Reihan Salam

Finding new ways to make work pay

Reihan Salam
Nov 14, 2013 18:32 UTC

One of the scariest notions about America’s sluggish labor market recovery is that it doesn’t represent an aberration, but rather a new reality in which good jobs are few and far between, particularly for those with limited skills. It is certainly possible that the future will be brighter than we think, and that we will soon enter a new economic Golden Age in which people with low education levels will flourish as employers clamor for their services at ever-higher wages. But if this happy outcome does not come to pass, as the current evidence suggests, the United States and other market democracies will have to come up with a Plan B.

A number of interrelated developments, from automation to organizational innovation to off-shoring, appear to have reduced the willingness of employers to pay middle-income wages to less-skilled workers. That is, the problem is not that there is no wage at which employers will take on less-skilled workers. If this were the case, agriculture and hospitality companies wouldn’t be pressing lawmakers for an immigration overhaul that would allow for a large influx of less-skilled workers from abroad.

Rather, the problem we face is that employers are only willing to employ less-skilled workers at very low wages, including wages that the voting public considers unacceptably low. Public support for raising the federal minimum wage, now at $7.25, is overwhelming. A Gallup survey released on Monday finds that 76 percent of voters favor a $9 per hour minimum wage, and one assumes that support for an even higher minimum wage would be almost as robust.

Many will argue that an increase in the minimum wage to $9 will not have a dramatic effect on the number of low-wage employees or on hours worked, and that may well be true. Yet it is possible that job growth might decline in the wake of minimum wage increases, as new research by Jonathan Meer and Jeremy West of Texas A&M University suggests. Nicole M. Coomer of RTI International and Walter J. Wessels of North Carolina State University, meanwhile, have explored the possibility that while increases in the minimum wage don’t appear to have a significant impact on total employment levels, they might cause workers to shift from jobs subject to the minimum wage to those that are not subject to the minimum wage. For example, the minimum wage for tipped employees, like restaurant servers, is lower than the standard minimum wage. Regardless, the minimum wage debate won’t get resolved any time soon.

What we do know, however, is that in market democracies with high effective minimum wages, whether established by statute or centralized collective bargaining, the lowest-wage employees tend to be more productive than their lowest-wage counterparts in the United States. This implies that as minimum wages increase, employers might become more inclined to substitute capital for labor and that they will be somewhat more reluctant to hold on to employees who can’t handle a steep learning curve. Earlier this year, Sarah O’Connor of the Financial Times wrote a brilliant account of Amazon UK’s Rugeley fulfillment center, where many employees are drawn from the ranks of the region’s long-term unemployed. Workers who can handle the intense workload are made full-time Amazon UK employees. Those who can’t are let go, and quickly. What O’Connor doesn’t explore is the very real possibility that Amazon UK’s personnel policies flow from Britain’s hourly minimum wage, which at 6.19 pounds ($9.84) is substantially higher than the U.S. minimum wage. The UK wage essentially mandates a reasonably high level of productivity that young workers, workers with limited English language proficiency, or workers taking on their first jobs a long spell of unemployment might struggle to reach.

A poor solution

Reihan Salam
Feb 15, 2013 16:55 UTC

The minimum wage debate is back, thanks to President Barack Obama. In his State of the Union address this week, he noted that a full-time worker earning the federal minimum wage of $7.25 an hour would earn $14,500 a year. This is an amount that would be very low for a single adult living alone, let alone the parent with two children whom the president invoked in his speech. And so he called for a sharp increase in the federal minimum wage from $7.25 an hour to $9 an hour, an amount that would be indexed to inflation, as a way to fight poverty and to give the economy a boost.

What the president didn’t mention is that the share of full-time workers who earn the federal minimum wage is very low. Mark Perry, an economist affiliated with the right-of-center American Enterprise Institute, observes that as of 2011, only 1.7 percent of full-time hourly employees were earning the minimum wage or less. Minimum-wage earners were more common among those aged 16 to 19 – 22.8 percent of these workers were earning the minimum wage or less. Of course, many of these workers live with their parents and are generally not the sole source of support for themselves or their families.

Another reason why so few workers earn the federal minimum wage is that as the value of the federal minimum wage has eroded, dozens of states have established or raised their own minimum wages. Thus far, only the state of Washington has a minimum wage, at $9.19 an hour and indexed to inflation, higher than the president’s proposal.