Monday, July 6, 2009

Minimum wage set to rise later this month...hmm

The Wall Street Journal is noting that the minimum wage hike may come at a bad time. This is the second minimum wage hike since the beginning of the recession. Some bullet points from the article (I added my commentary in bold):
  • "In the past, minimum-wage increases have done little to dent job creation." Rw: Yes, when the labor market and economy are tight, firms can pass on some of the new cost via output prices.
  • "You're going to have a very negative response. In a recession like this, companies don't have the pricing power to pass on those costs." [says John Silva, chief economist at Wells Fargo]
  • "Economists say there are 2.8 million workers earning between the current federal minimum wage of $6.55 an hour"..."But some estimates figure an additional seven million workers are affected because their wages are tied to the minimum and will go up accordingly."
  • "The Economic Policy Institute estimates that the minimum-wage increase will add $5.5 billion to the economy, and that this money is likely to be readily spent by low-wage workers, giving a boost to local economies. Heidi Shierholz, an economist at the liberal think tank in Washington, argues that "it is actually a good time" for an increase in the minimum wage. RW: But there will be offsets, via reduced spending as workers lose hours and jobs. The net effect is likely negligible at best, probably negative.
  • "Still, many economists also see long-term positive effects for the economy from boosting the income of those at the bottom of the economic ladder. They note that many small businesses may benefit through higher productivity in the form of improved worker retention and less churn." RW: I suppose yes, a higher paid worker is a happier worker, etc., etc.. But the distribution of workers stays the same, and the mean has changed - that is all. I'm not convinced that this will improve worker retention rates at all. For those of you familiar with this literature, can you point me in the direction of research that shows this correlation?
The Wall Street Journal does present the pros and cons of the minimum wage hike - the nominal minimum wage rate now approaches the rate adjusted for the cost of living. However, the cons will be quite evident, as different measures of unemployment rise, teen unemployment and probably the U-6 measure of labor underutilization, which includes part-time work for economic reasons (unless they change the survey to include the minimum wage effects). This could, and probably will, grow the national unemployment rate if workers lose jobs in lieu of manager's reducing hours.

Rebecca Wilder


  1. "a higher paid worker is a happier worker, etc., etc."

    That seems a little callous.

    I have some personal friends earning minimum wage in their adult years, and I'm quite sure that if you knew
    what their day-to-day lives were like, you might spend a little more thought on the externalities here.

  2. Hi Anonymous,

    Didn't mean to sound callous - it's just the theory. Theoretically, firms pay workers higher wages in order to reduce the turnover rate (hence, the " a higher paid worker is a happier worker, etc., etc.). I just don't believe that this is necessarily true when you are applying it to a state of federally-set minimum wage.

    And to which externalities do you refer?


  3. The real point of your analysis is that you do not know the net impact.

    In particular, you say that a cut in jobs and hours worked is likely or probably negative. But you do not really know if that is true.

  4. Hi Spencer,

    You say, "The real point of your analysis is that you do not know the net impact."

    Yes - an barring a statistical estimation, I really can only surmise. I was kind of left feeling that after reading the WSJ article - what will be the net effect?

    You seem to have done some research on minimum wage and employment (based on your comment on one of my previous posts) - what do you think will be the net impact?

    Thanks for commenting, Rebecca

  5. I expect a large increase in teen unemployment.

    But I think the bulk of the increase is due to the recession, not the minimum wage.

    Since 1960 there have been around a dozen increases in the minimum wage. About half were associated with a rise in teen unemployment and about half a fall in teen unemployment.

    But all those associated with a rise in teen unemployment were also associated with a recession
    and all those associated with falling teen unemployment were during an economic expansion.

    I think that the minimum wage has a much smaller impact than the opponents claim and that they deliberately try to blame what are cyclical factors on the minimum wage.

    If you regress the teen unemployment rate against the over 25 unemployment rate and the minimum wage the regression gives a very small weight to the minimum wage and implies that the adult unemployment rate explains the bulk of the change in teen unemployment.

    Since 1950 the teen unemployment rate has average 3.1 times the over 25 unemployment rate. The over 25 unemployment rate is now 8.2 which implies that teen unemployment should be 25.4%, not the actual 24%.

    see this:


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