have attendants to pump gas; funnily enough, these are two of the states that pop up in these minimum wage studies. Interestingly enough, in my google search to find which states do still require attendants, I came across an article reporting that some congressional candidate in Delaware wanted to mandate this nationwide, as a jobs-creation device.) Or the fact that, nearly everywhere, pop in fast food restaurants has become self-serve.

But one thing I haven’t seen in these studies is an analysis of whether minimum wage hikes have an inflationary effect on the local economy.

In any case, the pro-minimum wage hike rationale claims that, with a higher minimum wage comes less turnover and more employee stability — cited here, for instance, at raisetheminimumwage.com, but their examples are increases in the minimum wage for a given industry or specific employers or a specific city — not for an entire metro area, that is — so that it would seem most reasonable to assume that the higher wage is attracting a better class of employee.

In order to argue that a higher minimum wage across the board improves worker productivity, you’d really have to argue that the low wage produces stresses in the workers’ lives which are alleviated by the higher wage.

But one thing that’s not been discussed in the articles I’ve read is what I’ll call “wage compression” — even though, based on a quick search, the term actually means something else (though what it does mean isn’t entirely clear). What I mean is that if the minimum wage were indeed raised to $15 per hour, all those people who scraped their way to $15 / hour wages by learning new skills or taking on additional responsibilities or proving themselves to be trustworthy and reliable at their job, would feel pretty disgruntled at only being paid “minimum wage” and the same as the guy next to them who drags his feet and is one more unauthorized smoking break away from being fired.

If we assume that these folks’ pay goes up as well, then we’ve got inflation, prices go up, and we’re back where we started (or we’ve got a never-ending cycle if the wage is indexed to inflation). And there’s a limit to the automation that’d be available to an employer.

It’s not credible to assume a Lake Wobegone effect, that all the new $15 an hour workers will be above-average.

Imagine this situation persists. It seems to me that a system in which a worker can get by with minimal effort, and sees no reward for additional effort, isn’t viable.

(Thanks to anyone who’s stayed with me through the whole post — I’ll try to shape this into something more coherent another day.)

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