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Is minimum wage a benefit or a negative for America?

The participants in the following conversation, with accompanying short biographies, are:

Kanishka Sukumar, who is Gandhian in belief and free market in thought. He likes to find non-violent (or least violent) solutions driven by ideals and virtue but grounded in reality. He likes animals.

 

and 

Markus Daskal, who works in the software industry as a Project Manager. He is progressive and supports political leaders who are committed to solving problems that affect peoples' lives, fully understanding that the system our founders created has checks and balances, and requires compromise and flexibility to get anything done. He has no patience for those who can only attack from the sidelines while accomplishing nothing of value themselves.

He considered Donald Trump becoming President to be an extremely dangerous thing for our nation and the world, and did whatever he could to prevent that from happening, including donating whatever he could afford, traveling to Pennsylvania on weekends to register voters, and to Florida during election week to canvas and GOTV. He considers it his patriotic duty, and has absolutely no regrets other than he was not successful in the end.

He loves his country and considers himself deeply patriotic. If the Democrats ever nominated anyone as unqualified and unfit to be President as Trump is, he would never vote for them, and he will never understand why more Republicans didn't feel the same way. Did they put party over country in the end, or were they just misled by a con artist - or both? They should look in the mirror and ask themselves that.

                                                                                           ——————————

Kanishka:  

Minimum wages has the effect of lowering long term hiring rate among low-no skill workers. This acts as a regressive measure on overall society and in turn makes it more difficult for the workers it is intentioned to help. By making labor artificially more expensive, the long term result is a lower demand for their work.

Markus: 

I'm going to look at this in the broader context of capitalism and it's evolution. For much of the history of our nation, we nineteenth and early twentieth century, we had an increasingly large urban population and a growing industrial economy. Although some were highly successful and could afford the magnificent mansions that we can still visit in places like Newport, Rhode Island, it came at a high societal cost - there were many, many working people struggling to feed their families on wages that were barely subsistence level. There were abuses such as child labor, very long working hours, and extremely poor working conditions. One famous incident that galvanized reform was the Triangle Shirtwaist Factory fire - https://en.m.wikipedia.org/wiki/Triangle_Shirtwaist_Factory_fire

Outrage over this tragedy was one of several factors that led to the progressive era of the 1920s. https://en.m.wikipedia.org/wiki/Progressive_Era

However, there was still great disparity between the power of business and of workers. Income disparity was at an all-time high on the eve of the Great Depression. After the policies of Hoover failed to alleviate the suffering of the American people, they elected Franklin Delano Roosevelt, who promised American workers a "New Deal". The federal minimum wage was passed in 1938 as part of the New Deal legislation, along with many other reforms that changed the nature of American capitalism. 

https://en.m.wikipedia.org/wiki/New_Deal

So that's a little history - I think it's very important to know how we got here. I will get to where we are today and what we should do next shortly. 

 

Now that we've had some history and context, let's look at the two main arguments against the minimum wage as a concept and against higher minimum wages as well. The first is that it's a distortion of the free market, it interferes with the ability of employees to negotiate working conditions and wages with their workers. I'd say that this argument was settled a hundred years ago, when our nation's experience with unfettered capitalism proved to be a failure. I believe in capitalism - it has proven to be the economic system that works best to increase prosperity, by far - but it must be tempered by a reasonable amount of regulation. The bargaining power between capital and labor is just too disproportionate to work otherwise. The second argument is that the minimum wage is counterproductive, that it disincentivizes hiring and job growth. The problem with this argument is that there is no empirical evidence that supports it. Here's some excellent info regarding that: http://www.businessinsider.com/minimum-wage-effect-on-jobs-2016-5

So that sums up my case. I look forward to responding to any counter arguments!

Kanishka: 

Thanks for the history and background to the topic. 

I think the difference between perceptions is that while you believe increases in minimum wages as an increase in wages for the employed, I see them as an increase in the barriers to employment. 

Getting a job is a difficult task for a lot of people. Should we make it more difficult for them? 

The least fortunate, least skilled among us want a chance to start earning an income. They might not have the potential to negotiate a wage some others find suitable or even livable. Should unemployment be the only alternative left open to them? Should they not be allowed to negotiate a wage below what we think we they should compete at? 

Let’s consider what a rise in minimum wage represents. Are we negotiating a better wage for workers? Far from it. Although it might not be the intention, the increase essentially ensures that entry to the profession is difficult and restricts anyone from bargaining to offer his/her services at a lower rate. In no other place do we have the incorrect belief that raising minimum requirements is beneficial for the less fortunate side. For example, there is a place where greater support for increasing minimum wages exists. In a proposed immigration bill, the minimum wage for immigrant workers is sought to be increased from $60,000 to $90,000. There is no doubt if people proposing this bill have any altruistic objective for helping immigrants they are proposing to raise minimum wages. There is congruence in intentions and expected outcomes from this bill. Legislators want to reduce employment potential of internationals even though some of them may get increases in wage in the short run. 

For another group, at another wage level, the minimum wage will have exactly the same outcome irrespective of intended altruism.

I read the article you linked and its statements made me suspect its veracity. I’m sure it is not the work of any economist or part of recognized literature or surveying. If you want, I’ll point them out the parts of inaptitude. If minimum level increases were just a rise in wages and growth, it would be a great idea to increase wages exponentially not just marginally. The theory that increasing price for labor will still generate greater demand for its service is contrary to the law of demand. Neither data (in the long run) nor logic support it.

The New York Times article "A Smarter Minimum Wage" that we both had a chance to read suggested that a minimum wage for one area is not appropriate for another, and that myriad factors influenced pricing of commodities and in turn labor laws should be open and flexible to accommodate them. Can we not take the logic further and extend the same to suggest that what wage one person might consider abhorrent, another might find acceptable? That our labor laws should prevent force, fraud and falsehood but not try to enforce one price for everyone irrespective of individual circumstance.

On a deeper note, I believe the crux of the matter is how should wages be determined? We as a society and as profession, economists don’t really have good models for pricing labor. What macro factor/stat (for example: profits, inflation, productivity....) should wages be linked to, if anything? It will be helpful to hear your thoughts in developing models that help us approach the question in more scientific terms to reduce arbitrary wage levels.

Lastly, I’m glad to have a broader conversation of capitalism or free markets but think it will distract us from our current topic. As for reasonable regulation, I think we should judge systems/policies by their achieved outcomes and not the intentions supporters hold.

Markus:

Kanis -- thanks for your response. I'll take the points one at a time. Firstly, regarding the study on the effects of minimum wage - you questioned its validity but you didn't really substantiate it. There is a link to the study that explains its methodology and results in detail - I don't accept it being dismissed without a clear basis for doing so. I can post other articles that analyze all the studies and statistics and come to the conclusion that there are studies that reach conflicting results and at best, muddy as to whether minimum wage laws disinhibit hiring. I'd say the burden of proof is with those making the claim that it does so, given nobody has demonstrated that with clear empirical evidence. There's no doubt it would in an extreme case - say $30 an hour - but nobody is proposing that.

You said that "getting a job is difficult for a lot of people". That may be so but I doubt it has much to do with minimum wage laws. Someone who lives in a remote area may have such difficulty, only because there are very few jobs to be had at any pay level. Someone seeking a start in the professional world may struggle to get that first job but they often have an option where wages don't matter - an internship (with no pay at all). The sons and daughters of several friends of mine have done so. But for someone who lives in a reasonably populated area and is willing to take a job at current minimum wages - I don't believe they would have much difficulty. Again, you made the assertion otherwise, so I'll challenge you to provide evidence for it.

Kanishka:

Markus, thank you for your response. 

Why did I not like the article/study you linked? A key reason is because it uses employment numbers instead of unemployment numbers. I think this is a sleight of hand. I never suggested that the average person is hurt or that the economy at large is greatly affected. I said the least skilled and the least fortunate are hurt significantly.

The choice of using employment figures mask negative effects on low skilled people. It does so by hiding under the fact that most workers in society are not at minimum wage. So, the bad effects are really not seen in employment but sharp in low skill unemployment. I think a better metric to use is unemployment or teen unemployment (as a proxy for low skill unemployment) is needed to take any study on this topic seriously. 

 

We have a 59:1 proportion of workers above and below the minimum wage (157 million: 2.6 million). I am including almost 2 million (out of 2.6 million) people below a minimum wage despite no indication that an increase in minimum wage laws will help them at all. Add to that at least another 40 million who are neither employed nor considered unemployed steadily rising. These key facts are ignored in employment charts.

 

A second set of reasons include points of scientific inaptitude:

A. Incomplete attempt to show core data: A strange aspect about the core data in that it displays a chart where a correlation is drawn between arrows pointed upwards and downwards instead of actual numbers. A better study would at least attempt to draw a correlation of what levels of minimum wage increase effected employment to what degree.

 

Did a 5% raise increase employment by 1%? Or did a 1% increase in wage increase employment by 5%? I could not find that being reported. Under the banner of being simplistic, they suggested it was a natural causation. In my opinion, not using regressions to isolate factors like economic growth was not for making it simple but intentionally superfluous.

 

It is convenient that the study then counts the simultaneously increases in employment and minimum wage as evidence of support to their theory of positive correlation and then discounts any negative correlations on lack of economic growth or recessions.

 

B.  Unusual points of comparison: The study compares two data points for each increase. One is the employment rate on the month of implementation (not the month of announcement, which might be higher since business will not wait for higher costs) and on the same month a year after. This is unusual. Typically, most studies will focus of a longer term average like the average for a year before and after implementation. Such averages will be more resilient to external causes.

 

I did the same for the data I could find since 1948. I attached the sheet and graph showing my findings and sources. I found half of increases correlating with unemployment, especially the ones with huge percentages increases in minimum wages. The study I did should have also accounted for inflation and ideally take in 12 months before and after rather than the simpler year end averages. I can do the same during a week where I have more time.

Data for Point B: Analyzing Minimum Wage

C.  Not inflation adjusted: It does not account for minimum wages with inflation. Seeing the minimum wage in absolute terms is flawed because inflation makes it the purchasing power of the wage lower despite what might be a higher number. While the study was not deep enough to present problem as such due to this, a more dedicated researcher would regard the increases in the minimum wage as lowering of the effective standard due to inflation in the economy. I do not hold this against them but one would think full time researchers would choose details like this more carefully.

 

D. Imbalanced industry focus: It decided to focus on restaurant and retail. Minimum wage workers are a greater proportion in these two industries. It is a logical conclusion to focus on them. But these industries are among the few where it is difficult to replace manual labor across the century. If the study had included say airport tellers, miners, tailors, call centers and many other jobs in the periods since 1938 they would have seen a significant permanent decrease in employment of these industries. In recent years, even restaurants and retail have tried to reduce workers in their business with iPads. I don’t hold this against the study but want us to be more informed and broad in our discussion.

One of the reasons I feel there are so many more people employed by a small business in developing countries is that the cost of hiring a person is low.

 

E. Sourcing: Out of the six sources suggested, two are papers from the same organization. Another two are newspaper articles (which I would take seriously if they were in relation to the minimum wages) talk about low-income consumption. Then the other two academic sources are good research but limited in scope. There is solid research in the paper comparing contiguous counties but more expansive studies of effects on complete neighboring states show different results. The other paper focused on New York state which I am not sure if can be expanded across the country. This paper is also hypnotically explores the effects of a possible increase in New York to $15.

 

There are smaller details referring to the “nonsense” idea of “doomsayers” and “opponents” who say “the sky is falling” which are easily forgiven but do not indicate honest attempts to research or present the topic.

 

In response to your challenge for evidence, this study is a good read that supports the argument that least skilled workers are hurt from minimum wages. I think it is unbiased and presents data honestly. https://wol.iza.org/uploads/articles/6/pdfs/employment-effects-of-minimum-wages.pdf

 

I am open to hearing any criticisms of this study and look forward to see the studies and statistics you offered. I do not think it is helpful to use pieces of opinion or activism in favor of arguments. Having said that, I accept the moderator’s decision for criteria of articles to be used in support.

 

Back to the general discussion, you suggest people living in remote areas have few jobs at any pay level. I think at wages levels below the minimum there would be higher employment. Also, is the only alternative to anyone in such place move to a populated area? No town, city or country loses its low skill jobs to a place with a higher minimum wage. Businesses (especially small businesses) in remote areas have a small-none margin. These business usually can’t increases wages without severely affecting the sustainability of their business. 

 

Without allowing flexibility for small businesses to operate more freely the result is that only large businesses are able to set up cost-effective business methods at scale even in rural parts of the country. Small businesses do not have the capacity to compete against these larger firms since they are unable to reduce labor costs effectively at scale. This leads to a strange phenomenon where even in the most rural parts of the country is more profitable for a large retailer but unprofitable to have a small retail shop. The result is a more polarized economy with few large businesses.  

 

Let’s also examine the effects in non-rural areas. I doubt you are suggesting that everyone in urban areas is able to find some job if they so desire. You then suggest working at no wage as an alternative. I find that cynical and harsh. It would be very difficult for a person to work at no wage just because his skills is not able to justify a minimum wage. Does a person who works hard but yet to command a rate of $7.25 yet, deserve no wage for his service? As for unpaid internships, they are yet again an outcome of the same law that prevents workers from giving them what they deserve. Since employers have to choose between $58/day ($7.25*8 hours) or nothing, they chose to pay nothing as against some wage (between $0 and $58/day). Another phenomenon is reverse paid internships where the employee pays the organization for experience since it helps stand out as employed in a time where many don’t get their first job. 

 

I don’t like to make personal presumptions but I doubt your friends or their kids are among the least fortunate or least skilled in our society. They all probably speak at least English, have some family, completed high school, don’t suffer physical handicaps, don’t have addictions… among many other problems that several in our society face. With such disadvantage(s), can an unfortunate individual compete for work at the same minimum wage against someone who does not have these disadvantages? The minimum wage is disallowing them to bargain a lower initial rate for their service.

Kanishka: 

I came across this news and thought it is worth sharing : http://money.cnn.com/2017/12/29/news/economy/2018-minimum-wage-increases/index.html

Moderator:

Here is another new article that might be helpful! https://www.washingtonpost.com/news/wonk/wp/2017/12/29/the-u-s-has-one-of-the-stingiest-minimum-wage-policies-of-any-wealthy-nation/?utm_term=.b523c216ff7e&wpisrc=nl_rainbow&wpmm=1

 

I would also like to add a question to the discussion. Do you feel the minimum wage, if raised, should be done at a federal level or a state level? Or not at all?

This also is just the introduction to a book, but it might be helpful: http://research.upjohn.org/cgi/viewcontent.cgi?filename=0&article=1245&context=up_press&type=additional

(If you want to order the book: http://research.upjohn.org/up_press/227/)

This was also linked to in the above article, for a more conservative perspective: https://www.aei.org/publication/exposing-the-minimum-wage-fallacy-its-an-ironclad-law-of-economics-that-to-stimulate-one-group-you-have-to-un-stimulate-another-group/

 

Markus:

Kanis has put a lot of time into analyzing the various studies and certainly makes some valid points. Here's the simple truth - it's very, very difficult to do any simple cause and effect when it comes to macroeconomics in our economy, because there is no possibility of conducting a controlled experiment. There are always numerous factors at work. I'll give an example that I think is telling but I know can be questioned. Take any significant period - 50, 75, 100 years going back. Do a simple analysis of how our economy performed under Democratic presidents vs. Republican presidents. Use any or all of the basic economic measures - GDP growth, employment, the stock market, the deficits. It's not even close - there is an undeniable correlation between Democratic presidents and a better economy. Does this "prove" that Democrats do better at managing the economy? I'd say no. There are too many other factors at play, and even at 100 years, the sample size isn't very large. Is it sufficient to be suggestive and to set the context where one could argue that Democrats manage the economy better? Absolutely, and I believe they certainly do. The point being - the body of studies on minimum wage don't match this degree of correlation. At best, they're all over the place due to many factors, some of which Kanis has identified.

 

Some articles on this - and I'm not trying to change the subject, but more so to get us away from overly focusing on studies that can't really give us a definitive answer - I'll get back to the specific minimum wage points Kanis made shortly --

https://www.aeaweb.org/research/why-does-the-economy-do-better-democrats-white-house

https://www.factcheck.org/2015/10/clinton-economy-better-under-democrats/

OK, getting back to some of the points Kanis made regarding who is specifically affected by minimum wage laws. He makes a clear distinction between those at the minimum wage and those who are not. I see a problem with that. For example - let's say the minimum wage is $10 and 10% of workers make that wage, and the given state is considering an increase to $15. At a minimum - everyone making between $10 and $14.99 would get an increase assuming they retain their jobs. Secondly - others may well get an increase too. For example, a fast food chain that's been paying line supervisors $17 per hour may choose to give them an increase too to retain a meaningful differentiation. In some businesses this might go several levels and affect a lot of employees.

 

Kanis also focuses, it seems to me, on the impact on specific groups of workers in specific areas who work for specific businesses - low-skill / inexperienced workers in more rural areas, most likely who would potentially work for small businesses. The reality is - there is no such thing as a national - or state - policy that won't have some negative / unintended consequences for some people. This is true across the board. Let's take a common example - if you run a car repair body shop, you have to fill out a lot of paperwork that verifies how you disposed of various materials. Why? Because the industry uses many toxic chemicals that can cause serious health hazards if dumped illegally. Probably 99% of body shop owners would never dream of doing so, but they all need to spend time, money and resources to protect public health against the possible  actions of a few. Minimum wage laws help a lot of workers. They also often help businesses. There is a lot of evidence that higher minimum wages often lead to better employee retention, lessening training and recruiting costs - and to better employee morale, which can lead to better employee performance. There's a compelling case that better paid employees have more disposable income, which can lead to businesses doing better as many are consumer-driven. I'll sum up by saying that the overall benefit to society and to economic performance easily outweighs some isolated negative impacts. I favor a federal minimum wage that establishes a floor for all workers, and local minimum wages that are higher as states and municipalities find are fit for their particular circumstances. Thanks to Kanis for a great discussion and to Danielle for hosting!

 

Kanis: 

Good to see your response Markus. A multitude of factors affect the economy. Completely controlling for all such factors is difficult. Most economists try to locate circumstances where surrounding factors are not significant deterrents to factors being studied or measured. I don’t think we should discount findings from such good studies just because they might not be perfect. 

 

Although objective details and the parameters of choice may be questioned, I believe macroeconomics can be analyzed by looking at the big picture over a long time for major trends with crystal clarity. 

 

As I mentioned previously, in all its history, the United States has not yet lost a single low skill job to any country with a higher minimum wage. If local manufacturing firms relocated to China or regional call centers moved to Philippines, it is because there were lower minimum wages for the same low skill work. This is in accordance with my belief that we reduce the competitiveness of a local worker in international markets when we try to increase their minimum wage. Thus we make it more difficult for him/her to get or merely keep a job.

I am glad we agree that the correlation you quoted between party occupying the office of the President and economic metric is questionable. There are many cases where correlations can be made but they don’t really mean anything. While I am not as informed of long period you referenced, I think the economic growth in the late 1990s and post 2010 stemmed from technological changes. American behemoths like Google, Amazon, and Microsoft were founded and served global markets in mid-late 1990s. The recession of 2008 paved for progress in the sharing economy boom which increased self-employment from 2010 onwards through Uber, AirBNB, among other new age companies.

 

In response to the moderator’s question, I believe increases to minimum wages are either useless or harmful for any large group with diverse skill levels. Since the entire country is a large group of people with diverse skill levels, I would not want to see any federal increases in the minimum wage. It is impossible to have a single national policy for variety of economic conditions without significant clumsiness resulting in making it useless is some places and harmful in others. If they have to be implemented, I would like to see them in as local an organization as possible. This allows most workers and business a degree of flexibility through relocation. We can then observe if the localities with higher minimum wages gained or lost from their policies

 

Let’s examine the other points you mentioned. In your example, you point out that one needs to assume that everyone retains their job. At low skill jobs this assumption is rather generous. Low skills jobs will be reduced or replaced in most cases. 

 

I agree there is a cascading effect of increases in wages on other levels in some businesses. These rates have only diminishing increases higher up the wage hierarchy. In your example, the person earning $10/ hour receives 15$/hour if the minimum is set that high. But the person at $17 will probably not receive $22/hour. One of the reasons we don’t have literature describing this effect is because we can’t distinguish between the causes for a raise. The person previously earning $17/hour will probably believe that his raise was deserved on merit and not just because of the raise in minimum wage thus making it difficult to obtain gainful data. 

 

I believe my focus on low skill workers is appropriate because they are the ones most affected by it. They are the ones who lose their livelihood. I do not know any moderate or high skill, experienced workers who are still working at or close to minimum wages. If the moderate-high skill workers were affected by these wage increases, they would be against it as well. 

 

You said no one is suggesting an increase to a wage at $30/hour. Why not? If higher wages are better, why do we stop at $15? Why does the same principle of high minimum wages being a positive policy lose its appeal at $30/hour? I think the reason no one suggests it is because a large number of us in society would face unemployment if that is the case. Only a smaller proportion would face unemployment at $15/hour. The perspective of minimum wages being a barrier to employment becomes apparent at high levels. 

I have placed a greater focus on the unemployed because to me they are the group with no voice in the debate. If the unemployed had a union, I believe they would opine against the minimum wage. While you did focus on employed workers you failed to comment on effects on the unemployed. I hope we agree that it is indeed an increase in the barrier to employment for them. 

 

While there is a case to be made that higher minimum wages lead to greater business, I think the case is weak and certainly not compelling. If it was indeed a compelling case, we would only need to increase minimum wages in times of recessions. This runs contrary to the collective experience where we find minimum wage policies are least popular in bad economic times.

Most policies affect some groups negatively. However it is only the morally worse policies that seeks to help the fortunate/skilled people at the cost of the less fortunate/less skilled. For a policy whose proponents mostly claim the exact opposite, the minimum wage is shabby idea.

 

It was a nice discussion indeed Markus. Thank you for sharing your perspective and I appreciate our moderator’s effort in putting this together.

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