7/07/2004

Raise Minimum Wage?

John Kerry recently proposed that he would raise minimum wage from $5.15 and hour to $7.00 and hour if elected. This would be the first minimum wage increase in America since 1997. Kerry, speaking of President Bush, stated, "If a president can go out and fight for four years to provide over a trillion in tax cuts to the wealthiest people in America, we can fight for a few months to raise the minimum wage for the poorest people in America." I would like to hear some opinions on this proposal.

My personal feeling on the issue is that raising minimum wage won't solve too many problems. Even though the wage increase would increase my current paycheck, I don't feel that it would be a long term benefit to me or America. With a wage increase, inflation is sure to follow. Eventually, costs to employers will go up, prices will climb, and things will balance out. We'll be right back where we started.

I do think the a wage increase would benefit minimum wage workers for a short time, but how long would it be before current $7.00 and hour wage earners would demand that their wage's be increased as well? As I stated before, I think the whole proposal would just start a balancing act that would eventually land us back where we started.

14 comments:

Dr. Tufte said...

This is a good start for the new class, but I would like to see at least one link in most posts. In this case, there must be something either on Kerry's website, or on a major news site about this proposal.

Dr. Tufte said...

This is an issue that has both microeconomic and macroeconomic aspects.

Focusing on the latter, the idea that raising the minimum wage would be inflationary is part of the institutional theory of inflation discussed in Chapter 13 of the Colander text.

I also liked the comparison of the (nominal) minimum wage to prices of other goods - this is exactly the adjustment we talked about in class today, although in this case we are adjusting nominal wages to get real wages.

Kid said...

I feel that raising the minimum wage would be more detrimental to the economy then it would help. Though I have to say I’d like to make $7 an hour. A Possible solution to increasing the wages would to do it a little at a time. Going from $5.15 to 7.00 would drive prices up and cause inflation to go up and possible could cause hyperinflation.

Having better paying jobs would get those people who are discouraged and have stopped looking for work to go get a higher paying job. This could be a benefit to our economy by decreasing the unemployment rate.

From reading in the book I’ve recently learned that “inflation and unemployment are opposite sides of the coin” (pg. 154). In the end, raising minimum wages would reduce unemployment and drive inflation up. Which side of the coin would we rather have, inflation or unemployment?

Boris said...

Sorry about not posting a link for this topic. If you want to read more about Kerry's proposal, here is a link to his website:

http://www.johnkerry.com/pressroom/releases/pr_2004_0618.html

Dr. Tufte said...

With respect to Kid's comment, it isn't clear that raising the minimum wage is inflationary. As discussed in Chapter 13, there are two theories of the sources of inflation, and only one of them would attribute general inflation to increases in something like the minimum wage.

Also ... I know we discussed hyperinflation in class the day you posted this ... and even though it is fresh in your mind, we won't get hyperinflation from any increase in the minimum wage. Hyperinflation is always related to plain old easy to understand printing of too much money.

Note that if increasing the minimum wage caused discouraged workers to re-enter the labor force, we could see an increase in the unemployment rate with an increased minimum wage. That isn't something you are likely to hear from the Kerry campaign.

The book does make the case the inflation and unemployment tend to move in opposite directions (this is called the Phillips Curve, and is also discussed in Chapter 13). That idea was very strong in the 1960's, but has faded since then. This book retains that idea a little more prominently than others. My view is that these often move in opposite directions, but that they can both move together as a result of good policy choices (if they go down together as in the 1980's) or bad policy choices (if they go up together as in the 1970's).

Rolf Tiblin said...

Once again as the election season begins, offers of hand outs are made to attract the votes of voters. The minimum wage has always been a hotly debated issue used on both sides of the isle. It might help to do some easy searching to figure out if raising the wage will keep it in line with inflation rates.
The simplest way I found is to rely on the U.S. Department of Labor
Bureau of Labor Statistics http://www.bls.gov/cpi/home.htm#data The federal minimum wage has increased from 25-cents an hour in 1938, to the current $5.15, adopted in 1997. Using the CPI inflation calculator and entering in the 1997 (and current) minimum wage $5.15 the calculator reveals that it would take $6.07 to have the same buying power today. The calculator can also reveal that if the original $.25 an hour rate had only grown with inflation, employees should be receiving $3.35 an hour proving that $5.15 is more than adequate.
Personally I am opposed to raising the minimum wage when inflation is at such a low rate. The minimum wage is meant to be an entry level wage in the marketplace, not one that guarantees a decent living to every worker. Keeping the wage at its present rate will continue to keep inflation rates in check.

kavindavis said...

You said that raising minimum wadge you would rais infalation, well sence 1997 inflation hasent stoped, so dont you think its time that they do raise it?

You need to realize he wants to do this just to win the vote of the poorer class in America. Maby Mr. Kerrys idol is Andrew Jackson.

Senator Miller said...

John Kerry's minimum wage proposal is nothing more than an attempt to appeal to poor and younger voters in hopes to swing the election his way. I feel it is a fairly empty proposal that wouldn't happen even if he were elected (very unlikely). The increased minimum wage would end up hurting the very people it's trying to help. By overpricing the menial labor associated with minimum wage, employers will be more apt to fire them and buy machines to do it for them, or at least look for ways to cut back on the number of these overpriced employees. Economically speaking, as the price of unskilled labor goes up the demand would go down. To me, hiking up the minimum wage this high would simply hurt the very people it's trying to help.

kamm said...

This comment is directed to the comment made by kavindavis. I do not mean this to sound like I am trying to play "teacher", but you misspelled the words raise, hasn't, and maybe. I think everybody gets a little careless when they are typing and I'm sure you I'll be corrected too.

Moving along to the economic issue, I think this is one of the least intellegent ideas that Kerry has proposed. I agree with you that Kerry is making this proposal in order to win the vote of the poorer people, but that doesn't change the fact that it's a terrible idea. Raising the minimum wage would cause a more drastic rise of inflation. Looking at the economist's model of "rational expectaions" of inflation in Colander's book, inflation may have certain years where it is not predicted to rise much at all. Raising the minimun wage would automatically cause a rise in inflation.

Tennistud said...

I agree that Kerry's proposal is an attempt at getting extra votes from the younger/minimum-wage workers. To many Americans, it sounds like Kerry wants to "give us more money," which makes him look good. Overall, I think that it will make the economy worse off. One thing that improves the economy is increasing education throughout the population. I think that increasing the minimum wage will result in less incentive to become educated and gain marketable skills that can be used in the workplace. This proposal will only result in less-productive workers and higher costs to employers.

Dr. Tufte said...

The ideas in the comments since my last comment all seem pretty good.

Here's something that I'm learning from the blogosphere. There has been a lot of talk about the relevent empirical results and it is best summarized in the post entitled "The Effect of the Minimum Wage" at the Rasmusen Weblog. Macroeconomists tell our students that raising the minimum wage will lower employment in those jobs, and that really doesn't seem to quite be the case. Apparently small increases in the minimum wage don't have much effect on employment. The reason for this is probably that the employers find other ways to save money. Did you ever notice that there usually isn't air conditioning in places where people are making minimum wage? So the employer can always reduce the positive externalities an employee gets from working (e.g.,comfort) to raise the wage.

One thing to keep in mind about any politician wanting to raise the minimum wage is that this money isn't coming out of their pockets, or even out of the governments. They're ordering a small group of employers to pay more for something than it is worth (and yes that is probably to get votes). But I hope when I put it this way that it sounds pretty odious. You never here them propose to subsidize employers to pay their employees more, do you? Since you don't, it should be clear that they care more about trashing the employers than helping the employees.

Oh and Kamm, you misspelled minimum. People in glass houses .... ;)

metromut said...

I think that raising minimum wage will help Kerry out come election time. While it seems like a good and promising idea to most people, if you actually think it through the raise would eventually even out. If minimum wage goes up, then so will all prices on everything. I agree with your comment on how we will all be back where we started.

C-Dizzle said...

Isn't it that nice of Kerry to think of us, the working people?! Wait...has Kerry ever had a real "working man" job?

I remember in grade school when kids would run for student council. The kids who really wanted to win the election would have their moms buy them a bucket load of candy and bring it to school. These kids would walk around the school yard lobbying votes by giving out candy.

It looks like Kerry's got himself a bucket load of candy and is looking for votes. If the minimum wage goes up, in the short run people might benefit. I can assure you though that the people selling goods are going to be right on top of this wage hike. If a seller knows people have more money in their pockets, they're going to raise the prices of all goods and services. This is called inflation, does Kerry know this?

Tennistud said...

Going back to microeconomics, a minimum wage is a type of "Price Floor." Usually on a Supply and Demand Curve the axis are labeled Quantity (X) and Price (Y). In this case it would be Quantity of Workers (X) and Wage (Y). The optimum level of quantity and wage is at the natural equilibrium. When a minimum wage is set above the equilibrium, the quantity of labor demanded reduces, and there is an excess supply of workers. Macroeconomically, this causes unemployment to rise. Sure it helps those unskilled workers whom are able to still find jobs, but it also puts many out of work. (For more info, see Pg. 115-116 of Colander's Macroeconomics Textbook.)