Why do people care so much about the minimum wage?

October 20, 2010

Over at my old Time.com stomping grounds, Adam Cohen has written a fascinating article about the movement to have the federal minimum wage declared unconstitutional. This goes hand-in-hand with the emergence of the minimum wage as a campaign issue in the midterm elections. My question: Why do people care so much?

For much of its recent history, the federal minimum wage hasn’t even been all that binding. State minimum-wage laws have led to higher pay, or companies paid more on their own. According to the Labor Department, only 980,000 people made the federal minimum wage last year. Even when you add in the 2.6 million workers who made less (people like tip-collecting waitresses and teenagers just working for the summer), you still only wind up with 4.9 percent of all hourly-paid employees– and just 2.9% of the total U.S. wage-earning workforce.

Yes, it’s true, in Econ 101 we all learn that price floors disrupt the most efficient allocation of resources in a marketplace. When it comes to low-wage workers, that leads to companies hiring fewer people than they would otherwise, leaving some folks who want jobs without them.

But those who make it beyond one semester of economics find out that the world doesn’t always work the way a rudimentary model would predict. In fact, in recent years economists have struggled to find explanations for real-world situations in which higher wages do not, in fact, lead to lower employment. One theory: a higher wage forces employers to invest in their employees and figure out ways to make them more efficient (i.e., valuable). As Richard Florida likes to argue, boosting efficiency in low-wage (mostly service sector) jobs is exactly what we should be doing right now.

But I digress. Back to my original question: Why do people care so much about an economic policy that doesn’t seem to have much of an impact on the economy? One reason might be because of the anchoring effect of the minimum wage. Even if only a few people are earning the minimum wage, its existence still sends a signal to the market that this is about what it should cost to hire an unskilled worker. That tinkers with the expectations of both companies and workers. Or, what I might be quicker to believe: talking about the minimum wage—whether you want to increase it or abolish it—is a proxy for saying “I care about struggling workers,” or “I don’t want government telling business what to do.”

The problem with using the minimum wage to have this debate, though, is that no matter who wins, the victory will be hollow. If we want to help low-income families, we could do a lot more than change a wage many of them don’t make anyway. And if we want to minimize government intervention in free enterprise, we might choose a battle that is meaningful to companies outside of such a narrow range—half of all minimum-wage workers have jobs in the leisure and hospitality industries.

Although maybe saying that just goes to show how naive I am about politics. Maybe in that realm the best battles to fight are the ones that are the least likely to change the status quo no matter what the outcome is.

Comments

Admittedly, 3.5 million people is a small number. But how many of the 10% of the labor force who are unemployed (or 15% of those in ages 20-24, or 27% of blacks in ages 20-24) are priced out of the market because the minimum wage exceeds the value of their labor?

If you set the minimum price of milk at $7/gallon, farmers wouldn’t be selling as much milk.

Posted by LZed | Report as abusive
 

I believe you are overestimating the proportion of the population who have made it beyond one semester of economics.

Posted by klagge | Report as abusive
 

People care about the minimum wage because they want to be able to profit directly or indirectly from paying some people as little as possible. Very few people benefit from it.

A minimum wage that does not pay enough for people to live on is effectively forcing cities and states to subsidize those jobs. Not only do the minimum wage workers pay little or no taxes, but they usually need assistance from one or more governments just to survive. Why do we care about creating jobs that suck? They add no value to society.

If any group should be in favor of higher minimum wages, it is the ones who don’t like high taxes and government spending on social programs. Wages that are too low increase tax levels and government spending, and the benefit goes primarily to the low wage paying employers, not to the taxpayers.

Posted by OnTheTimes | Report as abusive
 

I think your final sentence sums up the political reality pretty nicely. Perhaps even more to the point, the best battles may be those that fire up the base during a campaign but can easily be swept under the run and forgotten once the campaign is over and we’re back to business as usual.

Posted by jporter | Report as abusive
 

The number of people receiving minimum wage may be small but the number of people whose wages are based on the minimum wage (minimum + $.50, minimum X 1.5, etc.) is much larger. The contractual implications of an increase in the minimum wage is that it’s an automatic wage increase for these other workers as well.

There are two sides to “why people care so much about the minimum wage”. As mentioned above, the minimum wage is above the market clearing price for some labor and reducing or eliminating it would cause some workers who are currently unemployable to become employable.

But the other side of the story is if so few are receiving minimum wage why the pressure to raise it? The answer to that resides in the many additional workers who receive raises when the minimum wage goes up.

Posted by DaveSchuler | Report as abusive
 

I would think one reason that minimum wage laws are counterintuitively effective is because labor isn’t merely a commodity- labors can be more or less productive depending on how much they value their job. Higher salaries tend to lead to more productive employees- a company looking to scrap the bottom of the bucket on pay is only going to find employees that have absolutely nothing vested in their job.

DaveSchuler- I’ve never ever heard of a job tied to minimum wage, do you have a link to that? I think its more likely simply that most people want minimum wage raised because they’re uncomfortable with the idea that people can be paid so little that they are unable to cover the basic necessities of life (without help from the government). People aren’t always motivated by purely by self interest.

Posted by AdamJ23 | Report as abusive
 

Well let’s see. I’m a trained teacher with 10ys exp. but as teachers are being laid off, rather than sit at home I decided to take on a childcare job making $8/hr. My point? Am I an unskilled worker? No. Am I using my teaching skills in my minimum wage job? No! Could I? You bet! But the old adage “you get what you pay for holds true.”

Posted by njj28 | Report as abusive
 

AdamJ, while I’ve never heard of a job FORMALLY tied to minimum wage, the wage scale at many businesses provides for increases based on tenure, skills, and job responsibilities. If the unskilled cashier is making $7.50/hr, then the burger-flipper might get $8.50/hr. If the unskilled cashier is making $6/hr, then the burger-flipper might get only $7/hr. When you raise the bottom of a ramp, the whole ramp rises.

Posted by TFF | Report as abusive
 

I believe the auto unions’ pay is tied to minimum wage, but I may be mistaken.

I think the better way to increase worker effiency would be to do away with hourly pay (in select roles). Paying a worker by task instead of time would naturally increase the rate that work is done. There would need to be penalties for bad quality, of course.

Posted by drewbie | Report as abusive
 

TFF- I’m confused by what ramp you’re talking about. Are you talking about minimum wage raising the salaries of higher skill jobs or simply pushing up the salaries of the least desirable jobs? The later is certainly possible, but I doubt the former. I think most people that take low paying skilled jobs are investing in learning a skill- it has little to do with whatever marginal benefit they might get from a wage slightly higher then minimum.

Posted by AdamJ23 | Report as abusive
 

drewbie- Paying people that way can have motivational benefits, but I suspect it can result in even more tension between employees and employers then already exists, particularly for jobs where evaluating the quality and amount of work done is highly subjective or otherwise difficult to evaluate. Employers might feel incentivized to underrate work if it means paying their employees less. It can also result in employees become hypercompetitive which can be destructive.

Posted by AdamJ23 | Report as abusive
 

AdamJ, even within the realm of “unskilled jobs” there are still different degrees of skills and responsibilities. A newly hired cashier may be paid less than a cashier with a year of tenure on the job, who in turn is paid less than a head cashier. A cart go-fer is paid less than a shelf stocker who is paid less than an aisle/department assistant manager. All of the above (and more) may be squeezed between 1x the minimum wage and 2x the minimum wage.

Raising the minimum wage won’t have any effect on higher-level positions (if anything, managerial work becomes LESS valuable because the service businesses are less profitable), but those jobs that are closest to the minimum wage are likely to get a bump in pay any time the minimum wage itself is raised.

Posted by TFF | Report as abusive
 

I should note that my direct experience is limited in scope and many years out of date. Perhaps grocery stores and fast food outlets are managed differently today?

Posted by TFF | Report as abusive
 

AdamJ, I’m aware the payment method I put forward isn’t appropriate for every job. Ideally, the people in charge would know not to institute it for subjective work and employees would know not to take such a job.

I was thinking more of factory or other production type work where both quantity and quality are easily measurable. Certain service jobs could also fall under this scheme.

Posted by drewbie | Report as abusive
 

One wonders what the Roberts court would do if presented with a case arguing that the minimum wage is unconstitutional. Post Bush v Gore I have no confidence in the judiciary and if anything the Supreme Court is worse now than it was then.

Posted by mfritter | Report as abusive
 

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