The Cost of Raising the Minimum Wage

On September 10, 2015 the governor of New York, Andrew Cuomo, with Vice-President Joe Biden by his side announced that New York will gradually raise the minimum wage for fast-food workers to $15 an hour. During the announcement Vice-President Biden reiterated that he and President Obama remain committed to raising the federal minimum wage to $12 an hour.

When governments get involved in markets it can have a negative effect on markets and on the labor force. In the case of raising the minimum wage the results to the market and labor force depend upon the demographics of the cities and states where minimum wage is raised. It is possible for a higher minimum wage to not have a negative effect on the labor force, so long as the price floor for labor is set lower than the market equilibrium price for labor. However, when the minimum wage is set above the market equilibrium for labor it leads to a surplus of labor in the market. This surplus results because there are more people looking for work than the market is willing to hire at the higher wage.

I read an article this week that looked at another way, besides labor supply and demand curves, to measure the effect of raising the minimum wage to $15 an hour. The article entitled, "What a $15 Minimum Wage Would Mean for Your City," which appeared in the New York Times, uses the ratio of minimum wage to median wage to look at how a $15 minimum wage may affect different large cities throughout the United States. The higher the income ratio the greater the risk for job losses. The article suggests there is evidence that cities and states are able to absorb an increase in minimum wage when the ratio of minimum to median income is around or below 50%, but that there are few examples of what happens when the ratio is above 60%. The city of New York has a ratio of 55%, whereas Las Vegas has a ratio above 70%. This suggests that raising the minimum wage in Las Vegas to $15 an hour may result in job losses. Thus an increase in the federal minimum wage may not negatively affect cities like Boston or New York whose income ratios are around 50%, but it may affect the labor force in cities like Las Vegas and New Orleans, who both have income ratios above 70%.

The evidence suggests that an increasing in the federal minimum wage may not be a great idea due to the potentially negative effects on local economies whose income ratios are higher than 50%. A universal sweeping federal minimum wage law ignores the negative economic impact on rural towns and large cities whose income ratios are high and where job losses are likely to occur if such a universal law is passed. 

Link to the article I read:  http://www.nytimes.com/2015/08/13/upshot/what-a-15-minimum-wage-would-mean-for-your-city.html?_r=0

1 comment:

Dr. Tufte said...

Jim Craig: 94/100 (dropped a "the"). Make that link look pretty or I'll ding you 6 more points.

Like most arguments about the minimum wage, this one also presumes that a mandated increase in the minimum wage won't be met with business practices to increase worker productivity. All of our discussions in texts and classrooms about price floors mention follow-up and secondary effects. But when it comes to the minimum wage, everyone seems to presume that it's just going to put workers out of work because they can't improve their productivity, or their bosses won't make sure that the do. But this seems unrealistic. The thing is though, increasing productivity isn't necessarily a nice thing. It includes reductions in job perks (like meals at cost, or scheduling flexibility), and increases in managerial attention (like getting fired for shirking).

Anyway ... oh gosh ... the source article here uses a little bait-and-switch. Not enough to ruin the argument, but a bit that you should be aware of. Think about this ratio they use: it's the proposed minimum wage divided by the median wage in a city. But if the proposed minimum wage is a single value (like $15/hour), then the only way the ratio gets higher (or lower) is if the median wage is lower (or higher). So saying that New York has a lower ratio is a backdoor way of saying the median wage is already higher in New York. Following that up with saying that if the ratio is lower the negative effects will be smaller is saying ... that if the increase isn't that big it won't hurt that much. Doh! Really? Is that telling us something we didn't know already? When someone stretches like this, I start to wonder what they're trying to divert my attention from. Perhaps you should too.