As protesters push for $15 an hour, minimum wage issue stalled in Missouri

Over recent years low wage employees have pushed and clawed to raise the minimum wage to $15 per hour. In California and New York they succeed. The plan is to have the new minimum wage in place by 2020. In other parts of the country low wage workers continue to pursue the same dream to get their minimum wage to increase. In St. Louis low-wage workers participate in one-day strikes in order to get their employers to take notice. Missouri has had many bills passed by lower-level forms of government only to be vetoed and then resubmitted and passed but blocked by state legislature. The case to finally raise minimum wage has been taken up to the Missouri Supreme Court. Everyone is currently waiting for a decision to be handed down.

What these employees don’t understand is that if minimum wage is increased, people will lose their jobs. This is a classic example of supply and demand. These restaurants need workers to meet the demands of customers. With a low minimum wage, employers are able to staff more people to meet those demands. Once that minimum wage is raised, what was being paid to two employees will be spent on one employee. The demand for workers will still be there but the supply will be greatly reduced because these companies can’t afford to pay the same amount of people more money. These companies won’t all of sudden have more money.  This new wage hike will raise fixed costs to pay salaries. In order to cut costs the logical thing would be to fire their workers. Furthermore, more responsibility will be placed on the remaining employees and the costs may be greater than the benefits. Whatever the competitive edge a company might have could be compromised because of lack of employees. For example with fewer employees the quality of products may be diminished. Although it seems like a great idea to help out the lower class, it will also mean the loss of jobs for many people as well. Catch 22.

As protesters push for $15 an hour, minimum wage issue stalled in Missouri


Dr. Tufte said...

mholley 88/100

-6 (for a missing "the" in "don't understand that if minimum ..."). -6 for "Catch 22". That's not a sentence. Also, the reference to Catch 22 is a little dated: a link might help.

The first paragraph reads like the poster is trying to be a reporter: loaded adjectives, clipped tone, etc. For all you others looking at the first post of the semester, you can write this way on this blog, but don't feel that you should have to write this way.

The general idea of moholley's post is OK (see the second comment I added). But the specifics are off in three spots.

First, the minimum wage is a price floor. Price floors (and ceilings) do not change demand or supply, they change quantity demanded and quantity supplied. So writing that "... supply will be greatly reduced ..." is incorrect. Even so, I think you probably meant to write demand.

Second, salaries are not usually fixed costs. This depends on perspective. One person's salary might be fixed with respect to production, as long as they keep their job. I think perhaps that what mholley is trying to say is that the wage bill (the total amount paid to all labor) is roughly constant, and raising the wage can't change that.

Lastly, would competitive edge be lost if everyone faced the same increase? This is actually part of the point of a legally mandated minimum wage. If there is no mandated floor, then each owner/manager is facing a prisoners' dilemma: they can't raise wages unless everyone else does at the same time. Having them all face the same minimum wage helps keep them from worrying about losing their edge.

Dr. Tufte said...

Of course, this sort of thing is all over the news. There's a lot of issues to consider.

First, let's make a distinction between the theoretical and the empirical argument. Republicans/conservatives are against minimum wage increases, and support that position with arguments that price floors are not a very good idea. But, in theory, we just throw up demand and supply of any old slope. But the slopes (or better yet elasticities) are related to the magnitude of the problems created. So we also need to pay attention to the empirical work. This indicates that the effects are not that large in the labor market. The estimates are consistent with minimum wage increases being like drawing straws: the wage bill is fixed, and (say) 20 workers might draw straws, with the result that one person is fired and the other 19 split the income they would have gotten. Do note for later in this comment that this is just for a 5% increase. I actually heard the other day about an operation in Moab that is doing just this. And I've informally surveyed students about this many times, and they tend to say they'd be OK with it if their boss faced them with this choice. In sum, Republicans/conservatives are correct about the theory, but have overstated its relevance.

On the other hand, Democrats/liberals/progressives have been running too far with a limited set of supportive results. There's been a ton of research on this (about 1,500 published papers). And some of them have been able to show that minimum wage increases are not harmful on net. These results are surprising. The thing is, a lot of research has been directed at shooting those results down, with only mixed success: there does seem to be something to the idea that we will be OK with higher minimum wages. But Democrats/liberals/progressives have oversold those results, which are more of a persistent curiosity, as a solid basis for assuming away any potential problems.

Third, increasing the minimum wage is always politically problematic. The minimum wage is nominal, so it does need to be adjusted for inflation periodically. It has fallen behind inflation, so it is reasonable to increase it somewhat: perhaps up to 20% or so. The thing is, it's already scheduled to increase by that much.

Fourth, the changes already passed in some locations are ridiculously large — on the other of a 100% increase. It is irresponsible of politicians to claim that the limited evidence that small increases in the minimum wage don't seem to be harmful justifies huge increases. This is like asserting that because eating candy makes you happy that you should eat all your Halloween candy in one sitting.

Fifth, labor markets are uneven across regions. Currently in California, it is clear that minimum wage is binding in the central valley, and not binding on the coast. Price floors are only a problem when they are high enough to be binding. Raising the minimum wage statewide will only make problem in the central valley worse.

Sixth, there are distributional concerns. Do we really think the distribution of who will be harmed by an increase will be uniform? Politicians and activists act as if costs will be evenly distributed across all workers. They won't be. They will fall most heavily on those with the least skills, and the least access (as determined by race, gender, and so on). Realism requires some acknowledgement that raising the minimum wage is about hurting the people at the bottom to help those a little above the bottom.

I could go on, but I'm sure you've read enough. ;-)

Vain Janglings said...

Mholley, I enjoyed the post. This is such a hot topic right now and I feel as others do, that if people better understood the economic ramification of raising the minimum wage, most would be singing a different tune. I myself have never been a fan of minimum wage at any level. I feel that a free market can handle wage just like it handles prices.

This discussion reminds me of a show called “Morgan Spurlock’s 30 Days-Living on minimum wage”, I am sure you can glean from the title what it’s about. I bring this up is because Spurlock goes to one of the poorest cities in America in order to live for 30 days on minimum wage. There is only one problem, he can’t find a job that only pays minimum wage. At the time minimum wage was $5.15 an hour and the best Spurlock could do was find a job that paid $7.00 an hour. So this begs the questions, “Why can’t he find a job that pays minimum wage?” also “Why run the episode when the very premise is uprooted?”

Spurlock couldn’t find a job at such a low rate because the market had forced wages higher. This was all done without the intervention of the government on the part of the people. What I have found is that minimum wage only hurts the young and unskilled. It used to be that teenagers would get unskilled jobs, work these jobs for a couple of years and end up in management. With companies being forced to raise wages, this also means they are looking for more skilled labor in order to justify the higher wage they must pay.

There is a great clip from Fox Business news on just this topic. Cheryl Bachelder (CEO of Popeyes) give some great insight on what workers should expect if this wage hike get pushed through. She claims workers should expect layoffs and an increase in customer facing technology. Both of which is not good for the company, the customer, or the U.S. economy.



Dr. Tufte said...

Vain Janglings: 41/50, The same mistake is repeated 3 times in the first paragraph, so I have copied it here and inserted a capital S where needed. "Mholley, I enjoyed the post. This is such a hot topic right now and I feel as others do, that if people better understood the economic ramificationS of raising the minimum wage, most would be singing a different tune. I myself have never been a fan of minimum wageS at any level. I feel that a free market can handle wageS just like it handles prices." (-3) That mistake is repeated once in the last paragraph. You also need a "the" before "minimum" in "At the time minimum wage was ..." This mistake is repeated in the following paragraph too. (-3) Lastly, you write "Both of which is not good ...", which is improper, and could be rewritten in a number of ways. (-3)

I'm emphasize again that the theory agrees with Vain Janglings position. But the empirical evidence indicates that both demand and supply for minimum wage labor are sufficiently inelastic that the effects are small.

I hate to break it to you folks, but I'm a pretty solid libertarian business professor who generally votes Republican — but the Democrats are either right on this one, or close enough to let it slide. If we could go back in time, I would have said that I would never say something like that, but evidence has a tendency to change minds.

CJ said...

This article came out today, I instantly thought of this post. It's an interesting read.


Dr. Tufte said...

Cool. Thanks for pointing us towards it; that's a cool part of blogging with students.

The author notes that profit rates are really low, without much wiggle room for increasing wagees.

I'd take that back a step further, and note that most people don't seem to recognize the difference between profits and revenue. In classes I like to point out that a lot of dumb ideas seem to be supported by the notion that there's cash-in-easy-to-carry-bags just laying around. There isn't.

Back to profits, formal surveys (and also informal ones I do in class) show that most people think profit rates are in the 30-60% range. Of course, numbers like that are so far off the mark as to defy finding adjectives that are strong enough. One that comes to us from psychology is that a lot of people simply engage in "magical thinking".

Having said that, I'll return to the point I've emphasized in earlier parts of this thread (and other threads on this blog). The theory is that minimum wage hikes can be harmful. The empirical evidence is that "can be harmful" turns out to be "not that harmful" and quite possible acceptable.

I'm not that comfortable saying that. But I'm a professional — I call them like I see them.