Opinion

Felix Salmon

The minimum wage and productivity

By Felix Salmon
July 12, 2010

Cardiff Garcia pushes back a little at my contention that raising the minimum wage might help the problems of unemployment, underemployment, and bad employment:

How do we know that with a higher minimum wage, employers will “compete on who has the best employees” and “invest significantly in those employees”?

It seems just as possible that employers would react by doing one of the following, or some combination thereof:

  • Hiring fewer workers and asking existing workers to do more (a tactic employers are more likely to get away with in an environment of sustained unemployment)
  • Investing more in capital (whose price relative to labor obviously declines as the minimum wage increases) to help the company do the same work with fewer people
  • Simply continuing to compete on price, even if the prices will be higher across the board as the increased minimum wage affects all employers in the same industry…

I’ve never seen the argument that employers react to higher minimum wages by increasing their investment in human capital.

To Cardiff’s last point first: pretty much by definition, an increase in the minimum wage forces an increase in employers’ investment in human capital. And my point is, at heart, the idea that the more employers spend on human capital, the more they think about it as an investment, as opposed to merely an expense.

To Cardiff’s other points, yes, it’s entirely possible that employers will hire fewer workers to do the same job, if those workers become more expensive. That’s called improving labor productivity, and it’s a good thing, especially when labor is rewarded for its improved productivity in the form of higher wages. Going back to Rich Florida’s original point, America doesn’t just need more jobs, it needs better jobs — especially in the service sector. And in the long term, more productive companies are more successful, and grow more, and end up hiring more people. Higher-productivity jobs are precisely the ones we most want to create.

Finally, Cardiff seems to worry that an increase in the minimum wage would cause price inflation. We should be so lucky. Right now, a bit of wage-driven inflation is exactly what the doctor is ordering. I just don’t see it happening, unfortunately.

Comments
19 comments so far | RSS Comments RSS

I think it’s important to remember who actually makes minimum wage. Most of those low paying jobs go to high school or college age students. For the majority of them, the jobs aren’t careers; they’re temporary. A higher minimum wage will lead buisnesses to pass on youths with little-to-no job experience and give positions to older workers who know what they’re doing.

Trouble is, the people who are qualified to do the job before being hired don’t want to make minimum wage, and will be unhappy at the job.

Posted by drewbie | Report as abusive
 

Drewbie, at the very least you’ll need to cite a source for that opinion, which is highly debated and has been for over 15 years. In my area, many holders of minimum wage jobs in agriculture and food service are adults old enough to be the parents of students. A Google search on “who earns minimum wage” suggests that the claim that only high school kids earn minimum wage has been argued over for a long time, and is far from being accepted fact.

A whole nother question, of course, is whether or not these agricultural and food service workers see their jobs as “careers,” as you put it, and whether or not they should.

Posted by SelenesMom | Report as abusive
 

I am generally in favor of free markets but I can see how a minimum wage is good for the low earners in most cases.

(1) Employers are forced to create substantial jobs, jobs worth at least some minimum amount, or not bother.

(2) Job hunters are forced to go out a little further to find a job, to their great benefit. Surely some people would hop right into the first $3 per hour job that is sitting on their doorstep. Perhaps they could find a job in half an hour. Maybe it would take a month or two on the other hand to find a $7 per hour job for that person. But that month searching pays off very quickly. Would the person at the below-minimum-wage job soon jump to the $7.25 an hour job? Maybe not because now he is not spending his days on the job hunt any more. Markets do not approximate efficiency until the job seeker spends a decent amount of time looking.

However in a period of high unemployment, markets are not clearing. The all-important question is, is there a shortage of minimum-wage jobs or is the failure to clear occuring at a higher level? Does anyone know the answer to this?

Posted by DanHess | Report as abusive
 

Any minimum wage that is not equal to or greater than the cost of living in a given region is a subsidy by the state and local governments. People who live on minimum wage jobs pay very little in taxes, certainly less than their share of what it costs to educate children, maintain roads and other infrastructure, pay for police, fire, and emergency services, and all of the other things that governments pay for. They also receive financial assistance from these local, state, and federal governments, all because they don’t get paid enough to survive. Effectively, the governments are helping these businesses that pay minimum wage jobs by supplementing the income of their workers.

Opponents of the minimum wage, or even minimum wages that provide minimum 21st century American living standards, use the argument that higher minimum wages kill jobs. Even if it were true (I don’t believe it, I know some employers will hire less people if they are forced to pay them more, but other businesses will do better because they will have a larger customer base, due to the increased incomes of the lower paid residents in the area), it doesn’t matter – what value does substandard jobs add to any community? The only people benefitting are the low wage employers.

“Businessmen” are always whining about government subsidies and handouts. Yet, the most obscene transfer of income from the public to private hands is the underpriced minimum wage.

Posted by OnTheTimes | Report as abusive
 

I think a part of your argument for a higher minimum wage is that you anticipate employers to invest in those jobs, because they cost more. In other words, if you’re paying a worker in a labor-intensive job more, you are more willing to invest in training and capital equipment to get more out of your investment.

That may have been true 20 or 30 years ago, but today I see employers increasingly treating even high-skill people as largely interchangeable. There seems to be little desire to invest in a person to obtain greater productivity; we would rather replace that person with a more productive one.

As I mentioned when you last raised this topic, we as a society can decide to turn low-paying service jobs into better-paying careers through higher minimum wages and substantial training, and that may not be a bad thing, but we need to be prepared for unintended consequences.

Posted by Curmudgeon | Report as abusive
 

Well I answered by own question.

According to El Erian’s recent WSJ post, unemployment among 16-19 year olds is 25%. That is depression-level unemployment.
http://www.pimco.com/LeftNav/Viewpoints/ 2010/The+Real+Tragedy+of+Persistent+Unem ployment+July+El-Erian.htm

The market is failing to clear at low levels. Obviously minimum wage is a culprit.

To a 16 or 17-year-old with no experience living at home, $50 per day would be quite nice and very helpful to their family too. Instead, such pay is a crime and that person ends up unemployed and with much dimmer prospects on into the future. Instead of some money and experience, they get nothing.

What a tragedy.

Posted by DanHess | Report as abusive
 

The only model I can think of where this works out well is if there is such a glut of skilled workers that employers are able to pay minimum wage and still get skilled workers. Raising the minimum then helps these skilled workers with no cost to the number of jobs. I’m sure there are instances of this out there, but there are also probably places at the margin where the raise will put the wage beyond the productivity level for a job, increasing the risk for the employer that the worker won’t progress or stick around once the skills catch up with the wage. In those cases, employers may decide it’s not worth the risk, leading to fewer jobs. I can’t think of any instances where the rise would reduce unemployment at the margin to offset this, though. The result is an increase in wages for skilled workers who would’ve gotten the job anyway, at the expense of less-skilled workers.

Would the cost be worth it, if it raised employers’ investment in workers? Maybe. But I’m not sure if a time of historically high unemployment is a time to trade even higher unemployment for uncertain long-term benefits.

DanHess,

As for (1), what probability do you put that they’ll go with ‘not bother’, rather than ‘create substantial jobs’? From other comments, it seems like ‘create substantial jobs’ has all upside to businesses, and is easy once it’s mandated by the government, so why do we need the stick rather than just using the carrot? Are businesses really so anti-worker that they would harm their own interests just so they can keep the poor oppressed?

For (2), have you seen the long term unemployment numbers? I doubt if the problem is that workers are taking the first thing that comes along, rather than holding out for something better. Either they’re already doing this to an extreme level, or there just aren’t jobs out there, even at the minimum level.

OnTheTimes,

From what I’ve seen, real wages for those that still have jobs are going up, just as they did during the depression. I’m not convinced, though, that this is as good a thing for businesses as you seem to imply. It seems more like a transfer of benefit from my mother-in-law, who is long-term unemployed, to me, who has a steady job.

Posted by Podunk | Report as abusive
 

If minimum wage is supposed to help to the poor it’s not working.

Unemployment among black teens climbed to 39.9% in June and 43.3% among black male teens. These folks really need a job.

http://www.diversityinc.com/article/7846  /JobTrends-Report-Black-Employment-Rema ins-Bleak/

Fifty bucks a day ($6 an hour) would be great when you have nothing.

Will all those in favor of jacking up minimum wage right now please go find some data in support of your arguments?

Posted by DanHess | Report as abusive
 

To support drewbie’s argument, here are a few sources:

http://www.heritage.org/Research/Reports  /2006/08/Who-Earns-the-Minimum-Wage-Sin gle-Parents-or-Suburban-Teenagers

http://utpjournals.metapress.com/content  /77184931231q842h/

I’m not certain as to the bias on the first one (I suspect there may be some right-wing-ery going on at Heritage), but at least you can read it without paying for it first.

-

Podunk,

Why do you restrict transfer of benefits to the middle and lower class? Isn’t it conceivable that there could be a transfer of benefits from wealthy owners to the middle and lower classes through an increase in the minimum wage? Do you think labour is so inelastic?

I do disagree with Felix – the minimum wage is an ineffective method of poverty alleviation (we’d be better off with higher transfers to the poor, or a negative income tax), and there are better ways to boost demand (again, gogo transfers to the poor rather than to middle-class teenagers), but I would like your logic to be internally consistent and complete.

Felix,

Is there any good way the US can realistically boost aggregate demand (given political realities)? The only way that I can think of right now that might actually work is a tax cut, preferably payroll taxes. You poor bastards.

Posted by the_iron_troll | Report as abusive
 

Iron Troll,

Well, certainly, the direct transfers to the higher-skilled workers who win the job lottery will come from the employers who pay them. Those employers would love to pass those costs on in higher prices, but that seems unlikely to work, right now, so they would probably need to come out of profits. This is the case when the worker is productive enough to justify the higher wage, but can’t demand it because of the glut in supply of workers. Right now employers can bank the difference in profits, which may help answer a question Tyler Cowen asked recently about why profits are up while AD is down.

But there are bound to be marginal cases where the business doesn’t have the profits to divert, yet still can’t pass on the higher costs. What happens in that case? Debt-financed investing in the worker, in hopes that the worker’s skills will eventually both pay for the higher wages as well as pay off the debt that financed the training? Perhaps, or maybe the business will just have to wait to hire until inflation makes the wage level match the productivity level, or profits can allow for investment in workers.

So at the margin, workers with skills/jobs will benefit, while the groups with the highest current unemployment will find it even harder to find jobs. Perhaps that’s not really a direct transfer from the lower to middle class, but it does hurt the lower class and help the middle, even if the transfer is mediated through employers.

As to boosting AD given political realities, I don’t really see any room for fiscal boosting, and the Fed seems determined to follow Japan’s shining example. Poor bastards, indeed.

Posted by Podunk | Report as abusive
 

A lot of people seem to assume that just because the unemployment rate for teenagers (and subsets, like black make teenagers) is very high, that the unemployment rate for head-of-the-household adults and recent college graduates isn’t that bad. It is bad, it is very bad. These people have incentive to not take a minimum wage job, as the difference between unemployment benefits and their take home pay at a minimum wage job is not that great, and certainly not worth the risk of resetting their salary expectations should they find a job in their field.

I don’t understand why society cares so much about creating jobs when the jobs are not very good and don’t pay enough to let the worker be a productive part of society. Job creation does not solve economic problems if the job does not support what is an acceptable standard of living in this country. They only serve the employer, who is bringing people to its community, where the community ends up supporting the minimum wage workers.

Posted by OnTheTimes | Report as abusive
 

SelenesMom, my opinion is based on personal experience. I live in the midwest, where I’ve known many people in both the ag and food indutries for years. The former starts paying well above minimum (average is around double the national minimum). The latter doesn’t pay so well at first, but still starts workers with experience off with higher than minimum pay.

Your milage may vary.

Posted by drewbie | Report as abusive
 

@OnTheTimes –

You wrote:
“I don’t understand why society cares so much about creating jobs when the jobs are not very good and don’t pay enough to let the worker be a productive part of society. ”

I don’t know about your experience but mine when I was a teenager / in my early twenties involved about ten different jobs. The pay was low. By the time I graduated from college I was saavy enough and had enough experience and a resume to go after good jobs and now we are a pretty well-off, one income household.

Another thing I promise you is that the early experience at the ‘low end’ got me thinking all the time about what to study and how to get in a better situation.

I can think of very few examples of people who make good money now who did not start at low paying jobs early on. This is true even for friends from wealthy households.

From the massive teenage unemployement rate, it seems obvious that raising the minimum from $5.15 in 2005 to $7.25 in 2007 (a 40% pay hike) cut off the bottom rungs of the ladder for a lot of teenagers. What rotten luck for them, who couldn’t even vote.

Posted by DanHess | Report as abusive
 

There should be a scalable minimum wage based on age so that kids (that need the job experience) and older adults (that need the $$) needs are both met. As for what a minimum wage should be, (for adults) I think 3x rent (national average) divided by 35hours per week (or roughly 148 hours per month) seems reasonable. I think that would be a smidge below $10/hr. For students (high school or post-secondary) should take a 25% haircut – so $7.50/hr. Cheers!

Posted by CDNrebel | Report as abusive
 

Dan, I don’t have a problem with creating jobs for teenagers, but there are lots of minimum wage jobs that are not held by teenagers. I’m not advocating eliminating jobs for teenagers, just that when you combine the minimum wage with a labor surplus, you end up having the government subsidizing those minimum wage jobs. If you want to carve out a student exception for low paying jobs, go ahead, but we shouldn’t apply the rules we create for those teens to everyone.

I wouldn’t want a company to come into my town, and start hiring independent, full-time, adults at $6/hr with no medical insurance. Those workers will not be able to afford to live here, and my town will pay the price. When the owner of that company brags about how many jobs he has created, and how he should get a tax break, think about how much all those workers will cost the community in terms of unpaid medical bills, negligible tax revenues, food assistance, etc. And the workers share of public services will have to be made up by other, better paid residents, further inflating the cost of living here for everyone else.

For the record, I had a low paying job until I graduated college, and it definitely helped prepare me for my life after college.

Posted by OnTheTimes | Report as abusive
 

OnTheTimes, between the Earned Income Tax Credit and Health Care Reform, those minimum-wage adults will end up with more than their basic wages. ($8/hr in my state)

Still not very good, though.

Posted by TFF | Report as abusive
 

Felix, I suspect you’ve never owned a business, and thus never employed anyone and had to actually write those checks. Likewise for most other commentors above, as this discussion is far too academic.

With respect to your point that the more business owners spend on employees, the more they think of them as an investment, that is simply not true in the small/midsized business world, nor in any business owned by private equity operators, no matter how large. Large public companies say that’s true (employees are investments), but their actions prove otherwise when cost (expense) cutting becomes necessary for corporate execs to make their bonuses/stock option targets.

Having worked with small and mid-sized business owners for multiple decades, my experience is that those who survive and thrive think about every expense as money coming out of their own pocket. I have yet to meet a business owner who thinks of labor/personnel expense as an investment. As someone who attended Harvard Business School, you should certainly know better. If not, go ask Sam Zell how he thinks about employee expenses.

With respect to your point that employers obtain higher productivity when wages are raised and they have to make due with fewer workers (which, by the way is exactly how most businesses increased profits in the last year), that of course is true. But you fail to recognize, or at least mention, what that means for the employees who have to work those extra hours. Typically they are salaried employees, because business owners aren’t going to utilize hourly wage workers at time and a half to make up those extra hours for fired employees. That work falls to salaried employees who will now receive a lower effective hourly rate.

So, living in your fantasy world, you say well they should just change jobs if they don’t want to work that hard. Try changing jobs in this economic environment. Most people are scared to death of losing their jobs. If you haven’t seen the surveys that show how many people are currently unhappy in their employment situations (in private enterprise, not the cushy government work), then check them out.

You entire premise rests on false assumptions.

Posted by NoRisk-NoReward | Report as abusive
 

Strap down for a lot of speculation about what happens if the minimum wage is raised in the absence of anything else going along with it that needs to go along with it for it to vector as… Oops. I almost said “as intended”.

The situation’s a bit like flying a helicopter – you make it move the way you’d like it to by a combination of complementary axial adjustments. If the idea is to keep the economy, like the helicopter, from crashing into the ground, you have to tweak five minor things to get it do that one big thing you really want it to do smoothly, without inducing queasiness or mechanical stress.

Raising minimum wage is but one economic necessity out of several. On its own, it’s liable to have only fizz but no sizzle, like a slightly less lame version of the infamously forgettable $200 Bush II tax rebate for the poor.

If his intention were for the US economy to finally stop nosediving into the tarmac, Obama and his squad could do a whole lot worse than to synchronize fairly substantial increases in America’s minimum wage with a concise bill of fundamental employment rights, simple guidelines and stabilizing statements, aggregate result of which would be to avert backlash and buy everyone a bit of much-needed breathing room, pending more epochal policy-making.

Then again, any opportunity to do worse on a grand mal scale is the sort of opportunity Obama and his bipartisan hegemonic neocon/neolib amours foux never seem able to pass up. Hence, less than six months from now they’ll be going, “Well we raised the minimum wage but that didn’t help, did it?” as the leading rationale for paying workers even less, after all.

And so the vassalage continues.

Posted by HBC | Report as abusive
 

1.Imho you totally miss some basic economic fact/laws.
Higher wage will simply (at least at first) mean lower demand for labor.
2. In the Henry Ford days because of a mostly closed economic enviroment (US as a seperayed market) it also meant higher demand for products etc. in THE US.
3. The problem is the situation has largely changed. It might short term at least mean higher demand but this could be (or is even likely) demand for Chinese goods.
In the present situation it would work as well on a per country basis (as you are suggesting) as it would by only implementing it in say Ohio and not in neighbouring states.
In a worldmarket you have to look at things on a worldscale.
4. At the end of the day the wealth of the US as well that of other countries is too a large extent based upon what you can sell abroad so you get money that can be used to buy the things you want or need from abroad. Increasing minimum wage doesnot make the US export more it simply only makes it more expensive. Leading to lower exports and for ther country as a whole less wealth. Only because the division of income has changed low incomes could overall be better of but the rest an dthe country as a whole will be worst of.
5. Employers will only invest in human capital if they cannot get the same kind of thing for free (or at least cheaper). Making the lowest category as expensive as the next one (with a lot of unemployment) will simply lead to replacing them by better educated ones.
6. PER EMPLOYEE employers might invest more however that doesnot mean that OVERALL they will invest more.
7. You use basically the same argumentation as a lot of (semi-) socialist European governments have used by increasing the number of civil servants (they consume and you train them as well) Now we see where that has brought them.
8. Imho rising minimum wage will be an economic disaster
(like you can see in many countries in Europe) high minimum wages simply mean more unemployment in that sector.
9. Escape from there is imho only possible by especially better education other measure are simply ignoring economic facts and a total waist of time and energy. Could do more harm than good.
10. If you like to do the increase for other than economic reasons, social or political please say so, but don’t try to use economic arguments that make no sense from an economic point of view, for that.

Posted by Rikh | Report as abusive
 

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