Why do people care so much about the minimum wage?

Oct 20, 2010 20:40 UTC

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.

COMMENT

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

Congress forces Bank of America to offer better service

Oct 19, 2010 19:03 UTC

Remember back when the big banks were telling us that re-regulating consumer finance with legislation such as the CARD Act and Dodd-Frank bill would severely disrupt the banks’ business models, and lead to horrible outcomes for ordinary Joes? Well, in Bank of America’s event-packed earnings call this morning, executives laid out how, exactly, the company’s consumer finance business has been forced to change in response to the new regulatory environment. From the press release:

As a result of the legislation and other changes in the environment, the company is changing the way its consumer bank does business, focusing on a relationship enhancement strategy designed to incent customers to bring more business and to make pricing more upfront and transparent. This change moves away from a dependence on penalty fees, which the industry had adopted over the years, and provides the customer with a better banking experience. These changes are expected to result in additional revenue.

So, let’s see. We’re getting 1) more transparent financial products; 2) better banking service; and 3) a boost to B of A’s bottom line. How could Congress have done this to us?!

Granted, the transition isn’t super-smooth. B of A would have reported a net profit today instead of a loss had it not been for a $10.4 billion “goodwill impairment” charge related to a new limit on how much the company is allowed to collect when people use debit cards at cash registers. (“Goodwill impairment” is a kind of made-up thing that you can read about here.)

And I’ll be the first to admit that “upfront and transparent” pricing might very well mean higher pricing, especially for people who are used to getting a free ride when it comes to financial services–like those of us who pay off our credit card balances each month, thereby borrowing at no cost. On CNBC this morning, B of A CEO Brian Moynihan was pretty darn clear: “Instead of charging penalty fees, we’ll charge monthly fees.”

Yet, as I’ve long argued, there is nothing wrong with that. If my bank wants to charge me for a service that I am receiving—credit card usage, paper statements, a low-balance checking account—why would I be upset? Just clearly tell me what the price of the service is, and then I’ll make a decision about whether or not I want to buy it. Old-fashioned, I know, but still so beautiful. I understand that many people continue to feel the effects of the recession, and that the idea of paying more for anything right now is a painful one. But, in the long run, it only seems fair that people pay for the services they get.

UPDATE: Kevin Drum digs this post, invoking Hayek along the way. Then one of his commenters smartly breaks things down according to demand elasticity.

COMMENT

I think it is excellent that BofA will now provide up-front fees. As a former banking employee, I can attest that customers always want the fees clear and concise, and they want to know what they are paying for. Unfortunately though, I think BofA will lose many consumers because they will now see exactly how expensive it is to bank there, and I believe BofA will lose revenues because they relied on these “fine print” fees.

Posted by Blackbird1996 | Report as abusive

Is culture to blame for poverty?

Oct 18, 2010 18:16 UTC

Hello, Reuters readers. Thank you, Felix, for inviting me and Justin to guest blog while you’re away. I promise to make the most of my newfound form of procrastination.

Over the weekend, the NYT ran a piece about academics rediscovering the “culture of poverty.” The story goes that for decades it was taboo to offer social, as opposed to economic, explanations about why particular people and neighborhoods were poor—unless, of course, you belonged to a certain camp of conservative critic. According to the Times:

The reticence was a legacy of the ugly battles that erupted after Daniel Patrick Moynihan, then an assistant labor secretary in the Johnson administration, introduced the idea of a “culture of poverty” to the public in a startling 1965 report. Although Moynihan didn’t coin the phrase (that distinction belongs to the anthropologist Oscar Lewis), his description of the urban black family as caught in an inescapable “tangle of pathology” of unmarried mothers and welfare dependency was seen as attributing self-perpetuating moral deficiencies to black people, as if blaming them for their own misfortune.

Now, it seems, culture is again fair play. Over the past few years, culture-informed explorations of poverty have been seeping into the research literature. High-profile examples include these Princeton/Brookings papers about unmarried parents and this special issue of The Annals of the American Academy of Political and Social Science (which led to a recent Congressional briefing). Nobel-winning economist George Akerlof goes down this path in his new book, Identity Economics: he and co-author Rachel Kranton argue that students decide how much to invest in their education (i.e., their earning potential) partly by whether they see themselves as fitting into the culture of the “nerd,” the “jock” or the “burnout.”

I’m all for understanding the nature of poverty, but the culture lens makes me nervous. Maybe that’s because right after I read Identity Economics, I read The Trouble With Diversity, by Walter Benn Michaels, an English professor at the University of Illinois at Chicago. One of the main arguments of that book is that there is a lurking danger in turning a conversation about economics (poor people don’t have money) into a conversation about culture (poor people have different values and make different life decisions). The big risk: since Americans are loathe to judge one culture as superior to another, we will come to accept poverty as a valid alternative. You’re not poor because you can’t get a job that pays enough to cover your bills (a failure of education, the free market, etc)—you’re poor because you are part of a different culture, which, in diversity-committed America, we all have to respect.

The other thing that worries me about the culture frame is that so much rests on the categories we use to try to capture “culture.” Akerlof’s nerd-jock-burnout rubric is clear-cut and colorful. But is that where the truly useful information lies?

One of the best things I’ve ever read about the nature of poverty is Kathryn Edin and Laura Lein’s 1997 book, Making Ends Meet. Edin and Lein, a sociologist and anthropologist, spent long periods of time interviewing poor single mothers—most of whom both received welfare checks and undertook some sort of paid work. When deciding the right balance between welfare and work, the mothers certainly took into account which paid better. But they also considered which would allow them to be better mothers by spending more time with their children, and which would provide a more predictable (even if lower) stream of income. Devotion to full-time motherhood definitely reads as a cultural value. But does the preference for income predictability?

If we look at poverty in terms of culture, we might be missing an important part of the puzzle. Let’s not forget something else that Daniel Patrick Moynihan once said: “The reason people are poor is that they don’t have money.” Sometimes an economic problem is just an economic problem.

COMMENT

@TFF: I like that distinction between things we can control and those we can’t.

@Curmudgeon: Nice to see you, as always.

Posted by BarbaraKiviat | Report as abusive

Welcome

Coreware Helpdesk
Oct 18, 2010 07:45 UTC

Posts for Barbara Kiviat

  • Archives

    •