Supply and Demand—the Minimum Wage Debate

I got my first “real job” at age 15, working at a gas station/lube shop, making $4.25 per hour.  Prior to that I had worked for myself mowing lawns in the summer.  This job was great as it was not just a summer job, but was one that I could work year round.  Not to mention the fact that they paid me minimum wage!  I honestly remember feeling excited about that.  At the time I had friends that were working for less, which made me feel fortunate due to my limited experience.

This job gave me a great start and introduction to the workforce.  I quickly learned what accountability truly meant.  I began to understand both the positive and negative affect of my actions.  My actions could not only affect me, but also my coworkers, my employer, and the company as a whole.  I also quickly learned that the owner of the lube shop was running this company for one reason, and that was to make money.  He wanted people on board that could help him achieve that goal.    

The math was simple, the more cars he could service and the less he paid out to his employees, the more money he could make.  There is a balancing act in keeping talent, but not overpaying for it.  He understood that this was mostly likely not going to be my career and that I would eventually leave for “greener pastures”. 

There has been a lot of conversation about raising the minimum wage.  I don’t feel any of the perceived benefits can truly help the economy in the long term.  States such as California are looking at raising their minimum wage by 66%, from $9.00/hr. to $15.00/hr.  As detailed in the article “The Minimum Wage”, many people, including politicians, are discounting the basic principles of economics in consider these increases. 

There are few conditions in which raising the minimum wage would actually increase demand.  Raising the minimum wage will make it more difficult for the inexperienced worker, specifically teenagers, to find work.  This will deny many of our youth the opportunity to have the experience of being a contributing member of the workforce and learning the valuable life lessons.

As for the increased payroll expenses, employers have several options that they can consider in running their organizations more efficiently.  It should be expected that the consequence of this increase would ultimately be passed on to the consumer in the form of increased prices of goods and services provided.

Minimum wage jobs are just that—they are minimum wage jobs, a starting point for bigger and better things.  They should not be looked at as a final destination.  For those individuals that are unhappy with their pay rate, look at it from the perspective of the owner.  Ask the question, “Am I an asset or a liability.”  If you are an asset and feel your time and efforts are worth more, then that would be a sign that it may be time for you to find a new job.
There is nothing wrong with starting from the bottom and working your way up.  I am thankful for my first job, for the experience I obtained and the foundation it helped create.  We owe it to our youth to allow them to have the same opportunities and experiences, as they will eventually be the future workforce.




Dr. Tufte said...

David: 94/100 I think "mostly likely" is something that I probably should take off for, but I believe it could be acceptable so I won't. I did take off for "in consider these increases" which is not OK. Make those links look pretty or I'll ding you 6 more points for each one.

So I promised I won't take off points for not "posting right", and I won't.

But, I think what David has written here is OK as a comment, but not really as a post. David: just do a better post next time, OK?

Why is this not a good post? Well, I'd like to see more economics. So at the end of the 4th paragraph, where David writes that some are "discounting the basic principles", I'd like to see a discussion of which ones (from the text). The next paragraph starts with "raising the minimum wage would actually increase demand", but then doesn't state any of those. The 6th paragraph talks about passing on the higher costs to consumers. But again, there's no economics: part of the reason we talk about price floors around the same time in the semester as elasticity, and surpluses, and tax incidence, is that it isn't clear that a supplier can pass on those costs to buyers in all situations.

And why is this a good comment? It's a lot longer than I expect a comment to be, but I think once we've gotten some economic facts and connections out in the open with a post (and maybe my comments and others), that personal experiences like this can be a useful addition that keeps a post's comment thread going. Remember, it's good if a comment has some economics in it, but it isn't strictly necessary. What's important is that your view was important enough to you to express here.

FWIW: I do also recognize that others have talked about the economics of the minimum wage in other posts, and there may not have been that much left over for David to bring up.


I don't have any redirection on the economics in this comment.

Dr. Tufte said...

Minimum wage increases are a hot political topic this year. To some extent this is supported by economic research on the minimum wage over the last 20 years. That research has changed the viewpoint of economists towards minimum wages increases from "it's a bad idea" to "it's a bad or neutral idea". I think politicians have taken the latter and treated it as carte blanche to claim that minimum wage increases are a good idea.

I have an insight about this that I picked up a few weeks ago from a friend (Tim Worstall) who's a well-known blogger and columnist.

He was discussing the unusual non-economic views of one presidential candidate versus the unusual economic views of a second candidate.

He pointed out that he was OK with the unusual non-economic views because it was difficult to see how they would influence policy decisions that candidate might be asked to make in office.

But he also pointed out that he was not OK with the unusual economic views of the second candidate. If they were willing to deny accepted understanding of the minimum wage in the field of economics for the sake of their advancement in the field of politics, then that was a much bigger deal.


I do have three personal stories that might add something to David's story.

1) Our kids don't get an allowance (they may get more handouts than other kids though). And there are some chores they are expected to do without compensation. But other work, usually of the sort that's a direct substitute for mom and dad, gets paid. I pay $6/hour. I make a point of telling them that this is likely to be higher than their take-home pay when they get their first job (it's also very transparent to say they get a buck for every 10 minutes of work). I've also made it clear that I'll raise their rate if they can beat it in the market. Maybe it's because I'm an economist, but I feel that it's important not to get them used to compensation that would give them an unrealistic view of their worth to the wider world.

2) There is a meme on the internet where people contribute their stories about how long it took them, and how many degrees they needed, before they got their first job that paid more than $15/hour. In my case, even after adjusting for inflation, my first job that paid that much was my first job as a professor at the University of Alabama. I started just before my 25th birthday. Truth be told, I did have a minimum wage job with tips that I started when I was 20. But it was delivering pizzas with my own car, and there were plenty of other drivers without the life skills to both do the job well, and keep their cars running.

3) I also note for my kids that I got fired from every job I had, until I stopped getting fired. The only job I've never been fired from is the one I made a career out of: being a professor. (Again, truth be told, I did get fired from the pizza delivery job, which was my second-to-last job, but I was quickly rehired when the owner overruled the manager). The point is, that all of those earlier employers had no trouble deciding that I wasn't worth the minimum wage they were paying me. This makes it troubling to me when I see many people claim they are worth more than the minimum wage. I wasn't.

John said...

*Warning: Long comment below.

The political debate about minimum wage is a very personal topic to me for a few reasons. First, my first job was working at Taco Bell, making minimal wage. I was grateful to have a job and definitely lucky to bring home a paycheck. I honestly felt I was being paid a fair wage for the work I did. Working at Taco Bell, I developed skills that I still use in the workplace today. Minimum wage jobs are beginner jobs. They are meant for individuals entering the workforce, such as high school students, or even college students as they continue their education, and develop further work place skills such as dependability and hard work.

The debate about increasing minimum wage has completely forgotten what these jobs are and who they are meant for. The debate may have an argument when several of these jobs are being filled by an older generation, immigrants and single moms without a formal education, trying to make ends meet for their family. Although I agree that the current minimum wage makes it difficult for these individuals to make a living, I do not believe the solution is to increase the minimum wage. Honestly, it makes me sick when I see high school students and college age students join the argument for increasing minimum wage. I have had multiple conversations with individuals of the millennial generations who say they will never work fast food or other minimum wage jobs. These are the jobs that teach you basic skills and, as you master them, you move up.

The minimum wage debate is misplaced. We pay people for the difficulty of the job. We do not pay people a higher wage for basic jobs just to make their lives easier (I'll probably get some back-lash on that comment). However, my background justifies my response. If individuals are not making enough at their current job to make ends meet, they should develop skills that will increase their pay level. The government already provides plenty of resources to help an individual make a better life for themselves. If anything, the debate should not be about increasing minimum wage, but perhaps educate people about the opportunities that are available. Perhaps, requiring employers to teach people about the opportunities provided by the government to improve the jobs related skills and/or education.

A little about my background, my parents were divorced when I was 12 years of age. My mother raised six kids without a college education and for the most part on minimum wage. Oh, were we poor! She humbled herself, and applied for food stamps and other government help. Something she thought she would never have to do. She applied for government grants and gained skills at a technical college which improved her pay from minimum wage to $9/hr. Still not enough to raise a family with six children. However, it was more than before. She applied for another grant and started working toward her bachelor's degree. Dedication pays, but not always in the short run. Raising six children, working and going to school was definitely not an easy task. She was still working on her degree when I started college. By the time all of us kids left home, she finished her degree, advanced her pay level and worked toward a master's degree. At the age of 55 she received her master's degree.

I do have sympathy for any individual or parent who has to go through the trials my mother did. However, I do not believe beginner jobs meant for beginners entering into the workforce should receive a high pay rate. There are resource out there for individuals seeking a better opportunity to enhance their pay through experience and relevant skills.

Dave Tufte said...

John 44/50 (forgot a "the", hyphenating "back-lash" isn't quite correct but I accepted it, you wrote "educate" rather than "educating").

I think John's comment is fine, and I tend to agree with it at a personal level.

But at a professional level, I wonder whether this sort of comment in this sort of group has what's called self-selection bias.

Self-selection bias is where you select which group to put yourself in (and everyone else does too). In this case, I think it's very unlikely to find a group of business graduate students (along with a professor) who did not move up and on from their minimum wage jobs. Because most or all of us made those successful steps, we talk to each other and thing that, gee whiz, anyone can do this and end up here. The thing is, I think most of the people who can't make the move up and on don't self-select into our group. In the end, we think our group is more representative than it is.

To me what this means is that a testimonial like this (or like the comment I made earlier), while interesting, may not be that informative about the rest of the population.

Unfortunately, people like testimonials more than theory. So this view will carry some weight. Alternatively, people stuck in minimum wage jobs may have self-selected into a sample where no one advances out of those minimum wage jobs, so they view them as dead ends. Clearly that sort of testimonial carries a lot of weight with the public too.

Anyway, the role of a class like this is that you all should probably be learning (or conditioning yourself) to make the theoretical arguments that we know are correct and presumably fairly neutral: production has to exceed wages, price floors create secondary problems, deadweight loss, and so on.

John said...
This comment has been removed by the author.
John said...

I believe what Dr. Tufte meant to say was "think" instead of "thing" when saying "Because most or all of us made those successful steps, we talk to each other and [think] that, gee whiz, anyone can do this and end up here."

Also, I am not sure representative makes sense in the first paragraph about self-selection bias. "In the end, we think our group is more [represented] than it is."

Dave Tufte said...

I'll concede the first one but not the second. Do you want me to undo a markdown in one of your other comments, John?

John said...

Dr. Tufte,

It wasn't my intent to point out a mistake to influence a change in my score. However, I will accept an increase in my grade for one of my comments, if you are offering.

Jim Craig said...


As one who is adamantly against raising the federal minimum wage as significantly as the politicians are suggesting, I appreciated your comments and insights in this post. I'm glad you talked about the effect raising the minimum wage may have on teenagers. A good majority of minimum wage jobs are entry level, low skill jobs that attract high school and college students who are developing foundational life skills to help build their careers on. Entry level jobs were never meant to be household sustaining jobs. One issue which may arise when a significant raise in the entry level wage occurs is that employers will have the ability to hire skilled workers for entry level positions in lieu of low skilled workers; this comes about because of an increase in the labor force when the market demand for employees declines due to the raised minimum wage. Therefore, a potentially negative effect of raising the minimum wage is the decline in available jobs for low skilled workers, which is one of the groups an increased minimum wage is suppose to help.

I found the following interesting as I have researched this topic of raising the minimum wage. One of the battle cries from the left in support of raising the minimum wage is, "no one who works full time should have to live in poverty.” There is truth in this statement, but there are also some hidden facts the left isn't attaching to their rally cry for raising the minimum wage. For example, in 2014, according to the United States Census Bureau, the percentage of full time workers who were living below the poverty line was 3 percent. This percentage may be even smaller when you factor in government programs such as the Earned Income Tax Credit, which may raise the overall income of the full time employee above the poverty line. It seems to me that with government programs such as this the small percentage of full time workers below the poverty line can be taken care of without raising the minimum wage so significantly. So the battle cry that "no one who works full time should have to live in poverty" ignores the fact that a very small percentage of full time worker do.

Dr. Tufte said...

Jim Craig: 50/50

The idea that a higher minimum wage will lead to a better skilled worker being hired is a good addition. I think the logic runs in parallel to what I was saying about keeping workers but getting more productivity out of them.

I tend to view soft skills as very underrated for productivity. The signalling view of education is that what completing a degree shows to potential employers is that you can start and finish something. Combine those together, and I wonder whether a substantially higher minimum wage is going to lead to positions filled by college graduates, not for what they've learned, but for the fact that they've proved they have the follow through to finish.

You are absolutely right that the number of people earning the minimum wage is quite small. However, a problem with those statistics is that they count someone making a penny more as not making the minimum wage. So, there are significant numbers of people earning below the proposed minimum wages.