The minimum wage debate has emerged. It appears that every
few years there is an outpouring of support to increase the federal set minimum
wage. When President Obama announced they he was going to increase the federal
minimum wage for government contractors, he set the stage for increasing the
minimum wage for everyone. Through executive action, President Obama increase
the wage for contractors to $10.10/ hour. When that number is extrapolated out,
the least amount of money someone could make for working full-time (40hr work
week) is just over $21,000 a year[1].
This isn't to bad for those who are most likely at the beginning of their
working career or do not possess the skills to demand higher wages.
The framing of the debate is largely a myth. When you hear
about people earning minimum wage by politicians, they typically throw out an
example of a single parent trying to raise a family on minimum wage. What
typically isn't revealed is that is almost never the case. According to a paper
written by Mark Wilson, a former deputy assistant secretary of the US
Department of Labor, the percent that fits the description of over 25, making
minimum wage, and trying to raise a family is 4.7%[2].
That is not what is largely talked about on campaign trails. When listening to
politicians campaigning they typically throw out some excellent one liners
about how they will improve quality of life, or income equality. However, this
ignores much of the debate and is used to get support from the voting public.
When you look at the entirety of the labor force, the total
percentage of people making these low wages is less than 3 percent[3].
According to a report conducted by the Mercatus Institute, the largest group
making minimum wage are those working in the food industry. Tracking their
income becomes difficult because there is an incentive for not reporting cash
tips. If an employee doesn't report their cash tips, the company must pay them
at least minimum wage, but they will have earned more due to the unreported
income. If the majority of those who work in food industries do not report all
tips and make more than minimum wage, the percentage of the population making
those wages decreases to 1.6 percent[4].
Many people seem to make it sound like if there wasn't a
minimum wage, then people would be making next to nothing. But this ignores the
fact that competition between companies drives wages, not the federal
government. If it was the law that drove wages, you would expect that a large
portion of the working population would make minimum wage. However, when you
see that the high estimate of the minimum wage earners is 3%, that means that
97% of workers are earning more than the mandated minimum. Evidently it isn't
the law that sets the wages, but competition between employers to hire those
with the best skills.
In the Mercatus study, reference is made to one of the most
famous empirical studies on the effects of a minimum wage increase. Card and Krueger's
study on the effect of restaurant workers who had their wages increased in the
state of NJ and PA showed no negative effects on unemployment. Surprisingly,
according to their findings, employment figures actually increased after the
minimum wage was increased. This sounds too good to be true, and in fact, it
is. The methodology used in their study was flawed. Instead of using payroll
information to measure the amount of minimum wage employees, they conducted
surveys of management. They asked about employees, and their hiring decisions
before and after the wage increase. So, they never actually measured real
employment numbers, just intentions.
While trying to recreate this student, economists Neumark
and Wascher targeted the same area as the Card/ Krueger study. Instead of using
survey's though, they used the payroll data and found a large difference
between their study and Card/Krueger. In the Neumark/Wascher study, they found
what many classical economists expected, after the minimum wage increase,
employment decreased[5].
The Mercatus study looking at all these different studies
ran their own analysis of the unemployment figures in the state of New Jersey.
NJ was planning at that time to increase its minimum wage by $1 per hour.
According to the conclusions of the study, for those who do not have a high
school education, unemployment is expected to increase by approximately 2
percent, those without a diploma, 1 percent. Those who have college degrees
there will be no effect. This fits with the conventional wisdom that raising
the minimum wage results in penalizing low skilled workers.
With the current state of the economy as a whole and the
level of unemployment we are currently experiencing, an increase of the federal
minimum wage is exactly something we don't need right now. Given that there is
a correlation between increased minimum wage and a decrease in low skilled
employment, increasing wages will only hurt low skilled workers. Also, with the
youth unemployment figures already high, it will only make things worse.
In the words of Milton Freidman, when government institutes
a minimum wage "employers must discriminate against people who have low
skills." This is clearly demonstrated with empirical analysis.
No comments:
Post a Comment